ASIAN DEVELOPMENT BANK — Annual Report 2016

May 17, 2017

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submitted to the Board of Governors for approval at its Annual Meeting, to be held on 4–7 May 2017.

50 YEARS OF ADB[:] IMPROVING LIVES FOR A BETTER F U T U R E

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ASIAN DEVELOPMENT BANK 2016 FINANCIAL REPORT

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Management’s Discussion and Analysis and

Annual Financial Statements

31 December 2016

Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB's Public Communications Policy 2011.

Asian Development Bank

CONTENTS

Management’s Discussion and Analysis

I.	Overview	Overview	1
II.	Combination of OCR and ADF Resources		1
III.	Ordinary Capital Resources		3
	A.	Basis of Financial Reporting	3
	B.	Selected Financial Data	4
	C.	Overall Financial Results	6
	D.	Operating Activities	7
		1. Loans	7
		2. Guarantees	13
		3. Syndications	14
		4. Equity Investments	14
		5. Debt Management Products	15
	E.	Financing Resources	15
		1. Equity	15
		2. Borrowings	16
	F.	Liquidity Portfolio	18
	G.	Contractual Obligations	20
	H.	Risk Management	20
		1. Credit Risk	21
		2. Market Risk	27
		3. Liquidity Risk	28
		4. Operational Risk	29
		5. Capital Adequacy	29
		6. Asset and Liability Management	30
	I.	Internal Control over Financial Reporting	30
	J.	Critical Accounting Policies and Estimates	30
**IV. **	Special Funds		31
	A.	Asian Development Fund	31
	B.	Technical Assistance Special Fund	36
	C.	Japan Special Fund	37
	D.	ADB Institute	38
	E.	Regional Cooperation and Integration Fund	38
	F.	Climate Change Fund	38
	G.	Asia Pacific Disaster Response Fund	39
	H.	Financial Sector Development Partnership Special Fund	39
V.	Grant Cofinancing		40
Appendix: Ordinary Capital Resources Condensed Management Reporting Balance Sheets			42

Financial Statements, Management’s Report on Internal Control over Financial Reporting, and Independent Auditor’s Reports

I. Ordinary Capital Resources (OCR)

I. Ordinary Capital Resources (OCR)	I. Ordinary Capital Resources (OCR)
Management’s Report on Internal Control over Financial Reporting		45
Independent	Auditor’s Report on Internal Control over Financial Reporting	46
Independent	Auditor’s Report on Financial Statements	48
OCR-1	Balance Sheet	50
OCR-2	Statement of Income and Expenses	52
OCR-3	Statement of Comprehensive (Loss) Income	53
OCR-4	Statement of Changes in Equity	54
OCR-5	Statement of Cash Flows	55
OCR-6	Summary Statement of Loans	56
OCR-7	Summary Statement of Borrowings	58
OCR-8	Statement of Subscriptions to Capital Stock and Voting Power	60
OCR-9	Notes to Financial Statements	62

II. Asian Development Fund (ADF)

II. Asian Development Fund (ADF)	II. Asian Development Fund (ADF)
Management’s Report on Internal Control over Financial Reporting		112
Independent	Auditor’s Report on Internal Control over Financial Reporting	113
Independent	Auditor’s Report on Financial Statements	115
ADF-1	Special Purpose Statement of Assets, Liabilities and Fund Balances	118
ADF-2	Special Purpose Statement of Revenue and Expenses	119
ADF-3	Special Purpose Statement of Comprehensive Loss	119
ADF-4	Special Purpose Statement of Changes in Fund Balances	120
ADF-5	Special Purpose Statement of Cash Flows	121
ADF-6	Special Purpose Summary Statement of Loans	122
ADF-7	Special Purpose Statement of Resources	124
ADF-8	Notes to Special Purpose Financial Statements	125
III. Technical Assistance Special Fund (TASF)
Management’s Report on Internal Control over Financial Reporting		139
Independent	Auditor’s Report on Internal Control over Financial Reporting	140
Independent	Auditor’s Report on Financial Statements	142
TASF-1	Statement of Financial Position	144
TASF-2	Statement of Activities and Changes in Net Assets	145
TASF-3	Statement of Cash Flows	146
TASF-4	Statement of Resources	147
TASF-5	Summary Statement of Technical Assistance Approved and Effective	148
TASF-6	Notes to Financial Statements	149

IV. Japan Special Fund (JSF)

IV. Japan Special Fund (JSF)	IV. Japan Special Fund (JSF)
Management’s Report on Internal Control over Financial Reporting		156
Independent	Auditor’s Report on Internal Control over Financial Reporting	157
Independent	Auditor’s Report on Financial Statements	159
JSF-1	Statement of Financial Position	161
JSF-2	Statement of Activities and Changes in Net Assets	162
JSF-3	Statement of Cash Flows	163
JSF-4	Notes to Financial Statements	164

V. Asian Development Bank Institute (ADBI)	V. Asian Development Bank Institute (ADBI)
Independent	Auditor’s Report	170
ADBI-1	Statement of Financial Position	172
ADBI-2	Statement of Activities and Changes in Net Assets	173
ADBI-3	Statement of Cash Flows	174
ADBI-4	Notes to Financial Statements	175
VI. Regional Cooperation and Integration Fund (RCIF)
Management’s Report on Internal Control over Financial Reporting		189
Independent	Auditor’s Report on Internal Control over Financial Reporting	190
Independent	Auditor’s Report on Financial Statements	192
RCIF-1	Statement of Financial Position	194
RCIF-2	Statement of Activities and Changes in Net Assets	195
RCIF-3	Statement of Cash Flows	196
RCIF-4	Notes to Financial Statements	197
VII. Climate	Change Fund (CCF)
Management’s Report on Internal Control over Financial Reporting		202
Independent	Auditor’s Report on Internal Control over Financial Reporting	203
Independent	Auditor’s Report on Financial Statements	205
CCF-1	Statement of Financial Position	207
CCF-2	Statement of Activities and Changes in Net Assets	208
CCF-3	Statement of Cash Flows	209
CCF-4	Notes to Financial Statements	210
VIII. Asia Pacific Disaster Response Fund (APDRF)
Management’s Report on Internal Control over Financial Reporting		215
Independent	Auditor’s Report on Internal Control over Financial Reporting	216
Independent	Auditor’s Report on Financial Statements	218
APDRF-1	Statement of Financial Position	220
APDRF-2	Statement of Activities and Changes in Net Assets	221
APDRF-3	Statement of Cash Flows	222
APDRF-4	Notes to Financial Statements	223

IX. Financial Sector Development Partnership Special Fund (FSDPSF)

IX. Financial Sector Development Partnership Special Fund (FSDPSF)	IX. Financial Sector Development Partnership Special Fund (FSDPSF)
Management’s Report on Internal Control over Financial Reporting		228
Independent	Auditor’s Report on Internal Control over Financial Reporting	229
Independent	Auditor’s Report on Financial Statements	231
FSDPSF-1	Statement of Financial Position	233
FSDPSF-2	Statement of Activities and Changes in Net Assets	234
FSDPSF-3	Statement of Cash Flows	235
FSDPSF-4	Notes to Financial Statements	236

MANAGEMENT’S DISCUSSION AND ANALYSIS

I. OVERVIEW

The Asian Development Bank (ADB), a multilateral development bank, was established in 1966 under the Agreement Establishing the Asian Development Bank (the Charter).[1] ADB is owned by 67 members, 48 of which are regional members, including Japan, Australia and New Zealand, providing 63.5% of its capital and 19 non-regional members, including the United States, Canada and 17 European countries, providing 36.5% of its capital.

The vision of ADB is an Asia and Pacific free of poverty. Its mission is to help its developing member countries (DMCs) reduce poverty and improve living conditions and quality of life. ADB’s strategy for reducing poverty focuses on achieving three strategic agendas: inclusive economic growth, environmentally sustainable growth, and regional integration.

ADB provides various forms of financial assistance to its DMCs. The main instruments are loans, technical assistance (TA), grants, guarantees, and equity investments. These instruments are financed through ordinary capital resources (OCR), Special Funds, and trust funds. ADB’s ordinary operations are financed from OCR and special operations from Special Funds. The Charter requires that funds from each resource be kept and used separately. Trust funds are generally financed by contributions and administered by ADB as the trustee.

ADB also offers debt management products to its members and entities fully guaranteed by members such as interest rate swaps and cross currency swaps (including local currency swaps) for their third party liabilities. ADB also provides policy dialogue and advisory services, and mobilizes financial resources through its cofinancing operations, which access official and other concessional, commercial, and export credit sources to maximize the development impact of its assistance. Cofinancing for ADB projects can be in the form of external loans, grants for TA and components of loan projects, equity, and credit enhancement products such as guarantees and syndications.

II. COMBINATION OF OCR AND ADF RESOURCES

On 1 January 2017, ADB transferred loans and other assets totaling $30,812 million from Asian Development Fund (ADF), the concessional lending window of ADB to OCR in accordance with the Board of Governors resolution authorizing the termination of ADF’s lending operations. The resolution stemmed from a proposal introduced in 2014 to enhance ADB’s financial capacity in a sustainable manner through more efficient and effective management of its capital resources. The proposal entailed combining ADF lending operations with the OCR and retaining the ADF as a grant-only operation. ADB would continue concessional lending on the same terms and conditions as currently provided to ADF countries through the OCR window, while the ADF would continue to provide grant assistance. The initiative will expand ADB’s lending capacity— particularly to poor countries and the private sector, enhance its risk-bearing capacity, and strengthen its readiness to respond to future economic crises and natural disasters.

The transfer of these assets was treated as a contribution from ADF to OCR and a return of the set-aside resources from ADF to OCR.[2] This resulted in the recognition of a one-time income of $30,748 million in OCR and a return of the set-aside resources of $64 million. On 15 March 2017, the Board of Governors approved the allocation of the one-time income from the transfer of ADF assets to OCR Ordinary Reserve effective 1 January 2017.

1 ADB. 1966. Agreement Establishing the Asian Development Bank . Manila.

2 The undisbursed ADF loan balance of SDR6,281 million ($8,444 million equivalent) was also assumed by OCR on 1 January 2017.

2

The transferred ADF assets are composed of loans, including accrued interest totaling $27,088 million and liquid assets totaling $3,724 million. Table 1 shows the balance sheet of OCR after the transfer of certain ADF assets. The sources of funding for the transferred ADF assets came from donor contributions, OCR net income transfers and set-aside resources. For further details on the composition of the sources, refer to disclosure on subsequent events in Note V of OCR financial statements and Note L of ADF financial statements.

Table 1: Asian Development Bank—Ordinary Capital Resources Summary Statement of Effect of Asset Transfer from ADF ($ million)

	Balance as of 31 December 2016 Asset Transfer from ADF 1 January 2017 Balance as of 1 January 2017
Due from banks Investments for liquidity purpose Securities purchased under resale arrangements Loans outstanding — Operationsa Sovereign Regular Concessional Nonsovereign Equity investments — Operations Other debt securities — Operations Accrued interest receivable Derivative assets Other assets	661 0 661 26,025 3,696 29,721 102 12 114 62,413 – 62,413 – 27,025 27,025
	62,413 27,025 89,438 5,186 – 5,186
	67,599 27,025 94,624 814 – 814 150 – 150 387 79 466 29,143 – 29,143 973 – 973
TOTAL ASSETS	125,854 30,812 156,666
TOTAL LIABILITIES EQUITY Capital Stock Subscription installments matured Less – capital transferred to ADF and discounts Nonnegotiable, noninterest-bearing demand obligations on account of subscribed capital Net notional maintenance of value receivable Ordinary reserve From ADF assets transfer From retained earnings Subtotal Special reserve Loan loss reserve Surplus Cumulative revaluation adjustments account Net income after appropriation–2016 Accumulated other comprehensive loss TOTAL EQUITY	108,640 – 108,640 7,154 – 7,154 79 (64) 15
	7,075 64 7,139 (676) – (676)
	6,399 64 6,463 (1,474) – (1,474) – 30,748 30,748 12,211 – 12,211
	12,211 30,748 42,959 340 – 340 172 – 172 1,065 – 1,065 88 – 88 (11) – (11) (1,576) – (1,576)
	17,214 30,812 48,026
TOTAL LIABILITIES AND EQUITY	125,854 30,812 156,666
– = nil, ( ) = negative, ADF = Asian Development Fund.

Notes:

1. The undisbursed ADF loan balance as of 31 December 2016 of $8,444 million was assumed by OCR on 1 January 2017. 2. 0 = amount less than $0.5 million.

2. a Including net unamortized loan origination cost, allowance for loan losses and Heavily Indebted Poor Countries debt relief, and fair value adjustment.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2016

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III. ORDINARY CAPITAL RESOURCES

This section describes the OCR operations prior to the transfer of ADF lending operations effective 1 January 2017.

Funding for OCR operations comes from three distinct sources: funds borrowed from capital markets and private placements, paid-in capital provided by shareholders, and accumulated retained income (reserves). The financial strength of ADB is based on the support it receives from its shareholders and on its financial policies and practices; shareholder support is reflected by capital subscriptions of members and the record of ADB borrowing members in meeting their debt service obligations.

Borrowed funds, together with equity, are used to fund OCR lending and investment activities and other general operations. ADB is rated triple-A by the major rating agencies and its bonds are viewed as high quality debt by investors. ADB’s funding strategy is aimed at ensuring availability of funds for its operations at the most stable and lowest possible cost. Such strategy has enabled ADB to achieve cost-efficient funding levels for its borrowing members.

Loans are generally provided to DMCs that have attained higher economic development and to nonsovereign borrowers. Sovereign loans are priced on a cost pass-through basis, which means the cost of funding the loans plus a contractual spread is passed to the borrowers. ADB applies market-based pricing for nonsovereign loans. In addition to direct lending, ADB also provides guarantees to assist DMC governments and nonsovereign borrowers in securing commercial funds for ADB-assisted projects.

A. Basis of Financial Reporting

Statutory reporting. ADB prepares OCR financial statements in accordance with accounting principles generally accepted in the United States of America (US GAAP), referred to in this document as the “statutory reporting basis.”

ADB manages its balance sheet by selectively using derivatives to minimize interest rate and currency risks associated with its financial instruments. Derivatives are used to enhance asset and liability management of individual positions and overall portfolios. ADB has elected not to define any qualifying hedging relationships, not because economic hedges do not exist, but rather because the application of hedging criteria under US GAAP does not make fully evident ADB’s risk management strategies.

ADB reports all derivative instruments on the balance sheet at fair value and recognizes the changes in fair value for the period as part of net income. ADB also elects to measure financial instruments at fair value on a selective basis and opts to measure at fair value borrowings that are swapped or have floating interest rates, to apply a consistent accounting treatment between the borrowings and their related swaps. ADB continues to report its loans and the remaining borrowings at amortized cost, and reports most of its investments (except time deposits and other debt securities that are recorded at cost) at fair value.

Management reporting. The asymmetric accounting treatment—in which certain financial instruments (including all derivatives, swapped and floating-rate borrowings, and certain investments) are recorded at their fair value, while loans and a portion of borrowings and investments are recorded at amortized cost—leads ADB Management to believe that statutory income may not fully reflect the overall economic value of ADB’s financial position. Accordingly, ADB also reports operating income, which excludes the impact of the fair value adjustments associated with financial instruments from the results of OCR operations. ADB uses operating

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2016

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income as the key measure to manage its financial position, make financial management decisions, and monitor financial ratios and parameters.

Operating income does not include unrealized gains or losses of the portfolio. The unrealized gains or losses, although an important indicator of the portfolio performance, generally represent changes in income as a result of fluctuations in the fair value of selected borrowings and derivatives. Because ADB does not actively trade these financial instruments, such gains or losses are generally not realized, unless ADB is forced to do so by risk events before maturity. ADB has instituted conservative risk management policies to mitigate such risks.

ADB intends to hold most borrowings and related swaps until maturity or call, hence net interim unrealized gains and losses reported under the statutory reporting basis will eventually converge with the net realized income and expenses that ADB recognizes over the life of the financial instrument.

The management reporting basis balance sheet reconciled from the statutory reporting basis balance sheet as of 31 December 2016 is provided in the Appendix.

B. Selected Financial Data

Selected financial data are presented on a statutory reporting basis and management reporting basis (Table 2). Rates of return on equity and earning assets under the management reporting basis improved in 2016 compared with 2015, mainly as a result of higher capital gains on equity investment sales. Conversely, under statutory reporting basis, rates of return on equity and earning assets were close to nil in 2016 because the unfavorable fair value adjustments on borrowings and related derivatives almost matched the operating income. Return on loans, return on investments and cost of borrowings, under both the statutory and management reporting bases increased due primarily to the rising trend in US dollar interest rates (Table 3). Under management reporting basis, the margin between return on loans and cost of borrowings was stable at 0.64% in 2016 and 2015. Income and expenses are discussed in the next section.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2016

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Table 2: Selected Financial Data for the Year Ended 31 December

($ million)

Item	2012 2016 2015 2014 2013
Statutory Reporting Basis Revenue From Loans — Operations From Investments for Liquidity Purpose From Guarantees — Operations From Equity Investments — Operations From Other Debt Securities — Operations From Other Sources Total Revenue Borrowings and Related Expenses Administrative Expensesa Provision for (Write-back of) Loan Losses Other Expenses Total Expenses Net Realized Gains Net Unrealized (Losses) Gains Net Income Average Earning Assetsb Annual Return on Average Earning Assets (%) Return on Equity (%) Return on Loans — Operations (%) Return on Investments for Liquidity Purpose (%) Cost of Borrowings (%) Management Reporting Basis Operating Incomec Average Earning Assetsb Annual Return on Average Earning Assetsd(%) Return on Equity (%) Return on Loans — Operations (%) Return on Investments for Liquidity Purpose (%) Cost of Borrowings(%)	1,054 678 605 646 770 399 322 305 339 390 18 19 21 18 18 18 (19) 17 10 38 0 – – 0 1 43 29 25 22 21
	1,532 1,029 973 1,035 1,238
	751 374 317 400 520 390 383 352 411 351 11 (1) (1) (6) 7 11 12 13 8 9
	1,163 768 681 813 887
	158 56 288 194 122 (520) 239 (193) 150 (331)
	7 556 387 566 142 92,456 85,227 80,633 78,828 76,361 0.01 0.65 0.48 0.72 0.19 0.04 3.23 2.24 3.43 0.87 1.65 1.16 1.15 1.31 1.56 1.58 1.33 1.30 1.43 1.69 1.68 0.19 0.82 0.51 0.91
	521 343 571 469 465 92,499 85,227 80,639 78,839 76,386 0.56 0.40 0.71 0.60 0.61 2.80 1.89 3.12 2.71 2.72 1.63 1.18 1.12 1.23 1.51 1.57 1.30 1.31 1.36 1.58 0.99 0.54 0.50 0.64 0.84

– = nil, ( ) = negative.

Note: 0 = amount less than $0.5 million.

a Net of administrative expenses allocated to the Asian Development Fund and origination costs that are deferred.

• b Average of investments and related sw aps, outstanding loans (excluding net unamortized loan origination cost and/or front-end fees) and related sw aps, equity investments and other debt securities.

c Operating income is defined as statutory net income before unrealized gains or losses and the Asian Development Bank’s proportionate share in unrealized gains or losses from equity investment accounted for under the equity method.

d Represents operating income over average earning assets.

Table 3: Selected US Dollar Interest Rates at 31 December

	(%)
Item	2016	2015	2014	2013	2012
6-Month US Dollar LIBOR	1.32	0.85	0.36	0.35	0.51
3-Year US Dollar SwapRate	1.69	1.42	1.30	0.88	0.50
LIBOR = London interbank offered rate, US = United States.
Source: Bloomberg Finance L.P.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2016

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C. Overall Financial Results

Net income. Table 4 presents the overall financial results for 2016 and 2015. Net income was $7 million, compared with $556 million for 2015. The decreased net income from 2015 is mainly attributed to the unrealized losses from ADB’s borrowings and associated derivatives.

Table 4: Overall Financial Results for the Year Ended 31 December ($ million)

Table 4: Overall Financial Results for the Year ($million)	Ended 31 December
Item	2016 2015 Change
Income from loans — operations Interest income (Provision for) Write-back of loan losses Others Income from investments for liquidity purpose Interest income Realized gains Income from equity investments — operations Profit on sale—net of impairment losses Proportionate share of income (loss) from EI accounted for under the equity method—realized Others (Loss) income from other debt securities — operations—net Other income—neta Borrowings and related expenses Interest and other expenses Realized gains Administrative expenses—OCR Operating income Net unrealized (losses) gains Proportionate share of income (loss) from EI accounted for under the equity method—unrealized Net income	1,043 678 365 1,051 673 378 (11) 1 (12) 3 4 (1) 452 365 87 399 322 77 53 43 10 116 19 97 107 12 95 9 (1) 10 (0) 8 (8) (2) 0 (2) 53 37 16 751 373 378 751 374 377 (0) (1) 1 390 383 7
	521 343 178 (520) 239 (759) 6 (26) 32
	7 556 (549)

( ) = negative, EI = equity investments, OCR = ordinary capital resources. Note: 0 = amount less than $0.5 million.

a Includes income and related expenses from guarantees and income from trust funds administration.

Operating income. Operating income in 2016 increased to $521 million, from $343 million in 2015.[3] The change in operating income was primarily driven by:

• (i) $365 million increase in income from loans, due to increase in average outstanding loans and higher interest rates;

• (ii) $87 million increase in income from investments due to higher average return and slight growth in average investments;

• (iii) $97 million increase in income from equity investments mainly due to divestment gains;

These were partially offset by:

• (iv) $378 million increase in borrowings and related expenses resulting from rising trend in short-term interest rates and larger average outstanding borrowings; and

• (v) $7 million increase in administrative expenses.

3 Operating income is defined as statutory net income before unrealized gains or losses and ADB’s proportionate share in unrealized gains or losses from equity investment accounted for under the equity method.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2016

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Net unrealized gains and losses. During 2016, ADB reported net unrealized losses of $520 million (2015: $239 million net unrealized gains), which primarily consisted of fair value adjustments on certain borrowings and derivatives used for hedging borrowings, investments and loans. A large portion of the net unrealized losses was the result of changes in the fair value of borrowings and related derivatives amounting to $523 million (2015: net unrealized gains of $244 million) due to movements in ADB’s credit spreads, interest rates and yield basis spreads.

D. Operating Activities

ADB provides financial assistance under its ordinary operations to its DMCs through loans (including other debt securities), guarantees and equity investments to help them meet their development needs. ADB also promotes cofinancing of its projects and programs to complement its assistance with funds from official and commercial sources, including export credit agencies. ADB also provides debt management products to its members and memberguaranteed entities for their third party liabilities.

1. Loans

ADB is authorized under the Charter to make, participate in or guarantee loans to its DMCs, to any of their agencies, instrumentalities or political subdivisions, and to any entities or enterprises operating within such countries, as well as to international or regional agencies or entities concerned with the economic development of the region. Such loans are made only for projects or programs of high developmental priority.

ADB’s lending limitation policy limits the total amount of disbursed loans, disbursed equity investments and related prudential buffer, and the maximum amount that could be demanded from ADB under its guarantee portfolio, to the total amount of ADB’s unimpaired subscribed capital, reserves, and surplus, exclusive of the special reserve. As of 31 December 2016, the total of such loans (including other debt securities), equity investments and related prudential buffer, and guarantees was $68,786 million (2015: $63,042 million), compared with the maximum lending ceiling of $154,938 million (2015: $159,136 million), which resulted in a headroom of $86,152 million (2015: $96,094 million).

ADB’s projects undergo an evaluation and approval process that includes such factors as economic, social, environmental, technical, institutional and financial feasibility, effect on the general development activity of the country concerned, contribution to economic development, capacity of the borrowing country to service additional external debt, effect on domestic savings, balance of payments effects, impact of new technologies on productivity, and expansion of employment opportunities.

Except in special circumstances, ADB requires that the proceeds of its loans (including other debt securities), and equity investments and the proceeds of the loans it guarantees be used only for procurement of goods and services produced in and supplied from member countries. Loan disbursements must comply with the requirements specified in loan agreements. ADB’s staff review progress and monitor compliance with ADB policies. ADB’s Independent Evaluation Department, reporting directly to ADB’s Board of Directors, evaluates the development effectiveness of ADB’s operations.

ADB offers the multitranche financing facility (MFF), a debt financing facility that delivers financial resources for a program or investment in a series of separate financing tranches over a fixed period. Financing tranches may be provided as loans, guarantees, or any combination of these instruments based on periodic financing requests (PFRs) submitted by the borrower.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2016

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In 2011, ADB reviewed its policy-based lending and enhanced the program lending policy by mainstreaming programmatic budget support and enhancing crisis response capacity. Consequently, ADB offers four policy-based lending products, each catering to a different situation in a DMC: stand-alone policy-based lending, programmatic approach, special policybased lending, and countercyclical support facility (CSF) lending.

In April 2011, ADB established the project design facility (PDF) on a pilot basis to support project preparation, particularly detailed engineering designs, through project design advances (PDA). The facility is designed to be refinanced from the proceeds of the ADB loan for the ensuing project. The pilot period has been extended for 3 years (until 31 December 2017).

In March 2013, the Board of Directors approved piloting results-based lending (RBL). This modality will support government-owned sector programs and disburse ADB financing based on program results. Loan terms under RBL are the same as for investment projects.

Nonsovereign operations. ADB provides lending without sovereign guarantee to privately-held or state-owned or subsovereign entities. In its nonsovereign operations, ADB provides financial assistance on market-based terms and conditions to provide investment capital. ADB’s nonsovereign operations primarily focus on two of the core areas of operations identified in Strategy 2020, namely infrastructure (with particular emphasis on energy) and finance. Strategic interventions focus on renewable energy and other infrastructure sectors. ADB’s participation is meant to catalyze or bring about financing from other sources – both local and foreign – and not to compete with these sources. ADB cannot be the largest single investor in an enterprise. As needed, ADB will help mobilize additional debt from commercial banks, other development institutions, and financing partners.

Loan approvals, disbursements, repayments, and prepayments. In 2016, approved loans totaled $13,572 million, representing a $934 million increase from 2015 ($12,638 million).[4] ADB approved 68 sovereign loans totaling $11,387 million, including three PDA loans for $25 million and 32 nonsovereign loans totaling $2,185 million, compared with 2015 approvals of 58 sovereign loans totaling $10,488 million, including one PDA loan for $3 million and 24 nonsovereign loans totaling $2,150 million.

In 2016, MFFs totaling $4,393 million (2015: $1,224 million) were approved under OCR while $283 million were reallocated from ADF (2015: $130 million were reallocated to ADF and a cofinancier).[5] Under the MFFs, PFRs totaling $2,319 million were approved in 2016 (2015: $2,609 million); a total of $2,582 million was disbursed in 2016 (2015: $2,149 million). In 2016, ADB approved two OCR loans totaling $375 million under RBL (2015: three loans totaling $1,025 million); and disbursed a total of $398 million (2015: $193 million).

Disbursements in 2016 totaled $9,763 million ($8,247 million for sovereign loans and $1,516 million for nonsovereign loans), a slight increase from the $9,667 million disbursed in 2015 ($8,223 million for sovereign loans and $1,444 million for nonsovereign loans). Regular principal repayments in 2016 were $3,818 million (2015: $3,325 million), while prepayments totaled $311 million (2015: $154 million). In 2016, 10 loans were fully prepaid for $275 million, and three loans were partially prepaid for $36 million. As of 31 December 2016, loans outstanding after allowance for loan losses and net unamortized loan origination cost totaled $67,599 million, of which sovereign loans represented $62,413 million and nonsovereign loans $5,186 million.

A summary of the OCR total loan portfolio by member country as of 31 December 2016 is set forth in OCR-6 of the Financial Statements. A breakdown by sector of loans as of 31 December

4 These are net of adjustments and terminations prior to signing.

5 These amounts may be adjusted based on flexibility in the use of OCR and ADF funding. ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2016

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2016 is shown in Table 5.

Table 5: Sectoral Breakdown of Total OCR Loan Portfolio[a] As of 31 December 2016

As of 31 December 2016
Sector	$ million	%
Transport	36,954	34.9
Energy	25,372	24.0
Public Sector Management	10,904	10.3
Water and Other Urban Infrastructure and Services	10,196	9.6
Finance	8,560	8.1
Agriculture, Natural Resources and Rural Development	5,972	5.6
Education	2,854	2.7
Multi-Sector	2,561	2.4
Industry and Trade	1,517	1.4
Health	734	0.7
Information and Communication Technology	217	0.2
Total	105,841	100.0
OCR = ordinary capital resources.
Note: Percentages may not sum precisely because of rounding.

a Includes outstanding loans of $67,547 million, effective but undisbursed loans of $26,898 million and approved loans that are not yet effective of $11,396 million. Of the approved loans that are not yet effective, only $2,890 million have been signed, but the loans are not effective and disbursements w ill not start until the relevant conditions to the effectiveness of the loans have been fulfilled.

The majority of outstanding loans (92.2%) have been made to the public sector (member countries and, with the guarantee of the concerned member, government agencies or other public entities) (Table 6). The rest have been made to private sector enterprises, financial institutions, and selected nonsovereign public sector entities.

Table 6: Loan Status at 31 December 2016 and 2015

Table 6: Loan Status at 31 December 2016 and 2015	Table 6: Loan Status at 31 December 2016 and 2015	Table 6: Loan Status at 31 December 2016 and 2015	Table 6: Loan Status at 31 December 2016 and 2015
Item	$ million % $ million % Outstanding 2016 2015		Effective but Undisbursed
	$ million % 2016		$ million % $ million % 2016 2015
Sovereign Nonsovereign	62,278 92.2 5,269 7.8	57,432 92.8 4,457 7.2	25,575 95.1 24,334 93.9 1,323 4.9 1,577 6.1
Total Loans	67,547 100.0	61,889 100.0	26,898 100.0 25,911 100.0
Note: Excludes approved loans that are not yet effective totalling $11,396 million in 2016 (2015: $10,099 million).

Status of loans. One nonsovereign loan was in nonaccrual status with outstanding principal of $20 million and no overdue principal as of 31 December 2016 (nil – 31 December 2015).

Lending windows. ADB’s currently available lending windows are the LIBOR-based loan (LBL) window and the local currency loan (LCL) window. The LBL has been the primary lending facility for OCR sovereign operations since 2001. The LBL is designed to meet demand by borrowers for loan products that suit project needs and effectively manage their external debt. The LBL also gives borrowers a high degree of flexibility in managing interest rate and exchange rate risks, while providing low intermediation risk to ADB. ADB has offered LCLs to nonsovereign borrowers since November 2002, and this was expanded to sovereign borrowers in August 2005.

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Discontinued lending windows. With the introduction of the LBL in July 2001, ADB’s poolbased single currency loans (PSCL), market-based loans (MBL), and fixed-rate multicurrency loans were no longer offered.

A breakdown of ADB’s loan portfolio by loan product as of 31 December 2016 and 2015 is presented in Table 7.

Table 7: Loan Portfolio by Lending Windows as of 31 December 2016 and 2015 ($ million)

	($ million)	($ million)
	Sovereign		Nonsovereign
Item	2016	2015	2016	2015
LIBOR-based loans Outstanding Undisbursed Local currency loans Outstanding	60,103 25,575 –	54,586 24,334 65	4,296 1,232 973	3,534 1,334 923
Undisbursed	–	–	91	243
Others
Outstanding	2,175	2,781	–	–
Undisbursed	–	–	–	–
Total
Outstanding Effective but Undisbursed	62,278 25,575	57,432	5,269 1,323	4,457
		24,334		1,577

–[ = nil, LIBOR = London interbank offered rate.] Note: Excludes approved loans that are not yet effective totalling $11,396 million in 2016 (2015: $10,099 million).

Sovereign loan charges. LBLs carry a floating lending rate that comprises a funding cost margin over or under the 6-month London interbank offered rate (LIBOR) and an effective contractual spread. LCLs may be made on a floating rate basis, and typically reset every 6 months. The cost-base rate of an LCL is based on back-to-back or a pool-based funding. The lending rate is reset every 6 months on each interest reset date and can be converted into a fixed rate at the request of the borrower. The lending rates for PSCLs are based on the previous semester’s average cost of borrowing. Interest rates for MBL are either fixed or floating. The floating rates are determined based on the 6-month LIBOR, with reset dates of 15 March and 15 September or 15 June and 15 December. OCR loans under PDF carry standard OCR lending rates. Payment of interest is deferred until the PDA is refinanced out of the loan proceeds or other repayment terms take effect.

A commitment charge is levied on the undisbursed loans beginning 60 days after signing of the applicable loan agreement; charges begin to accrue when the loan becomes effective, except for PDAs where commitment charges start to accrue after two years from the date the PDA agreement is signed.

Lending spread. Effective in 2000, all sovereign loans without specific provisions in the loan agreements were charged a lending spread of 60 basis points over the base lending rate.

Starting in 2004, ADB provided a 20 basis points waiver on the lending spread for borrowers or guarantors that have no OCR loans in arrears under ADB sovereign operations.[6] The waiver for

6 Applicable for sovereign loans negotiated before 1 October 2007. ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2016

11

the applicable loans is reviewed annually. In December 2014, the Board of Directors approved the continuation of this waiver[7] for borrowers of US dollar PSCL covering interest periods commencing from 1 January 2015 to 31 December 2015. Subsequently, the Board approved extending this waiver, the most recent extension being for interest periods commencing 1 January 2017 to 31 December 2017. In 2016, the total waiver provided on the lending spread was $5 million (2015: $6 million).

In December 2007, the ADB Board of Directors approved a revision to the pricing structure for all LBLs and LCLs negotiated on or after 1 October 2007, eliminating the waiver mechanism and provided a credit of 0.4% for the duration of the loan. This resulted in an effective contractual spread of 20 basis points over the base lending spread.

The Board of Directors subsequently revised the loan charges, where for LBLs and LCLs (i) negotiated from 1 July 2010 up to and including 30 June 2011, that the credit of 0.4% be reduced to 0.3% for the duration of the loan, to result in a contractual spread of 0.3% over the base lending rate; and (ii) negotiated from 1 July 2011, that the credit of 0.4% be reduced to 0.2% for the duration of the loan. This resulted in a contractual spread of 0.4% over the base lending rate.

In December 2013, the Board of Directors approved a revision to the loan pricing for all LBLs and LCLs negotiated on or after 1 January 2014, reducing the credit of 0.2% to 0.1% for the duration of the loan. This resulted in a contractual spread of 0.5% over the base lending rate.

The loans approved under the CSF carry a lending spread of 200 basis points over the base lending rate.

Maturity premium. In December 2011, the Board of Directors approved the introduction of maturity premiums for all LBLs (other than PDF loans) and LCLs for which formal loan negotiations were completed on or after 1 April 2012 of:

• (i) 10 basis points per annum on loans with an average loan maturity of greater than 13 years and up to 16 years, and

• (ii) 20 basis points per annum on loans with an average loan maturity of greater than 16 years and up to 19 years.

ADB also introduced a limit on the average loan maturity for new loans to not exceed 19 years. As of 31 December 2016, 179 approved loans totaling $27,141 million were subject to maturity premium (2015: 140 approved loans totaling $20,643 million [footnote 4]).

Rebates and surcharges . To maintain the principle of the cost pass-through pricing policy, ADB passes on the actual funding cost margin above or below LIBOR to its borrowers through a surcharge or rebate (Table 8). The funding cost margins are reset semi-annually (on 1 January and 1 July), and are based on the actual average funding cost margin for the preceding 6 months. The rebates or surcharges are passed on to borrowers by incorporating them into the interest rate for the succeeding interest period. ADB returned a sub-LIBOR funding cost margin of $62 million to its borrowers in 2016 (2015: $75 million).

7 This applies to borrowers or guarantors that do not have any OCR loans in arrears under ADB’s sovereign operations.

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Table 8: Funding Cost Margin on LIBOR-based Loans[a]

	(%peryear)
Type	(Rebate)or Surcharge
	1 July2016 1 January2016 1 July2015 1 January2015
LIBOR-based Loans US dollar Yen Euro New Zealand dollar CSF Loans	(0.07) (0.11) (0.12) (0.15) (0.48) (0.47) (0.46) (0.42) (0.35) (0.39) n/a n/a 0.29 0.29 0.29 0.29
US dollar	(0.04) (0.04) n/ab n/ab

( ) = negative, n/a = not applicable, CSF = Countercyclical Support Facility, LIBOR = London interbank offered rate, US = United States.

a Funding cost margins are announced on 1 January and 1 July and are valid for 6 months.

b Disbursements under CSF for 2015 w ere made only in December.

Lending rates for PSCLs are based on the previous semester’s average cost of borrowing (Table 9) and carry a lending spread of 60 basis points.

Table 9: PSCL Lending Rates[a]

		(% per year)
		2016	2015	Currency
1	January	5.66	5.51	US dollarb
		0.36	0.48	Yen
1	July	6.01	5.59	US dollarb
		0.27	0.40	Yen

PSCL = pool-based single currency loan, US = United States.

a Lending rates are set semi-annually on 1 January and 1 July and are valid for 6 months.

b Net of 20 basis points lending spread w aiver.

Commitment charge. ADB borrowers are charged commitment fees on the undisbursed loan balances for sovereign LBLs. The charges differ depending on when the loan was negotiated (Table 10).

Table 10: Commitment Fees

Table 10: Commitment Fees	Table 10: Commitment Fees
(%peryear)
Negotiation Date Project loans	CSF Others Results-based lending loans Policy-based loans
On or before 1 January 2007, with undisbursed balance as of 1 January 2007 0.75 After 1 January 2007 and before 1 October 2007 0.35 On or after 1 October 2007 0.15 a	n/a – n/a n/a – n/a 0.75 0.15 0.15

– = nil, n/a = not applicable, CSF = Countercyclical Support Facility. a Progressive.

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Nonsovereign loan charges. For nonsovereign loans, ADB applies market-based pricing to determine the lending spread, front-end fees, and commitment charges for each loan. The lending spread is intended to cover ADB’s risk exposure to specific borrowers and projects and the front-end fee to cover the administrative costs incurred in loan origination. Front-end fees are typically 1% to 1.5% depending on the transaction. ADB applies a commitment fee (typically 0.50% to 0.75% per year) on the undisbursed loan balance.

LCLs are priced based on relevant local funding benchmarks or ADB’s funding costs and a market-based spread.

Direct value-added official loan cofinancing. In 2016, $7,362 million from official sources was mobilized for loan cofinancing for 43 loan projects, of which $784 million is under ADB administration and $6,578 million is under collaborative arrangements. (Refer to Note F of OCR Financial Statements for loans administered by ADB as of 31 December 2016).

2. Guarantees

Guarantees are typically designed to facilitate cofinancing by mitigating the risk exposure of commercial lenders and capital market investors. Guarantees can be provided when ADB has a direct or indirect participation in a project or a related sector, through a loan, equity investment or technical assistance, ADB provides two primary guarantee products – a credit guarantee and a political risk guarantee. ADB’s credit guarantee is designed as credit enhancements for eligible projects to cover risks that the project and its commercial cofinancing partners cannot easily absorb or manage on their own. ADB also provides political risk guarantees to cover specifically defined political risks. Reducing these risks can make a significant difference in mobilizing debt funding for projects. ADB has used its guarantee instruments successfully for infrastructure projects, financial institutions, capital markets, and trade finance. These instruments generally are not recognized in the balance sheet and have off-balance-sheet risks. For guarantees issued and modified after 31 December 2002, ADB recognizes at the inception of a guarantee the noncontingent aspect of its obligations. In 2016, ADB approved one new guarantee facility and an additional approval to one existing facility totaling $515 million (2015: two new guarantee facilities and an additional approval to one existing facility totaling $341 million).

ADB’s exposure on guarantees as of 31 December 2016 and 2015 are shown in Table 11.

Table 11: Outstanding Guarantee Exposure As of 31 December 2016 and 2015

($ million)

Item	2016	2015
Credit guarantee
Trade related	1,088	525
Non-Trade related	996	809
Political riskguarantee	21	73
Total	2,105	1,407
Note: Trade related guarantees are gross of risk distribution
amounting to $476 million in 2016 (2015: $135 million)

Trade Finance Program. The Trade Finance Program (TFP), which started operations in 2004, comprises three products: (i) a credit guarantee facility, under which ADB issues guarantees to participating international and regional banks to guarantee payment obligations issued by an approved DMC and/or local banks in selected DMCs; (ii) a revolving credit facility, under which ADB provides trade-related loans to DMC banks in support of DMC companies’ export and

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import activities; and (iii) a risk participation agreement, under which ADB shares risk with international banks to support and expand trade in challenging and frontier markets. The credit guarantee and risk participation agreement are unfunded products, while the revolving credit facility is funded.

In 2016, TFP supported $3,090 million (2015: $2,548 million) in trade through 62 DMC banks in 14 different countries. Of the trade supported, $1,325 million was financed by ADB (2015: $1,133 million) and $1,765 million was cofinanced (2015: $1,415 million).

TFP transactions have average maturities of less than 180 days which enabled the TFP to revolve its $1 billion limit in 2016 to finance a total of $1,325 million of guarantees and loans. As of 31 December 2016, TFP unused risk participation amounted to $125 million (2015: $275 million), TFP guarantees outstanding totaled $1,088 million (2015: $525 million) and loans outstanding totaled $43 million (2015: $16 million). Of the outstanding TFP guarantees and loans, $481 million were with risk distribution (2015: $140 million), resulting in a net exposure of $650 million (2015: $402 million).

Supply Chain Finance Program. In 2012, ADB established the Supply Chain Finance Program totaling $200 million to provide guarantees and loans (both without government guarantee) through partner financial institutions to support payments to suppliers and distributors of goods in DMCs. In 2016, the program provided guarantees of $101 million (2015: $46 million) and the outstanding guarantee amount as of 31 December 2016 was $29 million (2015: $22 million).

3. Syndications

Syndications refer to the pooling of financing and sharing of risk among financiers. It enables ADB to mobilize cofinancing by transferring some or all of the risks associated with its loans and guarantees to other financing partners.[8] Thus, syndications decrease and diversify the risk profile of ADB’s financing portfolio. Syndications may be on a funded or unfunded basis, and they may be arranged on an individual, portfolio, or any other basis consistent with industry practices. Under this activity, in 2016, $203 million of B-loans were approved for five projects (2015: $1,085 million for eight projects).[9]

4. Equity Investments

The Charter allows the use of OCR for equity investments up to 10% of ADB’s unimpaired paidin capital actually paid up at any given time together with reserves and surplus, excluding special reserves. At the end of 2016, the total equity investment portfolio for OCR, including prudential buffers[10] , was $1,133 million (2015: $1,187 million), or about 63% (2015: 67%) of the ceiling defined by the Charter.

In 2016, ADB approved four equity investments totaling $77 million (2015: four equity investments totaling $130 million [footnote 4]). Equity investments disbursements in 2016 totaled $79 million, a 36% decrease from the $123 million in 2015, and received a total of $261 million from capital distributions and divestments, whether in full or in part, in 30 projects. The divestments were carried out in a manner consistent with good business practices, after ADB’s development role in its investments had been fulfilled, and without destabilizing the companies.

8 Depending on whether ADB retains risk or not, ADB may or may not have a contingent liability.

9 A B-loan is a tranche of a direct loan nominally advanced by ADB, subject to eligible financial institutions taking funded risk participation within such a tranche and without recourse to ADB. It complements an A-loan funded by ADB. B-loan figures for 2016 and 2015 include US dollar and local currency complementary loans.

10 Represents 80% and 100% of the signed and undisbursed amounts for private equity funds and direct equity investments, respectively.

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5. Debt Management Products

ADB offers debt management products to members and entities fully guaranteed by members in relation to their third-party liabilities.

Debt management products offered by ADB include currency swaps, including local currency swaps, and interest rate swaps. While currency swaps include the possibility of members or guaranteed entities transforming a foreign currency liability into a local currency liability, the reverse transformation of a local currency liability into a foreign currency liability is not offered.

E. Financing Resources

ADB’s ordinary operations are financed from ADB’s OCR, which consist primarily of its subscribed capital stock, proceeds from its borrowings, and funds derived from its ordinary operations.

1. Equity

As of 31 December 2016, ADB had 67 members with Japan and the United States as the two largest shareholders. Out of the 67 members, 27 members are non-borrowing members holding 66.8% of total shareholdings with a total voting power of 61.5%. The capital subscription of all ADB members is shown in OCR-8 of the Financial Statements.

The total authorized capital of ADB was 10,638,933 shares valued at $143,022 million as of 31 December 2016. The details of ADB’s equity as of 31 December 2016 and 2015 are shown in Table 12.

Table 12: Details of Equity ($ million)

Table 12: Details of Equity ($million)
	2016	2015
Subscribed Less: Callable capital subscribed	142,699 135,545	147,052 139,678
Paid-in capital subscribed	7,154	7,374
Less: Other adjustmentsa	79	81
	7,075	7,293
Add: Reservesb, Surplus, Accumulated Net Income and Other
Comprehensive Loss less nonnegotiable, noninterest- bearing demand obligations on account of subscribed capital and net notional amounts required to maintain value
of currency holdings	10,139	10,153
Total Equity	17,214	17,446
a Comprises capital transferred to the Asian Development Fund and discount. (See OCR-9 of the Financial Statements, Note M).

b For a description of reserves, see OCR-9 of the Financial Statements, Note N.

Total shareholders’ equity decreased from $17,446 million as of 31 December 2015 to $17,214 million as of 31 December 2016. This mainly resulted from (i) $203 million comprehensive loss in 2016 mainly from unfavorable fair value changes in available for sale investments and adjustments to the postretirement benefit liabilities, (ii) $160 million transfers to Special Funds, and (iii) $64 million drop in the USD value of paid-in capital brought by the depreciation of special drawing rights (SDR) against the US dollar, net of members’ maintenance of value obligations; offset by the (iv) demand notes encashment totaling $189 million.

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Callable capital. Callable capital can be called only if required to meet ADB’s obligations incurred on borrowings or guarantees under OCR. No call has ever been made on ADB’s callable capital.

Paid-in capital. ADB’s paid-in capital may be freely used in its ordinary operations, except that DMCs have the right under the Charter to restrict the use of a portion of their paid-in capital to making payments for goods and services produced and intended for use in their respective territories. (See OCR-9 of the Financial Statements, Note C).

The Charter authorizes the Board of Governors, by a vote of two-thirds of the total number of Governors representing at least three-quarters of the total voting power of the members, to set aside to Special Funds up to 10% of ADB’s unimpaired capital paid-in by members. (See IV Special Funds). As of December 31, 2016, a total of $64 million (0.9% of unimpaired paid-in capital) had been set aside and transferred to the ADF, one of ADB’s Special Funds. This was subsequently returned to OCR on 1 January 2017 following the termination of ADF’s lending operations.

Allocation of OCR net income. In accordance with Article 40 of the Charter, the Board of Governors annually approves the allocation of the previous year’s net income to reserves and/or surplus. In addition, to the extent feasible, it approves the transfer of part of net income to Special Funds to support development activities in the DMCs.

In May 2016, the Board of Governors approved the following with respect to ADB's 2015 net income of $537 million, after appropriation of guarantee fees to special reserve: (i) $43 million representing the adjustment to the Loan Loss Reserve as of 31 December 2015, be added from the loan loss reserve to the net income; (ii) $213 million representing the Accounting Standards Codification (ASC) 815/825 adjustments and the unrealized portion of net income from equity investments accounted for under the equity method for the year ended 31 December 2015, be added to the Cumulative Revaluation Adjustments account; (iii) $208 million be allocated to the Ordinary Reserve; (iv) $120 million be allocated to ADF; and (v) $40 million be allocated to Technical Assistance Special Fund (TASF).

2. Borrowings

General Borrowing Policies. Under the Charter, ADB may borrow only with the approval of the country in whose market ADB’s obligations are to be sold and the member in whose currency such obligations are to be denominated. ADB must also obtain the approvals of the relevant countries so that the proceeds of its borrowings may be exchanged for the currency of any member without restriction. The Charter also requires ADB, before determining to sell its obligations in a particular country, to consider the amount of previous borrowings in that country, the amount of previous borrowings in other countries, and the availability of funds in such other countries, giving due regard to the general principle that its borrowings should to the greatest extent possible be diversified as to country of borrowing.

ADB’s borrowing policy limits ADB’s gross outstanding borrowings to no more than the sum of callable capital of non-borrowing members, paid-in capital, and reserves (including surplus). Based on such policy, the sum of such capital and reserves as of 31 December 2016 was $110,043 million ($112,755 million in 2015). The aggregate of ADB’s gross outstanding borrowings after swaps of $77,232 million as of 31 December 2016 (2015: $68,965 million) was equivalent to 70% (61% in 2015) of such ceiling.

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Funding Operations. ADB raises funds for its ordinary operations through the issue and sale of debt obligations in the international capital markets. ADB’s primary borrowing objective is to ensure the availability of funds for its operations at the most stable and lowest possible cost. Subject to this objective, ADB seeks to diversify its funding sources across markets, instruments, and maturities. In 2016, ADB continued to employ a strategy of issuing liquid benchmark bonds to maintain its strong presence in key currency bond markets, and raising funds through opportunistic financing and private placements, such as retail-targeted transactions and structured notes, which provide ADB with cost-efficient funding levels.

2016 funding operations. In 2016, ADB raised the equivalent of $20,602 million (2015: $18,948 million) in medium- and long-term funds with 74 borrowing transactions. The new borrowings were raised in 14 currencies: Australian dollar, Brazilian real, yuan, euro, Georgian lari, Hong Kong dollar, Indian rupee, yen, New Zealand dollar, pound sterling, Singapore dollar, South African rand, Turkish lira, and US dollar. The average maturity to first call date of these borrowings is 4.1 years (2015: 4.7 years). Of the 2016 borrowings, $18,190 million was raised through 28 public offerings and the remaining $2,412 million was raised through 46 private placements.

Following the launch of the Green Bond program in 2015, ADB issued a dual tranche green bond offering in 2016 raising a total of $1.3 billion. Total green bonds outstanding as of end 2016 was $1.8 billion.

ADB also raised $8,341 million ($4,082 million in 2015) of short-term funds under its EuroCommercial Paper Program (ECP). Of the ECPs issued in 2016, $2,330 million were outstanding as of 31 December 2016. Table 13 shows details of 2016 borrowings as compared with 2015.

Table 13: Borrowings

($ million)

($ million) Table 13: Borrowings
Item	2016	2015
Long Term
Total Principal Amount	20,602	18,948
Average Maturity to First Call (years)	4.1	4.7
Average Final Maturity (years)	5.1	4.9
Number of Transactions
Public Offerings	28	26
Private Placements	46	30
Number of Currencies (before swaps)
Public Offerings	5	5
Private Placements	10	9
Short Terma
Total Principal Amountb	8,341	4,082
Number of Transactions	62	29
Number of Currencies	1	1

a All euro commercial papers.

b At year-end, the outstanding principal amount w as $2,330 million in 2016 ($1,317 million in 2015).

Use of derivatives. ADB undertakes currency and interest rate swaps to cost-efficiently and on a fully hedged basis raise the currencies needed for its operations, while maintaining its borrowing presence in major capital markets. Figures 1 and 2 show the effects of swaps on the currency composition and interest rate structure of ADB’s outstanding borrowings as of 31

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December 2016. Interest rate swaps are also used for asset and liability management purposes to match the liabilities with the interest rate characteristics of loans.

==> picture [429 x 215] intentionally omitted <==

----- Start of picture text -----

Figure 1: Effect of Swaps on Currency Composition of Borrowings
As of 31 December 2016
(%)
Currency Composition of Currency Composition of
Outstanding Borrowings Outstanding Borrowings
(Before Swaps) (After Swaps)
Australian
dollar
10.2
Euro y en
2.4 1.5
New Other
Zealand Currencies [b]
dollar 1.2
2.4
US dollar
74.0 Other US dollar
Currencies [a] 97.3
11.0
----- End of picture text -----

a Other currencies include the Brazilian real, yuan, Canadian dollar, lari, Hong Kong dollar, Indian rupee, yen, ringgit, Mexican peso, Norwegian krone, pound sterling, Singapore dollar, South African rand, Swiss franc, and Turkish lira.

b Other currencies include the yuan, lari, and Indian rupee.

==> picture [429 x 203] intentionally omitted <==

----- Start of picture text -----

Figure 2: Effect of Swaps on Interest Rate Structure of Borrowings
As of 31 December 2016
(%)
Interest Rate Structure of Interest Rate Structure of
Outstanding Borrowings Outstanding Borrowings
(Before Swaps) (After Swaps)
Variable Fixed
10.6 7.4
Variable
Fixed
92.6
89.4
----- End of picture text -----

F. Liquidity Portfolio

The liquidity portfolio helps ensure the uninterrupted availability of funds to meet loan disbursements, debt servicing, and other cash requirements; provides a liquidity buffer in the event of financial stress; and contributes to ADB’s earning base. ADB’s Investment Authority governs ADB’s investments in liquid assets. The primary objective is to maintain the security and liquidity of the funds invested. Subject to these two parameters, ADB seeks to maximize the total return on its investments. ADB does not switch currencies to maximize returns on investments, and investments are generally made in the same currencies in which they are received. At the end of 2016, ADB held liquid investments in 23 currencies.

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Liquid investments are held in government or government-related debt instruments, time deposits, and other unconditional obligations of banks and financial institutions. To a limited extent, they are also held in corporate bonds that are rated at least A–. These investments are held in five portfolios—core liquidity, operational cash, cash cushion, discretionary liquidity, and ad hoc—all of which have different risk profiles and performance benchmarks. The year-end balance of the portfolios in 2016 and 2015 is presented in Table 14. The amortized cost and fair value returns of the portfolios are presented in Table 15.

Table 14: Year-End Balance of Investment Portfolio[a]

	($ million)
Item		2016	2015
Core Liquidity Portfolio		16,367	15,308
Cash Cushion Portfolio		1,538	550
Operational Cash Portfolio		98	113
Discretionary Liquidity Portfolio		8,437	7,771
Ad hoc Portfolio		120	127
Total		26,560	23,869

a Including securities purchased under resale arrangements, securities transferred under repurchase agreements, and investment related sw aps. The composition of the liquidity portfolio may shift from year to year as part of ongoing liquidity management.

Table 15: Return on Investment Portfolio

(%)

	(%)
		Annualized	Return
	Amortized Cost		Fair Value
Item	2016	2015	2016	2015
Core Liquidity Portfolio	1.9	1.8	1.0	1.3
Operational Cash Portfolio	0.7	0.3	0.7	0.3
Cash Cushion Portfolio	0.9	0.6	0.9	0.6
Discretionary Liquidity Portfolioa	0.5	0.3	0.5	0.3
Ad hoc Portfolio	3.4	3.1	5.0	0.9

Note: The amortized returns are based on income from investments and realized gains and losses reported in the Statement of Income and Expenses. The fair value return incorporate unrealized gains and losses that are reported as part of other comprehensive income loss and movements are dependent on prevailing market environment. a Spread over funding cost.

The core liquidity portfolio (CLP) is invested to ensure that the primary objective of a liquidity buffer is met. Cash inflows and outflows are minimized to maximize the total return relative to a defined level of risk. The portfolio has been funded by equity, and the average duration of the major currencies in the portfolio was about 3.1 years (2015: 2.6 years) as of 31 December 2016.

The operational cash portfolio, designed to meet net cash requirements over a 1-month horizon, is funded by equity and invested in short-term highly liquid money market instruments.

The cash cushion portfolio holds the proceeds of ADB’s borrowing transactions pending disbursement. It is invested in short-term instruments and aims to maximize the spread earned between the borrowing cost and the investment income.

The discretionary liquidity portfolio is used to support medium-term funding needs and is funded by debt to provide flexibility in executing the funding program over the medium-term to opportunistically permit borrowing ahead of cash-flow needs, and to bolster ADB access to short-term funding through continuous presence in the market.

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G. Contractual Obligations

In the normal course of business, ADB enters into contractual obligations that may require future cash payments. Table 16 summarizes ADB’s significant contractual cash obligations as of 31 December 2016 and 2015. Long-term debt includes direct medium- and long-term borrowings, excluding swaps, and excludes unamortized premiums, discounts, and the effects of applying ASC 815. Other long-term liabilities correspond to accrued liabilities, including pension and postretirement medical benefits.

Table 16: Contractual Cash Obligations

($ million)

($million)
Item	2016	2015
Long-Term Debt	55,928	51,820
Undisbursed Loan Commitments	29,787	29,801
Guarantee Commitments	2,462	1,975
Undisbursed Equity Investment Commitments	422	432
Undisbursed Commitment for Other Debt Securities	75	4
Other Long-Term Liabilities	1,445	1,358
Total	90,119	85,390

H. Risk Management

In its operations, ADB faces various kinds of risks, including financial, operational, and other organizational risks. ADB has a risk management framework that is built on the three core components of governance, policies, and processes. Governance starts with the Board of Directors, which plays a key role in reviewing and approving risk policies that define ADB's risk appetite. ADB also maintains an independent risk management group and has various management-level committees with responsibility to oversee bank-wide risk issues and endorse related decisions for approval by the Board and President. ADB’s risk management framework also includes the Risk Committee, which provides high-level oversight of ADB’s risks and recommends risk policies and actions to the President.

ADB monitors the credit profile of existing transactions in the operations portfolio, conducts risk assessments of new nonsovereign transactions, and assumes responsibility for resolving distressed transactions when necessary. It also monitors market and credit risks in treasury operations, such as the credit quality of counterparties, interest rate risk, and foreign exchange risk. In addition, ADB has developed an operational risk management framework for the institution. For the aggregate portfolio, ADB monitors limits and concentrations; sets aside loan loss reserves; provides loan loss provisions, including collective provision requirements; and assesses its capital adequacy.

Risk to which ADB is exposed in carrying out its mission include: (i) credit risk, (ii) market risk, (iii) liquidity risk, and (iv) operational risk. This section discusses each of these risks as well as ADB’s capital adequacy—ADB’s ultimate protection against unexpected losses—and its asset and liability management.

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1. Credit Risk

Credit risk is the risk of loss that could result if a borrower or counterparty defaults or if its creditworthiness deteriorates. Related to credit risk, ADB also faces concentration risk, which arises when a high proportion of the portfolio is allocated to a specific country, industry sector, obligor, type of instrument, or individual borrower.

ADB assigns a risk rating to each loan, guarantee, and treasury counterparty (Table 17). For nonsovereign transactions, the rating typically is not better than that of the sovereign.

Table 17: Asian Development Bank Internal Risk Rating Scale

Table 17:	Asian Development Bank	Internal Risk Rating Scale
ADB Internal	Credit Rating
Rating Scale	Agency Equivalent	ADB Definitions
1	AAA / Aaa to A / A2	Lowest expectation of credit risk
2	A– / A3	Very low credit risk
3	BBB+ / Baa1	Low credit risk
4	BBB / Baa2	Low credit risk
5	BBB– / Baa3	Low to medium credit risk
6	BB+ / Ba1	Medium credit risk
7	BB / Ba2	Medium credit risk
8	BB– / Ba3	Medium credit risk
9	B+ / B1	Significant credit risk
10	B / B2	Significant credit risk
11	B– / B3	Significant credit risk
12	CCC+ / Caa1	High credit risk
13	CCC / Caa2 to C	Very high credit risk
14	D	Default

ADB = Asian Development Bank.

Table 18: Exposure to Credit Risk

As of 31 December 2016 and 2015

Item	Exposure Rating Exposure Rating ($million) (1–14) ($million) (1–14) 2015 2016
Sovereign operations a. Loan and guaranteea b. Equity Investmentsb Nonsovereign operations a. Loan and guaranteea b. Equity Investmentsb Treasury a. Fixed income b. Cash instruments c. Derivatives	62,983 58,106 62,832 4.9 / BBB– 57,956 4.9 / BBB– 150 n/a 150 n/a 7,175 5,837 6,483 6.0 / BB+ 5,041 6.2 / BB+ 692 n/a 797 n/a 27,397 1.1 / AA 24,656 1.1 / AA 22,251 1.1 / AA 20,710 1.1 / AA 5,052 1.1 / A+ 3,903 1.0 / AA 93 1.0 / AA– 43 1.0 / AA–
Aggregate Exposure	97,554 3.9 / BBB 88,599 3.9/BBB

n/a = not applicable.

Note: Numbers may not sum precisely because of rounding.

a The sum of disbursed and outstanding loan balances (including investments in nonconvertible debentures reported as other debt securities) and the present value of guaranteed obligations.

b At fair value. Inclusive of investments in compulsorily convertible debentures reported as other debt securities.

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ADB is exposed to credit risk in its sovereign, nonsovereign, and treasury operations. The sovereign portfolio includes sovereign loan and guarantees as well as one equity investment, while the nonsovereign portfolio includes nonsovereign loan and guarantees, equity investments (direct and private equity funds), and other debt securities. The treasury portfolio includes fixedincome securities, cash and cash equivalents, and derivatives. Table 18 details the credit risk exposure and weighted average risk rating for each asset class. Aggregate credit risk has remained at 3.9 (BBB) in 2016 as the growth of the nonsovereign portfolio with relatively weaker credit rating (BB+ on average) was offset by the growth of the highly-rated Treasury portfolio (AA) and sovereign portfolio (BBB-). In terms of volume, ADB’s nonsovereign loan and guarantee exposure increased by 29% while the annual growth in sovereign and Treasury operations were limited to 8% and 11%, respectively.

Credit risk in the sovereign portfolio. Sovereign credit risk is the risk that a sovereign borrower or guarantor will default on its loan or guarantee obligations. ADB manages its sovereign credit risk through loan loss reserves and by maintaining conservative equity levels. OCR has experienced no loss of principal from sovereign operations. When countries have delayed payments, they have returned their loans to accrual status, and ADB has never had to write off a sovereign loan funded from OCR.

ADB charges provisions against income for a specific transaction if it is considered impaired. In addition, ADB also appropriates loan loss reserves within equity for the average loss that ADB could incur in the course of lending. The provisions are based on projections of future repayment capacity. The loan loss reserve is based on the historical default experience of sovereign borrowers to multilateral development banks. The sum of the provisions and loan loss reserve represents ADB’s expected loss for sovereign operations. The 2016 results are discussed below.

Sovereign loan and guarantee exposure. The weighted average risk rating of the sovereign loan and guarantee portfolio remained at 4.9 (BBB–) in 2016 as improving sovereign credit conditions in some ADB DMCs were offset by rating downgrades of other ADB DMCs and higher disbursements to countries with weaker ratings (Figure 3). Refer to Note F of OCR Financial Statements for additional information.

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Figure 3: Sovereign Loan and Guarantee Exposure by Credit Quality
As of 31 December 2016 and 2015
(%)
2016 2015
Medium
Medium
credit risk
credit risk
3.4
11.5
Significant
Significant credit risk
credit risk 19.0
14.1
High credit High credit
risk risk
0.1 0.1
Low credit Low credit
risk risk
74.3 77.6
----- End of picture text -----

Notes: Low credit risk = exposures with risk rating 1–5, medium credit risk = exposures with risk rating 6–8, significant credit risk = exposures with risk rating 9–11, high credit risk = exposures with risk rating 12–14. Percentages may not total 100% because of rounding.

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Sovereign concentrations. ADB has assumed some concentration risk to fulfill its development mandate. The three largest borrowers—the People’s Republic of China, India, and Indonesia—represented 59.8% of the portfolio in 2016 (Table 19).

Table 19: Sovereign Country Exposure[a] As of 31 December 2016 and 2015

Country	$ million % $ million % 2015 2016
People’s Republic of China India Indonesia Philippines Pakistan Others	15,615 24.8 14,646 25.2 13,331 21.2 12,916 22.2 8,700 13.8 8,214 14.1 5,935 9.4 5,525 9.5 4,570 7.3 4,319 7.4 14,831 23.5 12,486 21.6
Total	62,983 100.0 58,106 100.0

Note: Numbers may not sum precisely because of rounding.

a The sum of disbursed and outstanding loan balances, present value of guaranteed obligations and fair values of equities.

Expected loss . In 2016, ADB experienced an improvement in the credit quality of some countries in the sovereign portfolio. Because of an increase to the ADB’s sovereign exposure, the expected loss increased from $136 million in 2015 to $151 million in 2016 (Table 20).

Table 20: Sovereign Portfolio Expected Loss As of 31 December 2016 and 2015

Item	$ million % of SO portfolio $ million % of SO portfolio 2016 2015
Provision for Loan Losses Loan Loss Reserve Requirement	– – – – 151 0.2 136 0.2 a
Expected Loss	151 0.2 136 0.2

– = nil, SO = sovereign operations.

a Allocation to the loan loss reserve is subject to the Board of Governors’ approval in May 2017.

Credit and equity risks in the nonsovereign portfolio. Nonsovereign credit risk is the risk that a borrower will default on a loan or guarantee obligation for which ADB does not have recourse to a sovereign entity. ADB’s nonsovereign credit risk is considered more significant than in the sovereign operations because of the uncertain economic environment in some ADB markets. In addition, ADB’s exposure is concentrated in the energy and finance sectors. ADB employs various policy-based measures to manage these risks.

The Investment Committee and the Risk Committee oversee risks in the nonsovereign portfolio. The Investment Committee reviews all new nonsovereign transactions for creditworthiness and pricing. The Risk Committee monitors aggregate portfolio risks and individual transactions with deteriorating creditworthiness. The Risk Committee also endorses changes in portfolio risks and management policy, and approves provisions for impaired transactions.

ADB manages its nonsovereign credit risk by assessing all new transactions at the concept clearance stage and before final approval. Following approval, all exposures are reviewed at least annually; more frequent reviews are performed for those that are more vulnerable to default or have defaulted. In each review, ADB assesses whether the risk profile has changed; takes necessary actions to mitigate risks and either confirms or adjusts the risk rating; and updates the valuation for equity investments including assessing whether impairments are

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considered other than temporary. ADB will provide specific provisions where necessary in accordance with its provisioning policy.

ADB recognizes specific provisions in net income for known or probable losses in individual loans or guarantees, and collective provisions for probable losses that exist collectively in disbursed loans rated below investment grade. In addition, ADB appropriates loan loss reserves within equity for the average loss that ADB would expect to incur in the course of lending for credit transactions that are rated investment grade and for the undisbursed portions of credit transactions rated worse than investment grade. Specific provisions are based on projections of future repayment capacity. The collective provision and loan loss reserve are based on historical default data from Moody’s Investors Service that is mapped to ADB’s portfolio. ADB annually tests whether this external data reasonably corresponds to ADB’s actual loss experience and may adjust estimates on the basis of this back testing. The sum of the specific provision, collective provision, and loan loss reserve represents ADB’s expected loss for nonsovereign operations.

ADB uses limits for countries, industry sectors, corporate groups, obligors, products and individual transactions to manage concentration risk in the nonsovereign portfolio. The 2016 results are discussed below.

Nonsovereign loan and guarantee exposure . ADB assigns a risk rating to each nonsovereign loan and guarantee. ADB’s weighted average risk rating improved slightly to 6.0 (BB+) in 2016 from 6.2 (BB+) in 2015 as transactions with high credit risk declined mainly due to (i) upgrades of some nonsovereign transactions following a high-risk sovereign’s rating upgrade (Figure 4) and (ii) the full repayment of an impaired account. Refer to Note F of OCR Financial Statements for additional information.

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Figure 4: Nonsovereign Loan and Guarantee Exposure by Credit Quality
As of 31 December 2016 and 2015
(%)
2016 2015
Significant Significant
credit risk credit risk
22.6 23.9
High credit High credit
risk risk
0.6 3.4
Medium Medium
credit risk credit risk
37.0 29.6
Low credit Low credit
risk risk
39.8 43.1
Notes: Low credit risk = exposures with risk rating 1–5, medium credit risk = exposures with risk rating 6–8,
significant credit risk = exposures with risk rating 9–11, high credit risk = exposures with risk rating 12–14.
----- End of picture text -----

Nonsovereign equity exposure. The nonsovereign private equity portfolio has two components: (i) direct equity investments, where ADB owns shares in investee companies; and (ii) private equity funds, where ADB has partial ownership of a private equity fund, managed by a fund manager, which acquires equity stakes in investee companies. ADB’s nonsovereign private equity portfolio decreased to $692 million in 2016 from $797 million in 2015. The

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decrease was mainly due to exits and write-offs of some investments during the year. Refer to Note H of OCR Financial Statements for additional information.

Nonsovereign concentrations. The three largest nonsovereign country exposures as of 31 December 2016 were India (22.1%), the People’s Republic of China (17.0%), and Thailand (7.2%). The exposure of the top three countries decreased from 50.7% in 2015 to 46.3% in 2016 (Table 21). All country exposures complied with ADB exposure limits.

Table 21: Nonsovereign Country Exposure[a] As of 31 December 2016 and 2015

Country	$ million % $ million % 2015 2016
India People’s Republic of China Thailand Pakistan Indonesia Others	1,585 22.1 1,274 21.8 1,216 17.0 1,174 20.1 515 7.2 515 8.8 377 5.3 343 5.9 304 4.2 263 4.5 3,177 44.3 2,268 38.9
Total	7,175 100.0 5,837 100.0

Note: Numbers may not sum precisely because of rounding.

a The sum of disbursed and outstanding loan balances, present value of guaranteed obligations and fair values of equities.

ADB employs the Global Industry Classification Standard for its nonsovereign exposures. Under this standard, utilities represent the largest sectoral share of ADB’s nonsovereign exposures (Table 22). ADB maintains higher exposures to this sector because of the importance of infrastructure to economic development. In addition, the high level of exposure to the utilities sector is deemed acceptable because of the systemic importance of utilities to the national economies in which they operate, and the lack of correlation between the utilities sector in one country and another. The utilities sector is also fragmented with seven major sub-industries. To mitigate sector concentration, ADB conducts additional monitoring of and reporting on this sector and employs specialists in these areas.

Table 22: Nonsovereign Sector Exposure As of 31 December 2016 and 2015

Sector	$ million % $ million % 2015 2016
Utilities Banks Diversified Financials Insurance Administration Energy Others	2,656 37.0 2,626 45.0 1,511 21.1 1,246 21.3 916 12.8 710 12.2 832 11.6 469 8.0 502 7.0 297 5.1 209 2.9 209 3.6 550 7.7 280 4.8
Total	7,175 100.0 5,837 100.0

Note: Numbers may not sum precisely because of rounding.

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Expected loss . Expected loss in the nonsovereign portfolio increased in 2016 because of the increase in loan and guarantee exposures (Table 23).

Table 23: Nonsovereign Portfolio Expected Loss

As of 31 December 2016 and 2015

Item	$ million % of NSO portfolioa $ million % of NSO portfolioa 2015 2016
Specific Provision for Loan Losses Collective Provision for Loan Losses Loan Loss Reserve Requirement	14 0.2 6 0.1 31 0.5 28 0.6 36 0.6 37 0.7 b
Expected Loss	82 1.3 71 1.4

NSO = nonsovereign operations. Note: Numbers may not sum precisely because of rounding. a Percentage only applies to the loan and guarantee operations of the nonsovereign portfolio. b Allocation to the loan loss reserve is subject to the Board of Governors’ approval in May 2017.

Credit risk in the treasury operations. Issuer default and counterparty default are credit risks that affect the liquidity portfolio. Issuer default is the risk that a bond issuer will default on its interest or principal payments, while counterparty default is the risk that a counterparty will not meet its contractual obligations to ADB.

To mitigate issuer and counterparty credit risks, ADB transacts only with institutions rated by reputable international rating agencies. Moreover, the liquidity portfolio is generally invested in conservative assets, such as money market instruments and government securities. In addition, ADB has established exposure limits for its corporate investments, depository relationships, and other investments.

ADB has counterparty eligibility criteria to mitigate counterparty credit risk arising through derivative transactions. In general, ADB will only undertake swap transactions with counterparties that meet the required minimum counterparty credit rating, have executed an International Swaps and Derivatives Association Master Agreement or its equivalent, and have signed a credit support annex. Under the credit support annex, derivative positions are marked to market daily, and the resulting exposures are generally collateralized by cash or US government securities. ADB also sets exposure limits for individual swap counterparties and monitors these limits against current and potential exposures. ADB enforces daily collateral calls as needed to ensure that counterparties meet their collateral obligations.

The weighted average credit rating for the liquidity portfolio was AA in 2016. About 98% of the portfolio was rated A– or better.

As of 31 December 2016 and 2015, no fixed-income instruments, derivatives, or other treasury exposures were past due or impaired.

Deposits. Generally, credit risk from investment deposits is low. ADB only invests with depository institutions that have a minimum long-term average credit rating of A+ or a shortterm credit rating of A-1. ADB maintains a watch list of institutions that it perceives as potentially riskier based on regular internal credit risk assessments. Moreover, the size of the investment deposits is limited by the counterparty’s equity and creditworthiness.

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Fixed income. Sovereign and sovereign-guaranteed securities, and those issued by government-related enterprises, including supranationals, represent 93% of ADB’s fixed income assets. The remainder is in corporate bonds that are rated at least A– (Table 24). ADB has monitored market developments closely and adjusted its risk exposures accordingly.

Table 24: Fixed Income Portfolio by Asset Class As of 31 December 2016 and 2015

Item	$ million % $ million % 2015 2016
Government Government Guaranteed Government-Sponsored Enterprises and Supranationals Corporates	10,955 49.2 11,906 57.5 3,726 16.8 2,640 12.7 6,018 27.0 4,672 22.6 1,552 7.0 1,492 7.2
Total	22,251 100.0 20,710 100.0

Derivatives . All eligible swap counterparties are rated at least A–. Current exposure to counterparties rated below A+ is generally fully collateralized, while the uncollateralized exposure to those rated AA– and above are subject to specified thresholds. ADB maintains and periodically reevaluates a watch list of institutions that it perceives as potentially riskier based on regular internal credit risk assessments. At the end of 2016, all counterparty marked-to-market exposures were fully collateralized, except for three counterparties whose uncollateralized exposures are within their established thresholds.

Country exposure. At the end of 2016, treasury credit risk exposure was allocated across 30 countries with the largest exposure in Japan (Table 25).

Table 25: Treasury Country Exposure As of 31 December 2016 and 2015	Table 25: Treasury Country Exposure As of 31 December 2016 and 2015
Country	$ million % $ million % 2015 2016
Japan United States Supranational Korea Germany Others	8,130 29.7 6,715 27.2 6,862 25.0 6,579 26.7 2,251 8.2 1,608 6.5 2,245 8.2 2,007 8.1 2,133 7.8 1,861 7.5 5,776 21.1 5,886 24.0
Total	27,397 100.0 24,656 100.0

2. Market Risk

Market risk is the risk of loss on financial instruments because of changes in market prices. ADB principally faces three forms of market risk: (i) equity price risk, which is the risk that the fair value of equities decreases as a result of changes in the levels of equity indices and the value of individual stocks; (ii) interest rate risk; and (iii) foreign exchange risk. Interest rate risk and foreign exchange risk are further discussed below.

Interest rate. Interest rate risk in the operations portfolio is hedged as the basis for borrowers’ interest payments are matched to ADB’s borrowing expenses. Therefore, the borrower must assume or hedge the risk of fluctuating interest rates, whereas ADB’s margins remain largely constant.

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ADB is primarily exposed to interest rate risk through the liquidity portfolio. ADB monitors and manages interest rate risks in the liquidity portfolio by employing various quantitative methods. It marks all positions to market, monitors interest rate risk metrics, and employs stress testing and scenario analysis.

ADB uses duration and interest rate value-at-risk (VaR) to measure interest rate risk in the liquidity portfolio. Duration is the estimated percentage change in the portfolio’s value in response to a 1% parallel change in interest rates. Interest rate VaR is a measure of possible loss at a given confidence level in a given time frame because of changes in interest rates. ADB uses a 95% confidence level and a 1-year horizon. In other words, ADB would expect to lose at least this amount once every 20 years because of fluctuations in interest rates. ADB uses duration and VaR to measure interest rate risk across the liquidity portfolio, with particular attention to the major CLP, which is the most exposed to interest rate risk.

Foreign exchange . ADB endeavors to minimize exposure to exchange rate risk in its operations. ADB is required to match the currencies of its assets with the currencies of its liabilities, thereby avoiding any transaction-related currency risk. Borrowed funds or funds to be invested may only be converted into other currencies provided that they are fully hedged through cross currency swaps or forward exchange agreements. However, because of its multicurrency operations, ADB is exposed to fluctuations in reported US dollar results due to currency translation adjustments.

ADB monitors VaR and duration, and performs stress testing to manage market risk in the liquidity portfolio. The major currencies of the CLP bear the majority of ADB’s market risks and account for 57% of ADB’s OCR liquid asset portfolio. Major currencies include the US dollar, yen, euro, pound sterling, Australian dollar, and Canadian dollar and represented 93% of the CLP.

Value-at-risk. The interest rate 1-year value-at-risk of the major CLP, increased from 1.5% of ADB’s equity in 2015 to 2.7% in 2016. This means that there is a 5.0% probability that the portfolio will lose more than 2.7% ($497 million) of its value due to interest rate volatility over the next year assuming normal market conditions.

Duration. The major CLP’s interest rate sensitivity, as reflected in its weighted portfolio duration, increased from 2.6 years as of the end of 2015 to 3.1 years as of the end of 2016.

Stress testing . ADB measures how sensitive the major CLP is to interest rate changes. If interest rates were to rise 2%, the major CLP would be expected to lose 6.0% ($916 million). ADB also uses scenario analysis to assess how the major CLP would respond to significant changes in market factors, such as those that have occurred in the past. Because of the high quality of ADB’s investments, scenario analysis suggests that the liquidity portfolio would appreciate during many stressed scenarios, as demand for highly rated securities increases (flight to quality).

3. Liquidity Risk

Liquidity risk can arise if ADB is unable to raise funds to meet its financial and operational commitments. ADB maintains core liquidity to safeguard against a liquidity shortfall in case its access to the capital market is temporarily denied. The overriding objective of the liquidity policy is to enable ADB to obtain the most cost-efficient funding under both normal and stressed situations and manage liquidity optimally to achieve its development mission. The Board of Directors approved a revised liquidity policy framework in November 2016. The revised policy redefined the prudential minimum liquidity as 100% of the 1-year net cash requirements. This represents the minimum amount of eligible liquidity necessary for ADB to continue operations

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even if access to capital markets is temporarily denied. Maintaining the prudential minimum liquidity level is designed to enable ADB to cover net cash requirements for 12 months without borrowing. The liquidity levels and cash requirements are monitored on an ongoing basis, with quarterly review by the Board of Directors.

4. Operational Risk

ADB defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people, and systems; or from external events. ADB manages its operational risks based on a framework endorsed by the Risk Committee and approved by the President in 2012. The framework enables ADB to implement an approach that focuses on identifying, accessing, and managing risks to minimize potential adverse impacts.

Key components of ADB’s operational risk management approach include (i) employing the Operational Risk Self Assessment in its key business areas; (ii) using Key Risk Indicators for operational risk profile monitoring and the collection of risk event information; and (iii) promoting risk awareness, including through presentations to staff on the application of the methodologies. ADB has completed implementing its operational risk management approach across the organization in 2014. ADB will continue maintaining the framework, while retaining the key operational risk methodologies and tools.

Like any other organization, ADB is exposed to various types of operational risk, which it mitigates by applying internal controls and monitoring areas of particular concern. ADB uses risk transfer, including insurance, for mitigating low-frequency, high-severity operational risks. ADB continuously strengthens its business continuity process and particularly information technology (IT) to reduce the impact of disruptions.

5. Capital Adequacy

ADB’s most significant risk is potential default of a large portion of its loan portfolio. Credit risk is measured in terms of both expected and unexpected losses. For expected losses, ADB holds loan loss reserves and provisions. For unexpected losses, ADB relies on its income-generating capacity and capital, which is a financial institution’s ultimate protection against unexpected losses that may arise from credit and other risks.

ADB principally uses stress testing to assess the capacity of its capital to absorb unexpected losses. The framework has two objectives. First, it measures ADB’s ability to absorb income losses because of a credit shock. Through this monitoring, ADB reduces the probability that it would have to rely on shareholder support, such as additional paid-in capital or a capital call.

Second, the framework evaluates ADB’s ability to generate sufficient income to support loan growth after a credit shock. As a development institution, ADB’s mandate becomes more important during a financial crisis when some DMCs may find their access to capital markets limited. Demand for ADB assistance may rise under such adverse conditions. For the stress test, ADB generates thousands of potential portfolio scenarios and imposes credit shocks that are large enough to account for 99% of those scenarios. ADB then assesses the impact of these shocks on its capital by modeling the ratio of equity to loans over the next 10 years. Throughout 2016, the stress test indicated that ADB had adequate capital to absorb the losses of a severe credit shock and to continue its development lending. ADB is currently reviewing its capital adequacy framework following the combination of the OCR and ADF lending operation.

During 2016, ADB’s AAA credit rating was reaffirmed by the three major international credit rating agencies.

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6. Asset and Liability Management

ADB has an asset and liability management policy framework that guides all financial policies related to asset and liability management including liquidity, investments, and equity management. The objectives of the asset and liability management are to safeguard ADB’s net worth and capital adequacy, promote steady growth in ADB’s risk-bearing capacity, and define financial policies to undertake acceptable financial risks. The aim is to provide resources for developmental lending at the lowest and most stable funding cost to borrowers, along with the most reasonable lending terms, while safeguarding ADB’s financial strength. ADB’s asset and liability management aims to safeguard net worth from foreign exchange rate risks, protect net interest margin from fluctuations in interest rates, and provide sufficient liquidity to meet the needs of ADB operations.

I. Internal Control over Financial Reporting

ADB Management has been assessing the effectiveness of its internal controls over financial reporting since 2008. ADB uses the revised Internal Control—Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission since its effectivity in 2014. The 2013 Framework includes (i) codification of the 17 principles that support the 5 components of internal control, (ii) the concept of considering the potential of fraud risk as part of the risk assessment process, and (iii) considerations on outsourcing and increased relevance of information technology as a result of changes in the business and operating environment. For an effective system of internal control, the 2013 Framework requires that (i) each of the 5 components and the 17 principles is present and functioning, and (ii) the 5 components are operating together in an integrated manner.

ADB assessed the effectiveness of its internal control over financial reporting for its 2016 financial statements. ADB applied a risk-based evaluation framework for the assertion of the effectiveness of internal control over financial reporting for OCR and Special Funds, except for the ADB Institute (ADBI). The scope included a review of 53 business processes for financial reporting and four domains for the IT general computer controls. ADB staff across several departments and offices were responsible for (i) identifying and testing key controls, and (ii) assessing and evaluating the design and operating effectiveness of the business processes. The effectiveness of ADB’s internal control over financial reporting has been audited by its external auditor, as stated in their respective reports, which expressed an unmodified opinion on the effectiveness of ADB’s internal control over financial reporting for OCR and Special Funds (except for ADBI) as of 31 December 2016.

J. Critical Accounting Policies and Estimates

Significant accounting policies are contained in Note B of the OCR financial statements. As disclosed in the financial statements, Management estimates the fair value of financial instruments. Because the estimates are based on judgment and available information, actual results may differ and could have a material impact on the financial statements.

Fair value of financial instruments. Under statutory reporting, ADB carries selected financial instruments and derivatives, as defined by ASC Topics 815 and 825, on a fair value basis. These financial instruments include embedded derivatives that are valued and accounted for in the balance sheet as a whole. Fair values are usually based on quoted market prices. If market prices are not readily available, fair values are usually determined using market-based pricing models incorporating market data requiring judgment and estimates. These are discussed in more detail in Note B of OCR’s financial statements.

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The pricing models used to determine the fair value of ADB’s financial instruments are based on discounted cash-flow models. ADB reviews the pricing models to assess whether the assumptions are appropriate and produce results that reflect the reasonable valuation of the financial instruments. In addition, the fair values derived from the models are subject to ongoing internal and external verification and review. The models use market-sourced inputs, such as interest rates, exchange rates, and option volatilities. The selection of these inputs may involve some judgment and may impact net income. ADB believes that the estimates of fair values are reasonable.

Provision for loan losses and loan loss reserves . In 2006, the Board of Directors approved the revision of the loan loss provisioning methodology for ADB’s nonsovereign operations to a risk-based model. Provision against loan losses for impaired loans reflects Management’s judgment and estimate of the present value of expected future cash flows discounted at the loan’s effective interest rate. ADB considers a loan impaired when, based on current information and events, ADB will probably be unable to collect all the amounts due according to the loan’s contractual terms. The provisioning estimate is done quarterly. In 2010, ADB refined the provisioning methodology to include collective provisioning for the nonsovereign portfolio.

ADB uses an internal risk-rating system to estimate expected loss for unimpaired loans. The probability of default is based on the historical default experience of sovereign borrowers to multilateral development institutions; for nonsovereign loans, it is based on Moody’s Investors Service default data. A loan loss reserve is established within equity for the expected losses as an allocation of net income, subject to the approval of the Board of Governors.

Pension and other postretirement benefits. ADB provides staff pension and postretirement medical benefits for all eligible staff members, provided they have not reached the normal retirement age of 60. Net periodic benefit costs are allocated between OCR and the ADF based on the agreed cost-sharing methodology. The underlying actuarial assumptions used to determine the projected benefit obligations, accumulated benefit obligations, and funded status associated with these plans are based on market interest rates, past experience, and Management’s best estimate of future benefit changes and economic conditions. For further details, refer to Notes to Financial Statements—Note Q—Staff Pension and Postretirement Medical Benefits.

IV. SPECIAL FUNDS

ADB is authorized by its Charter to establish and administer Special Funds. These are the ADF, the TASF, the Japan Special Fund (JSF), ADBI, the Regional Cooperation and Integration Fund (RCIF), the Climate Change Fund (CCF), Asia Pacific Disaster Response Fund (APDRF), and the Financial Sector Development Partnership Special Fund (FSDPSF). Financial statements for each Special Fund are prepared in accordance with US GAAP except for the ADF, for which special purpose financial statements are prepared.

A. Asian Development Fund

Until 31 December 2016, the ADF was ADB’s concessional financing window for DMCs with per capita gross national income below the ADB operational cutoff and limited or low creditworthiness. It provided a multilateral source of concessional assistance dedicated exclusively to reducing poverty and improving the quality of life in Asia and the Pacific. The ADF had received contributions from 34 donors (regional and nonregional). Cofinancing with bilateral and multilateral development partners complements ADF resources.

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Starting 1 January 2017, concessional lending on the same terms and conditions continues under the expanded OCR while ADF remains as a grant-only operation. Table 26 shows the balance sheet of ADF after the transfer of certain assets to OCR.

Table 26: Asian Development Bank—Asian Development Fund Summary Statement of Effect of Asset Transfer to OCR ($ million)

	Balance as of 31 December 2016 Asset Transfer to OCR 1 January 2017 Balance as of 1 January 2017
Due from banks Investments for liquidity purpose Securities purchased under resale arrangements Loans outstanding — Operationsa Accrued interest receivable Other Assets	281 (0) 281 5,726 (3,696) 2,030 13 (12) 1 27,306 (27,306) – 87 (79) 8 172 172
TOTAL ASSETS	33,585 (31,093) 2,492
TOTAL LIABILITIES FUND BALANCES Contributions received Contributed resources–net of unamortized discount Set-aside resources Transfers from OCR and TASF Nonnegotiable, noninterest-bearing demand obligations on account of contributions Accumulated deficit From operations From asset transfer to OCR Subtotal Accumulated other comprehensive loss TOTAL FUND BALANCES	2,637 – 2,637 32,667 – 32,667 64 (64) – 1,703 – 1,703
	34,434 (64) 34,370 (1,633) – (1,633) (361) (361) (31,029) (31,029)
	(361) (31,029) (31,390) (1,492) – (1,492) 30,948 (31,093) (145)
TOTAL LIABILITIES AND FUND BALANCES	33,585 (31,093) 2,492

– = nil, ( ) = negative, OCR = ordinary capital resources, TASF = Technical Assistance Special Fund. Note: 0 = amount less than $0.5 million. a Net of allowance for Heavily Indebted Poor Countries debt relief.

Contributed resources. In July 2012, the Board of Governors adopted a resolution providing for the 10th replenishment of the ADF (ADF XI) and the 5th regularized replenishment of the TASF. The resolution provided for a substantial replenishment of the ADF to finance ADB’s concessional program for 4 years from January 2013, and for replenishment of the TASF in conjunction with the ADF replenishment to finance TA operations under the TASF. The total replenishment of SDR8,415 million ($13,155 million equivalent at the exchange rates provided in the resolution) comprised SDR5,018 million ($7,844 million equivalent) financed from internal resources, SDR3,090 million ($4,831 million equivalent) from new donor contributions, and SDR307 million ($480 million equivalent) from net income transfers from OCR. The replenishment became effective on 4 June 2013. As of 31 December 2016, ADB had received instruments of contributions from all 32 donors. The remaining unpaid contributions under ADF IX, ADF X and ADF XI as of 31 December 2016 totaled $385 million.

ADF 12 Replenishment. The eleventh replenishment of the ADF (ADF 12) is the first replenishment in which the ADF will operate as a grant-only facility. In July 2016, the Board of Governors adopted Resolution No. 382 providing for ADF 12 and the sixth regularized replenishment of the TASF for 4 years from January 2017. The total replenishment of $3,798

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million consists of $3,337 million for ADF 12 and $461 million for the TASF. The replenishment will be financed from donor contributions ($2,580 million equivalent at the exchange rates provided in the resolution), OCR net income transfer ($1,038 million), and income from liquidity investments ($180 million).

Currency management. Based on ADF’s currency management framework, its resources are managed using the SDR basket of currencies (US dollar, euro, pound sterling, yen and yuan) as the basis. ADF donor contributions and loan reflows received in currencies that are not part of the SDR basket are converted into one of the currencies in the basket to maintain the SDRbased liquidity portfolio. In addition, since 2006, the borrower’s obligations for new ADF loans are determined in SDR.

Starting in 2008, ADB extended the full-fledged SDR approach to ADF legacy loans by providing ADF borrowers the option to convert their existing liability (i.e., disbursed and outstanding loan balance) in various currencies into SDR, while the undisbursed portions were to be treated as new loans redenominated in SDR. As of 31 December 2016, 21 of 29 borrowing members agreed to the conversion. The outstanding balance of their SDR-converted loans amounted to $12,197 million. The SDR conversion option was discontinued on 1 January 2017. As of 31 December 2016, the eligible loans of eight borrowers totaled $2,684 million, or 9.8% of total disbursed and outstanding loans.

In anticipation of the termination of ADF lending operations and transfer of ADF loans and other assets to the OCR effective on 1 January 2017, a comprehensive review of ADF financial management and policies was undertaken and approved by the Board of Directors in February 2016. Since the US dollar has been adopted for ADF grant operations, starting in January 2017, ADF commitment authority and liquidity will be determined and managed in US dollars to mitigate commitment and disbursement risks.

Framework for grants and hard-term facility. In September 2007, the Board of Directors approved the ADF grant framework, which limits grant eligibility to ADF-only countries and introduced a new hard-term ADF lending facility. The facility had a fixed interest rate of 150 basis points below the weighted average of the 10-year fixed swap rates of the SDR basket of currencies plus the OCR lending spread, or the current ADF rate, whichever was higher. Other terms were similar to those of regular ADF loans.

In June 2012, the Board of Directors approved the hardening of lending terms to blend countries: (i) for project and policy-based loans financed from ADF resources, a 25-year tenor including a 5-year grace period, 2.0% per year interest rate throughout the loan tenor, and equal amortization; and (ii) for hard-term loans, a 25-year tenor including a 5-year grace period; an interest rate calculated as 150 basis points below the weighted average of the 10-year fixed swap rates of the SDR component currencies plus the OCR lending spread, or the applicable ADF interest rates, whichever is higher, throughout the loan tenor; and equal amortization. These new lending terms were applicable to loans for which formal loan negotiations were completed on or after 1 January 2013. In general, blend countries with per capita income not exceeding the International Development Association (IDA) operational cutoff for more than 2 consecutive years and with an active OCR lending program are eligible to borrow from this new facility. The interest rate, which is fixed for the life of hard-term loans approved during the year, is reset every January.

For hard-term ADF loans approved in 2016 and 2015, the interest rate is set at (i) 1.0% during the grace period and 1.5% thereafter for ADF-only countries; and (ii) 2.0% fixed for the life of the loans for blend countries. During 2016 and 2015, no loans were approved under this facility. The hard-term ADF facility has been discontinued effective January 2017.

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Liquidity management. ADF manages its liquidity assets under two tranches to enable the optimal use of financial resources. The main objective of the first tranche is to ensure adequate liquidity is available to meet expected cash requirements. The second tranche comprises the prudential minimum liquidity the ADF should hold to meet unexpected demands and any usable liquidity for future commitments. This approach ensures that liquidity is managed transparently and efficiently.

Heavily Indebted Poor Countries Initiative. Launched in 1996 by the International Development Association (IDA) and the International Monetary Fund (IMF), the HIPC Initiative provides partial debt relief to poor countries with external debt that severely burdens export earnings or public finance. In response to ADF donors’ request, the ADB Board of Governors adopted a resolution on 7 April 2008 for ADB to participate in the Heavily Indebted Poor Countries (HIPC) Initiative and to provide Afghanistan with debt relief. The estimated principal amount of Afghanistan’s ADF debt to be forgiven and charged against ADF income was $82 million.

On 26 January 2010, the executive boards of the IDA and the IMF agreed that Afghanistan had reached the completion point under the HIPC Initiative. Thus, debt relief to Afghanistan under the initiative had become irrevocable. The amount of debt relief including principal and interest was revised to $106 million and was to be provided through a reduction of Afghanistan’s debt service from July 2008 to February 2028. As of December 2016, the ADF had delivered $28 million under this arrangement, bringing the balance to $78 million. In line with the HIPC framework, the write-off of the loan principal and interest of the HIPC-related loans will continue to be undertaken when loan service payments fall due from 1 January 2017 to February 2028. This write-off will be borne by OCR.

Accelerated repayment of loans to Armenia, Azerbaijan, and Georgia. ADF loan agreements include a provision allowing ADB, subject to the approval of the Board of Directors, to modify the lending terms of the outstanding loans of a DMC when its per capita gross national income has exceeded ADB’s operational cutoff for five consecutive years and the DMC has graduated from ADF assistance. This provision allows ADB to modify the loan repayment terms by increasing the principal due on each loan service payment date by 100% until the principal amount of the loan is fully repaid. Alternatively, ADB may—at the request of the borrower— increase the interest rate to the extent that it would yield the same grant element[11] as would be obtained under the principal option. In February 2016, the Board of Directors approved the application of this provision to the loans of Armenia, Azerbaijan, and Georgia starting 1 January 2017.

Additional currency choices for concessional OCR loans. In November 2016, the Board of Directors approved the provision of additional currency choices for eligible concessional OCR loans effective 1 January 2017, when the ADF lending operations are to be terminated and transferred to OCR. In addition to SDR as a liability currency, concessional OCR loan borrowers may also choose a loan liability currency in a currency that is available under ADB’s London interbank offered rate-based product and is a currency that is available in the SDR basket, subject to ADB's confirmation of the availability of such currency. The eligible loans are (i) all concessional OCR loans for which formal loan negotiations are completed on or after 1 January 2017 (i.e., new loans) and (ii) all concessional loans for which formal loan negotiations are completed before 1 January 2017 that are not effective until 30 June 2017 (i.e., other eligible loans). At the end of 2016, there were 36 other eligible loans totaling $1,902 million (at 31 December 2016 exchange rate).

11 The grant element is the level of concessionality of a loan measured by the difference between the sum of the present values of loan disbursements and loan service payments, expressed as a percentage of the present value of loan disbursements.

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Commitment authority. The commitment authority available for future commitments comprises the resources available to the ADF for its future lending activities in the form of loans and grants. These resources are derived from donor contributions, reflow-based resources, and net income transfers from OCR. The balance of the commitment authority available for operations as of 31 December 2016 was $243 million, compared with $436 million as of 31 December 2015 (Table 27). As the ADF lending operations will be terminated and transferred to OCR on 1 January 2017, the available commitment authority of $243 million is allocated between concessional loans ($228 million) and grants ($15 million) based on the unutilized allocation for concessional loans and grants.

Table 27: Asian Development Fund Commitment Authority[a] 31 December 2016 and 2015

($ million)

($ million)
Item	2016	2015
Carryover of ADF X Commitment Authorityb ADF XI Contributions ADF X Contributionsc ADF VIII and IX Contributionsd Internal Resourcese Savings and Cancellations OCR Net Income Transfer	743 3,150 176 188 6,746 750 480	766 2,345 174 155 5,219 671 360
Credits from ANE Program	17	–
Total ADF Commitment Authority Loans and Grants Committed	12,248 12,006	9,691 9,255
ADF Commitment Authority Available for Future Commitments	243 f	436

– = nil, ADF = Asian Development Fund, ANE = accelerated note encashment, OCR = ordinary capital resources.

Note: Numbers may not sum precisely because of rounding.

• a The Asian Development Bank monitors the ADF commitment authority based on special draw ing rights. All reported figures are based on special draw ing rights translated to US dollar as of 31 December 2016 and 2015 exchange rates.

• b A portion of the carryover funds from ADF X w ould be used to finance loans and grants that overflow ed from 2012 approval.

• c Represents the additional payments of Italy, Spain and the United States including the corresponding pro-rated amounts released by France, Germany and Turkey.

• d Represents payment from the United States including the corresponding pro-rated amounts released by Germany and Turkey.

• e Internal resources include (i) reflow -based resources, (ii) liquidity draw dow n, and (iii) resources from the three enhancement options.

• f The carry-over amount w ill be allocated as follow s: (i) $228 million for concessional loans and (ii) $15 million for grants.

In May 2016, the Board of Governors approved the transfer of $120 million to the ADF as part of the net income allocation for OCR (2015: $120 million). In addition, $750 million from loan and grant savings and cancellations were included in the commitment authority. This resulted from Management’s continued assessment of opportunities to free committed resources through cancellations of unused loan and grant balances.

During 2016, deposited installments under ADF XI amounted to $893 million, and ADF XI promissory notes encashed totaled $705 million. About $71 million was transferred to the TASF.

Loan approvals, disbursements, and repayments. In 2016, 53 ADF loans totaling $2,556 million were approved compared with 43 ADF loans totaling $2,514 million in 2015. Disbursements during 2016 totaled $2,027 million, a decrease of 1.0% from $2,048 million in

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1. At the end of 2016, cumulative disbursements from ADF resources were $41,813 million. Loan repayments during 2016 totaled $1,363 million (2015: $1,242 million). At the end of 2016, outstanding ADF loans amounted to $27,367 million (2015: $27,270 million).

In 2016, MFFs for $100 million (2015: $211 million) were approved under the ADF and $283 million were reallocated to OCR (2015: $8 million were reallocated from OCR).[ 12] PFRs under the MFFs totaling $344 million were approved in 2016 (2015: $341 million). A total of $348 million was disbursed under the MFFs in 2016 (2015: $412 million).

Results-based lending . In 2016, two ADF loans for $141 million were approved under RBL (2015: one loan amounting to $88 million); disbursements totaled $45 million (2015: $47 million).

Project design facility. In April 2011, ADB established the PDF on a pilot basis to support project preparation, particularly detailed engineering designs, through PDA. ADF loans approved under the facility carry standard ADF interest rates. Payment of interest is deferred until the PDA is refinanced out of the loans proceeds, or other repayment terms take effect. In 2016, two loans totaling $7 million were approved under this facility (2015: nil).

Investment portfolio position. The ADF investment portfolio totaled $5,739 million at the end of 2016 compared with $6,030 million at the end of 2015.[13] About 21% of the portfolio was invested in bank deposits, and 79% in fixed-income securities. The annualized rate of return on ADF investments, including unrealized gains and losses, was 1.1% (2015: 0.7%).

Grants. In 2016, ADB approved 27 grants (2015: 15) totaling $518 million (2015: $358 million), of which $188 million were PFRs under MFFs (2015: $200 million) (footnote 12), while 18 grants (2015: 16) totaling $380 million (2015: $360 million) became effective, and $4 million (2015: $12 million) of undisbursed grants were written-back as savings on financially closed and/or cancelled projects.

Direct value-added official and other concessional cofinancing for ADF loans and grants. In 2016, $1,390 million (2015: $2,088 million) was mobilized in official loan and grant cofinancing for 41 ADF-financed projects (2015: 39) totaling $2,180 million (2015: $1,373 million).

B. Technical Assistance Special Fund

The TASF was established to provide TA on a grant basis, both regionally and to ADB’s DMCs.

In July 2012, as part of ADF XI replenishment, donors agreed to contribute 3% of the total – replenishment size as the fifth replenishment of the TASF. The replenishment covered 2013 2016.

TASF Sixth Regularized Replenishment. In July 2016, as part of the ADF 12 replenishment, the donors agreed to allocate $461 million of the total replenishment size as the sixth replenishment of the TASF. The replenishment will cover 2017-2020.

Contributed resources. As of 31 December 2016, 31 donors had committed a total of $376 million to the TASF as part of the ADF XI and the fifth regularized replenishment of the TASF. Of the total committed contributions, $358 million had been received.

12 These amounts are adjusted based on flexibility in the use of OCR and ADF funding. 13 Includes securities purchased under resale arrangements.

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As part of the ADF X and fourth regularized replenishment of TASF, $319 million of the total commitment of $339 million had been received as of 31 December 2016.

During the period, Pakistan made a direct voluntary contribution of $0.14 million. In addition, $40 million was allocated to the TASF as part of the OCR’s 2015 net income allocation, and $5 million was committed for the fifth regularized replenishment of the TASF. At the end of 2016, TASF resources totaled $2,440 million, of which $2,399 million was committed, leaving an uncommitted balance of $41 million ($147 million as of 31 December 2015) (Table 28).

Table 28: Technical Assistance Special Fund

Cumulative Resources ($ million)

($million)
Item	2016	2015
Regularized Replenishment
Contributions	1,150	1,145
Allocations from OCR Net Income	989	949
Direct Voluntary Contributions	91	91
Income from Investment and
Other Sources	213	204
Transfers from the TASF to the ADF	(3)	(3)
Total	2,440	2,386

( ) = negative, ADF = Asian Development Fund, OCR = ordinary capital resources, TASF = Technical Assistance Special Fund.

Operations. Net TA commitments (approved and effective) increased from $124 million in 2015 to $145 million in 2016 for 180 TA projects and 48 supplementary approvals that were made effective during the year, net of $28 million (2015: $24 million) in write-backs of undisbursed TA for completed and canceled TA projects. Undisbursed TA, net of advances for TA increased to $354 million as of 31 December 2016 ($339 million as of 31 December 2015). The TASF financed 51% of all TA activities approved in 2016 (2015: 57%).

Investment position. As of 31 December 2016, the total investment portfolio, which was in time deposits, amounted to $302 million, compared with $367 million at the end of 2015. Revenue from investments for 2016 and 2015 amounted to $2 million.

C. Japan Special Fund

The JSF was established in 1988 when ADB, acting as the administrator, entered into a financial arrangement with the Government of Japan, which agreed to make the initial contribution to help ADB’s DMCs restructure their economies and broaden the scope of opportunities for new investments, mainly through TA operations.

Contributed resources. As of 31 December 2016, Japan’s cumulative contribution to the fund since inception amounted to ¥113 billion ($974 million equivalent), comprising regular contributions of ¥95 billion ($823 million equivalent) and supplementary contributions of ¥18 billion ($151 million equivalent). The uncommitted balance was $69 million as of 31 December 2016 ($68 million as of 31 December 2015).

Operations. In 2016 and 2015, no new TA projects or grants were approved or made effective. However, $1 million was written back for financially completed and cancelled projects in 2016 (2015: $3 million). Undisbursed TA, net of advances for TA as of 31 December 2016 were $1 million, compared with $3 million as of the end of 2015.

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Investment position. As of 31 December 2016 and 2015, the total investment portfolio, which was in time deposits, remained at $69 million.

D. ADB Institute

ADBI was established in 1996 as a subsidiary body of ADB. ADBI’s objectives are to identify effective development strategies and capacity improvements for sound development management in the DMCs. Its operating costs are met by ADBI, and it is administered in accordance with the Statute of the Asian Development Bank Institute.

In July 2016, the Government of Japan committed its 27th contribution for ¥672 million ($7 million equivalent) and in December 2016, committed its 28th contribution for ¥672 million ($6 million equivalent). In November 2016, the Government of Republic of Korea committed the second installment of its 2nd contribution for $0.7 million.

As of 31 December 2016, cumulative contributions committed to ADBI amounted to ¥27 billion, A$2 million, and $3 million (about $253 million equivalent). Of the total contributions received, $234 million had been used by the end of 2016 mainly for research and capacity-building activities, including (i) organizing symposia, forums, and training sessions; (ii) preparing research reports, publications, and websites; and (iii) financing associated administrative expenses. The balance of net current assets (excluding property, furniture, and equipment) available for future projects and programs was about $10 million.

E. Regional Cooperation and Integration Fund

The RCIF was established in February 2007 in response to the increasing demand for regional cooperation and integration activities among ADB’s member countries in Asia and the Pacific. Its main objective is to improve regional cooperation and integration by facilitating the pooling and provision of additional financial and knowledge resources.

Contributed resources. There were no new contributions to RCIF in 2016 and 2015. As of 31 December 2016, RCIF resources totaled $63 million, of which $57 million had been used, leaving an uncommitted balance of $6 million ($8 million as of 31 December 2015).

Operations . In 2016, net TA expenses totaled $1.9 million (2015: $0.1 million), comprising three TA projects and two supplementary approvals totaling $2.8 million that became effective, and a $0.9 million write-back on financially completed and/or cancelled projects (2015: two TA projects and one supplementary approval totaling $1.4 million, and a $1.3 million write-back). The balance of undisbursed grants, net of grant advances as of 31 December 2016 amounted to $8 million (2015: $9 million).

Investment position. As of 31 December 2016, the total investment portfolio, which was in time deposits, amounted to $12 million ($15 million as of end of 2015).

F. Climate Change Fund

The CCF was established in April 2008 to facilitate greater investments in DMCs to address the causes and consequences of climate change in combination with ADB assistance in related sectors.

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Contributed resources. There were no new contributions to CCF in 2016 and 2015. As of 31 December 2016, CCF resources totaled $60 million, of which $52 million had been used, leaving an uncommitted balance of $8 million ($11 million as of 31 December 2015).

Operations. In 2016, two TA projects and two supplementary approvals totaling $2.2 million (2015: nil) became effective, and $0.7 million of financially completed and/or cancelled projects was written-back (2015: $0.8 million write-back only). The balance of undisbursed grants and TA, net of advances as of 31 December 2016 amounted to $10 million (2015: $11 million).

Investment position . As of 31 December 2016, the total investment portfolio, which was in time deposits, amounted to $17 million ($21 million as of 31 December 2015).

G. Asia Pacific Disaster Response Fund

The APDRF was established on 1 April 2009 to provide timely incremental grant resources to DMCs affected by natural disasters.

Contributed resources. There were no new contributions to APDRF in 2016 (2015: $20 million). As of 31 December 2016, fund resources totaled $60 million, of which $52 million had been used, leaving an uncommitted balance of $8 million ($17 million as of 31 December 2015).

Operations. In 2016, five grants amounting to $9.2 million became effective (2015: three grants totaling $7 million). All undisbursed grants as of 31 December 2016 and 2015 have been advanced.

Investment position. As of 31 December 2016, the total investment portfolio, which was in time deposits amounted to $7 million (2015: $11 million).

H. Financial Sector Development Partnership Special Fund

The FSDPSF was established on 31 January 2013 to strengthen regional, subregional, and national financial systems in Asia and the Pacific.

Contributed resources. In 2016, the Government of Luxembourg committed $3 million equivalent (2015: $2 million equivalent) of contributions to the fund. As of 31 December 2016, fund resources totaled $14 million, of which $7 million had been used, leaving an uncommitted balance of $7 million (2015: $7 million as of 31 December 2015).

Operations. In 2016, seven TA projects totaling $3 million (2015: two TA projects and three supplementary approvals totaling $2 million) became effective, and $0.2 million (2015: $0.1 million) of financially completed and/or cancelled projects were written-back. The balance of undisbursed grants, net of advances as of 31 December 2016 amounted to $4 million ($2 million as of 31 December 2015).

Investment position. As of 31 December 2016, the total investment portfolio amounted to $8 million ($5 million as of 31 December 2015).

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V. GRANT COFINANCING

Trust funds and project-specific grants are key instruments to mobilize and channel financial resources from external sources to finance TA and components of investment projects. They play an important role in complementing ADB’s own resources. Multilateral, bilateral, and private sector partners have contributed about $7,428 million in grants and loans to ADB operations (Table 29). In 2016, grant cofinancing for ADB-approved projects totaled $952 million, comprising $148 million for 102 TA projects and $804 million for components of 40 investment projects. By the end of 2016, ADB was administering 42 trust funds, comprising 31 stand-alone trust funds,[14] and 11 trust funds established under financing partnership facilities. Of these, 27 have balances totaling $611 million in grants. Additional grant resources from external partners totaled $362 million in 2016, comprising $15 million in new commitments, $221 million in replenishments to existing trust funds, and $126 million in additional allocation from global funding initiatives.

Financing partners provided the following commitments and replenishments to existing trust funds:

• (i) $105 million from ANA Trust Fund for the Afghanistan Infrastructure Trust Fund;

• (ii) $58.8 million from the Government of Japan for the Afghanistan Infrastructure Trust Fund, Japan Fund for Poverty Reduction, Japan Fund for the Joint Crediting Mechanism, and Japan Scholarship Program;

• (iii) $40 million from the Government of the United States for the Afghanistan Infrastructure Trust Fund;

• (iv) $14.5 million form the Government of the Republic of Korea for the e-Asia and Knowledge Partnership Fund;

• (v) $7.8 million from the Nordic Development Fund for the Project Readiness Improvement Trust Fund;

• (vi) $7.1 million from the Government of Australia as new contribution for the Asia Pacific Project Preparation Facility;

• (vii) $2.5 million from the Government of Norway for the Clean Energy Fund under the Clean Energy Financing Partnership Facility; and

• (viii) $0.5 million from the Government of France for the Cooperation Fund Project Preparation in the Greater Mekong Subregion and in Other Specific Asian Countries.

Additional allocations from global funding initiatives comprised $76 million from the Climate Investment Funds, $31 million from the Green Climate Fund, $18 million from the Global Environment Facility, and $0.5 million from the Global Partnership for Education.

Japan Fund for Poverty Reduction. The Government of Japan established the JFPR in May 2000 to provide grants for projects supporting poverty reduction and related social development activities that add value to projects financed by ADB. In 2010, the JFPR expanded its scope of grant assistance to provide TA grants in addition to project grants. At the end of 2016, the JFPR received a total of $742 million in contributions from the Government of Japan, and funded 174 grant projects and 224 technical assistance projects.

14 Trust funds not related to financing partnership facilities and including the Japan Scholarship Program. ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2016

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Japan Scholarship Program. The Government of Japan established the JSP in 1988 to provide an opportunity for well-qualified citizens of DMCs to undertake postgraduate studies in economics, management, science and technology, and other development-related fields at selected educational institutions in Asia and the Pacific. Between 1988 and 2016, Japan has contributed $172 million and 3,526 scholarships were awarded to recipients from 37 member countries. Of the total, 3,180 have completed their courses. Women have received 1,317 scholarships. An average of 144 new scholarships per year has been awarded since 2007. As of 2016, JSP has 29 participating institutions in 10 countries.

Table 29: Schedule of Cumulative Contributions from External Sources As of 31 December 2016 ($ million)

Item	Item Nonsovereign entities and 782.5 external trust funds 19.6 Bill and Melinda Gates Foundation 15.0 19.8 Clean Technology Fund 1,028.1 0.3 Eneco Energy Trade B.V. 13.6 258.7 Global Agriculture and Food 40.1 Security Program 41.8 34.7 Global Environment Fund 215.4 444.6 Global Partnership for Education Fund 0.4 64.6 Special Climate Change Fund 11.2 37.2 Least Developed Countries Fund 14.3 0.5 International Fund for Agricultural 0.9 Development 0.5 2.3 Nordic Development Fund 47.7 2.2 POSCO 20.0 1,226.9 Public Private Infrastructure 93.2 Advisory Facility 1.4 8.3 Strategic Climate Fund 381.0 395.9 Trust Fund for Forest 15.1 52.5 The Rockefeller Foundation 5.0 196.6 Other 14.9 0.6 Subtotal 1,825.2 31.5 250.0 Grand Total 7,427.6 60.5 1,278.6 299.6 5,602.3 Contribution Contribution	Item Nonsovereign entities and 782.5 external trust funds 19.6 Bill and Melinda Gates Foundation 15.0 19.8 Clean Technology Fund 1,028.1 0.3 Eneco Energy Trade B.V. 13.6 258.7 Global Agriculture and Food 40.1 Security Program 41.8 34.7 Global Environment Fund 215.4 444.6 Global Partnership for Education Fund 0.4 64.6 Special Climate Change Fund 11.2 37.2 Least Developed Countries Fund 14.3 0.5 International Fund for Agricultural 0.9 Development 0.5 2.3 Nordic Development Fund 47.7 2.2 POSCO 20.0 1,226.9 Public Private Infrastructure 93.2 Advisory Facility 1.4 8.3 Strategic Climate Fund 381.0 395.9 Trust Fund for Forest 15.1 52.5 The Rockefeller Foundation 5.0 196.6 Other 14.9 0.6 Subtotal 1,825.2 31.5 250.0 Grand Total 7,427.6 60.5 1,278.6 299.6 5,602.3 Contribution Contribution
Administered by ADBa Country Australia Austria Belgium Brunei Darussalam Canada China, People's Republic of Denmark European Community Finland France Germany India Ireland Italy Japan Korea, Republic of Luxembourg The Netherlands New Zealand Norway Portugal Spain Sweden Switzerland United Kingdom and Northern Ireland United States Subtotal
		1,825.2
		7,427.6

ADB = Asian Development Bank. Note: Numbers may not sum precisely because of rounding. a Excludes capital contributions to Credit Guarantee and Investment Facility.

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42 Appendix

ORDINARY CAPITAL RESOURCES

CONDENSED MANAGEMENT REPORTING BALANCE SHEETS

As of 31 December 2016 and 2015

($ million)

Item	2015 Statutory Reporting Basis Adjustmentsa Management Reporting Basis Management Reporting Basis 2016
Due from banks Investments for liquidity purpose Securities purchased under resale arrangements Loans outstanding — operations Unamortized net loan origination costs, less allowance for loan losses Equity investments — operations Other debt securities — operations Accrued interest receivable Derivative Assets Borrowings Investments for liquidity purpose Loans — operations Other assets	661 – 661 753
	26,025 – 26,025 23,309
	102 – 102 126
	67,547 – 67,547 61,889
	52 – 52 52
	814 (27) 787 839
	150 – 150 6
	387 – 387 261
	19,942 (760) 19,182 20,599 8,542 (36) 8,506 7,091 659 (20) 639 748 973 676 1,649 1,761
TOTAL	125,854 (167) 125,687 117,434
Borrowings and accrued interest Derivative Liabilities Borrowings Investments for liquidity purpose Loans — operations Payable for swap related collateral Accounts payable and other liabilities	74,476 (536) 73,940 65,240 23,385 (575) 22,810 24,906 8,109 (61) 8,048 6,631 585 (24) 561 582 605 – 605 494 1,480 – 1,480 1,431
Total Liabilities	108,640 (1,196) 107,444 99,284
Paid-in capital Net notional maintenance of value receivable Ordinary reserve Special reserve Loan loss reserve Surplus Cumulative revaluation adjustments account Net (loss) incomeb Accumulated other comprehensive loss	6,399 676 7,075 7,293
	(1,474) – (1,474) (1,616) 12,211 2 12,213 11,984 340 – 340 322 172 – 172 215 1,065 – 1,065 1,065
	88 (88) – – (11) 513 502 324 (1,576) (74) (1,650) (1,437)
Total Equity	17,214 1,029 18,243 18,150
TOTAL	125,854 (167) 125,687 117,434

– = nil, ( ) = negative.

a Includes reversal of ASC Topics 815 and 825 effects, Asian Development Bank’s share in unrealized gains or losses from equity investments accounted for under the equity method and from equity investment w ith associated derivative, and nonnegotiable, and noninterest-bearing demand obligations on account of subscribed capital.

b Net (loss) income after appropriation of guarantee fees to the Special Reserve.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 31 DECEMBER 2016

Financial Statements

[This page is intentionally left blank]

45

ORDINARY CAPITAL RESOURCES MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Asian Development Bank ("ADB") is responsible for designing, implementing, and maintaining effective internal control over financial reporting. ADB's internal control over financial reporting is a process designed to provide reasonable assurance regarding the preparation of reliable financial statements in accordance with generally accepted accounting principles in the United States of America.

ADB's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of ADB; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (iii) provide reasonable assurance regarding prevention, or timely detection and correction, of unauthorized acquisition, use, or disposition of ADB's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct, misstatements. Also, projections of any assessment of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

ADB's management assessed the effectiveness of ADB's internal control over financial reporting as of 31 December 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management concluded that, as of 31 December 2016, ADB's internal control over financial reporting is effective based on the criteria established in Internal Control – Integrated Framework (2013).

==> picture [83 x 22] intentionally omitted <==

----- Start of picture text -----

Takehiko Nakao
President
----- End of picture text -----

Ingrid van Wees Vice-President (Finance and Risk Management)

Chai S. Kim Controller

17 March 2017

46

47

48

49

50

ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES BALANCE SHEET 31 December 2016 and 2015 Expressed in Millions of US Dollars

ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES BALANCE SHEET 31 December 2016 and 2015 Expressed in Millions of US Dollars	ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES BALANCE SHEET 31 December 2016 and 2015 Expressed in Millions of US Dollars
A S S E T S
DUE FROM BANKS (Note C) INVESTMENTS FOR LIQUIDITY PURPOSE (Notes D, J, O, and R) Government or government-guaranteed obligations Time deposits Other securities SECURITIES PURCHASED UNDER RESALE ARRANGEMENTS (Notes D and R) LOANS OUTSTANDING — OPERATIONS (OCR-6) (Notes A, F, J, R, T, and U) (Including net unamortized loan origination costs of $97 – 2016 and $86 – 2015) Sovereign Nonsovereign Less—allowance for loan losses EQUITY INVESTMENTS — OPERATIONS (Notes A, H, R, T, and U) OTHER DEBT SECURITIES — OPERATIONS (Notes I, R, T, and U) ACCRUED INTEREST RECEIVABLE Investments for liquidity purpose Loans — Operations DERIVATIVE ASSETS (Notes J, L, and R) Borrowings Investments for liquidity purpose Loans — Operations OTHER ASSETS Property, furniture, and equipment (Note K) Investment related receivables Swap related collateral (Notes J and R) Miscellaneous (Notes G, P, and R)	661 $ 23,730 $ 863 1,432 26,025 102 62,413 5,231 67,644 45 67,599 814 150 101 286 387 19,942 8,542 659 29,143 163 11 605 194 973 2016	2015
		753 $ 20,635 $ 1,308 1,366 23,309 126 57,555 4,420 61,975 34 61,941 862 6 77 184 261 21,664 7,112 762 29,538 168 10 494 229 901
TOTAL	125,854 $	117,697 $

Note: Certain reclassifications have been made to conform to current year's presentation. The accompanying notes are an integral part of these financial statements (OCR-9).

51

OCR-1

LIABILITIES AND EQUITY

BORROWINGS (OCR-7) (Notes J, L, and R) At amortized cost At fair value DERIVATIVE LIABILITIES (Notes J, L, and R) Borrowings Investments for liquidity purpose Loans — Operations ACCOUNTS PAYABLE AND OTHER LIABILITIES Investment related payables Swap related collateral (Notes J and R) Accrued pension and postretirement medical benefit costs (Note Q) Miscellaneous (Notes G, K, P, and R) TOTAL LIABILITIES EQUITY (OCR-4) Capital stock (OCR-8) (Note M) Authorized (SDR106,389) Subscribed (SDR106,149, less temporary reduction of nil � 2016 and SDR117 � 2015) Less—“callable” shares subscribed (SDR100,827, less temporary reduction of nil � 2016 and SDR112 � 2015) “Paid-in” shares subscribed (SDR5,322, less temporary reduction of nil � 2016 and SDR5 � 2015) Less—capital transferred to the Asian Development Fund and discount Nonnegotiable, noninterest-bearing demand obligations on account of subscribed capital (Note M) Net notional amounts required to maintain value of currency holdings (Note M) Ordinary reserve (Note N) Special reserve (Note N) Loan loss reserve (Note N) Surplus (Note N) Cumulative revaluation adjustments account (Note N) Net (loss) income after appropriation (OCR-4) (Note N) Accumulated other comprehensive loss (Note N)	5,177 $ 69,299 74,476 $ 23,385 8,109 585 32,079 11 605 1,297 172 2,085 108,640 142,699 135,545 7,154 79 7,075 (676) 6,399 (1,474) 12,211 340 172 1,065 88 (11) (1,576) 17,214 2016	2015
		4,259 $ 61,795 66,054 $ 24,985 6,679 608 32,272 10 494 1,258 163 1,925
		100,251 147,052 139,678 7,374 81 7,293 (860) 6,433 (1,616) 11,981 322 215 1,065 (125) 537 (1,366) 17,446
TOTAL	125,854 $	117,697 $

52

OCR-2

ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES STATEMENT OF INCOME AND EXPENSES For the Years Ended 31 December 2016 and 2015 Expressed in Millions of US Dollars

REVENUE (Note O) From loans — operations (Notes F and J) Interest Commitment charge Other, net From investments for liquidity purpose (Notes D and J) Interest From guarantees — operations From equity investments — operations From other debt securities — operations From other sources—net (Notes F and S) TOTAL REVENUE EXPENSES (Note O) Borrowings and related expenses (Notes J and L) Administrative expenses (Notes K, N, and Q) (Provision for) Write-back of loan losses (Note F) Other expenses TOTAL EXPENSES NET REALIZED GAINS From investments for liquidity purpose (Notes D, J, N, and O) From equity investments — operations (Notes N and O) From other debt securities — operations From borrowings (Note J) NET REALIZED GAINS NET UNREALIZED (LOSSES) GAINS (Notes H, J, L, and O)	1,051 $ 46 (43) 1,054 $ 399 18 18 0 43 1,532 $ (751) (390) (11) (11) (1,163) 53 107 (2) 0 158 (520) 2016	1,051 $ 46 (43) 1,054 $ 399 18 18 0 43 1,532 $ (751) (390) (11) (11) (1,163) 53 107 (2) 0 158 (520) 2016	2015	2015
			673 $ 49 (44) 678 $ 322 19 (19) – 29 1,029 $ (374) (383) 1 (12) (768) 43 12 – 1 56 239
NET INCOME		7 $		556 $

Note: 0 = less than $0.5 million. Certain reclassifications have been made to conform to current year's presentation. The accompanying notes are an integral part of these financial statements (OCR-9).

53

OCR-3

ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES STATEMENT OF COMPREHENSIVE (LOSS) INCOME For the Years Ended 31 December 2016 and 2015 Expressed in Millions of US Dollars

NET INCOME (OCR-2) Other comprehensive loss (Note N) Unrealized holding losses: From investments for liquidity purpose From equity investments — operations From debt securities — operations Postretirement benefit liability adjustments Currency translation adjustments	7 $ (153) $ 20 (1) (134) (58) (18) (210) 2016	7 $ (153) $ 20 (1) (134) (58) (18) (210) 2016	2015	2015
			556 $ (100) $ (26) 1 (125) $ 133 (136) (128)
COMPREHENSIVE (LOSS) INCOME		(203) $		428 $

The accompanying notes are an integral part of these financial statements (OCR-9).

54

OCR-4

ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES STATEMENT OF CHANGES IN EQUITY For the Years Ended 31 December 2016 and 2015 Expressed in Millions of US Dollars (Note M)

																			Accumulated	Accumulated
			Nonnegotiable,												Cumulative		Net Income			Other
				Noninterest-	Net Notional										Revaluation			After		Compre-
		Capital	bearing Demand		Maintenance		Ordinary		Special		Loan Loss				Adjustments			Appro-		hensive
		Stock		Obligations		of Value	Reserve		Reserve			Reserve	Surplus			Account		priations		Loss		Total
Balance, 1 January 2015	$	7,229	$	(1,098)	$	(1,537)	$	11,559	$	303	$	230	$	1,065	$	59	$	366	$	(1,238)	$	16,938
Comprehensive income
(OCR-3, Note N)																		556		(128)		428
Appropriation of guarantee
fees (Note N)										19								(19)				–
Change in subscription
installments not due and
paid-in shares		321		(74)																		247
Effect of change in SDR/USD
rate on capital transferred
to ADF		3						(3)														–
Effect of change in SDR/USD
rate on paid-in capital		(262)				221		41														–
Encashment of demand
obligations				257																		257
Change in US dollar value
(Note M)		2		55		(300)																(243)
Allocation of prior year income
(Note N)								384				(15)				(183)		(186)				–
Allocation of prior year income
to ADF, TASF, and APDRF
(Note N)																		(180)				(180)
Balance, 31 December 2015	$	7,293	$	(860)	$	(1,616)	$	11,981	$	322	$	215	$	1,065	$	(125)	$	537	$	(1,366)	$	17,446
Comprehensive loss
(OCR-3, Note N)																		7		(210)		(203)
Appropriation of guarantee
fees (Note N)										18								(18)				–
Change in subscription
installments not due and
paid-in shares		6																				6
Effect of change in SDR/USD
rate on capital transferred
to ADF		2						(2)														–
Effect of change in SDR/USD
rate on paid-in capital		(226)				201		25														–
Encashment of demand
obligations				189																		189
Change in US dollar value
(Note M)		(0)		(5)		(59)																(64)
Allocation of prior year income
(Note N)								208				(43)				213		(377)				–
Allocation of prior year income
to ADF and TASF (Note N)																		(160)				(160)
Balance, 31 December 2016	$	7,075	$	(676)	$	(1,474)	$	12,211	$	340	$	172	$	1,065	$	88	$	(11)	$	(1,576)	$	17,214

ADF = Asian Development Fund, APDRF = Asia Pacific Disaster Response Fund, SDR = Special Drawing Rights, TASF = Technical Assistance Special Fund, US = United States. Notes: Numbers may not sum precisely because of rounding. 0 = less than $0.5 million. The accompanying notes are an integral part of these financial statements (OCR-9).

55

OCR-5

ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES STATEMENT OF CASH FLOWS For the Years Ended 31 December 2016 and 2015 Expressed in Millions of US Dollars

CASH FLOWS FROM OPERATING ACTIVITIES Interest and other charges on loans — operations received Interest on investments for liquidity purpose received Interest received from securities purchased under resale/ repurchase agreement Interest and other charges on other debt securities — operations received Interest and other financial expenses paid Administrative expenses paid Others—net Net Cash Provided by Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Sales of investments for liquidity purpose Maturities of investments for liquidity purpose Purchases of investments for liquidity purpose Receipts from securities purchased under resale arrangements Payments for securities purchased under resale arrangements Principal collected on loans — operations Loans — operations disbursed Receipts from derivatives Payments for derivatives Property, furniture, and equipment acquired Purchases of equity investments — operations Purchases of other debt securities — operations Sales of equity investments — operations Net Cash Used in Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from new borrowings Borrowings redeemed Capital subscriptions collected1 Issuance expenses paid Demand obligations of members encashed Receipts from derivatives Payments for derivatives Resources transferred to ADF Resources transferred to TASF Resources transferred to APDRF Net Cash Provided by Financing Activities Effect of Exchange Rate Changes on Due from Banks Net (Decrease) Increase in Due from Banks Due from Banks at Beginning of Year Due from Banks at End of Year RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net Income (OCR-2) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Provision for losses charged (written back)—net Net realized gains Proportionate share in (earnings) losses on equity investments — operations Net unrealized losses (gains) Change in accrued revenue from loans — operations, investments for liquidty purpose, other debt securities — operations, and other swaps Change in receivable from ADF— allocation of administrative expenses Change in accrued interest on borrowings and swaps, and other expenses Change in pension and postretirement benefit liability Others—net Net Cash Provided by Operating Activities	2016 892 $ 376 0 1 (577) (342) 23 373 13,549 154,893 (171,269) 27,484 (27,468) 4,129 (9,693) 11 (41) (15) (79) (148) 261 (8,386) 28,963 (19,945) 6 (26) 189 48 (1,115) (120) (40) – 7,960 (39) (92) 753 661 $ 7 $ 47 11 (158) (15) 520 (219) 47 212 (57) (22) 373 $	2015
		613 $ 341 0 – (281) (346) 27
		354
		12,377 161,404 (174,752) 125,837 (124,743) 3,479 (9,623) 438 – (17) (124) – 74
		(5,650)
		23,175 (16,583) 243 (25) 257 95 (1,315) (120) (40) (20)
		5,667
		(35)
		336 417
		753 $
		556 $ 86 (1) (56) 28 (239) (85) (10) (34) 132 (23)
		354 $
ADF = Asian Development Fund, APDRF = Asia Pacific Disaster Response Fund, TASF = Technical Assistan Note: 0 = less than $0.5 million. Certain reclassifications have been made to conform to current year's presentation. The accompanying notes are an integral part of these financial statements (OCR-9). Supplementary disclosure of noncash financing activities: 1There were no nonnegotiable, noninterest-bearing demand promissory notes received from members in 201	ce Special Fund. 6 ($74 million – 2015).

56

ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES SUMMARY STATEMENT OF LOANS — OPERATIONS

31 December 2016 and 2015

Expressed in Millions of US Dollars

31 December 2016 and 2015 Expressed in Millions of US Dollars
Borrowers/Guarantors	Loans Outstanding1	Undisbursed Balances of Effective Loans2	Loans Not Yet Effective3	Total Loans	Percent of Total Loans
Armenia Azerbaijan Bangladesh Bhutan Cambodia China, People's Republic of Cook Islands Fiji Georgia India Indonesia Kazakhstan Kyrgyz Republic Lao People's Democratic Republic Malaysia Micronesia, Federated States of Mongolia Myanmar Pakistan Palau Papua New Guinea Philippines Sri Lanka Tajikistan Thailand Timor-Leste Turkmenistan Uzbekistan Viet Nam Regional TOTAL – 31 December 2016 Allowance for loan losses Unamortized loan origination cost—net NET BALANCE – 31 December 2016 Made up of: Sovereign Loans Nonsovereign Loans Private Sector Public Sector NET BALANCE – 31 December 2016 TOTAL – 31 December 2015 Allowance for loan losses Unamortized loan origination cost—net NET BALANCE – 31 December 2015 Made up of: Sovereign Loans Nonsovereign Loans Private Sector Public Sector Net Balance – 31 December 2015	189 $ 1,867 2,221 59 54 16,721 21 123 506 15,223 8,932 2,525 – 104 34 7 253 203 4,823 18 418 5,530 1,647 – 799 40 113 1,792 3,276 67,498 49 67,547 (45) 97 67,599 $ 62,413 $ 4,775 411 67,599 $ 61,889 $ (34) 86 61,941 $ 57,555 $ 3,968 418 61,941 $	311 $ 875 1,844 61 – 5,762 8 152 325 5,779 1,632 203 10 73 – 2 306 47 2,566 36 179 1,272 1,013 – 0 95 0 1,672 2,663 26,886 12 26,898 – – 26,898 $ 25,575 $ 1,140 183 26,898 $ 25,911 $ – – 25,911 $ 24,334 $ 1,483 94 25,911 $	52 $ 595 545 – 4 2,044 10 39 99 3,618 70 456 – – – – – 177 1,308 – 284 310 460 5 249 – – 298 733 11,356 40 11,396 – – 11,396 $ 8,953 $ 1,443 1,000 11,396 $ 10,099 $ – – 10,099 $ 8,235 $ 1,344 520 10,099 $	552 $ 3,337 4,610 120 58 24,527 39 314 930 24,620 10,634 3,184 10 177 34 9 559 427 8,697 54 881 7,112 3,120 5 1,048 135 113 3,762 6,672 105,740 101 105,841 (45) 97 105,893 $ 96,941 $ 7,358 1,594 105,893 $ 97,899 $ (34) 86 97,951 $ 90,124 $ 6,795 1,032 97,951 $	0.52 3.15 4.36 0.11 0.05 23.17 0.04 0.30 0.88 23.26 10.05 3.01 0.01 0.17 0.03 0.01 0.53 0.40 8.22 0.05 0.83 6.72 2.95 0.00 0.99 0.13 0.11 3.55 6.30
					99.90 0.10
					100.00

1 Amounts outstanding on the pool-based loans totaled $2,175 million ($2,781 million – 2015) and on LIBOR-based and local currency loans totaled $65,372 million ($59,108 million � 2015). The average yield on loans was 1.65% (1.16% – 2015).

2 Refer to the unwithdrawn portions of effective loans as of 31 December 2016. Of the undisbursed balances, ADB has made irrevocable commitments to disburse various amounts totaling $401 million ($575 million – 2015).

3 Loans totaling $8,506 million ($6,209 million – 2015) have been approved by ADB, but the related agreements have not been signed. Agreements for loans totaling $2,890 million ($3,890 million – 2015) have been signed, but the loans are not effective and disbursements will not start until the relevant conditions to the effectiveness of the loans have been fulfilled.

The accompanying notes are an integral part of these financial statements (OCR-9).

57

OCR-6

MATURITY OF EFFECTIVE LOANS AS OF 31 DECEMBER 2016

Twelve Months Ending 31 December 2017 2018 2019 2020 2021	Amount 4,030 $ 4,593 6,022 6,807 6,085	Five Years Ending 31 December 2026 2031 2036 2041 over 2041 Total	Amount
			25,962 22,817 14,004 3,841 284
			94,445 $

SUMMARY OF CURRENCIES RECEIVABLE ON LOANS OUTSTANDING — OPERATIONS

Currency		2016			2015
Yuan	$		459	$	479
Euro			51		56
Lari			62		42
Yen			927		1,259
Indian rupee			122		105

Currency	2016 2015
Rupiah Tenge New Zealand dollar Philippine peso Baht US dollar Total	12 17 – 65 21 22 38 7 280 273 65,575 59,564
	67,547 $ 61,889 $

58

ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES SUMMARY STATEMENT OF BORROWINGS 31 December 2016 and 2015 Expressed in Millions of US Dollars

	Borrowings	Borrowings	Swap Arrangements2	Swap Arrangements2	2016 2015 1 $ (23) $ 5 (0) (26) (21) 473 484 Net Currency Obligation3	2016 2015 1 $ (23) $ 5 (0) (26) (21) 473 484 Net Currency Obligation3
	Principal Outstanding1		Payable(Receivable)3
	2016	2015	2016	2015	2016
Australian dollar Brazilian real Canadian dollar Yuan	7,618 $ 1,297 1,409 576	8,750 $ 874 1,391 552	(7,617) $ (1,292) (1,435) (116) 13	(8,773) $ (874) (1,412) 12 (80)	1 $ 5 (26) 473
Euro	1,822	1,819	(1,826)	(1,827)	(4)	(8)
Hong Kong dollar Indian rupee Yen Ringgit Mexican peso New Zealand dollar Norwegian krone Pound sterling Singapore dollar South African rand Swiss franc Baht Turkish lira Lari US dollar Total	239 427 1,024 114 220 1,778 118 846 759 193 271 – 627 62 55,076 74,476 $	10 45 1,026 120 264 1,730 118 1,675 343 319 769 29 855 42 45,323	(239) – 1,155 (978) (114) (232) (1,784) (117) (845) (757) (192) (283) – (625) – 22,217 (1,490)	(10) – 1,317 (942) (120) (294) (1,736) (118) (1,675) (343) (319) (291) (29) (856) – 23,656 (1,965)	0 427 1,201 0 (12) (6) 1 1 2 1 (12) – 2 62 75,803	0 45 1,401 (0) (30) (6) (0) 0 (0) (0) 478 (0) (1) 42 67,014 69,375 $
		66,054 $	3,443 $	3,321 $	77,919 $

Note: 0 = less than $0.5 million.

1 Includes accrued interest and commission. Reported at fair value except for unswapped borrowings which are reported at principal amount net of unamortized discount/premium. The aggregate face amounts and discounted values of zero coupon and deep discount borrowings (in US dollar equivalents) are:

Currency	Aggregate Face Amount	Aggregate Face Amount	Discounted Value	Discounted Value
	2016 331 $ 188 26 15 – 286 142 1,610	2015	2016	2015
Australian dollar Brazilian real Euro South African rand Swiss franc Turkish lira Mexican peso US dollar		335 $ 154 – 149 495 415 170 1,848	284 $ 165 26 13 – 265 114 1,690	274 $ 120 – 144 492 376 132 1,348

The average cost of borrowings after swaps was 1.68% (0.19% - 2015).

59

OCR-7

MATURITY STRUCTURE OF BORROWINGS OUTSTANDING AS OF 31 DECEMBER 2016[4]

2020 2021 Twelve Months Ending 31 December 2017 2018 2019	Amount 18,548 $ 16,963 11,706 9,541 6,871	Five Years Ending 31 December 2026 2031 2036 over 2036 Total	Amount
			8,254 $ 2,547 46 –
			74,476 $

INTEREST RATE SWAP ARRANGEMENTS AS OF 31 DECEMBER 2016

Receive Fixed Swaps: Australian dollar7 Yuan US dollar US dollar8 Receive Floating Swaps: Yen US dollar Total	Notional Amount	Pay Maturing Receive Floating5 Through6 Average Rate (%)	Pay Maturing Receive Floating5 Through6 Average Rate (%)
		Receive
	43 $ 143 51,545 17 34 9,819	2.64 3.88 1.47 2.45 4.22 0.79	(0.32) 2027-2032 2.39 2019-2020 0.89 2017-2046 (0.31) 2027 (0.35) 2032 0.90 2017-2021
	61,601 $

2 Include currency and interest rate swaps. At 31 December 2016, the remaining maturity of swap agreements range from less than one year to 20 years. Approximately 82% of the swap receivables and 83% of the payables are due before 1 January 2022.

3 Adjusted by the cumulative effect of the adoption of ASC 815 effective 1 January 2001

4 Bonds with put and call options were considered maturing on the first put or call date.

5 Represents average current floating rates, net of spread.

6 Swaps with early termination date were considered maturing on the first termination date.

7 Consists of dual currency swaps with interest receivable in Australian dollar and interest payable in yen.

8 Consists of dual currency swaps with interest receivable in US dollar and interest payable in yen.

The accompanying notes are an integral part of these financial statements (OCR-9).

60

ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES STATEMENT OF SUBSCRIPTIONS TO CAPITAL STOCK AND VOTING POWER 31 December 2016

Expressed in Millions of US Dollars

MEMBERS	SUBSCRIBED CAPITAL	SUBSCRIBED CAPITAL	VOTING POWER
	Number of Percent Shares of Total	Par Value Of Shares1	Number of Percent Votes of Total
		Total Callable Paid-in
REGIONAL Afghanistan Armenia Australia Azerbaijan Bangladesh Bhutan Brunei Darussalam Cambodia China, People’s Republic of Cook Islands Fiji Georgia Hong Kong, China India Indonesia Japan Kazakhstan Kiribati Korea, Republic of Kyrgyz Republic Lao People’s Democratic Republic Malaysia Maldives Marshall Islands Micronesia, Federated States of Mongolia Myanmar Nauru Nepal New Zealand Pakistan Palau Papua New Guinea Philippines Samoa Singapore Solomon Islands Sri Lanka Taipei,China Tajikistan Thailand Timor-Leste Tonga Turkmenistan Tuvalu Uzbekistan Vanuatu Viet Nam	3,585 0.034 48.2 $ 41.8 $ 6.4 $ 31,671 0.298 425.8 404.4 21.3 614,220 5.786 8,257.1 7,844.2 412.9 47,208 0.445 634.6 602.8 31.8 108,384 1.021 1,457.0 1,384.2 72.9 660 0.006 8.9 8.3 0.6 37,386 0.352 502.6 477.4 25.2 5,250 0.049 70.6 64.7 5.9 684,000 6.444 9,195.2 8,735.3 459.9 282 0.003 3.8 3.6 0.2 7,218 0.068 97.0 92.2 4.9 36,243 0.341 487.2 462.8 24.4 57,810 0.545 777.2 738.3 38.9 672,030 6.331 9,034.3 8,582.5 451.8 578,100 5.446 7,771.6 7,382.9 388.6 1,656,630 15.607 22,270.6 21,156.8 1,113.8 85,608 0.806 1,150.9 1,093.3 57.6 426 0.004 5.7 5.4 0.3 534,738 5.038 7,188.6 6,829.2 359.5 31,746 0.299 426.8 405.4 21.3 1,476 0.014 19.8 18.6 1.2 289,050 2.723 3,885.8 3,691.5 194.3 426 0.004 5.7 5.4 0.3 282 0.003 3.8 3.6 0.2 426 0.004 5.7 5.4 0.3 1,596 0.015 21.5 20.4 1.1 57,810 0.545 777.2 738.3 38.9 426 0.004 5.7 5.4 0.3 15,606 0.147 209.8 199.3 10.5 163,020 1.536 2,191.5 2,081.9 109.6 231,240 2.178 3,108.6 2,953.2 155.5 342 0.003 4.6 4.4 0.2 9,960 0.094 133.9 127.2 6.7 252,912 2.383 3,400.0 3,230.0 170.0 348 0.003 4.7 4.4 0.3 36,120 0.340 485.6 461.3 24.3 708 0.007 9.5 9.0 0.5 61,560 0.580 827.6 786.2 41.4 115,620 1.089 1,554.3 1,476.6 77.7 30,402 0.286 408.7 388.2 20.5 144,522 1.362 1,942.9 1,845.7 97.2 1,050 0.010 14.1 13.4 0.7 426 0.004 5.7 5.4 0.3 26,874 0.253 361.3 343.2 18.1 150 0.001 2.0 1.9 0.1 71,502 0.674 961.2 913.2 48.1 708 0.007 9.5 9.0 0.5 36,228 0.341 487.0 455.4 31.6		43,192 0.326 71,278 0.537 653,827 4.928 86,815 0.654 147,991 1.115 40,267 0.303 76,993 0.580 44,857 0.338 723,607 5.454 39,889 0.301 46,825 0.353 75,850 0.572 97,417 0.734 711,637 5.363 617,707 4.655 1,696,237 12.784 125,215 0.944 40,033 0.302 574,345 4.329 71,353 0.538 41,083 0.310 328,657 2.477 40,033 0.302 39,889 0.301 40,033 0.302 41,203 0.311 97,417 0.734 40,033 0.302 55,213 0.416 202,627 1.527 270,847 2.041 39,949 0.301 49,567 0.374 292,519 2.205 39,955 0.301 75,727 0.571 40,315 0.304 101,167 0.762 155,227 1.170 70,009 0.528 184,129 1.388 40,657 0.306 40,033 0.302 66,481 0.501 39,757 0.300 111,109 0.837 40,315 0.304 75,835 0.572
Total Regional(Forward)	6,743,985 63.533 90,661.4 $ 86,113.1 $ 4,548.3 $		8,645,121 65.155

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MEMBERS	SUBSCRIBED CAPITAL	SUBSCRIBED CAPITAL	VOTING POWER
	Number of Percent Shares of Total	Par Value Of Shares1	Number of Percent Votes of Total
		Total Callable Paid-in
Total Regional(Forward)	6,743,985 63.533 90,661.4 $ 86,113.1 $ 4,548.3 $		8,645,121 65.155
NONREGIONAL Austria Belgium Canada Denmark Finland France Germany Ireland Italy Luxembourg The Netherlands Norway Portugal Spain Sweden Switzerland Turkey United Kingdom United States	36,120 0.340 485.6 461.3 24.3 36,120 0.340 485.6 461.3 24.3 555,258 5.231 7,464.5 7,091.2 373.3 36,120 0.340 485.6 461.3 24.3 36,120 0.340 485.6 461.3 24.3 247,068 2.328 3,321.4 3,155.3 166.1 459,204 4.326 6,173.2 5,864.5 308.7 36,120 0.340 485.6 461.2 24.3 191,850 1.807 2,579.1 2,450.1 129.0 36,120 0.340 485.6 461.2 24.3 108,882 1.026 1,463.7 1,390.5 73.2 36,120 0.340 485.6 461.3 24.3 12,040 0.113 161.9 150.5 11.4 36,120 0.340 485.6 461.3 24.3 36,120 0.340 485.6 461.3 24.3 61,950 0.584 832.8 791.2 41.7 36,120 0.340 485.6 461.3 24.3 216,786 2.042 2,914.3 2,768.6 145.7 1,656,630 15.607 22,270.6 21,156.8 1,113.8		75,727 0.571 75,727 0.571 594,865 4.483 75,727 0.571 75,727 0.571 286,675 2.161 498,811 3.759 75,727 0.571 231,457 1.744 75,727 0.571 148,489 1.119 75,727 0.571 51,647 0.389 75,727 0.571 75,727 0.571 101,557 0.765 75,727 0.571 256,393 1.932 1,696,237 12.784
Total Nonregional	3,870,868 36.467 52,037.2 49,431.5 2,605.8		4,623,401 34.845
TOTAL	10,614,853 100.000 142,698.7 $ 135,544.6 $ 7,154.1 $		13,268,522 100.000

Note: Numbers may not sum precisely because of rounding.

1 The authorized capital stock of the ADB has a par value of $10,000 in terms of US dollars of the weight and fineness in effect on 31 January 1966. Pending ADB's selection of the appropriate successor to the 1966 dollar, the par value of each share is SDR 10,000 for financial reporting purposes. Exchange rate at 31 December 2016 was $1.34433. (Notes B and M)

The accompanying notes are an integral part of these financial statements (OCR-9).

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ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES NOTES TO FINANCIAL STATEMENTS 31 December 2016 and 2015

NOTE A—NATURE OF OPERATIONS AND LIMITATIONS ON LOANS, GUARANTEES AND EQUITY INVESTMENTS

Nature of Operations

The Asian Development Bank (ADB), a multilateral development financial institution, was established in 1966 with its headquarters in Manila, Philippines. ADB and its operations are governed by the Agreement Establishing the Asian Development Bank (the Charter). Its purpose is to foster economic development and co-operation in Asia and the Pacific region and to contribute to the acceleration of the process of economic development of the developing member countries (DMCs) in the region, collectively and individually. Since 1999, ADB’s corporate vision and mission has been to help DMCs reduce poverty in the region. This was reaffirmed under the long-term strategic framework for 2008-2020 (Strategy 2020). Under Strategy 2020, ADB’s corporate vision continues to be “An Asia and Pacific Free of Poverty” and its mission has been to help its DMCs reduce poverty and improve living conditions and quality of life. ADB has been pursuing its mission and vision by focusing on three complementary strategic agendas: inclusive growth, environmentally sustainable growth, and regional integration.

ADB conducts its operations through the ordinary capital resources (OCR) and Special Funds (See Note S). Mobilizing financial resources, including cofinancing, is another integral part of ADB’s operational activities, where ADB, alone or jointly, administers on behalf of donors funds provided for specific uses.

ADB’s OCR operations comprise loans, equity investments, investment in debt securities, and guarantees. ADB finances its ordinary operations through borrowings, paid-in capital, and reserves.

ADB is immune from taxation pursuant to Chapter VIII, Article 56, Exemption from Taxation , of the Charter.

Combined ADF-OCR Lending Operations

In April 2015, the Board of Governors adopted the resolution authorizing the termination of Asian Development Fund (ADF) loan operations and the transfer of ADF loans, resources originally set-aside from the OCR, and certain other assets as may be determined by the Board of Directors to OCR effective 1 January 2017. After the effective date of this transfer, concessional lending to lower-income countries will continue from the expanded OCR (See Note V).

Limitations on Loans, Guarantees, and Equity Investments

Article 12, paragraph 1 of the Charter provides that the total amount outstanding of loans, equity investments, and guarantees made by ADB shall not exceed the total of ADB’s unimpaired subscribed capital, reserves, and surplus, exclusive of the special reserve. ADB’s policy on lending limitations limits the total amount of disbursed loans, disbursed equity investments and related prudential buffer, and the maximum amount that could be demanded from ADB under its guarantee portfolio, to the total amount of ADB’s unimpaired subscribed capital, reserves and surplus exclusive of the special reserve. At 31 December 2016, the total of such loans (including other debt securities), equity investments and related prudential buffers, and guarantees aggregated approximately 44.4% (39.6% – 2015) of the total subscribed capital, reserves, and surplus exclusive of the special reserve.

Article 12, paragraph 3 of the Charter provides that equity investments shall not exceed 10% of the unimpaired paid-in capital actually paid up at any given time together with reserves and surplus, exclusive of the special reserve. At 31 December 2016, such equity investments represented approximately 6.3% (6.7% – 2015) of the paid-in capital, reserves, and surplus, as defined.

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NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Presentation of the Financial Statements

The financial statements of OCR are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP).

Certain reclassifications were made in 2015 to conform to current year’s presentation.

Functional Currencies and Reporting Currency

The currencies of members are all functional currencies of ADB as these are the currencies of the primary economic environment in which OCR generates and expends cash. The reporting currency is the US dollar.

Translation of Currencies

ADB adopts the use of daily exchange rates for accounting and financial reporting purposes. This allows transactions in currencies other than the US dollar to be translated to the reporting currency using exchange rates applicable at the time of transactions. At the end of each accounting month, translations of assets, liabilities, capital, and reserves denominated in non-US dollar currencies are adjusted using the applicable rates of exchange at the end of the reporting period. These translation adjustments, other than those relating to the non-functional currencies (Note O) and to the maintenance of special drawing right (SDR) capital values (Notes M and N), are charged or credited to Accumulated translation adjustments and reported in EQUITY as part of Accumulated other comprehensive loss.

Valuation of Capital Stock

The authorized capital stock of ADB is defined in Article 4, paragraph 1 of the Charter “in terms of US dollars of the weight and fineness in effect on 31 January 1966” (1966 dollar) and the value of each share is defined as 10,000 1966 dollars. The capital stock had historically been translated into the current US dollar (ADB’s unit of account) on the basis of its par value in terms of gold. From 1973 until 31 March 1978, the rate arrived at on this basis was $1.20635 per 1966 dollar. Since 1 April 1978, at which time the Second Amendment to the Articles of Agreement of the International Monetary Fund (IMF) came into effect, currencies no longer have par values in terms of gold. Pending ADB’s selection of the appropriate successor to the 1966 dollar, the capital stock has been valued for purposes of these financial statements in terms of the SDR at the value in US dollars as determined by the IMF, with each share valued at SDR10,000.

As of 31 December 2016, the value of the SDR in terms of the US dollar was $1.34433 ($1.38686 – 2015) giving a value for each share of ADB’s capital equivalent to $13,443.30 ($13,868.60 – 2015).

Derivative Financial Instruments

ADB reports all derivative transactions in accordance with Accounting Standards Codification (ASC) 815, “Derivatives and Hedging.” ADB has elected not to define any qualifying hedging relationships, not because economic hedges do not exist, but rather because the application of ASC 815 hedging criteria does not make fully evident ADB’s risk management strategies. All derivative instruments, as defined by ASC 815, have been marked to fair value (FV), and all changes in FV have been recognized in net income. ADB records derivatives in the Balance Sheet as either assets or liabilities measured at FV, consistent with the legal rights and way the instruments are settled. Individual interest rate swaps under the Master Agreement of the International Swaps and Derivatives Association (ISDA), absent of local market constraints, are recorded on a net basis, while all other swaps, including cross currency and foreign exchange swaps, are recorded on a gross basis.

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Investments for Liquidity Purpose

All investment securities and negotiable certificates of deposit held by ADB are considered by Management to be “Available for Sale” (AFS) and are reported at FV. Unrealized gains and losses are reported in EQUITY as part of Accumulated other comprehensive loss. Realized gains and losses are reported in the Statement of Income and Expenses under NET REALIZED GAINS From investments and are measured by the difference between amortized cost and the net proceeds of sales using the specific identification method for internally managed investment portfolio and the weighted average cost method for externally managed investment portfolio.

Interest income on investment securities and time deposits is recognized as earned and reported, net of amortization of premiums and discounts.

Unrealized losses on investment securities are assessed to determine whether the impairment is deemed to be other than temporary. If the impairment is deemed to be other than temporary, the investment is written down to the impaired value, which becomes the new cost basis of the investment. Impairment losses are not reversed for subsequent recoveries in the value of the investment, until it is sold.

Securities Transferred Under Repurchase Agreements and Securities Purchased Under Resale Arrangements

ADB accounts for transfers of financial assets in accordance with ASC 860, “Transfers and Servicing.” Transfers are accounted for as sales when control over the transferred assets has been relinquished. Otherwise the transfers are accounted for as repurchase/resale agreements and collateralized financing arrangements. Under repurchase agreements, securities transferred are recorded as assets and reported at estimated FV and cash received is recorded as a liability. ADB monitors the FV of the securities transferred under repurchase agreements and the collateral. Under resale arrangements, securities purchased are recorded as assets and are not re-pledged.

Loans — Operations

ADB’s loans are made to or guaranteed by members, with the exception of nonsovereign loans. Loan interest income and loan commitment fees are recognized on accrual basis. In line with ADB’s principle of cost pass-through pricing, the funding cost margin is passed on to LIBOR-based loan borrowers as a surcharge or rebate.

It is the policy of ADB to place loans in non-accrual status for which principal, interest, or other charges are overdue by six months or in the case of loans that are not yet overdue, when there is expectation that interest and other charges will not be collected when they become due, at the point when such information is known. Interest and other charges on non-accruing loans are included in income only to the extent that payments have been received by ADB. Accordingly, loans are reinstated to accrual status when all the principal, interest and other charges due on the loan have been collected. ADB maintains a position of not taking part in debt rescheduling agreements with respect to sovereign loans. In the case of nonsovereign loans, ADB may agree to debt rescheduling only after alternative courses of action have been exhausted.

ADB’s periodic evaluation of the adequacy of the allowance for loan losses is based on its past loan loss experience, known and inherent risks in existing loans, and adverse situations that may affect a borrower’s ability to repay.

For sovereign loans, ADB determines that a loan is impaired and therefore subject to provisioning when principal or interest is in arrears for more than one year. Specific provision for sovereign loan losses is written-back when the borrower’s arrears have been fully settled and the borrower has re-established regular loan service payments. The nonsovereign loans are individually reviewed and subject to provisioning when the loan is considered impaired. The impairment is determined based on the difference between the

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loan carrying value and the present value of expected future cash flows discounted at the loan’s effective interest rate. In addition, ADB provides collective provisions for nonsovereign loans based on the credit risk ratings and probability of default and assumed loss given default.

ADB establishes loan loss reserves for both sovereign and nonsovereign credit exposures to be used as a basis for capital adequacy against expected losses in loans and guarantees. The amount of expected loss pertaining to credit exposures that is not impaired or subject to collective provision is recorded as loan loss reserve in the EQUITY section of the balance sheet. Any adjustment to loan loss reserve following this methodology is subject to the approval of the Board of Governors.

From 2000 to 2003, ADB levied front-end fees on all new sovereign loans. These fees are deferred and amortized over the life of the loans after offsetting deferred direct loan origination costs. Front-end fees were waived on sovereign loans approved from 2004 and were eliminated for sovereign loans negotiated on or after 1 October 2007. Since 1988, ADB has charged front-end fees for nonsovereign loans.

ADB levies a commitment charge on the undisbursed balance of effective loans. Unless otherwise provided by the loan agreement, the charges take effect commencing on the 60th day after the loan signing date and are credited to loan income.

Guarantees

ADB provides guarantees under its sovereign and nonsovereign operations. Guarantees are regarded as outstanding when the underlying financial obligation of the borrower is incurred. ADB would be required to perform under its guarantees if the payments guaranteed were not made by the debtor, and the guaranteed party called the guarantee by demanding payments from ADB in accordance with the term of the guarantee.

For guarantees issued and modified on or after 1 January 2003, ADB recognizes at the inception of a guarantee, a liability for the stand-by obligation to perform on guarantees. A front-end fee on guarantees received is deferred and amortized over the term of the guarantee contract. ADB records a contingent liability for the probable losses related to guarantees outstanding. This provision, as well as the unamortized balance of the deferred guarantee fee income, and the unamortized balance of the obligation to stand ready, are included in ACCOUNTS PAYABLE AND OTHER LIABILITIES - Miscellaneous on the Balance Sheet.

Collateral

ADB requires collateral from individual swap counterparties in the form of approved liquid securities or cash to mitigate its credit exposure to these counterparties. ADB records the restricted cash in OTHER ASSETS with a corresponding obligation to return the cash in ACCOUNTS PAYABLE AND OTHER LIABILITIES. Collateral received in the form of liquid securities is disclosed in Note J and not recorded on OCR’s Balance Sheet.

Equity Investments — Operations

Investments in equity securities with readily determinable market price are considered AFS and are reported at FV, with unrealized gains and losses reported in EQUITY as part of Accumulated other comprehensive loss. ADB reports equity investments with associated derivatives at FV, with changes in FV reported in the Statement of Income and Expenses under NET UNREALIZED (LOSSES) GAINS.

ADB applies the equity method of accounting to investments where it has the ability to exercise significant influence such as in limited liability partnerships (LLPs) and certain limited liability companies (LLCs) that maintain a specific ownership account for each investor in accordance with ASC 323-30, “Partnerships,

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Joint Ventures, and Limited Liability Entities” and direct equity investment that fall under the purview of ASC 323, “Investments—Equity Method and Joint Ventures.”

Investments in equity securities without readily determinable FVs are reported at cost or at written down value. ADB has determined that it is not practicable to estimate the FV of equity investments reported at cost or written down. These investments are assessed each quarter to reflect the amount that can be realized using valuation techniques appropriate to the market and industry of each investment. When impairment is identified and is deemed to be other than temporary, the equity investment is written down to the impaired value, which becomes the new cost basis of the equity investments. Impairment losses are not reversed for subsequent recoveries in the value of the equity investments.

Variable Interest Entities

ADB complies with ASC 810, “Consolidated Financial Statements.” ASC 810 requires an entity to consolidate and provide disclosures for any Variable Interest Entity (VIE) for which it is the primary beneficiary. An entity is subject to the ASC 810 VIE Subsections and is considered a VIE if it (i) lacks equity that is sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties; or (ii) if holders of the equity investment at risk lack decision-making rights about the entity’s activities that most significantly impact the entity’s economic performance; or (iii) do not have the obligation to absorb the expected losses or the right to receive the residual returns of the entity proportionally to their voting rights. ASC 810 defines the primary beneficiary as the entity that both has the (i) power to direct the activities that most significantly impact the economic performance of the VIE and the (ii) obligation to absorb losses or the right to receive residual returns of the entity. As of 31 December 2016 and 2015, ADB did not identify any VIE in which ADB is the primary beneficiary, requiring consolidation in OCR financial statements.

ADB's variable interests can arise from equity investments, loans, guarantees, and other contractual agreements that change with the changes in the FV of the VIE’s net assets exclusive of variable interests. ADB is required to disclose information about its involvement in VIEs where ADB holds significant variable interest (see Note T).

Other Debt Securities — Operations

Investments in other debt securities may be classified as held-to-maturity (HTM) or AFS based on the intent and ability of ADB to hold these securities to maturity. HTM securities are reported at amortized cost while AFS are reported at fair value.

Interest income on other debt securities is recognized as earned and reported, net of amortization of premiums and discounts, if any. In cases where front-end fees are collected, the fees are deferred and amortized over the life of the security after offsetting deferred direct origination costs.

Unrealized losses on other debt securities are assessed to determine whether the impairment is deemed to be other than temporary. If deemed to be other than temporary, the impairment is treated based on the classification. For HTM, the impairment related to credit loss is charged against income while the impairment related to other factors is recognized in other comprehensive income, which is accreted over the remaining life of the debt security. The accretion increases the carrying value of the security until it matures or is sold. For AFS, the impairment is charged against income and not reversed for subsequent recoveries in the value of the investment, until it is sold.

Property, Furniture, and Equipment

Property, furniture, and equipment are stated at cost and, except for land, depreciated over estimated useful lives on a straight-line basis. Maintenance, repairs, and minor betterments are charged to expense. Land is stated at cost and is not amortized.

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Borrowings

Borrowings provide funds for ADB’s operations. ADB diversifies its funding sources across markets, instruments, and maturities. In conjunction, ADB uses currency and interest rate swaps for asset and liability management.

ADB reports selected borrowings that are swapped or have floating interest rates at FV. Changes in FV are reported in the Statement of Income and Expenses under NET UNREALIZED (LOSSES) GAINS. Fixed rate borrowings, including legacy borrowings that do not have associated swaps continue to be reported at amortized cost. Amortization of discounts and premiums and issuance costs associated with new borrowings are deferred and amortized over the period during which the borrowing is outstanding.

Fair Value of Financial Instruments

ASC 820, “Fair Value Measurement” defines FV as the price that would be received to sell an asset or paid to transfer a liability at measurement date in an orderly transaction among willing participants with an assumption that the transaction takes place in the entity’s principal market, or in the absence of principal market, in the most advantageous market for the asset or liability. The most advantageous market is the market where the sale of the asset or transfer of liability would maximize the amount received for the asset or minimize the amount paid to transfer the liability. The FV measurement is not adjusted for transaction cost.

The Fair Value Option

ADB has adopted the Fair Value Option subsections of ASC 825, “Financial Instruments” (ASC 825 or the Fair Value Option). ASC 825 permits the measurement of eligible financial assets, financial liabilities and firm commitments at FV on an instrument-by-instrument basis, that are not otherwise permitted to be accounted for at FV under other accounting standards. The election to use the FV Option is available when an entity first recognizes a financial asset or liability or upon entering into a firm commitment.

In adopting ASC 825, ADB elected to record and report at FV all borrowings that are swapped or have floating interest rates. This election allows ADB to apply a consistent accounting treatment between borrowings and their related swaps. ADB continues to report its loans and fixed rate borrowings, including legacy borrowings that do not have associated swaps at amortized cost and reports most of its investments (except time deposits that are recorded at cost) at FV.

Fair Value Hierarchy

ASC 820 establishes a FV hierarchy that gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), next priority to observable market inputs or market corroborated data (Level 2), and the lowest priority to unobservable inputs without market corroborated data (Level 3).

The FVs of ADB’s financial assets and liabilities are categorized as follows:

Level 1: FVs are based on unadjusted quoted prices for identical assets or liabilities in active markets. Level 2: FVs are based on quoted prices for similar assets or liabilities in active markets or markets that are not active; or valuation models for which significant inputs are obtained from market-based data that are observable.

Level 3: FVs are based on prices or valuation models for which significant inputs to the model are unobservable.

Inter-level transfers from one year to another may occur due to changes in market activities affecting the availability of quoted market prices or observable market data.

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ADB’s policy is to recognize transfers in and transfers out of levels as of the end of the reporting period in which they occur.

Accounting Estimates

The preparation of the financial statements requires Management to make reasonable estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the end of the year and the reported amounts of revenues and expenses during the year. The actual results could differ from those estimates. Judgments have been used in the valuation of certain financial instruments, the determination of the adequacy of the accumulated provisions for losses on loans and other exposures (irrevocable commitments and guarantees), the determination of net periodic cost from pension and other postretirement benefits plans, and the present value of benefit obligations.

Accounting and Reporting Developments

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-09 “Revenue from Contracts with Customers (Topic 606)” to improve financial reporting by creating common revenue recognition guidance for US GAAP and the International Financial Reporting Standards. In 2016, ASUs 2016-08, 2016-10, 2016-12 and 2016-20 were issued to clarify the implementation guidance on principal versus agent considerations, on identifying performance obligations and licensing, on assessing collectability, noncash consideration, and completed contracts and contract modifications at transition, and to clarify the Codification and correct unintended application of the guidance, respectively. A public business entity is required to apply the amendments retrospectively for annual reporting periods beginning after 15 December 2017. These ASUs are not expected to have material impact on OCR’s financial statements on effectivity.

– In November 2014, the FASB issued ASU 2014-16 “Derivatives and Hedging (Topic 815) Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity, a Consensus of the FASB Emerging Issues Task Force.” This update eliminated diversity in practice by requiring to consider all of a hybrid instrument’s stated and implied substantive terms and features, including any embedded derivative features evaluated for bifurcation, in evaluating the nature of a host contract in a hybrid financial instrument. This update became effective on 1 January 2016 but had no impact to ADB's current practice, which has been consistent with the method prescribed in this update.

In February 2015, the FASB issued ASU 2015-02 “Consolidation (Topic 810) – Amendments to the Consolidation Analysis,” which amended the consolidation requirements and significantly changed the consolidation analysis required. The amendments reduced the number of consolidation models and placed more emphasis on risk of loss when determining a controlling financial interest. This update became effective on 1 January 2016 but did not have a material impact on OCR’s financial statements.

In April 2015, the FASB issued ASU 2015-03 “Interest – Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs,” and ASU 2015-05 “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) – Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” which became effective for OCR financial statements from 1 January 2016, with no material impact on OCR’s financial position, results of operations or cash flows. ASU 2015-03 required that debt issuance costs related to a recognized debt liability, currently reported as deferred charges, be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. It did not change the recognition and measurement guidance for debt issuance costs. ASU 2015-05 provided guidance to customers on accounting for cloud computing arrangement, giving consideration on whether the arrangement includes software license or not.

– In January 2016, the FASB issued ASU 2016-01, “ Financial Instruments—Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities. ” This update enhances the

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reporting requirements for financial instruments. Specifically, this update (i) requires that investments in equity securities measured at FV recognize FV changes through net income, (ii) simplifies the impairment assessment of equity investments without readily determinable FV by requiring entities to perform a qualitative assessment to identify impairment, (iii) amends certain disclosure requirements associated with the FV of financial instruments, and (iv) requires to present separately in other comprehensive income the portion of the total change in the FV resulting from a change in the instrument-specific credit risk of liabilities that an entity has elected to measure at FV in accordance with the FV option. This update is effective for fiscal years beginning after 15 December 2017 and interim periods thereafter. Early adoption is permitted. ADB is currently assessing the impact of this ASU on OCR’s financial statements.

In February 2016, the FASB issued ASU 2016-02, “ Leases (Topic 842). ” This amendment requires the recognition by lessees of lease assets and lease liabilities for the rights and obligations arising from operating leases with terms of more than 12 months. It also requires qualitative disclosures along with specific quantitative disclosures. This update is effective for fiscal years beginning after 15 December 2018 and interim periods thereafter. This ASU is not expected to have material impact on OCR’s financial statements on effectivity.

In March 2016, the FASB issued the following ASUs which are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after 15 December 2016. ASU 2016-06, “ Derivatives and Hedging (Topic 815) – Contingent Put and Call Options in Debt Instruments, ” requires the sole use of the four-step decision sequence in assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. ADB is currently assessing the impact of this ASU on OCR’s financial statements. ASU – 2016-07, “ Investments - Equity Method and Joint Ventures (Topic 323) Simplifying the Transition to the Equity Method of Accounting, ” eliminates the requirement to retroactively adopt the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. This update will become effective for OCR financial statements from 1 January 2017.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments,” replacing the incurred loss impairment methodology with a methodology that reflects expected credit losses on financial instruments and other commitments to extend credit. This update is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after 15 December 2019. Amendments in this update will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. ADB is currently assessing the impact of this ASU on OCR's financial statements and anticipates that the initial application will result in changes to the accounting policies and additional disclosures relating to loans, guarantees, AFS and HTM securities. It is currently impracticable to disclose any further information on the known or reasonably estimable impact to OCR’s financial statements in the period of initial application as its detailed assessment has not been completed yet. ADB does not plan to early adopt this update.

In August and November 2016, FASB issued two ASUs related to statement of cash flows. ASU 2016-15, “Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments,” provides guidance for eight specific cash flow issues, where current standards are either unclear or deficient. ASU 2016-18, “ Statement of Cash Flows (Topic 230) – Restricted Cash ,” requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. Amendments in these updates should be applied retrospectively for annual financial statements issued for fiscal years beginning after 15 December 2017, and for interim periods within those fiscal years. Early adoption is permitted. ADB is currently assessing the impact of this ASU on OCR’s financial statements.

In January 2017, FASB issued ASU 2017-01, “Business Combinations (Topic 805) – Clarifying the Definition of a Business,” which clarifies the definition of a business to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposal) of assets or business. Amendments in

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this update should be applied prospectively for annual financial statements issued for fiscal years beginning after 15 December 2017, and for interim periods within those fiscal years. No disclosures are required at transition. Early adoption is permitted. ADB is currently assessing the impact of this ASU on OCR’s financial statements.

Also in January 2017, FASB issued ASU 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323) – Amendments to SEC Paragraphs Pursuant to Staff Announcements at the 22 September 2016 and 17 November 2016 EITF Meetings,” which adds the Securities and Exchange Commission (SEC) Staff Announcement regarding disclosure of the impact that recently issued accounting standards, particularly ASU 2014-09, ASU 2016-02 and ASU 201613 will have on the entity’s financial statements when adopted in future period. Such disclosure should include (i) a description of the effect of the accounting policies that the entity expects to apply, if determined; (ii) a comparison with current accounting policies; and (iii) the entity’s progress in implementing the new standards and any significant implementation matters yet to be addressed. Appropriate disclosures were provided in the affected ASUs.

In February 2017, the FASB issued ASU 2017-05 “Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) – Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets,” which clarifies the scope of recognizing gains and losses from the transfer of nonfinancial assets and adds guidance for partial sales of nonfinancial assets. A public business entity is required to apply the amendments retrospectively for annual reporting periods beginning after 15 December 2017. ADB is currently assessing the impact of this ASU on OCR’s financial statements.

Statement of Cash Flows

For the purposes of the Statement of Cash Flows, ADB considers that its cash and cash equivalents are limited to DUE FROM BANKS, which consist of current accounts in banks used for (i) operational disbursements, (ii) receipt of funds from encashment of members’ promissory notes, and (iii) clearing accounts.

NOTE C—RESTRICTIONS ON USE OF CURRENCIES OF MEMBERS

In accordance with Article 24, paragraph 2(i) of the Charter, the use by ADB or by any recipient from ADB of certain currencies may be restricted by members to payments for goods or services produced and intended for use in their territories. With respect to the currencies of 40 DMCs for 2016 and 2015, cash in banks (due from banks) totaling $76 million ($88 million – 2015) may be, but are not currently so restricted.

In accordance with Article 24, paragraphs 2(i) and (ii) of the Charter, no member has restricted the use by ADB or by any recipient from ADB of its currency to payments for goods or services produced in its territory.

NOTE D—INVESTMENTS FOR LIQUIDITY PURPOSE

The main investment management objective is to maintain security and liquidity. Subject to these parameters, ADB seeks the highest possible return on its investments. Investments are governed by the Investment Authority approved by the Board of Directors.

ADB enters into currency and interest rate swaps, and forward rate agreements. Exposure to interest rate risk may be adjusted within defined bands to reflect changing market conditions. These adjustments are made through the purchase and sale of securities.

ADB may engage in securities lending of government or government-guaranteed obligations and corporate obligations, for which ADB receives a guarantee from the securities custodian and a fee. Transfers of securities by ADB to counterparties are not accounted for as sales as the accounting criteria

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for the treatment of a sale have not been met. These securities must be available to meet ADB’s obligation to counterparties. Included in investments as of 31 December 2016 were securities transferred under securities lending arrangements of government or government-guaranteed obligations totaling $42 million ($24 million – 2015).

The currency composition of the investment portfolio as of 31 December 2016 and 2015 expressed in US dollars was as follows:

($million)
Currency US dollar Yen Won Euro Australian dollar Indian Rupee Yuan Canadian dollar New Zealand dollar Others Total	2016 2015 13,651 $ 12,677 $ 7,096 5,779 1,987 2,005 624 614 622 598 450 180 418 283 390 377 286 274 501 522 26,025 $ 23,309 $

The estimated FV and amortized cost of the investments by contractual maturity at 31 December 2016 and 2015 were as follows:

($million)
Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years through fifteen years Total	Estimated Amortized Fair Value Cost 8,481 $ 8,473 $ 15,735 15,870 1,809 1,831 – – 26,025 $ 26,174 $ 2016	2015
	Estimated Fair Value 8,481 $ 15,735 1,809 – 26,025 $	Estimated Amortized Fair Value Cost 7,279 $ 7,274 $ 15,735 15,758 282 265 13 7 23,309 $ 23,304 $

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Additional information relating to investments in government or government-guaranteed obligations and other securities classified as available for sale are as follows:

($ million)

($million)
		2016		2015
As of 31 December
Amortized cost	$	25,311	$	21,997
Estimated fair value		25,162		22,001
Gross unrealized gains		67		85
Gross unrealized losses		(216)		(81)
For the year ended 31 December
Change in net unrealized gains
from prior year		(153)		(100)
Proceeds from sales		13,549		12,377
Gross gain on sales		56		43
Gross loss on sales		(3)		(1)

The table below provides a listing of investments that sustained unrealized losses as of 31 December 2016. Five government or government-guaranteed obligations (five – 2015), and two corporate obligations (31 – 2015) sustained unrealized losses for over one year, representing 1.86% (2.93% – 2015) of the total investments. Comparative details for 2016 and 2015 are as follows:

($million)
Fair Unrealized Value Losses 2016 Government or government- guaranteed obligations 14,639 $ 208 $ Other securities Corporate obligations 383 5 Total 15,022 $ 213 $ Oneyear or less	Oneyear or less		Over oneyear		Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Unrealized Value Losses 14,844 $ 211 $ 663 5 15,507 $ 216 $
		208 $ 5	205 $ 280	3 $ 0
	15,022 $	213 $	485 $	3 $
2015 Government or government- guaranteed obligations 10,142 $ Other securities Corporate obligations 645 Total 10,787 $		69 $ 4	164 $ 518	6 $ 2	10,306 $ 75 $ 1,163 6 11,469 $ 81 $
	10,787 $	73 $	682 $	8 $
0 = less than $0.5 million.

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Fair Value Disclosure

The fair value of INVESTMENTS FOR LIQUIDITY PURPOSE and related financial assets as of 31 December 2016 and 2015 was as follows:

($million)
2016 Investments for liquidity purpose Government or government-guaranteed obligations Time deposits	Total 23,730 $ 863	Fair Value Measurements
		Level 1 22,251 $ –	Level 2 1,479 $ 863	Level 3
				– $ –
Other securities Securities purchased under resale arrangements	1,432 102	1,179 –	253 102	– –
Total at fair value 2015 Investments for liquidity purpose Government or government-guaranteed obligations Time deposits	26,127 $ 20,635 $ 1,308	23,430 $ 19,303 $ –	2,697 $ 1,332 $ 1,308	– $
				– $ –
Other securities Securities purchased under resale arrangements	1,366 126	1,353 –	13 126	– –
Total at fair value	23,435 $	20,656 $	2,779 $	– $

If available, active market quotes are used to assign fair values to investment securities and related financial assets. These include most government or government-guaranteed obligations and corporate obligations. Investments and related financial assets where active market quotes are not available are categorized as Level 2 or Level 3, and valuation is provided by independent valuation services, custodians, and asset managers, or based on discounted cash flow model using market observable inputs, such as interest rates, foreign exchange rates, basis spreads, cross currency rates, and volatilities, and unobservable inputs, such as option adjusted spreads, and other techniques. Time deposits are reported at cost, which approximates FV.

OCR’s INVESTMENTS FOR LIQUIDITY PURPOSE are governed by the Investment Authority approved by the Board of Directors. The asset and liability management committee and risk committee are involved in overseeing the activities and performance of the investment portfolio. ADB maintains documented processes and internal controls to value the investment securities and financial assets. The data management unit in the treasury department is responsible for providing the valuation in accordance with the business process. In instances where ADB relies primarily on prices from third party pricing information, there are procedures in place to validate the appropriateness of those values in determining the hierarchy levels. This involves evaluating the nature of prices provided by third party pricing sources to determine if they are indicative or binding prices.

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The table below provides the details of transfers between Levels 1 and 2, which are attributed to the availability or absence of market quotes for the years ended 31 December 2016 and 2015:

($million)
Investments for liquidity purpose	Level 1 Level 2 2016		2015
	Level 1		Level 1	Level 2
Government or government-guaranteed obligations
Transfers into (out of) Transfers (out of) into Corporate obligations Transfers into (out of) Transfers (out of) into	242 $ (25) 10 (251)	(242) $ 25 (10) 251	20 $ (35) 249 (11)	(20) $ 35 (249) 11
	(24) $	24 $	223 $	(223) $

NOTE E—SECURITIES TRANSFERRED UNDER REPURCHASE AGREEMENTS

ADB has entered into Global Master Repurchase Agreements with counterparties in which ADB agrees to transfer securities under repurchase agreements. The agreements provide for the right of a party to terminate if any of the specified default and termination events occur and includes provisions to offset the sum due from one party against the sum due from the other. ADB monitors daily the FV of margin securities for compliance with the repurchase agreement.

There are no repurchase agreements accounted for as secured borrowings as of 31 December 2016 and 2015.

NOTE F—LOANS — OPERATIONS

Loans

The carrying amount and estimated FV of loans outstanding by lending window at 31 December 2016 and 2015 were as follows:

($million)
	2016		2015
	Carrying Value	Estimated Fair Value	Carrying Value	Estimated Fair Value
LIBOR-based loansa Local currency loans Pool-based single currency loans (US$) Pool-based single currency loans (yen)	64,461 $ 963 2,134 41	64,800 $ 995 2,443 41	58,181 $ 979 2,600 181	58,385 $ 1,019 3,019 181
Total aThis includes market-based loans.	67,599 $	68,279 $	61,941 $	62,604 $

In July 1992, ADB introduced a US dollar pool-based variable lending rate system, and in November 1994, a market-based lending rate system was made available to sovereign and nonsovereign borrowers.

ADB introduced LIBOR-based loans (LBLs) in the following currencies – US dollar, euro, and yen on 1 July 2001. The LBL lending facility offers borrowers (i) choice of currency and interest rate basis; (ii) flexibility to change the original loan terms (currency and interest rate basis) at any time during the life of the loan; and (iii) options to cap or collar the floating lending rate at any time during the life of the loan. With the introduction of LBLs, prior loan windows are no longer offered to borrowers. ADB enhanced the LBL lending facility to sovereign LBLs negotiated after 1 January 2007, offering additional major currencies that ADB can

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efficiently intermediate, and additional repayment options including (i) annuity method with various discount factors, (ii) straight-line repayment, (iii) bullet repayment, and (iv) custom-tailored repayment.

In November 2002, ADB started to offer local currency loans (LCL) to nonsovereign borrowers and extended the LCL to sovereign borrowers in 2005.

In June 2009, ADB established a Countercyclical Support Facility (CSF) in response to the global economic crisis that spread to Asia and the Pacific. Loans approved under the CSF carry a lending spread of 2.0% above ADB’s average funding cost, and have a maturity of 5 years, including a 3-year grace period. As of 31 December 2016, outstanding CSF loans amounted to $2,000 million ($1,500 million – 2015).

In April 2011, ADB established the project design facility on a pilot basis to support project preparation, particularly detailed engineering designs, through project design advances (PDA). The facility is designed to be refinanced from the proceeds of the ADB loan for the ensuing project. PDAs approved carry standard lending rates. Payment of interest is deferred until the PDA is refinanced out of the loans proceeds, or other repayment terms take effect.

During 2016, ADB received prepayments for 13 loans (eight loans – 2015) amounting to $311 million ($154 million – 2015), of which $157 million ($39 million – 2015) was for sovereign loans and $154 million was for nonsovereign loans ($115 million – 2015).

Loans in Non-accrual Status

ADB places loans in non-accrual status when they are past due by six months or in the case of loans that are not yet overdue, when there is expectation that interest and other charges will not be collected when they become due, at the point when such information is known. As of 31 December 2016, one (nil – 2015) nonsovereign loan was in non-accrual status with principal outstanding of $20 million, but without overdue principal.

An analysis of the age of the recorded loans outstanding that are past due as of 31 December 2016 and 2015 is as follows:

($ million)

($million)
2016 Sovereign Loans Nonsovereign Loans Total Allowance for loan losses Unamortized loan origination costs—net Net Loans Outstanding	1–90 Days > 90 Days Total – $ – $ – $ – – – – $ – $ – $ Overdue Loan Service Payments		Current 62,278 $ 5,269 67,547 $	Total Loans
	1–90 Days – $ – – $	> 90 Days – $ – – $
				62,278 $ 5,269
				67,547 (45) 97
				67,599 $

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($ million)

($million)
2015 Sovereign Loans Nonsovereign Loans Total Allowance for loan losses Unamortized loan origination costs—net Net Loans Outstanding	1–90 Days > 90 Days Total 0 $ – $ 0 $ 2 1 3 2 $ 1 $ 3 $ Overdue Loan Service Payments		Current 57,432 $ 4,454 61,886 $	Total Loans
	1–90 Days 0 $ 2 2 $	> 90 Days – $ 1 1 $
				57,432 $ 4,457
				61,889 (34) 86
				61,941 $

0 = less than $0.5 million

Undisbursed loan commitments and an analysis of loans by borrower as of 31 December 2016 are shown in OCR-6. The carrying amounts of loan outstanding by loan products at 31 December 2016 and 2015 were as follows:

($million)
Sovereign Loans LIBOR-based loans Local currency loans Pool-based single currency loans (US$) Pool-based single currency loans (yen) Allowance for loan losses Unamortized direct loan origination cost—net Subtotal Nonsovereign Loans LIBOR-based loans Local currency loans Allowance for loan losses Unamortized front-end fee—net Subtotal Total	2016 2015 60,103 $ 54,586 $ – 65 2,134 2,600 41 181 62,278 57,432 – – 135 123 135 123 62,413 57,555 4,296 3,534 973 923 5,269 4,457 (45) (34) (38) (37) (83) (71) 5,186 4,386 67,599 $ 61,941 $

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Allowance for Loan Losses

ADB has not suffered any losses of principal on sovereign loans to date. During 2016 and 2015, no loan loss provision has been made against outstanding sovereign loans. There was no accumulated loan loss provision for sovereign loans as of 31 December 2016 and 2015.

A net provision of $11 million was made for nonsovereign loans ($1 million net write-back – 2015) consisting of $21 million provision ($2 million – 2015), and $10 million write-back ($3 million write-back – 2015).

The changes in the allowance for loan losses during 2016 and 2015 as well as information pertaining to loans which were subject to specific allowance for loan losses were as follows:

($million)
Allowance for Credit Losses: Beginning balance Provision during the year Written back/off Ending Balance Outstanding Allowance on: Individually evaluated for loan losses Collectively evaluated for loan losses Outstanding Loans Individually evaluated for loan losses Collectively evaluated for loan losses		2016			2015
	Sovereign Loans	Nonsovereign Loans	Total	Sovereign Loans	Nonsovereign Loans Total 35 $ 35 $ 2 2 (3) (3) 34 $ 34 $ 6 $ 6 $ 28 $ 28 $ 4,457 $ 61,889 $ 18 $ 18 $ 4,439 $ 4,439 $
	– $ – –	34 $ 21 (10)	34 $ 21 (10)	– $ – –
	– $ – $ – $ 62,278 $ – $ – $	45 $ 14 $ 31 $ 5,269 $ 20 $ 5,249 $	45 $ 14 $ 31 $ 67,547 $ 20 $ 5,249 $	– $ – $ – $ 57,432 $ – $ – $

Loans subject to provisioning with related allowance for loan losses during 2016 and 2015 were as follows:

($million)
Sovereign Loans Nonsovereign Loans		2016	Related allowance – $ 14		2015
	Recorded Loan Receivable – $ 20	Unpaid Principal balance – $ –		Recorded Loan Receivable – $ 18	Unpaid Principal balance Related allowance – $ – $ 3 6

No loans were modified or restructured for the years ended 31 December 2016 and 2015.

Credit Risks and Quality of Loans

ADB is exposed to credit risks in the loan portfolio if a borrower defaults or its creditworthiness deteriorates. Credit risks represent the potential loss due to possible nonperformance by obligors and counterparties under the terms of the contract. ADB manages credit risk for lending operations through continuous monitoring of creditworthiness of the borrowers and the capital adequacy framework.

ADB monitors credit quality of the loans by assigning a risk rating to each loan on an internal scale from 1 to 14 with 1 denoting the lowest expectation of credit risk and 14 denoting that the borrower has defaulted. The rating scale corresponds to the rating scales used by international rating agencies. For sovereign loans, ADB has a process of assigning internal ratings to provide more accurate inputs for risk measurements. For nonsovereign loans, each transaction is reviewed and assigned a rating based on a methodology that is

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broadly aligned with the rating approach of international rating agencies. The risk ratings are used to monitor the credit risks in the portfolio.

The following table summarizes the credit quality of sovereign and nonsovereign loans after the effect of risk transfers. High credit risk includes $20 million in nonsovereign loans that were considered impaired ($18 million in nonsovereign loans – 2015).

Risk Class Low credit risk Medium credit risk High credit risk Total	Risk Rating 1–5 (AAA to BBB–) 6–11 (BB+ to B–) 12–14 (CCC+ to D)	2016 2015 Sovereign Loans	2016 2015 Sovereign Loans	Nonsovereign Loans	Nonsovereign Loans
		2016		2016	2015
		46,121 $ 16,121 36	44,447 $ 12,955 30	2,040 $ 3,194 35	2,001 $ 2,368 88
		62,278 $	57,432 $	5,269 $	4,457 $

As of 31 December 2016, ADB’s loan and guarantee portfolios had a significant concentration of credit risk to Asia and the Pacific region. The credit exposure determined based on FV amounted to $70,383 million ($64,011 million – 2015).

Fair Value Disclosure

ADB does not sell its sovereign loans, nor does it believe there is a market for its sovereign loans. As of 31 December 2016 and 2015, all loans are carried at amortized cost.

Fair valuation is based on internal discounted cash flow models in which expected cash flows are discounted at applicable market yield curves, plus ADB's lending spread, reduced by the specific and collective provisions. Inputs for the models are based on available market data such as yield curves, interest rates, volatilities, credit curves, and foreign exchange rates. Parameters and models used for valuation are subject to internal review and periodic external validation. The accounting division is responsible for determining and reporting the FV of the loan portfolio. The office of risk management is primarily responsible for determining the specific and collective provisions for the nonsovereign loans and the accounting division, in coordination with regional departments, is responsible for determining the specific provisions for sovereign loans. The provisioning levels are discussed at the risk committee and reported to the Board of Directors quarterly.

The significant observable inputs used in valuing the various classes of loans classified as Level 2 include foreign exchange rates and yield curves specified to index fixed rates, deposit and swap interest rates, and yield curves specified to LIBOR. The significant unobservable inputs used in valuing the various classes of loans classified as Level 3 include probability of default, weighted average cost of fixed and floating rate borrowings attached to pool-based single currency loans and swaps spreads for selected currencies.

Significant increase (decrease) in these unobservable inputs, independently, will generally decrease (increase) the FV of the loan.

The hierarchy of estimated FV of ADB loans as of 31 December 2016 and 2015 was as follows:

($million) Level 1 Level 2 Level 3 Total at fair value
	2016 2015 – $ – $ 62,166 56,815 6,113 5,789 68,279 $ 62,604 $

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Cofinancing

ADB functions as lead lender in cofinancing arrangements with other participating financial institutions who also provide funds to ADB’s sovereign and nonsovereign borrowers. In such capacity, ADB provides loan administration services, which include loan disbursements and/or loan collections. The participating financial institutions have no recourse to ADB for their outstanding loan balances. These loans are not recorded as part of OCR’s Balance Sheet.

Loans administered by ADB on behalf of participating institutions during the year ended 31 December 2016 and 2015 were as follows:

==> picture [308 x 98] intentionally omitted <==

----- Start of picture text -----

($ million)
2016 2015
No.of No.of
Amount Loans Amount Loans
Sovereign loans $ 2,177 69 $ 1,755 59
Nonsovereign loans 1,378 19 1,200 16
Total $ 3,555 88 $ 2,955 75
----- End of picture text -----

NOTE G—GUARANTEES — OPERATIONS

ADB provides guarantees under its sovereign and nonsovereign operations. Such guarantees include (i) credit guarantees where certain principal and/or interest payments are covered; (ii) political risk guarantees, which provide coverage against well-defined country risk events; and (iii) guarantees for certain traderelated obligations. While counter-guarantees from the host government are required for all sovereign guarantees, guarantees for nonsovereign projects may be provided with or without a host government counter-guarantee. ADB also seeks risk-sharing arrangements that set ADB’s net exposure under a guarantee at the lowest level required to mobilize the necessary financing while maintaining a participation that is meaningful to its financing partners. A counter-guarantee takes the form of a counter-guarantor’s agreement to indemnify ADB for any payment it makes under the guarantee. In the event that a guarantee is called, ADB has the contractual right to require payment from the counter-guarantor, on demand, or as ADB may otherwise direct.

Tenors of guarantees are subject to risk considerations and market conditions. They should normally not exceed the maximum tenor of ADB’s ordinary capital resources lending operations, as may be adjusted from time to time, and there is no minimum tenor. In some cases however, guarantees may be for short tenors if the underlying obligations are short term, such as trade related products.

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The committed and outstanding amounts of these guarantee obligations as of 31 December 2016 and 2015 covered:

($ million)

Credit Guarantees Trade Related with counterguarantee without counterguarantee Non-Trade Related with counterguarantee without counterguarantee Subtotal Political Risk Guarantees Non-Trade Related with counterguarantee without counterguarantee Subtotal Total	Committed Outstanding Amount Amount 476 $ 476 $ 737 612 1,213 1,088 1,013 872 198 124 1,211 996 2,424 2,084 38 21 – – 38 21 2,462 $ 2,105 $ 2016	2015
	Committed Amount	Committed Outstanding Amount Amount
	476 $ 737 1,213 1,013 198 1,211 2,424 38 – 38 2,462 $	135 $ 135 $ 666 390 801 525 814 712 174 97 988 809 1,789 1,334 127 59 59 14 186 73 1,975 $ 1,407 $

The committed amount represents the maximum potential amount of undiscounted future payments that ADB could be required to make, inclusive of standby portion for which ADB is committed but not currently at risk. The outstanding amount represents the guaranteed amount utilized under the related loans, which have been disbursed as of the end of the year, exclusive of the standby portion.

As of 31 December 2016, a total liability of $24 million ($21 million – 2015) relating to standby ready obligations for nine credit risk guarantees (eight – 2015) and one political risk guarantees (three – 2015) has been included in ACCOUNTS PAYABLE AND OTHER LIABILITIES – Miscellaneous on the Balance Sheet for all guarantees issued after 31 December 2002.

As of 31 December 2016 and 2015, one credit guarantee with nonsovereign counter-guarantee had collateral from a counter-guarantor.

Fair Value Disclosure

As of 31 December 2016 and 2015, all of ADB’s future guarantee receivables and guarantee liabilities are classified as Level 3 within the FV hierarchy.

The accounting division is responsible for determining and reporting the FV of guarantees reported in the balance sheet. Future guarantee receivables and guarantee liabilities are stated at discounted present value using significant unobservable inputs such as discount rates applicable to individual guarantee contracts that are internally determined and are classified under Level 3. An increase (decrease) in discount rates generally results in a decrease (increase) in the FV of the guarantees.

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The valuation technique and significant unobservable quantitative inputs for guarantee receivables/ guarantee liabilities classified as Level 3 as of 31 December 2016 and 2015 were summarized below:

Valuation Unobservable Portfolio Technique Inputs	Range (Average)
	2016 2015 222% to 443% (299%) 304% to 537% (35%)
Guarantee receivable/ Discounted Discount rates
Guarantee liability cash flows	. . . . . .

The following table presents the changes in the carrying amounts of ADB’s Level 3 future guarantee receivable/liability for the years ended 31 December 2016 and 2015:

($ million)

	Guarantee Receivable/Liability	Guarantee Receivable/Liability
	2016	2015
Balance, 1 January Issuances	21 $ 21 (18) 24 $	25 $ 13 (17) 21 $
Amortization
Balance, 31 December

Note: There w ere no realized/unrealized gains and losses included in earnings and other comprehensive loss.

NOTE H—EQUITY INVESTMENTS — OPERATIONS

ADB’s equity investments may be in the form of direct equity investments (e.g. common, preferred, or other capital stock) or through investment funds (e.g. private equity funds). They are reported: (i) at fair value; (ii) under the equity method; and (iii) at cost or written down value as follows:

($ million)

Equity method Cost method Fair value method Total	2016 2015 614 $ 578 $ 122 250 78 34 814 $ 862 $

Equity investments with readily determinable FVs that are not accounted for under the equity method are reported at FV. As of 31 December 2016, these included an equity investment which was classified as AFS amounting to $71 million ($23 million – 2015) and equity investments with associated derivative amounting to $7 million ($11 million – 2015).

There were no equity investments classified as AFS that sustained unrealized losses in 2016 and 2015.

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Additional information relating to equity investments classified as available for sale is as follows:

($million)
As of 31 December Amortized cost Estimated fair value	2016 2015 41 $ 11 $ 71 23
Gross unrealized gains	30 12
For the years ended 31 December: Change in unrealized gains from prior year Proceeds from sales Gross gain on sales	18 (27) 25 29 14 17

Approved equity investments that have not been disbursed totaled $422 million at 31 December 2016 ($432 million – 2015).

Fair Value Disclosure

ADB’s equity investments reported at FV as of 31 December 2016 were $78 million ($34 million – 2015). Equity investments with readily determinable market prices are valued using quoted prices in active markets and are classified as Level 1. Equity investments valued with financial models using unobservable inputs are classified as Level 3.

The FV hierarchy of ADB’s equity investments at FV as of 31 December 2016 and 2015 was as follows:

($million)
Level 1 Level 2 Level 3 Total equity investments at fair value	2016 2015 71 $ 23 $ – – 7 11 78 $ 34 $

The office of risk management is primarily responsible for determining the FV of equity investments with associated derivatives. An increase (decrease) in these unobservable inputs, independently, will generally decrease (increase) the FV of equity investments. The valuation methodology used for the Level 3 securities was changed in 2016. The new methodology considers the proposed amendments to the put option agreement. The valuation technique and significant unobservable inputs for equity investment classified as Level 3 as of 31 December 2016 and 2015 were as presented below.

Year 2016 2015	Valuation Technique Expected book value method Discounted cash flow	Unobservable Inputs Range (Average) Discount rate 23.35% Internal rate of return 21% Discount rate 23.35% Asset growth rates 20.00% to 30.00% (23.33%)

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The following table presents the changes in the carrying amounts of ADB’s Level 3 equity investments for the years ended 31 December 2016 and 2015:

($million)
Balance, beginning of year Total (losses) gains - (realized/unrealized) Included in earningsa Included in other comprehensive lossb Purchases Balance, end of year	2016 11 $ (2) (2) – 7 $	2015
		9 $ 2 (2) 2
		11 $
The amount of total (losses) gains for the year included in earnings attributable to the change in unrealized
gains relating to assets still held at reporting date	(2) $ a	2 $
aIncluded in net unrealized (losses) gains (OCR-2). bIncluded in accumulated translation adjustments (Note N).

NOTE I—OTHER DEBT SECURITIES — OPERATIONS

ADB’s financial assistance to DMCs may be made by way of subscription to an entity’s debt instruments such as bonds and debentures issued for the purpose of financing development projects and programs. The amortized cost and estimated FV of the outstanding other debt securities by contractual maturity as of 31 December 2016 and 2015 are presented below:

($million)
	Amortized Estimated Cost Fair Value 2016		2015
	Amortized Cost		Amortized Cost	Estimated Fair Value
Due after one year through five years	147 $	150 $	– $	– $
Due after five years through ten years Due after ten years through fifteen Total	– 3 150 $	– 3 153 $	– 6 6 $	– 6
				6 $

Fair Value Disclosure

Fair valuation is based on internal discounted cash flow models in which expected cash flows are discounted at applicable market yield curves. Inputs for the models are based on available market data such as foreign exchange rates and yield curves specified to index fixed rates, deposit and swap interest rates. Parameters and models used for valuation are subject to internal review and periodic external validation. The accounting division is responsible for determining and reporting the FV of the other debt securities portfolio.

Significant increase (decrease) in the inputs, independently, will generally decrease (increase) the FV of the debt securities.

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The hierarchy of estimated FV of ADB’s other debt securities as of 31 December 2016 and 2015 was as follows:

($million)
Level 1 Level 2 Level 3 Total at fair value	2016 2015 – $ – $ 150 – 3 6 153 $ 6 $

Historically, the value of the Level 3 securities was based on return on the put option. However, due to unfavorable developments with the issuer during the year, ADB deemed it more appropriate to use the enterprise value of the issuer to estimate the fair value of the underlying business. The valuation techniques and significant unobservable inputs used in valuing the other securities classified as Level 3 as of 31 December 2016 and 2015 are presented below:

31 December 2016 31 December 2015 Valuation Date	Valuation Technique Unobservable Inputs Enterprise Value Method Median EV / EBITDA multiples of peer companies Median EV / Sales multiples of peer companies Return on Put Option INR/USD foreign exchange rate Internal rate of return (10%�15%)

EBITDA = Earnings before interest, tax, depreciation and amortization; EV = Enterprise value; INR = Indian rupee; USD = United States dollar.

The following table presents the changes in the carrying amounts of ADB’s Level 3 other debt securities for the years ended 31 December 2016 and 2015:

($million)

2016 2015 Balance, beginning of year 6 $ 6 $ Total gains (losses) - (realized/unrealized) Included in other comprehensive loss (Note N) Accumulated translation adjustments (0) (0) Unrealized investment holding (loss) gains (1) 0 Write-downa (2) – Balance, end of year 3 $ 6 $ The amount of total (loss) gains for the year recognized in other comprehensive loss attributable to the change in net unrealized gains or losses relating to assets still held at the reporting date (1) $ 0 $ 0 = less than $0.5 million Note: There were no transfers in and out of Level 3. aIncluded in net realized gains (OCR-2). bIncluded in unrealized investment holding gains for the period(Note N). b

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NOTE J—DERIVATIVE INSTRUMENTS

ADB uses derivative instruments such as interest rate swaps, currency swaps, and foreign exchange swaps and forwards for asset and liability management of individual positions and portfolios. The FV of outstanding currency and interest rate swap agreements is determined at the estimated amount that ADB would receive or pay to terminate the agreements using market-based valuation models. The basis of valuation is the present value of expected cash flows based on market data.

Included in DERIVATIVE ASSETS/DERIVATIVE LIABILITIES – Borrowings are interest rate and currency swaps that ADB has entered into for the purpose of hedging specific borrowings. The terms of ADB’s interest rate swap and currency swap agreements usually match the terms of particular borrowings. Included in DERIVATIVE ASSETS/DERIVATIVE LIABILITIES – Investments for liquidity purpose are interest rate, currency and foreign exchange swaps and forwards that ADB has entered into for the purpose of hedging specific investments. Included in DERIVATIVE ASSETS/DERIVATIVE LIABILITIES – Loans – Operations are interest rate and currency swaps that ADB has entered into for the purpose of hedging specific loans. The loan related swaps were executed to better align the composition of certain outstanding loans with funding sources. Future dated derivatives as of 31 December 2016 amounted to $1 million for derivative assets ($9 million – 2015) and nil for derivative liabilities ($0.04 million – 2015).

Fair Value Disclosure

The FV hierarchy of ADB’s derivatives and the balance sheet location as of 31 December 2016 and 2015 were as follows:

($million)
2016 Assets Borrowings related derivatives Currency swaps Interest rate swaps Investments related derivatives Currency swaps Interest rate swaps Foreign exchange swaps Loans related derivatives Currency swaps Interest rate swaps Total assets at fair value Liabilities Borrowings related derivatives Currency swaps Interest rate swaps Investments related derivatives Currency swaps Interest rate swaps Foreign exchange swaps Loans related derivatives Currency swaps Interest rate swaps Total liabilities at fair value 0 = less than $0.5 million.	Balance Sheet Location Derivative Assets - Borrowings Derivative Assets - Investments for liquidity purpose Derivative Assets - Loans�Operations Derivative Liabilities - Borrowings Derivative Liabilities - Investments for liquidity purpose Derivative Liabilities - Loans � Operations		Fair Value Me	asurements
		Total 19,720 $ 222 5,517 1 3,024 655 4 29,143 $ 22,841 $ 544 5,287 38 2,784 580 5 32,079 $	Level 1 – $ – – – – – – – $ – – – – – – – – $	Level 2 Level 3 18,557 $ 1,163 $ 222 – 5,517 – 1 – 3,024 – 655 – 4 0 27,980 $ 1,163 $ 22,841 – 544 – 5,287 – 38 – 2,784 – 103 477 5 0 31,602 $ 477 $

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($million)
2015 Assets Borrowings related derivatives Currency swaps Interest rate swaps Investments related derivatives Currency swaps Foreign exchange swaps Foreign exchange forwards Loans related derivatives Currency swaps Interest rate swaps Total assets at fair value Liabilities Borrowings related derivatives Currency swaps Interest rate swaps Investments related derivatives Currency swaps Interest rate swaps Foreign exchange swaps Foreign exchange forwards Loans related derivatives Currency swaps Interest rate swaps Total liabilities at fair value 0 = less than $0.5 million.	Balance Sheet Location Derivative Assets - Borrowings Derivative Assets - Investments for liquidity purpose Derivative Assets - Loans � Operations Derivative Liabilities - Borrowings Derivative Liabilities - Investments for liquidity purpose Derivative Liabilities - Loans � Operations		Fair Value Me	asurements
		Total 21,194 $ 470 5,822 1,286 4 761 1 29,538 $ 24,886 $ 99 5,341 47 1,287 4 593 15 32,272 $	Level 1 – $ – – – – – – – $ – – – – – – – – – $	Level 2 Level 3 19,576 $ 1,618 $ 470 – 5,822 – 1,286 – 4 – 761 0 1 0 27,920 $ 1,618 $ 24,886 – 99 – 5,341 – 47 – 1,287 – 4 – 109 484 14 1 31,787 $ 485 $

The office of risk management is primarily responsible for determining the FV of derivatives using discounted cash flow models. Market inputs, such as yield curves, foreign exchange rates, basis spreads, cross currency rates, and volatilities are obtained from pricing services and brokers and applied to the models. ADB has a process to validate the appropriateness of the models and inputs in determining the hierarchy levels. This involves evaluating the nature of rates and spreads to determine if they are indicative and binding. For derivatives classified under Level 3, basis swaps spreads for selected currencies are considered to be significant unobservable inputs to derive the discount rates based on benchmark yield curves adjusted with a basis swap spread.

A significant increase (decrease) in the basis swap spread will generally decrease (increase) the FV of derivatives.

There were no transfers between Levels 1 and 2 in the derivatives portfolio during 2016 and 2015.

The valuation techniques and quantitative information on significant unobservable inputs used in valuing ADB’s derivative instruments classified as Level 3 as of 31 December 2016 and 2015 are presented in the next table:

Portfolio Borrowings related swaps/	Valuation Technique Discounted	Unobservable Inputs Basis	Range (Weighted Average)
			2016 2015
Loans related swaps	cash flows	swapspreads	-0.87% to 8.05%(-1.85%) -1.06% to 10%(-1.53%)

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The following tables present the changes in the carrying amounts of ADB’s Level 3 derivative assets and derivative liabilities for the years ended 31 December 2016 and 2015:

($million)
	Borrowings related derivatives		Loans related derivatives
2016	Assets	Liabilities	Assets	Liabilities
Balance, beginning of year	1,618 $	– $	0 $	(485) $
Total gains (losses) - (realized/unrealized) Included in earningsa	22	–	(0)	(6)
Included in other comprehensive lossb Issuances Maturities/Redemptions	(139) 96 (434)	– – –	0 – –	3 (104) c 115
Balance, end of year	1,163 $	– $	0 $	(477) $
The amount of total gains (losses) for the year included in earnings attributable to the change in net unrealized gains or lossesarelating to
assets/liabilities still held at the reporting date	16 $	– $	(0) $	(6) $
0 = less than $0.5 million aIncluded in net unrealized (losses) gains (OCR-2). bIncluded in accumulated translation adjustments (Note N). cIncluding accretion of $18 million.

($million)
	Borrowings related derivatives		Loans related derivatives
2015	Assets	Liabilities	Assets	Liabilities
Balance, beginning of year Total (losses) gains - (realized/unrealized) Included in earningsa Included in other comprehensive lossb	6,004 $ (177) (386)	(27) $ – –	1 $ (0) (0)	(536) $ (28) 86
Issuances Maturities/Redemptions Transfer out of Level 3d Balance, end of year The amount of total (losses) gains for the year included in earnings attributable to the change in net unrealized gains or lossesarelating to assets/liabilities still held at the reporting date	239 (1,799) (2,263) 1,618 $ (33) $	– – 27 – $ – $	– – (0) 0 $ (0) $	(82) c 50 25 (485) $ 27 $
0 = less than $0.5 million aIncluded in net unrealized (losses) gains (OCR-2).

b Included in accumulated translation adjustments (Note N). c Including accretion of $24 million. d Transferred to Level 2 due to availability of observable market data.

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Effect of Derivative Instruments on the Statement of Income and Expenses

ADB reports changes in the FV of its derivative instruments as part of net unrealized gains and losses in its Statement of Income and Expenses while all interest income, expenses, and related amortization of discounts, premiums, and fees are reported as part of revenue and expenses. These are summarized below:

($million)
Borrowings related derivatives Currency swaps	Location of Gain (Loss) recognized in Income (Expenses) on Derivatives Borrowing and related expenses	Amount of Gain (Loss) recognized in Income(Expenses) on Derivatives
		2016 2015 530 $ 734 $
	Net Realized Gains	0 –
	Net Unrealized (Losses) Gains	(218) (16)
Interest rate swaps	Borrowing and related expenses	323 534
	Net Realized Gains	– 9
Investments related derivatives Currency swaps Interest rate swaps Foreign exchange swaps	Net Unrealized (Losses) Gains Revenue from investments for liquidity purpose Net Unrealized (Losses) Gains Revenue from investments for liquidity purpose Net Unrealized (Losses) Gains Revenue from investments for liquidity purpose Net Unrealized (Losses) Gains	(605) 231 30 $ 1,492 $ 44 $ 8 $ (11) 4 (10) (12) 11 6 40 14 2 (0)
Foreign exchange forwards	Net Realized Gains	0 0
Loans related derivatives Currency swaps Interest rate swaps 0 = less than $0.5 million.	Net Unrealized (Losses) Gains Revenue from Loans�Operations Net Unrealized (Losses) Gains Revenue from Loans�Operations Net Unrealized (Losses) Gains	0 (0) 76 $ 20 $ (14) $ (20) $ (3) (22) (12) (15) 10 9 (19) $ (48) $

Counterparty Credit Risks

ADB undertakes derivative transactions with its eligible counterparties and transacts in various financial instruments as part of liquidity and asset/liability management purposes that may involve credit risks. For all investment securities and their derivatives, ADB manages credit risks by following the policies set forth in the Investment Authority and other risk management guidelines . ADB has a potential risk of loss if the derivative counterparty fails to perform its obligations. In order to reduce credit risk, ADB transacts with counterparties eligible under ADB’s swap guidelines which include a requirement that the counterparties have at least a credit rating of A– or higher and generally requires entering into master swap agreements which contain legally enforceable close-out netting provisions for all counterparties with outstanding swap transactions. The reduction in exposure as a result of these netting provisions can vary as additional

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transactions are entered into under these agreements. The extent of the reduction in exposure may therefore change substantially within a short period of time following the balance sheet date.

Counterparty credit risk is also mitigated by requiring counterparties to post collateral based on specified credit rating driven thresholds. As of 31 December 2016, ADB had received collateral of $943 million ($912 million – 2015) in connection with the swap agreements. Of this amount, $605 million ($494 million – 2015) was recorded as swap related collateral in the balance sheet.

ADB has entered into several agreements with its derivative counterparties under the ISDA Master Agreement and the Master Agreement of the National Association of Financial Market Institutional Investors (NAFMII). The agreements provide for the right of a party to terminate the derivative transaction if any of the various events of default and termination events specified occur. Events of default include failure to pay and cross default. Termination events include the situation where the long term unsecured and unsubordinated indebtedness of ADB or the counterparty ceases to be rated at least Baa3 by Moody’s Investor Service, Inc. or BBB– by Standard and Poor’s Ratings Group, or such indebtedness ceases to be rated by Moody’s or S&P. If ADB’s counterparties are entitled under the agreements to terminate their derivative transactions with ADB, ADB will be required to pay an amount equal to its net liability position with each counterparty (in the case of counterparties who have entered into the ISDA Master Agreement absent of local market constraints) and an amount equal to its gross liability position with each counterparty (in the case of counterparties without enforceable netting agreement). The aggregate FV of all derivative instruments that ADB has under the enforceable ISDA Master Agreement that are in a net liability (negative marked-tomarket) position as of 31 December 2016 was $3,810 million ($3,559 million – 2015). The gross liability position in the aggregate FV of all derivative instruments that ADB has no enforceable netting agreement amounted to $12 million as of 31 December 2016 ($12 million – 2015).

ADB has elected not to offset any derivative instruments by counterparty in the balance sheet. Gross amounts of DERIVATIVE ASSETS and DERIVATIVE LIABILITIES not offset in the balance sheet that are subject to enforceable master netting arrangements as of 31 December 2016 and 2015 were as follows: (See Note E for PAYABLE UNDER SECURITIES REPURCHASE ARRANGEMENTS.)

($million)
Gross amount presented in the balance sheet Gross amounts not offset in the balance sheet Financial instruments Collateral receivedc Net amount	Derivative assets Derivative liabilities Derivative assets Derivative liabilities 29,129 $ (32,067) $ 29,518 $ (32,260) $ (28,257) 28,257 (28,701) 28,701 (772) – (761) – 100 $ (3,810) $ 56 $ (3,559) $ 2016 2015 a b a b

a This excludes gross amount of DERIVATIVE ASSETS presented in the balance sheet not subject to enforceable master netting agreements amounting to $14 million ($20 million – 2015).

b This excludes gross amount of DERIVATIVE LIABILITIES presented in the balance sheet not subject to enforceable master netting agreements amounting to $12 million ($12 million – 2015).

c Collateral received includes both cash and securities collateral.

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NOTE K—PROPERTY, FURNITURE, AND EQUIPMENT

In 1991, under the terms of an agreement with the Philippines (Government), ADB returned the former headquarters (HQ) premises, which had been provided by the Government. In accordance with the agreement as supplemented by a memorandum of understanding, ADB was compensated $22,657,000 for the return of these premises. The compensation is in lieu of being provided premises under the agreement and accordingly, is deferred and amortized over the estimated life of the current HQ building as a reduction of occupancy expense. HQ depreciation for the years ended 31 December 2016 and 2015 amounted to $4 million, net of amortization of the compensation for the former HQ building. At 31 December 2016, the unamortized deferred compensation balance (included in ACCOUNTS PAYABLE AND OTHER LIABILITIES – Miscellaneous) was $5 million ($6 million – 2015).

The changes in the property, furniture, and equipment during 2016 and 2015, as well as information pertaining to accumulated depreciation, were as follows:

($million)
Cost: Balance, 1 January 2016	Property, Furniture and Equipment
	Buildings Office Furniture and and Land Improvements Equipment	Total
	10 $ 257 $ 179 $	446 $
Additions during the year Disposals during the year	– 4 11 – – (3)	15 (3)
Balance, 31 December 2016	10 261 187	458
Accumulated Depreciation:
Balance, 1 January 2016 Depreciation during the year Disposals during the year	– (130) (148) – (8) (12) – – 3	(278) (20) 3
Balance, 31 December 2016 Net Book Value, 31 December 2016	– (138) (157)	(295)
	10 $ 123 $ 30 $	163 $

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($ million)

($million)
Cost: Balance, 1 January 2015	Property, Furniture and Equipment
	Buildings Office Furniture and and Land Improvements Equipment	Total
	10 $ 252 $ 168 $	430 $
Additions during the year Disposals during the year	– 5 14 – – (3)	19 (3)
Balance, 31 December 2015	10 257 179	446
Accumulated Depreciation:
Balance, 1 January 2015 Depreciation during the year Disposals during the year	– (122) (135) – (8) (15) – – 2	(257) (23) 2
Balance, 31 December 2015 Net Book Value, 31 December 2015	– (130) (148)	(278)
	10 $ 127 $ 31 $	168 $

NOTE L—BORROWINGS

The key objective of ADB’s borrowing strategy is to raise funds at the most stable and lowest possible cost for the benefit of its borrowers. ADB uses financial derivative instruments in connection with its borrowing activities to increase cost efficiency, while achieving risk management objectives. Currency and interest rate swaps enable ADB to raise operationally needed currencies in a cost-efficient way and to maintain its borrowing presence in the major capital markets. Interest rate swaps are used to reduce interest rate mismatches arising from lending and liquidity operations.

Fair Value Disclosure

The office of risk management is primarily responsible for determining the FV of the borrowings. Parameters and models used for determining the FV of borrowings are subject to internal review and periodic external validation. Plain vanilla borrowings are valued using discounted cash flow methods with market-based observable inputs such as yield curves, foreign exchange rates, and credit spreads. On some borrowings, significant unobservable input is also used such as derived credit spread. Structured borrowings issued by ADB are valued using financial models that discount future cash flows and simulated expected cash flows. These involve the use of pay-off profiles within the realm of accepted market valuation models such as Hull-White and Black-Scholes. The model incorporates market observable inputs, such as yield curves, foreign exchange rates, basis spreads, funding spreads and interest rate volatilities.

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The FV hierarchy of ADB’s outstanding borrowing as of 31 December 2016 and 2015 were as follows:

($million)
at Amortized cost	2016	2015
Level 1 Level 2 Level 3 Sub-total at Fair value	– $ 5,530 200 5,730 $	– $ 4,685 202 4,887 $
Level 1 Level 2 Level 3 Sub-total	– $ 66,598 2,701 69,299 $	– $ 59,341 2,454 61,795 $
Total borrowings at fair value	75,029 $	66,682 $

ADB uses the discounted cash flow method using derived credit spreads in determining the FVs of borrowings classified as Level 3. The derived credit spread adjusts the discount rate in valuing the borrowings. A significant increase (decrease) in credit spreads generally decreases (increases) the FV of the borrowings.

There were no transfers between Levels 1 and 2 in the borrowings portfolio during 2016 and 2015.

For borrowings carried at FV, the quantitative information on significant unobservable inputs used for valuation as of 31 December 2016 and 2015 are presented below:

Portfolio Borrowings	Valuation Technique Discounted cash flows	Unobservable Inputs Derived credit spreads	Range (Weighted Average)
			2016 2015 -1.52% to 0.4% (-0.65%) -0.96% to 0.93% (-0.15%)

The following table presents the changes in the carrying amounts of ADB’s Level 3 borrowings reported at FV for the years ended 31 December 2016 and 2015:

($million)
	2016	2015
Balance, beginning of year	2,454 $	6,488 $
Total losses (gains) - (realized/unrealized) Included in earningsa Included in other comprehensive lossb Issuances Maturities/Redemptions Transfer out of Level 3c	70 (203) 814 (434) –	(203) (455) 302 (1,957) (1,721)
Balance, end of year	2,701 $	2,454 $
The amount of total losses (gains) for the year included in earnings attributable to the change in net unrealized gains or lossesarelating to liabilities still held at the reporting date. aIncluded in net unrealized (losses) gains (OCR-2).	57 $	(62) $
bIncluded in accumulated translation adjustments (Note N).
cTransferred to Level 2 due to availability of observable market data.

Refer to OCR-7 for Summary Statement of Borrowings.

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NOTE M—CAPITAL STOCK, CAPITAL TRANSFERRED TO ASIAN DEVELOPMENT FUND, MAINTENANCE OF VALUE OF CURRENCY HOLDINGS, AND MEMBERSHIP

Capital Stock

The authorized capital stock of ADB as of 31 December 2016 and 2015 consists of 10,638,933 shares, of which 10,614,853 shares (10,603,211 – 2015) have been subscribed by members. Of the subscribed shares, 10,082,688 (10,071,512 – 2015) are “callable” and 532,165 (531,699 – 2015) are “paid-in”. The “callable” share capital is subject to call by ADB only as and when required to meet ADB’s obligations incurred on borrowings of funds for inclusion in its OCR or on guarantees chargeable to such resources. The “paid-in” share capital has been received, partly in convertible currencies and partly in the currency of the subscribing member which may be convertible. In accordance with Article 6, paragraph 3 of the Charter, ADB accepts nonnegotiable, noninterest-bearing demand obligations in satisfaction of the portion payable in the currency of the member, provided such currency is not required by ADB for the conduct of its operations. Nonnegotiable, noninterest-bearing demand obligations received on demand amounted to $210 million ($257 million – 2015), while those notes received with fixed encashment schedules totaled $466 million ($603 million – 2015).

In January 2011, the Board of Directors approved the temporary reduction of shares and voting power of members in proportion to the delayed amount of paid-in shares if ADB does not receive confirmation of subscription payments within 45 days of the respective due dates thereof. The affected shares and voting power will be automatically restored upon receipt of the installment to the extent that the installment payments are made by 1 April 2015. In March 2015, the Board of Directors deferred this deadline to 18 May 2015. Payments received beyond this date will be referred to the Board of Directors for approval of the restoration of affected shares and voting power. As of 31 December 2016, there was no (11,642 shares – 2015) temporary reduction in subscribed shares.

As of 31 December 2016, all matured installments amounting to $7,154 million ($7,374 million – 2015) had been received.

Capital Transferred to Asian Development Fund

Pursuant to the provisions of Article 19, paragraph 1(i) of the Charter, the Board of Governors has authorized the setting aside of 10% of the unimpaired “paid-in” capital paid by members pursuant to Article 6, paragraph 2(a) of the Charter and of the convertible currency portion paid by members pursuant to Article 6, paragraph 2(b) of the Charter as of 28 April 1973 to be used as a part of the Special Funds of ADB. The resources so set aside amounting to $64 million as of 31 December 2016 ($66 million – 2015) expressed in terms of the SDR on the basis of $1.34433 ($1.38686 – 2015) per SDR ($57 million in terms of $1.20635 per 1966 dollar— Note B ), were allocated and transferred to the ADF.

As stated in Note A, these set-aside resources were returned to OCR effective 1 January 2017.

Maintenance of Value of Currency Holdings

Prior to 1 April 1978, the effective date of the Second Amendment to the IMF Articles, ADB implemented maintenance of value (MOV) in respect of holdings of member currencies in terms of 1966 dollars, in accordance with the provisions of Article 25 of the Charter and relevant resolutions of the Board of Directors. Since then, settlement of MOV has been put in abeyance.

In as much as the valuation of ADB’s capital stock and the basis of determining possible MOV obligations are still under consideration, notional amounts have been calculated provisionally in terms of the SDR as receivable from or payable to members in order to maintain the value of members’ currency holdings. The notional MOV amounts of receivables and payables are offset against one another and shown as net notional

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amounts required to maintain value of currency holdings in the EQUITY portion of the Balance Sheet. The carrying book value for such receivables and payables approximates its FV.

The net notional amounts as of 31 December 2016 consisted of (i) the net increase of $754 million ($954 million – 2015) in amounts required to maintain the value of currency holdings to the extent of matured and paid-in capital subscriptions due to the increase in the value of the SDR in relation to the US dollar during the period from 1 April 1978 to 31 December 2016 and (ii) the net increase of $720 million ($662 million – 2015) in the value of such currency holdings in relation to the US dollar during the same period. In terms of receivable from and payable to members, they are as follows:

($ million)

Notional MOV Receivables Notional MOV Payables Total	2016 2015 1,524 $ 1,621 $ (50) (5) 1,474 $ 1,616 $

Membership

As of 31 December 2016 and 2015, ADB’s shareholders consist of 67 members, 48 from the region and 19 from outside the region (OCR-8) .

NOTE N—RESERVES

Ordinary Reserve and Net Income

Under the provisions of Article 40 of the Charter, the Board of Governors shall determine annually what part of the net income shall be allocated, after making provision for reserves, to surplus and what part, if any, shall be distributed to the members.

In May 2016, the Board of Governors approved the following with respect to ADB's 2015 net income of $537 million, after appropriation of guarantee fees to special reserve: (i) $43 million representing the adjustment to the Loan Loss Reserve as of 31 December 2015, be added from the loan loss reserve to the net income; (ii) $213 million representing the ASC 815/825 adjustments and the unrealized portion of net income from equity investments accounted for under the equity method for the year ended 31 December 2015, be added to the Cumulative Revaluation Adjustments (CRA) account; (iii) $208 million be allocated to the Ordinary Reserve; (iv) $120 million be allocated to ADF; and (v) $40 million be allocated to Technical Assistance Special Fund (TASF).

In May 2015, the Board of Governors approved the following with respect to ADB's 2014 net income of $366 million, after appropriation of guarantee fees to special reserve: (i) $183 million representing the ASC 815/825 adjustments and the unrealized portion of net income from equity investments accounted for under the equity method for the year ended 31 December 2014, be added from the CRA account; (ii) $15 million representing the adjustment to the Loan Loss Reserve as of 31 December 2014, be added from the loan loss reserve to the net income; (iii) $384 million be allocated to the Ordinary Reserve; (iv) $120 million be allocated to ADF; (v) $40 million be allocated to TASF; and (vi) $20 million be allocated to Asia Pacific Disaster Response Fund (APDRF).

The revaluation of the capital stock for purposes of these financial statements on the basis of the SDR instead of the 1966 dollar (Note B) resulted in a net credit of $23 million to the Ordinary Reserve during the year ended 31 December 2016 (net credit of $38 million – 2015). That credit is the decrease in the value of the matured and paid-in capital subscriptions caused by the change during the year in the value

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of the SDR in relation to the US dollar not allocated to members as notional maintenance of value adjustments in accordance with resolutions of the Board of Directors.

Cumulative Revaluation Adjustments Account

In May 2002, the Board of Governors approved the allocation of net income representing the cumulative net unrealized gains (losses) on derivatives, as required by ASC 815 to a separate category of Reserves – Cumulative Revaluation Adjustments Account. Beginning 2008, the unrealized portion of net income from equity investments accounted under equity method is also transferred to this account. During 2016, the 2015 net unrealized gains on derivatives of $239 million (net unrealized losses of $193 million – 2015) and net unrealized losses from equity investments accounted for under the equity method of $26 million (net unrealized gains of $9 million – 2015) resulted in a credit balance in the CRA account at 31 December 2016 of $88 million (debit balance of $125 million – 2015).

Special Reserve

The Special Reserve includes commissions on loans and guarantee fees received which are required to be set aside pursuant to Article 17 of the Charter to meet liabilities on guarantees. For the year ended 31 December 2016, guarantee fees amounting to $18 million ($19 million – 2015) were appropriated to Special Reserve.

Loan Loss Reserve

ADB sets aside Loan Loss Reserve as part of EQUITY to be used as a basis for capital adequacy against the estimated expected loss in ADB’s sovereign and nonsovereign loans and guarantees portfolio. The loan loss reserve is estimated based on expected loss using ADB’s credit risk model net of allowance for loan losses recorded in the balance sheet.

As of 31 December 2016, the loan loss reserve was $172 million ($215 million – 2015).

Surplus

Surplus represents funds for future use to be determined by the Board of Governors.

Accumulated Other Comprehensive Loss

Comprehensive income (loss) has two major components: net income (loss) and other comprehensive income (loss) comprising gains and losses affecting equity that, under US GAAP, are excluded from net income (loss). Other comprehensive income (loss) includes items such as unrealized gains and losses on financial instruments classified as AFS, translation adjustments, and pension and post-retirement liability adjustment.

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The changes in Accumulated Other Comprehensive Loss balances for the years ended 31 December 2016 and 2015 were as follows:

($million)
Balance, 1 January 2015 Other comprehensive loss before reclassifications Amounts reclassified from accumulated other comprehensive loss Net current-period other comprehensive (loss) income Balance, 31 December 2015 Other comprehensive income loss before reclassifications Amounts reclassified from accumulated other comprehensive loss Net current-period other comprehensive (loss) income Balance, 31 December 2016 0 = less than $0.5 million.	(156) $ (136) – (136) (292) $ Adjustments Accumulated Translation	Unreal	Equity Other 36 $ 0 $ (12) 1 (14) – (26) 1 10 $ 1 $ Operations debt securities— Operations Investments— ized Holding (losses) Gains		Postretirement (1,222) $ 51 82 133 (1,089) $ Adjustments Pension/ Liability	Accumulated Other Comprehensive Loss
		Investments for liquidity purpose	Equity Operations Investments—
		104 $ (77) (23) (100) 4 $	36 $ (12) (14) (26) 10 $			(1,238) $
						(173) 45
						(128)
						(1,366) $
	(18)	(125)	32	–	(109)	(220)
	–	(28)	(12)	(1)	51	10
	(18) (310) $	(153) (149) $	20 30 $	(1) – $	(58) (1,147) $	(210)
						(1,576) $

The reclassifications of Accumulated Other Comprehensive Loss to Net Income for the year ended 31 December 2016 and 2015 are presented below:

($million)

2016 2015 Unrealized Holding Gains Investments for liquidity purpose 28 $ 23 $ NET REALIZED GAINS From investments for liquidity purpose Equity investments — operations 12 14 NET REALIZED GAINS From EI — operations Other debt securities — operations 1 – NET REALIZED GAINS From Other debt securities — operations 41 $ 37 $ Pension/Postretirement Liability Adjustments Actuarial losses (51) $ (82) $ Administrative expenses Total reclassifications for the period (10) $ (45) $ EI = equity investments. aAmounts in parentheses indicate debits to net income. Affected Line Item in the Statement of Income and Expenses Accumulated Other Comprehensive Loss Components Amounts Reclassified from Accumulated Other Comprehensive Lossa

NOTE O—INCOME AND EXPENSES

Revenue from loan operations for the year ended 31 December 2016 totaled $1,054 million ($678 million – 2015). The average yield on the loan portfolio during the year was 1.65% (1.16% – 2015), including risk transfer costs.

Total income from investment for liquidity purpose including net realized gains on sales, interest earned for securities transferred under repurchase agreements and resale arrangements for the year ended 31 December 2016 was $452 million ($365 million – 2015). The annualized rate of return on the average investments held during the year, based on the portfolio held at the beginning and end of each month, was 1.58% (1.33% – 2015) excluding unrealized gains and losses on investments and 1.04% (0.98% – 2015) including unrealized gains and losses on investments.

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Net income from equity investment operations resulted in net income of $125 million (net loss of $7 million – 2015) for the year ended 31 December 2016. This included divestment gains of $142 million ($19 million – 2015), net equity income of $15 million (net equity losses of $28 million – 2015), and dividend income of $3 million ($8 million – 2015). These were offset by $35 million ($7 million – 2015) other than temporary impairment losses.

Net loss from other debt securities amounted to $2 million (nil – 2015), representing other than temporary impairment losses.

Income from other sources primarily included income received as executing agency amounting to $17 million ($16 million – 2015), transaction advisory service fees of $15 million ($3 million – 2015) and other miscellaneous income amounting to $11 million ($10 million – 2015).

Total borrowing expense of $751 million ($374 million – 2015) consisted of interest expense and other related expenses such as amortization of issuance costs and derivatives, while the average cost of borrowings outstanding after swaps was 1.68% (0.19% – 2015).

Total depreciation expense incurred for the year ended 31 December 2016 amounted to $20 million ($23 million – 2015).

ADB leases office spaces and other assets. Annual rental expenses under operating leases for the years ended 31 December 2016 and 2015 were about $11 million. The minimum rental payments required under operating leases that have initial or noncancelable lease terms in excess of one year as of 31 December 2016 are as follows:

	Minimum amount
	of future rentals
Year ending 31 December	($ million)
2017	5
2018	5
2019	5
2020	4
Later years	4

Administrative expenses (other than those pertaining directly to ordinary operations and special operations) for the year ended 31 December 2016 were apportioned between OCR and ADF in proportion to the relative volume of operational activities. Of the total administrative expenses of $682 million ($682 million – 2015), $268 million ($278 million – 2015) was charged to ADF. The balance of administrative expenses represents the amount allocated to OCR which was reduced by the deferral of direct loan origination costs of $24 million ($21 million – 2015) related to new loans made effective during the year (Note B) .

For the year ended 31 December 2016, net provision for loan losses of $11 million ($1 million net writeback– 2015) consisted of $21 million additional loan loss provision ($2 million – 2015) and $10 million write-backs ($3 million – 2015).

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The following table provides information on the unrealized gains or losses included in income for the years ended 31 December 2016 and 2015:

($million)
Unrealized (losses) gains on: Borrowings and related swaps Investments related swaps Loans related swaps Equity investments�Operations Translation adjustments of non-functional currencies Total	2016 2015 (523) $ 244 $ 2 10 7 (13) (2) 2 (4) (4) (520) $ 239 $

NOTE P—RELATED PARTY TRANSACTIONS

At 31 December 2016 and 2015, ADB had the following net receivables from and payable to Special Funds and externally funded trust funds under ADB administration (Agency Trust Funds) resulting from administrative arrangements and operating activities which are included in Miscellaneous under OTHER ASSETS and ACCOUNTS PAYABLE AND OTHER LIABILITIES:

($million)
Amounts receivable from: Asian Development Fund Employee Benefit Plans Total Amounts payable to: Agency Trust Funds—net Employee Benefit Plans Total	2016 2015 5 $ 51 $ – 2 5 $ 53 $ 1 $ 1 $ 7 – 8 $ 1 $

As of 31 December 2016 and 2015, the related parties include employee benefit plans consisting of the Staff Retirement Plan (SRP) and the Retiree Medical Plan Fund (RMPF).

NOTE Q—STAFF PENSION AND POSTRETIREMENT MEDICAL BENEFITS

Staff Retirement Plan

ADB has a contributory defined pension benefit plan called the SRP. Every employee, as defined under the SRP, shall, as a condition of service, become a participant from the first day of service, provided the employee has not reached the normal retirement age of 60 at that time. The plan applies also to members of the Board of Directors who elect to join. Retirement benefits are based on an annual accrual rate, length of service and the highest average two years remuneration during eligible service. The plan assets are segregated in a separate fund. The costs of administering the plan are absorbed by ADB, except for fees paid to the investment managers and related charges, including custodian fees, which are borne by the Plan.

Participants hired prior to 1 October 2006 are required to contribute 9 1/3% of their salary to the plan while those hired on or after 1 October 2006 are not required to contribute. The annual accrual rate is 2.95% for

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staff hired prior to 1 October 2006 and 1.5% for those hired on or after 1 October 2006. Participants may also make discretionary contributions. ADB’s contribution is determined at a rate sufficient to cover that part of the costs of the SRP not covered by the participants’ contributions.

Expected Contributions

ADB’s contribution to the SRP varies from year to year, as determined by the Pension Committee, which bases its judgment on the results of annual actuarial valuations of the assets and liabilities of the plan. ADB is expected to contribute $53 million for 2017 based on a budgeted contribution of 23% of salary.

ADB’s staff members are expected to contribute $32 million representing participants’ mandatory contribution of $9 million and discretionary contributions of $23 million.

Investment Strategy

Contributions in excess of current benefits payments are invested in international financial markets and in a variety of investment vehicles. The SRP employs 13 external asset managers and one global custodian who are required to operate within the guidelines established by the SRP’s Investment Committee. The investment of these assets, over the long term, is expected to produce returns higher than short-term investments. The investment policy incorporates the plan’s package of desired investment return and tolerance for risk, taking into account the nature and duration of its liabilities. The SRP’s assets are diversified among different markets and different asset classes. The use of derivatives for speculation, leverage or taking risks is prohibited. Selected derivatives are used for hedging and transactional efficiency purposes.

The SRP’s investment policy is periodically reviewed and revised to reflect the best interest of the SRP’s participants and beneficiaries. As approved by the Pension Committee on 27 October 2015, the SRP’s new long-term target asset-mix, which was implemented in 2016, is 35% US equity, 30% non-US equity, 15% global fixed income, 10% globally high yield, and 10% diversified asset.

For the year ended 31 December 2016, the net return on the SRP assets was 6.36% (-0.47% – 2015). ADB expects the long-term rate of return on the assets to be 7.0% (7.0% – 2015).

Assumptions

The assumed overall rate of return takes into account long-term return expectations of the underlying asset classes within the investment portfolio mix, and the expected duration of the SRP’s liabilities. Return expectations are forward looking and, in general, not much weight is given to short-term experience. Unless there is a drastic change in investment policy or market environment, as well as in the liability/benefit policy side, the assumed average long-term investment return of 7.0% on the SRP’s assets is expected to remain on average broadly the same, year to year.

Effective for the 2015 actuarial valuation, as part of the regular assumptions review, some revisions were made to the previous actuarial assumptions based on the 2010-2014 experience. The assumptions that were revised include changes to the investment return, salary progression, pension increases, rates of withdrawal, early and incapacity retirement rates, retirement and post-incapacity retirement mortality rates, percent of international staff who commute, and other commutation factors.

Post-Retirement Group Medical Insurance Plan

In 1993, ADB adopted a cost-sharing arrangement for the Post-Retirement Group Medical Insurance Plan (PRGMIP). Under this plan, ADB is obligated to pay 75% of the PRGMIP premiums for retirees, which includes retired members of the Board of Directors, and their eligible dependents who elected to participate.

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The Retiree Medical Plan Fund (RMPF) was established in 2014 to hold the assets in trust that will fund the accumulated obligations of the PRGMIP. The income of RMPF consists of ADB’s contributions and investment earnings; it does not have any component attributable to participants’ share of PRGMIP costs. In 2016 and 2015, insurance premium paid by ADB for the PRGMIP is considered ADB’s contribution to the fund. The costs of administering the RMPF are absorbed by ADB, while investment management and custodian fees are paid from the RMPF.

The SRP Pension Committee is responsible for the overall financial management of the RMPF and is assisted by the SRP Investment Committee.

Expected Contribution

ADB’s expected contribution to the RMPF is based on the recommendation of the SRP Pension Committee. For 2017, ADB is expected to contribute $6 million, which is equivalent to 2% of salary.

Investment Strategy

The RMPF employs three external asset managers and one global custodian who are required to operate within the guidelines established by the SRP’s Investment Committee. The investment of these assets, over the long term, is expected to produce returns higher than short-term investments. Similar to SRP, the investment policy incorporates the RMPF’s package of desired investment return and tolerance for risk, taking into account the nature and duration of its liabilities. The RMPF’s assets are diversified among different markets and asset classes. The use of derivatives for speculation, leverage or taking risks is prohibited. Selected derivatives are used for hedging and transactional efficiency purposes.

In October 2015, the Pension Committee approved the RMPF’s investment policy. Based on the approved policy, the RMPF’s long-term target asset-mix is 40% US equity, 30% non-US equity, and 30% global fixed income. For the year ended 31 December 2016, the net return on the RMPF assets was � 5.89% (-2.06% 2015).

Assumptions

The overall long-term rate of return is 7% per annum, similar to the SRP.

Effective for the 2015 actuarial valuation, as part of the regular assumptions review, some revisions were made to the previous actuarial assumptions based on the 2010-2014 experience. The assumptions that were revised include retirement mortality rates and PRGMIP election rates, and average per capita medical costs among others.

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The following table sets forth the funded status of pension and postretirement medical benefits at 31 December 2016 and 2015:

($million)
	Pension	Benefits	Postretirement Medical Benefits
	2016	2015	2016	2015
Change in plan assets: Fair value of plan assets at beginning of year	2,409 $	2,305 $	308 $	315 $
Actual return on plan assets	159	(9)	18	(7)
Employer's contribution Plan participants' contributions Benefits paid Fair value of plan assets at	168 143 (127)	145 84 (116)	5 – (5)	4 – (4)
end of year	2,752 $	2,409 $	326 $	308 $
Change in projected benefit obligation:
Projected benefit obligation at beginning of year Service cost Interest cost Plan participants' contributions Actuarial loss (gains) Benefits paid Projected benefit obligation at	3,557 $ 89 164 143 152 (127)	3,542 $ 95 149 84 (197) (116)	418 $ 23 20 – (59) (5)	430 $ 24 19 – (50) (5)
end of year	3,978 $	3,557 $	397 $	418 $
Funded status	(1,226) $	(1,148) $	(71) $	(110) $
Amounts recognized in the Balance sheet as Accrued pension and
postretirement medical benefit costs	(1,226) $	(1,148) $	(71) $	(110) $
Amounts recognized in the Accumulated other comprehensive loss as Pension/Postretirement
liability adjustments (Note N)	1,146 $	1,034 $	0 $	55 $
Weighted-average assumptions as of 31 December (%)
Discount rate Expected return on plan assets	4.40 7.00	4.55 7.00	4.70 7.00	4.55 7.00
Rate of compensation increase varies with age and averages	4.00	4.00	N/A	N/A
0 = less than $0.5 million

For measurement purposes, a 7.0% annual rate of increase in the per capita cost of covered postretirement medical benefits was assumed for the valuation as of 31 December 2016 and 2015. The rate was assumed to decrease gradually to 5.0% by 2022 and remain at the level thereafter.

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The following table summarizes the benefit costs associated with pension and postretirement medical benefits for the year ended 31 December 2016 and 2015:

($million)
Components of net periodic benefit cost: Service cost Interest cost Expected return on plan assets Recognized actuarial loss (Note N)	Pension	Benefits	Postretirement Medical Benefits
	2016	2015	2016	2015
	89 $ 164 (170) 51	95 $ 149 (162) 79	23 $ 20 (23) 0	24 $ 19 (19) 3
Net periodic benefit cost	134 $	161 $	20 $	27 $
0 = less than $0.5 million

The accumulated benefit obligation of the pension plan as of 31 December 2016 was $3,760 million ($3,346 million – 2015).

The estimated net loss for the defined benefit pension plans and postretirement medical benefits plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year amounted to $57 million and $0 million, respectively.

Assumed postretirement medical benefits cost trend rates have a significant effect on the amounts reported for the postretirement medical benefits plan. A one-percentage-point change in the assumed trend rates would have the following effects:

($million)		1-Percentage- Point Decrease (9) (69)
Effect on total service and interest cost components Effect on postretirement medical benefit obligation	1-Percentage- Point Increase 13 90

Estimated Future Benefits Payments

The following table shows the benefit payments expected to be paid in each of the next five years and subsequent five years. The expected benefit payments are based on the same assumptions used to measure the benefit obligation at 31 December 2016:

($million)
Year	Pension Postretirement Benefits Medical Benefits 144 $ 7 $ 153 8 164 9 172 10 183 11 1,089 72
2017 2018 2019 2020 2021 2022–2026

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Fair Value Disclosure

The FV of the SRP and RMPF’s assets measured on a recurring basis as of 31 December 2016 and 2015 was shown below:

($ million)

2016 Staff Retirement Plan Cash and cash equivalents Common/preferred stocks Investment funds Government or government- guaranteed securities Corporate debt securities Mortgage/Asset-backed securities: Mortgage-backed securities Collateralized mortgage obligations Asset-backed securities Short term investments Derivatives Other asset/liabilitiesa—net Total fair value of SRP assets Retiree Medical Plan Fund Cash and cash equivalents Common/preferred stocks Investment funds Government or government- guaranteed securities Corporate debt securities Mortgage/Asset-backed securities: Mortgage-backed securities Collateralized mortgage obligations Asset-backed securities Short term investments Derivatives Other asset/liabilitiesa—net Total fair value of RMPF assets	Total	Fair Value Measurements	Fair Value Measurements
		Level 1	Level 2 Level 3 254 $ – $ – – – – 2 – 20 1 – – 33 – 3 2 0 1 1 – 7 – (29) – 291 $ 4 $ 20 $ – $ – – – – 0 – 0 – 3 – – – – 0 0 – 1 – (10) – 14 $ 0 $
	254 $ 473 1,268 256 425 57 5 1 35 7 (29)	– $ 473 1,268 254 404 – 24 – – 34 0 –
	2,752 $	2,457 $
	20 $ 90 131 43 39 12 – 0 0 1 (10)	– $ 90 131 43 39 – 9 – 0 0 – –
	326 $	312 $

0 = less than $0.5 million.

a Incudes receivables and liabilities carried at amounts that approximate fair value.

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($million)
2015 Staff Retirement Plan Cash and cash equivalents Common/preferred stocks Investment funds Government or government- guaranteed securities Corporate debt securities Mortgage/Asset-backed securities: Mortgage-backed securities Collateralized mortgage obligations Asset-backed securities Short term investments Derivatives Other asset/liabilitiesa—net Total fair value of SRP assets Retiree Medical Plan Fund Cash and cash equivalents Common/preferred stocks Investment funds Government or government- guaranteed securities Corporate debt securities Mortgage/Asset-backed securities: Mortgage-backed securities Collateralized mortgage obligations Asset-backed securities Short term investments Derivatives Other asset/liabilitiesa—net Total fair value of RMPF assets 0 = less than $0.5 million.	Total	Fair Value Measurements
		Level 1	Level 2 Level 3 60 $ – $ – – – – 6 – 4 6 26 – 9 2 1 1 98 – (5) – (39) – 160 $ 9 $ 10 $ – $ – – – – 0 – 1 – 5 – – – – 0 0 – (1) – (5) – 10 $ 0 $
	60 $ 465 1,076 358 305 71 11 2 105 (5) (39)	– $ 465 1,076 352 295 45 – – 7 (0) –
	2,409 $	2,240 $
	10 $ 90 116 51 36 11 – 0 0 (1) (5)	– $ 90 116 51 35 6 – – – (0) –
	308 $	298 $
aIncudes receivables and liabilities carried at amounts that approximate fair value.

The SRP’s Investment Committee and SRP investment unit meet periodically and are involved in overseeing the activities and performance of the investment portfolios. The FV of the SRP investments is provided by the SRP’s global custodian from various independent pricing providers. The accounting division in coordination with data management unit of treasury services division evaluates the FV in determining the hierarchy level. All investments including equity securities, fixed income securities and derivatives are provided by independent pricing providers. Equity securities include common and preferred stocks and mutual funds. Fixed income securities include government or governmentguaranteed securities, corporate obligations, asset and mortgage-backed securities, and short-term investments. Derivatives include futures, swaps and currency forward contracts.

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The table below provides details of transfers of SRP and RMPF’s assets between Levels 1 and 2, which are attributed to the availability or absence of market quotes, for the years ended 31 December 2016 and 2015.

($ million)

Investments - Staff Retirement Plan	Level 1 Level 2 – $ – $ (0) 0 3 (3) (1) 1 2 $ (2) $ – $ – $ (0) 0 1 (1) (0) 0 1 $ (1) $ 2016	2015	2015
	Level 1	Level 1	Level 2
Government or government-guaranteed securities
Transfers into (out of) Transfers (out of) into Corporate debt securities Transfers into (out of) Transfers (out of) into	– $ (0) 3 (1)	– $ (4) 2 (2)	– $ 4 (2) 2
	2 $	(4) $	4 $
Investments - Retirement medical Plan Fund
Government or government-guaranteed securities
Transfers into (out of) Transfers (out of) into Corporate debt securities Transfers into (out of) Transfers (out of) into	– $ (0) 1 (0)	– $ – – –	– $ – – –
	1 $	– $	– $

0 = less than $0.5 million.

The following tables present the changes in the carrying amounts of SRP and RMPF’s Level 3 investments for the years ended 31 December 2016 and 2015:

($ million)

2016 Balance, beginning of the year Total realized/unrealized gains/(losses) in:	Retiree Medical Plan Fund Common / preferred stocks Corporate debt securities Mortgage / Asset- backed securities/ Collateralized Mortgage Obligations Mortgage / Asset- backed securities – $ 6 $ 3 $ 0 $ Staff Retirement Plan
Net increase (decrease) in net assets
available for benefits Purchases Sales/Maturities Settlement and others Transfers out of Level 3 Balance, end of the year Total unrealized gains (losses) included in income related to financial assets still held at the reporting date	– 0 (0) (0) – 1 1 – – (2) (1) – – – (1) (0) – (3) 0 – – $ 2 $ 2 $ 0 $ – $ 0 $ (0) $ (0) $
0 = less than $0.5 million.

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($ million)

($million)
2015 Balance, beginning of the year Total realized/unrealized (losses)/gains in:	Retiree Medical Plan Fund Common / preferred stocks Corporate debt securities Mortgage / Asset- backed securities/ Collateralized Mortgage Obligations Mortgage / Asset- backed securities 0 $ 1 $ 5 $ – $ Staff Retirement Plan
Net decrease in net assets
available for benefits Purchases Sales/Maturities Settlement and others Transfers out of Level 3 Balance, end of the year Total unrealized gains included in income related to financial assets still held at the reporting date	(0) (0) (0) (0) – 20 1 0 – (15) (1) – – 0 (1) – – – (1) – – $ 6 $ 3 $ 0 $ – $ 0 $ 0 $ – $

0 = less than $0.5 million.

Transfers out of Level 3 in 2016 and 2015 are due to the availability of market observable inputs.

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NOTE R—OTHER FAIR VALUE DISCLOSURES

The carrying amounts and estimated FVs of ADB’s financial instruments as of 31 December 2016 and 2015 are summarized below:

($million)
On-balance sheet financial instruments: ASSETS: Due from banks Investments for liquidity purpose (Note D) Securities purchased under resale arrangements (Note D) Loans outstanding — operations (Note F) Equity investments — operations carried at fair value (Note H) Other debt securities — operations (Note I) Derivative assets - borrowings (Note J) Derivative assets - investments for liquidity purpose (Note J) Derivative assets - loans — operations (Note J) Swap related collateral (Note J) Future guarantee receivable (Note G) LIABILITIES: Borrowings (Note L) Derivative liabilities - borrowings (Note J) Derivative liabilities - investments for liquidity purpose (Note J) Derivative liabilities - loans — operations (Note J) Swap related collateral (Note J) Guarantee liability (Note G) Off-balance sheet financial instruments: ASSETS: Future guarantee receivable LIABILITIES: Guarantee liability	2016		2015
	Carrying Amount	Estimated Fair Value	Carrying Estimated Amount Fair Value 753 $ 753 $ 23,309 23,309 126 126 61,941 62,604 34 34 6 6 21,664 21,664 7,112 7,112 762 762 494 494 21 21 66,054 66,682 24,985 24,985 6,679 6,679 608 608 494 494 21 21 n/a 7 $ n/a 7
	661 $ 26,025 102 67,599 78 150 19,942 8,542 659 605 24 74,476 23,385 8,109 585 605 24 n/a n/a	661 $ 26,025 102 68,279 78 153 19,942 8,542 659 605 24 75,029 23,385 8,109 585 605 24 6 6

As of 31 December 2016 and 2015, ADB has no material assets or liabilities measured at FV on a nonrecurring basis.

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NOTE S—SPECIAL AND OTHER FUNDS

ADB’s operations include special operations, which are financed from Special Funds resources. The OCR and Special Funds resources are at all times used, committed, and invested entirely separately from each other. The Board of Governors may approve allocation of the net income of OCR to Special Funds, based on the funding and operational requirements for the funds. The administrative and operational expenses pertaining to the OCR and Special Funds are charged to the respective Special Funds. The administrative expenses of ADB are allocated amongst OCR and Special Funds and are settled regularly.

In addition, ADB, alone or jointly with donors, administers on behalf of the donors, including members of ADB, their agencies and other development institutions, projects/programs supplementing ADB’s operations. Such projects/programs are funded with external funds administered by ADB and with external funds not under ADB’s administration (referred as trust funds). ADB charges administrative fees for external funds administered by ADB. The trust funds are restricted for specific uses including technical assistance to borrowers and for regional programs, grants for projects, and loans. The responsibilities of ADB under these arrangements range from project processing to project implementation including the facilitation of procurement of goods and services. These funds are held in trust with ADB, and are held in a separate investment portfolio. The assets of trust funds are not commingled with ADB’s resources, nor are they included in the assets of ADB.

Special Funds and trust funds are not included in the assets of OCR. The net assets as of 31 December 2016 and 2015 are summarized below:

($million)
Special Funds	2016	No.	2015
	Total Net Assets		Total Net Assets	No.
Asian Development Fund	30,948 $	1	30,784 $	1
Technical Assistance Special Fund Japan Special Fund	41 106	1 1	147 105	1 1
Asian Development Bank Institute	10	1	9	1
Regional Cooperation and Integration Fund Climate Change Fund Asia Pacific Disaster Response Fund Financial Sector Development Partnership Special Fund Subtotal	6 8 8 7 31,134	1 1 1 1 8	8 11 17 7 31,088	1 1 1 1
				8
Trust Funds (including project specific cofinancing)	2,253	123	2,258	117
Total	33,387 $	131	33,346 $	125

During the year ended 31 December 2016, a total of $15 million ($12 million – 2015) was recorded as compensation for administering projects/programs. The amount has been included in REVENUE From other sources—net.

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NOTE T—VARIABLE INTEREST ENTITIES

In 2016, ASU 2015-02 became effective for ADB. It modified the evaluation of whether limited partnerships and similar entities are VIEs, eliminated the presumption that a general partner should consolidate a limited partnership, modified the consolidation assessment of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and provided a scope exception for reporting entities with interest in money market funds. Based on the result of the reevaluation, ADB has identified investments in 34 (33 – 2015) VIEs which are not consolidated by ADB but in which it is deemed to hold significant variable interests at 31 December 2016. These non-consolidated VIEs are mainly (i) operating entities where the total equity invested is considered insufficient to finance its activities without additional subordinated financial support and (ii) investment funds, where the general partner or fund manager does not have substantive equity at risk and the equity holders lack decision making rights. These VIEs are in the finance and energy sectors.

ADB’s involvement in these non-consolidated VIEs includes loans, guarantees, and investments in debt securities and equity interests. Based on the most recent available data from these VIEs at 31 December 2016, the assets of these non-consolidated VIEs totaled $11,941 million ($13,765 million – 2015).

The table below shows the carrying value of ADB interests in the non-consolidated VIEs and the maximum exposure to loss of these interests. For guarantees, the maximum exposure is the notional amount of such guarantee, less any counter-guarantee.

($ million)

2016 Loans — Operations Equity Investments — Operations Guarantees Total 2015 Loans — Operations Equity Investments — Operations Guarantees Total	161 $ 327 52 540 $ 918 $ 127 60 1,105 $ Carrying value of ADB's Variable Interests	– $ 182 – 182 $ 74 $ 71 – 145 $ Committed but Undisbursed	Maximum Exposure to Loss
			161 $ 509 52
			722 $
			992 $ 198 60
			1,250 $

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NOTE U—SEGMENT REPORTING

Based on an evaluation of OCR’s operations, Management has determined that OCR has only one reportable segment since OCR does not manage its operations by allocating resources based on a determination of the contribution to net income from individual borrowers.

The following table presents the outstanding issuances and associated revenue of OCR’s loan, guarantees, other debt securities, and equity investments by geographic region, as of and for the years ended 31 December 2016 and 2015:

($ million)

Country People’s Republic of China India Indonesia Philippines Pakistan Viet Nam Others Total	2016	2016	2015
	Outstanding Balance	Revenue	Outstanding Balance Revenue 15,795 $ 231 $ 14,557 124 8,456 109 5,711 40 4,744 43 2,925 20 12,022 111 64,210 $ 678 $
	16,796 $ 15,592 8,972 6,370 5,136 3,926 13,876	294 $ 211 152 75 67 40 251
	70,668 $	1,090 $

Revenue comprises income from loans, guarantees, other debt securities, and equity investments, and excludes net realized gains and unrealized gains and losses.

For the years ended 31 December 2016 and 2015, sovereign loans to three members individually generated more than 10 percent of loan revenue which amounted to $252 million, $171 million, and $143 million ($186 million, $103 million, and $97 million – 2015).

NOTE V—SUBSEQUENT EVENTS

ADB has evaluated subsequent events after 31 December 2016 through 17 March 2017, the date these Financial Statements are available for issuance. During this period, ADB has raised additional borrowings of approximately $12,567 million in various currencies.

Transfer of ADF loans and other assets to OCR

In 2014, ADB introduced a proposal to enhance ADB’s financial capacity in a sustainable manner through more efficient and effective management of its capital resources. The proposal entailed combining ADF lending operations with the OCR and retaining the ADF as a grant-only operation. ADB would continue concessional lending on the same terms and conditions as currently provided to ADF countries through the OCR window, while the ADF would continue to provide grant assistance.

In April 2015, the Board of Governors adopted a resolution authorizing the termination of ADF’s loan operations and the transfer of ADF’s loans and other assets to OCR effective 1 January 2017 (the 2015 Resolution). This resolution was further amended in June 2016. Accordingly, on 1 January 2017, ADB transferred ADF loans and other assets totaling $30,812 million from ADF to OCR. The transferred ADF assets composed of loans including accrued interest totaling $27,088 million and liquid assets totaling $3,724 million. The source of funding for ADF came from donor contributions, OCR net income transfer, and set-aside resources.

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The transfer of these assets was treated as a contribution from ADF to OCR and a return of the set-aside resources from ADF to OCR. This resulted in the recognition of one-time income of $30,748 million in OCR and a return of the set-aside resources of $64 million. The corresponding income recognized in OCR has been allocated to ordinary reserves as from 1 January 2017 following the adoption of Board of Governors Resolution No. 387.

The proportionate interest of ADF donors in the transferred assets as of 1 January 2017, taking into account the value of paid-in donor contributions that have been made available for operational commitments which are deemed by ADB to be applied for the transferred assets, was determined in accordance with Article V of the Regulations of the Asian Development Fund. The value of each donor’s paid-in contributions was fixed in US dollars based on the SDR value of each donor contribution as of 1 January 2017. This was then used to determine the sources of funds in the transferred assets on 1 January 2017, the date of the termination of the ADF loan operations and transfer of assets to OCR. Under the 2015 Resolution, the proportionate interest of an ADF donor will be taken into account in the event of the withdrawal of that donor from ADB and ADB's repurchase of its shares, and in the theoretical termination of ADB operations and liquidation of its assets. The following table shows the funding sources of the transferred assets:

Source of Funds in ADF $ million % Source of Funds in ADF

$ million %

Donor Contributions Australia 2,213 $ 7.18 Malaysia Austria 257 0.83 Nauru Belgium 231 0.75 The Netherlands Brunei Darussalam 17 0.06 New Zealand Canada 1,889 6.13 Norway China, People's Republic of 84 0.27 Portugal Denmark 242 0.79 Singapore Finland 180 0.58 Spain France 1,270 4.12 Sweden Germany 1,679 5.45 Switzerland Hong Kong, China 93 0.30 Taipei,China India 24 0.08 Thailand Indonesia 14 0.05 Turkey Ireland 79 0.26 United Kingdom Italy 1,099 3.57 United States Japan 11,197 36.34 Subtotal Kazakhstan 4 0.01 OCR Net Income Transfers Korea, Republic of 484 1.57 Set-Aside Resources Luxembourg 47 0.15 Total

24 0.08 0 0.00 716 2.32 157 0.51 266 0.86 79 0.26 18 0.06 432 1.40 436 1.42 359 1.17 90 0.29 15 0.05 114 0.37 1,440 4.67 4,060 13.18 29,309 95.13 1,439 4.67 64 0.20 30,812 $ 100.00

0 = about $0.3 million, 0.00 = 0.001%.

112

ASIAN DEVELOPMENT FUND MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Asian Development Bank (“ADB”) is responsible for designing, implementing, and maintaining effective internal control over financial reporting. ADB's internal control over financial reporting is a process designed to provide reasonable assurance regarding the preparation of reliable special purpose financial statements in accordance with accounting policies as described in Note B of the special purpose financial statements.

ADB's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of ADB; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of special purpose financial statements in accordance with accounting policies as described in Note B of the special purpose financial statements, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (iii) provide reasonable assurance regarding prevention, or timely detection and correction, of unauthorized acquisition, use, or disposition of ADB's assets that could have a material effect on the special purpose financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct, misstatements. Also, projections of any assessment of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

ADB's management assessed the effectiveness of ADB's internal control over financial reporting as of 31 December 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management concluded that, as of 31 December 2016, ADB's internal control over financial reporting is effective based on the criteria established in Internal Control – Integrated Framework (2013).

Takehiko Nakao President

Ingrid van Wees Vice-President (Finance and Risk Management)

Chai S. Kim Controller

17 March 2017

113

114

115

116

117

118

ADF-1

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT FUND SPECIAL PURPOSE STATEMENT OF ASSETS, LIABILITIES, AND FUND BALANCES 31 December 2016 and 2015

Expressed in Millions of US Dollars

ASSETS DUE FROM BANKS INVESTMENTS FOR LIQUIDITY PURPOSE (Notes C and K) Government or government-guaranteed obligations Time deposits SECURITIES PURCHASED UNDER RESALE ARRANGEMENTS (Note C) LOANS OUTSTANDING — OPERATIONS (ADF-6) (Notes D and K) Sovereign Less—allowance for HIPC Debt Relief ACCRUED REVENUE Investments for liquidity purpose Loans outstanding — operations OTHER ASSETS (Note F)	281 $ 4,546 $ 1,180 5,726 13 27,367 61 27,306 24 63 87 172 2016	281 $ 4,546 $ 1,180 5,726 13 27,367 61 27,306 24 63 87 172 2016	2015	2015
	4,546 $ 1,180		5,591 $ 402	63 $ 5,993 37 27,205 92 193
	27,367 61		27,270 65
	24 63		26 66
TOTAL		33,585 $		33,583 $
LIABILITIES AND FUND BALANCES PAYABLE TO RELATED FUNDS (Note E) ADVANCE PAYMENTS ON CONTRIBUTIONS (Note F) UNDISBURSED GRANTS (Notes J and K) TOTAL LIABILITIES FUND BALANCES (ADF-4) Contributions received (ADF-7) Contributed resources (Note F) Unamortized discount Set-aside resources (Note H) Transfers from Ordinary Capital Resources and Technical Assistance Special Fund Nonnegotiable, noninterest-bearing demand obligations on account of contributions (Note F) Accumulated deficit Accumulated other comprehensive loss (Note I)	5 $ 149 2,483 2,637 32,686 $ (19) 32,667 64 1,703 34,434 (1,633) (361) (1,492) 30,948		51 $ 167 2,581 2,799 31,830 $ (28) 31,802 66 1,583 33,451 (1,738) (111) (818) 30,784	51 $ 167 2,581
TOTAL	33,585 $		33,583 $

The accompanying notes are an integral part of these special purpose financial statements (ADF-8).

119

ADF-2

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT FUND SPECIAL PURPOSE STATEMENT OF REVENUE AND EXPENSES For the Years Ended 31 December 2016 and 2015

Expressed in Millions of US Dollars

REVENUE From loans — operations (Note D) From investments for liquidity purpose (Note C) EXPENSES Grants (Note J) Administrative expenses (Note G) Amortization of discounts on contributions NET REALIZED GAINS FROM INVESTMENTS FOR LIQUIDITY PURPOSE (Notes C and I) NET UNREALIZED GAINS (LOSSES)	330 $ 60 390 (376) (268) (7) (651) 7 4 2016	2015
		308 $ 56 364 (348) (278) (7) (633) 8 (56)
REVENUE LESS THAN EXPENSES	(250) $	(317) $

The accompanying notes are an integral part of these special purpose financial statements (ADF-8).

ADF-3

SPECIAL PURPOSE STATEMENT OF COMPREHENSIVE LOSS For the Years Ended 31 December 2016 and 2015

For the Years Ended 31 December 2016 and 2015
Expressed in Millions of US Dollars
REVENUE LESS THAN EXPENSES (ADF-2) Other comprehensive loss (Note I) Currency translation adjustments Unrealized holding gains (losses) on investments for liquidity purpose	(250) $ (679) $ 5 (674) 2016	2015
		(317) $ (586) $ (19) (605)
COMPREHENSIVE LOSS	(924) $	(922) $

The accompanying notes are an integral part of these special purpose financial statements (ADF-8).

120

ADF-4

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT FUND SPECIAL PURPOSE STATEMENT OF CHANGES IN FUND BALANCES For the Years Ended 31 December 2016 and 2015 Expressed in Millions of US Dollars

							Nonnegotiable,	Nonnegotiable,			Accumulated	Accumulated
					Transfers		Noninterest-		Accumulated			Other
	Contributed		Set-Aside		from OCR		bearing	Demand		Surplus	Comprehensive
	Resources		Resources		&	TASF	Obligations			(Deficit)		Loss		Total
Balance, 1 January 2015	$	31,794	$	69	$	1,463	$	(1,841)	$	206	$	(213)	$	31,478
Comprehensive loss
(ADF-3) (Note I)										(317)		(605)		(922)
Contributions made
available for operational
commitment		838												838
Amortization of discount
on donor's contribution		7												7
Demand obligations
received								(568)						(568)
Encashment of
demand obligations								615						615
Transfer from OCR						120								120
Translation adjustments		(837)		(3)				56						(784)
Balance, 31 December 2015	$	31,802	$	66	$	1,583	$	(1,738)	$	(111)	$	(818)	$	30,784
		–		–		–		–		–		–		–
Comprehensive loss
(ADF-3) (Note I)										(250)		(674)		(924)
Contributions made
available for operational
commitment		960												960
Amortization of discount
on donor's contribution		7												7
Demand obligations
received								(665)						(665)
Encashment of
demand obligations								712						712
Transfer from OCR (Note F)						120								120
Translation adjustments		(102)		(2)		(0)		58						(46)
Balance, 31 December 2016	$	32,667	$	64	$	1,703	$	(1,633)	$	(361)	$	(1,492)	$	30,948

OCR = ordinary capital resources, TASF = Technical Assistance Special Fund. Note: 0 = less than $0.5 million. The accompanying notes are an integral part of these special purpose financial statements (ADF-8).

121

ADF-5

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT FUND SPECIAL PURPOSE STATEMENT OF CASH FLOWS For the Years Ended 31 December 2016 and 2015

Expressed in Millions of US Dollars

2016 CASH FLOWS FROM OPERATING ACTIVITIES Interest charges on loans — operations received 304 $ Interest received from investments for liquidity purpose 81 Administrative expenses paid (315) Grants disbursed (463) Net Cash Used in Operating Activities (393) CASH FLOWS FROM INVESTING ACTIVITIES Sales of investments for liquidity purpose 1,908 Maturities of investments for liquidity purpose 61,138 Purchases of investments for liquidity purpose (62,928) Receipts from securities purchased under resale arrangements 12,517 Payments for securities purchased under resale arrangements (12,495) Principal collected on loans — operations 1,363 Loans — operations disbursed (2,000) Net Cash Used in Investing Activities (497) CASH FLOWS FROM FINANCING ACTIVITIES Contributions received and encashed1 993 Cash received from ordinary capital resources 120 Cash Provided by Financing Activities 1,113 Effect of Exchange Rate Changes on Due from Banks (5) Net Increase in Due from Banks 218 Due from Banks at Beginning of Year 63 Due from Banks at End of Year 281 $ RECONCILIATION OF REVENUE LESS THAN EXPENSES TO NET CASH USED IN OPERATING ACTIVITIES: Revenue less than expenses (ADF-2) (250) $ Adjustments to reconcile revenue less than expenses to net cash used in operating activities: Amortization of discounts/premiums on investments for liquidity purpose 20 Amortization of discount on donor’s contributions 7 Grants approved and effective 376 Capitalized charges on loans — operations (27) Net gain on sale of investments for liquidity purpose (7) Change in accrued revenue on investments for liquidity purpose and loans — operations 2 Change in other assets 11 Change in payable to related funds (47) Change in undisbursed grants (474) Exchange (gains) losses—net (4) Net Cash Used in Operating Activities (393) $	2015
	273 $ 85 (267) (503)
	(412)
	2,422 62,015 (64,558) 41,941 (41,624) 1,242 (2,024)
	(586)
	880 120
	1,000
	1
	3 60
	63 $
	(317) $ 27 8 348 (24) (8) (10) (1) 11 (502) 56
	(412) $

Supplementary disclosure on noncash financing activities:

1 Nonnegotiable, noninterest-bearing demand promissory notes amounting to $735 million ($668 million – 2015) were received from contributing members.

The accompanying notes are an integral part of these special purpose financial statements (ADF-8).

122

ADF-6

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT FUND SPECIAL PURPOSE SUMMARY STATEMENT OF LOANS — OPERATIONS 31 December 2016 and 2015

Expressed in Millions of US Dollars

Borrowers/Guarantors1	Loans Outstanding	Undisbursed Balances of Effective Loans2,3	Loans Not Yet Effective4	Total Loans	Percent of Total Loans
Afghanistan Armenia Azerbaijan Bangladesh Bhutan Cambodia Cook Islands Georgia Indonesia Kazakhstan Kiribati Kyrgyz Republic Lao People’s Democratic Republic Maldives Marshall Islands Micronesia, Federated States of Mongolia Myanmar Nepal Pakistan Palau Papua New Guinea Philippines Samoa Solomon Islands Sri Lanka Tajikistan Timor-Leste Tonga Tuvalu Uzbekistan Vanuatu Viet Nam Regional TOTAL – 31 December 2016 Allowance for HIPC Debt Relief NET BALANCE – 31 December 2016 NET BALANCE – 31 December 2015	597 $ 355 39 5,783 189 1,122 23 654 720 4 22 569 789 91 54 46 546 514 1,466 5,530 7 442 277 99 40 2,311 263 12 27 4 481 42 4,245 4 27,367 $ (61) 27,306 $ 27,205 $	4 $ 107 0 1,325 98 486 – 144 5 – 4 151 284 1 – 2 237 255 1,001 539 6 106 – 1 23 324 14 27 – – 270 28 1,100 0 6,542 $ – 6,542 $ 6,854 $	– $ – – 253 – 62 – – – – – 115 20 – – – – 236 180 29 – 72 – – – 112 96 48 2 – 266 – 396 15 1,902 $ – 1,902 $ 1,436 $	601 $ 462 39 7,361 287 1,670 23 798 725 4 26 835 1,093 92 54 48 783 1,005 2,647 6,098 13 620 277 100 63 2,747 373 87 29 4 1,017 70 5,741 19 35,811 $ (61) 35,750 $ 35,495 $	1.68 1.29 0.11 20.56 0.80 4.66 0.06 2.23 2.03 0.01 0.07 2.33 3.05 0.26 0.15 0.13 2.19 2.81 7.39 17.03 0.04 1.73 0.77 0.28 0.18 7.67 1.04 0.24 0.08 0.01 2.84 0.20 16.03 0.05
					100.00

Note: 0 = less than $0.5 million.

1 Loans other than those made directly to a member or to its central bank have been guaranteed by the member.

• 2 Loans negotiated before 1 January 1983 were denominated in current US dollars. Loans negotiated after that date are denominated in special drawing rights (SDR) for the purpose of commitment. The undisbursed portions of such SDR loans are translated into US dollars at the applicable exchange rates as of the end of a reporting period. Of the undisbursed balances, ADB has entered into irrevocable commitments to disburse various amounts totaling $56 million ($45 million – 2015).

• 3 Refer to the unwithdrawn portions of effective loans as of 31 December 2016.

• 4 Refer to approved loans that have not become effective as of 31 December 2016, pending borrowers' compliance with effectiveness conditions specified in the loan regulations and the loan agreements.

123

ADF-6

continued

MATURITY OF EFFECTIVE LOANS AS OF 31 DECEMBER 2016

31 December 2017 2018 2019 2020 2021 Twelve Months Ending	Amount 1,394 $ 1,497 1,609 1,698 1,863	Five Years Ending 31 December 2026 2031 2036 2041 2046 2051 2056 Total	Amount
			8,953 7,435 5,338 2,968 996 122 36
			33,909 $

SUMMARY OF CURRENCIES RECEIVABLE ON LOANS OUTSTANDING — OPERATIONS

Currency Australian dollar Canadian dollar Danish krone Euro Yen Won Ringgit New Zealand dollar	2016 21 $ 47 10 613 867 12 0 1	2015 30 $ 147 18 1,293 2,504 16 0 1	Currency Norwegian krone Pound sterling Singapore dollar Swedish krona Swiss franc Baht US dollar Special Drawing Rights5 Total	2016 48 81 – 20 39 0 924 24,684 27,367 $	2015
					60 169 0 50 73 0 1,581 21,328
					27,270 $

5 Basket of currencies defined by the International Monetary Fund consisting of the US dollar, euro, pound sterling, yen, and yuan. The accompanying notes are an integral part of these special purpose financial statements (ADF-8).

124

ADF-7

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT FUND SPECIAL PURPOSE STATEMENT OF RESOURCES 31 December 2016

Expressed in Millions of US Dollars

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT FUND SPECIAL PURPOSE STATEMENT OF RESOURCES 31 December 2016 Expressedin Millions ofUSDollars
	Committed1 Amounts Effective	Contributions Received
CONTRIBUTED RESOURCES Australia Austria Belgium Brunei Darussalam Canada China, People’s Republic of Denmark Finland France Germany Hong Kong, China India Indonesia Ireland Italy Japan Kazakhstan Korea, Republic of Luxembourg Malaysia Nauru The Netherlands New Zealand Norway Portugal Singapore Spain Sweden Switzerland Taipei,China Thailand Turkey United Kingdom United States Total SET-ASIDE RESOURCES TRANSFERS FROM ORDINARY CAPITAL RESOURCES TRANSFERS FROM TECHNICAL ASSISTANCE SPECIAL FUND	2,393 $ 275 244 20 1,951 102 254 190 1,363 1,862 109 30 15 95 1,153 11,959 5 570 53 29 0 761 174 288 92 21 536 470 382 105 17 122 1,557 4,522 31,720	2,093 $ 261 221 20 1,976 102 305 153 1,219 1,723 109 30 15 73 862 14,788 5 512 47 26 0 726 163 258 89 23 418 399 545 102 17 116 1,104 4,166 32,667 64 1,700 3
TOTAL	31,720 $	34,434 $

Notes: Numbers may not sum precisely because of rounding. 0 = less than $0.5 million. 1 At exchange rates per Resolutions.

The accompanying notes are an integral part of these special purpose financial statements (ADF-8).

125

ADF-8

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT FUND NOTES TO SPECIAL PURPOSE FINANCIAL STATEMENTS 31 December 2016 and 2015

NOTE A—NATURE OF OPERATIONS

The Asian Development Bank (ADB), a multilateral development financial institution, was established in 1966 with its headquarters in Manila, Philippines. ADB and its operations are governed by the Agreement Establishing the Asian Development Bank (the Charter). Its purpose is to foster economic development and co-operation in Asia and the Pacific region and to contribute to the acceleration of the process of economic development of the developing member countries (DMCs) in the region, collectively and individually. Since 1999, ADB’s corporate vision and mission has been to help DMCs reduce poverty in the region. This was reaffirmed under the long-term strategic framework for 2008-2020 (Strategy 2020). Under Strategy 2020, ADB’s corporate vision continues to be “An Asia and Pacific Free of Poverty” and its mission has been to help its DMCs reduce poverty and improve living conditions and quality of life. ADB has been pursuing its mission and vision by focusing on three complementary strategic agendas: inclusive growth, environmentally sustainable growth, and regional integration. ADB provides financial and technical assistance for projects and programs, which will contribute to achieve this purpose. These are financed through ordinary capital resources (OCR) and Special Funds.[1]

The Asian Development Fund (ADF) was established in 1974 to more effectively carry out the special operations of the ADB by providing resources on concessional terms for economic and social development of the less developed member countries.

ADB is immune from taxation pursuant to Chapter VIII, Article 56, Exemption from Taxation , of the Charter.

Combined ADF-OCR Lending Operations

In April 2015, the Board of Governors adopted a resolution authorizing the termination of ADF loan operations and the transfer of ADF loans, resources originally set-aside from the OCR, and certain other assets as may be determined by the Board of Directors to OCR effective 1 January 2017. After the effective date of this transfer, ADF will continue to provide assistance to developing member countries through its grant operations (See Note L).

Replenishments

In July 2012, the Board of Governors adopted a resolution providing for the 10th replenishment of the ADF (ADF XI) and the 5th regularized replenishment of the Technical Assistance Special Fund (TASF). The replenishment provides resources to the ADF to finance ADB’s concessional program, and to the TASF to finance technical assistance operations. Total replenishment size was SDR8,415 million, of which SDR3,090 million came from new donor contributions. The donors agreed to allocate 3% of the total replenishment size (equivalent to about 8% of total donor contributions) to TASF. The replenishment became effective on 4 June 2013. As of 31 December 2016, ADB had received instruments of contributions from all 32 donors including qualified contributions amounting to SDR410 million.

In July 2016, the Board of Governors adopted a resolution providing for the 11th replenishment of the ADF (ADF 12) and the 6th regularized replenishment of the TASF. The replenishment provides resources to finance the ADF grant program and the TASF operations during 2017-2020. As of 31 December 2016, total replenishment size is $3,798 million, of which $2,580 million will come from new donor contributions. Donors agreed to allocate $461 million out of the total donor contributions to TASF.

1 Asian Development Fund (ADF), Technical Assistance Special Fund (TASF), Japan Special Fund (JSF), ADB Institute (ADBI), Regional Cooperation and Integration Fund (RCIF), Climate Change Fund (CCF), Asia Pacific Disaster Response Fund (APDRF), and Financial Sector Development Partnership Special Fund (FSDPSF).

126

ADF-8

continued

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

In May 2001, the Board of Directors approved the adoption of the special purpose financial statements for ADF. The financial statements have been prepared for the specific purpose of reflecting the sources and applications of member contributions and are presented in US dollar equivalents at the reporting dates. With the adoption of the special purpose financial statements, loan loss provisioning, other than those for the debt relief loan write-off resulting from the implementation of the Heavily Indebted Poor Countries (HIPC) Debt Initiative discussed in Note D, has been eliminated. With the exception of the aforementioned, the ADF financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP).

In September 2016, the Board of Directors approved the change in the financial reporting of ADF from special purpose to general purpose financial statements, effective from 1 January 2017, in anticipation of the transfer of ADF loans and certain assets to OCR (See Note L).

In November 2005, the Board of Governors accepted a resolution to adopt a special drawing rights (SDR) currency management framework to facilitate resource administration and operational planning for the benefit of borrowers. The currency management framework was implemented on 1 January 2006 whereby ADB is authorized to convert ADF resources held in various currencies into one of the SDR basket of currencies (US dollar, euro, pound sterling, and yen), to value disbursements, repayments and loan charges in terms of SDR, and to determine the value of contributors’ paid-in contributions and all other resources of the ADF in terms of SDR, in case of withdrawal of a Contributor or termination of ADF.

In July 2007 ADB offered ADF borrowers the option to convert their existing liability (i.e., disbursed and outstanding loan balance) in various currencies into SDR, while the undisbursed portions would be treated as new loans. The conversion was made available beginning 1 January 2008, and as of 31 December 2016, 21 out of 29 ADF borrowing countries had opted to convert their loans, which were carried out on the nearest loan service payment dates at least one month from their concurrence. In 2016, 130 loans from one borrower totaling $2,946 million were converted to SDR. The SDR conversion option was discontinued on 1 January 2017.

In anticipation of the termination of ADF lending operations and transfer of ADF loans and other assets to the OCR effective on 1 January 2017, a comprehensive review of ADF financial management and policies was undertaken and approved by the Board of Directors in February 2016. Since the US dollar has been adopted for ADF grant operations, starting in January 2017, ADF commitment authority and liquidity will be determined and managed in US dollars to mitigate commitment and disbursement risks.

Functional Currencies and Reporting Currency

The US dollar is the reporting currency of the ADF for the purpose of presenting the financial position and the result of its operations.

With the implementation of the SDR currency management framework, ADF conducts its operations in SDRs and the SDR basket of currencies, which are US dollar, euro, pound sterling, and yen. The SDR and the SDR basket of currencies comprise the functional currencies of ADF. Effective 1 October 2016, the yuan was added to the SDR basket as one of its component currencies. Consequently, the yuan was considered a functional currency of ADF beginning 1 October 2016.

Translation of Currencies

ADB adopts the use of daily exchange rates for accounting and financial reporting purposes. This allows transactions in currencies other than USD to be translated to the reporting currency using exchange rates applicable at the time of the transactions. Assets and liabilities are translated using the applicable exchange rates at the end of each reporting period, except for Contributed Resources received in nonfunctional currencies. Translation adjustments relating to set-aside resources (Note H) are recorded as

127

ADF-8

continued

notional amounts receivable from or payable to OCR. Translation adjustments relating to revaluation of assets, liabilities, and fund balances denominated in ADF’s functional currencies are reported as Accumulated Translation Adjustments in FUND BALANCES as part of Accumulated other comprehensive loss. Translation adjustments relating to other non-functional currencies are reported as NET UNREALIZED GAINS (LOSSES) in the Special Purpose Statement of Revenue and Expenses.

Investments for Liquidity Purpose

Investment securities and negotiable certificates of deposit are classified as available for sale and are reported at fair value (FV). Unrealized gains and losses are reported in FUND BALANCES as part of Accumulated other comprehensive loss. Realized gains and losses are measured by the difference between amortized cost and the net proceeds of sales.

Interest income on investment securities and time deposits is recognized as earned and reported, net of amortizations of premiums and discounts.

Securities Purchased Under Resale Arrangements

ADF accounts for transfers of financial assets in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 860, “Transfers and Servicing.” Transfers are accounted for as sales when control over the transferred assets has been relinquished. Otherwise the transfers are accounted for as resale agreements and collateralized financing arrangements. Under resale arrangements, securities purchased are recorded as assets and are not re-pledged.

Loans — Operations

Loan interest income is recognized on an accrual basis. It is the policy of ADF to place in non-accrual status loans made to eligible borrowing member countries if the principal or interest with respect to any such loans is overdue by six months. Interest on non-accruing loans is included in revenue only to the extent that payments have actually been received by ADF. ADB maintains a position of not taking part in debt rescheduling agreements with respect to sovereign loans. When ADB decides that a particular loan is no longer collectible, the entire amount is expensed during the period.

Contributed Resources

Contributions by donors are included in the special purpose financial statements as amounts committed and are reported in Contributed Resources as part of FUND BALANCES from the date Instruments of Contribution are deposited and related formalities are completed and made available for operational commitments.

Contributions are generally received in the currency of the contributor either in cash or notes.

Under ADF IX, ADF X, and ADF XI, contributors have the option to pay their contributions under the accelerated note encashment program and receive a discount. ADF invests the cash generated from this program and the investment income is used to finance operations. The related contributions are recorded at the full undiscounted amount, and the discount is amortized over the standard encashment period of 10 years for ADF IX and 9 years for ADF X and ADF XI.

Advanced Payments on Contributions

Payments received in advance or as qualified contributions that cannot be made available for operational commitment are recorded as advance payments on contributions and included under LIABILITIES.

128

ADF-8

continued

Grants and Undisbursed Grants

Grants are recognized in the special purpose financial statements when the grant is approved and becomes effective. Upon completion of a project or cancellation of a grant, any undisbursed amount is written back as a reduction in the grants for the year and the corresponding undisbursed grant is eliminated accordingly.

Fair Value of Financial Instruments

ASC 820, “Fair Value Measurement” defines FV as the price that would be received to sell an asset or paid to transfer a liability at measurement date in an orderly transaction among willing participants with an assumption that the transaction takes place in the entity’s principal market, or in the absence of principal market, in the most advantageous market for the asset or liability. The most advantageous market is the market where the sale of the asset or transfer of liability would maximize the amount received for the asset or minimize the amount paid to transfer the liability. The FV measurement is not adjusted for transaction costs.

Fair Value Hierarchy

ASC 820 establishes a FV hierarchy that gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), next priority to observable market inputs or market corroborated data (Level 2), and the lowest priority to unobservable inputs without market corroborated data (Level 3).

The FVs of ADB’s financial assets and liabilities are categorized as follows:

Level 1: FVs are based on unadjusted quoted prices for identical assets or liabilities in active markets. Level 2: FVs are based on quoted prices for similar assets or liabilities in active markets or markets that are not active; or valuation models for which significant inputs are obtained from market-based data that are observable.

Level 3: FVs are based on prices or valuation models for which significant inputs to the model are unobservable.

Inter-level transfers from one year to another may occur due to changes in market activities affecting the availability of quoted market prices or observable market data.

ADB’s policy is to recognize transfers in and transfers out of levels as of the end of the reporting period in which they occur.

Accounting Estimates

The preparation of special purpose financial statements requires management to make reasonable estimates and assumptions that affect the reported amounts of assets, liabilities, and fund balances as of the end of the year and the reported amounts of revenue and expenses during the year. The actual results could differ from those estimates. Judgments have been used in the valuation of certain financial instruments.

Accounting and Reporting Developments

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-09 “Revenue from Contracts with Customers (Topic 606)” to improve financial reporting by creating common revenue recognition guidance for US GAAP and the International Financial Reporting Standards. In 2016, ASUs 2016-08, 2016-10, 2016-12, and 2016-20 were issued to clarify the implementation guidance on principal versus agent considerations, on identifying performance obligations and licensing, and on assessing collectibility, noncash consideration, and completed contracts and contract modifications at transition, and to clarify the Codification and to correct unintended application of the guidance, respectively. A public business entity is required to apply the amendments retrospectively

129

ADF-8

continued

for annual reporting periods beginning after 15 December 2017. These ASUs are not expected to have material impact on ADF’s financial statements on effectivity.

In January 2016, the FASB issued ASU 2016-01, “ Financial Instruments—Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities ”. This update enhances the reporting requirements for financial instruments. Specifically, this update (i) requires that investments in equity securities measured at FV recognize changes in FV in net income, (ii) simplifies the impairment assessment of equity investments for which FV is not readily determinable by requiring entities to perform a qualitative assessment to identify impairment, (iii) amends certain disclosure requirements associated with the FV of financial instruments, and (iv) requires to present separately in other comprehensive income the portion of the total change in the FV of financial liabilities measured at FV resulting from a change in the instrument-specific credit risk. This update is effective for fiscal years beginning after 15 December 2017 and interim periods thereafter. ADB is currently assessing the impact of this ASU on ADF’s financial statements.

In August and November 2016, FASB issued two ASUs related to statement of cash flows. ASU 2016-15, “ Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments ,” provides guidance for eight specific cash flow issues, where current standards are either unclear or deficient. ASU 2016-18, “ Statement of Cash Flows (Topic 230) – Restricted Cash ,” requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. Amendments in these updates should be applied retrospectively for annual financial statements issued for fiscal years beginning after 15 December 2017, and for interim periods within those fiscal years. Early adoption is permitted. ADB is currently assessing the impact of this ASU on ADF’s financial statements.

In January 2017, FASB issued ASU 2017-01, “ Business Combinations (Topic 805) – Clarifying the Definition of a Business ,” which clarifies the definition of a business to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposal) of assets or business. Amendments in this update should be applied prospectively for annual financial statements issued for fiscal years beginning after 15 December 2017, and for interim periods within those fiscal years. No disclosures are required at transition. Early adoption is permitted. ADB is currently assessing the impact of this ASU on ADF’s financial statements.

Also in January 2017, FASB issued ASU 2017-03, “ Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323) – Amendments to SEC Paragraphs Pursuant to Staff Announcements at the 22 September 2016 and 17 November 2016 EITF Meetings ,” which adds the Securities and Exchange Commission (SEC) Staff Announcement regarding disclosure of the impact that recently issued accounting standards, particularly ASU 2014-09, ASU 201602 and ASU 2016-13 will have on the entity’s financial statements when adopted in future period. Such disclosure should include (i) a description of the effect of the accounting policies that the entity expects to apply, if determined; (ii) a comparison with current accounting policies; and (iii) the entity’s progress in implementing the new standards and any significant implementation matters yet to be addressed. Appropriate disclosures were provided in the affected ASUs.

Special Purpose Statement of Cash Flows

For the purposes of the Special Purpose Statement of Cash Flows, ADF considers that its cash and cash equivalents are limited to DUE FROM BANKS, which consists of cash on hand and current accounts in banks used for (i) operational disbursements, (ii) receipt of funds from encashment of donor countries’ promissory notes, and (iii) clearing accounts.

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NOTE C—INVESTMENTS FOR LIQUIDITY PURPOSE

The main investment management objective is to maintain security and liquidity. Subject to these parameters, ADB seeks the highest possible return on its investments. Investments are governed by the Investment Authority approved by the Board of Directors.

ADB may engage in securities lending of government or government-guaranteed obligations for which ADB receives a guarantee from the securities custodian and a fee. Transfers of securities by ADB to counterparties are not accounted for as sales as the accounting criteria for the treatment of a sale have not been met. These securities must be available to meet ADB’s obligation to counterparties. Included in INVESTMENTS as of 31 December 2016 were government or government-guaranteed obligations transferred under securities lending arrangements amounting to $48 million ($17 million – 2015).

The currency composition of the investment for liquidity purpose portfolio as of 31 December 2016 and 2015 expressed in US dollars was as follows:

($million)	2016 2015 3,457 $ 2,983 $ 1,236 1,891 386 752 376 – 262 367 9 – 5,726 $ 5,993 $
Currency US dollar Euro Pound sterling Yuan Yen SDR Total

The estimated FV and amortized cost of the investments for liquidity purpose as of 31 December 2016 and 2015 were as follows:

($million)
Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years through fifteen years Total	Estimated Amortized Fair Value Cost 1,552 $ 1,551 $ 3,723 3,710 444 450 7 7 5,726 $ 5,718 $ 2016	2015
	Estimated Fair Value 1,552 $ 3,723 444 7 5,726 $	Estimated Amortized Fair Value Cost 1,443 $ 1,440 $ 4,133 4,136 403 400 14 14 5,993 $ 5,990 $

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Additional information relating to investments in government or government-guaranteed obligations classified as available for sale is as follows:

($million)	2016 2015 4,538 $ 5,588 $ 4,546 5,591 33 16 (25) (13) 5 (19) 1,908 2,422 7 8 (0) (0)
As of 31 December Amortized cost Estimated fair value Gross unrealized gains Gross unrealized losses For the years ended 31 December Change in net unrealized gains (losses) from prior year Proceeds from sales Gross gain on sales Gross loss on sales 0 = less than $0.5 million.

The rate of return on the average investments held during the year, including securities purchased under resale arrangements, based on the portfolio held at the beginning and end of each month, was 1.08% (0.95% – 2015) excluding unrealized gains and losses on investment securities, and 1.15% (0.67% – 2015) including unrealized gains and losses on investments.

There were no government or government-guaranteed obligations (nil – 31 December 2015) that sustained losses for over one year. Comparative details for 2016 and 2015 are as follows:

($million)
As of 31 December 2016 Government or government- guaranteed obligations As of 31 December 2015 Government or government- guaranteed obligations	Oneyear or less		Over o	neyear	Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Unrealized Value Losses 1,590 $ 25 $ 2,639 $ 13 $
	1,590 $	25 $	– $	– $
	2,639 $	13 $	– $	– $

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Fair Value Disclosure

The FV of INVESTMENTS FOR LIQUIDITY PURPOSE and related financial assets as of 31 December 2016 and 2015 was as follows:

($million)
31 December 2016 Investments for liquidity purpose Government or government- guaranteed obligations Time deposits Securities purchased under resale arrangements Total at fair value 31 December 2015 Investments for liquidity purpose Government or government- guaranteed obligations Time deposits Securities purchased under resale arrangements Total at fair value	Total 4,546 $ 1,180 13 5,739 $ 5,591 $ 402 37 6,030 $	Fair Value Measurements
		Level 1 4,537 $ – – 4,537 $ 5,586 $ – – 5,586 $	Level 2 Level 3 9 $ – $ 1,180 – 13 – 1,202 $ – $ 5 $ – $ 402 – 37 – 444 $ – $

If available, active market quotes are used to assign fair values to investment securities and related financial assets. These include most government or government-guaranteed obligations. Investments and related financial assets where active market quotes are not available are categorized as Level 2 or Level 3, and valuation is provided by independent valuation services, custodians, and asset managers, or based on discounted cash flow model using market observable inputs, such as interest rates, foreign exchange rates, basis spreads, cross currency rates, and volatilities, and unobservable inputs, such as option adjusted spreads, and other techniques. Time deposits are reported at cost, which approximates FV.

The table below provides details of transfers between Level 1 and Level 2 for the years ended 31 December 2016 and 2015:

($million)
Investments for liquidity purpose	2016 Level 1 Level 2		2015
	Level 1		Level 1 Level 2
Government or government- guaranteed obligations Transfers into (out of) Transfers(out of)into	5 $ –	(5) $ –	– $ – $ (5) 5

The inter-level transfers are attributed to the absence or availability of market quotes.

ADB maintains documented processes and internal controls to value the investment securities and financial assets. The data management unit in the treasury department is responsible for providing the valuation in accordance with the business process. In instances where ADB relies primarily on prices from third party pricing information, there are procedures in place to validate the appropriateness of those values in determining the hierarchy levels. This involves evaluating the nature of prices provided by third

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party pricing sources to determine if they are indicative or binding prices. There were no investments categorized as Level 3 as of 31 December 2016 and 2015.

NOTE D—LOANS — OPERATIONS AND HIPC INITIATIVE

Prior to 1 January 1999, loans of ADF extended to eligible borrowing members bore a service charge of 1% and required repayment over periods ranging from 35 to 40 years. On 14 December 1998, the Board of Directors approved an amendment to ADF loan terms, as follows: (i) for loans to finance specific projects, the maturity was shortened to 32 years including an 8-year grace period; (ii) for program loans to support sector development, the maturity was shortened to 24 years including an 8-year grace period; and (iii) all new loans bear a 1% interest charge during the grace period, and 1.5% during the amortization period, with equal amortization. The revised ADF lending terms took effect on 1 January 1999 for loans for which formal loan negotiations were completed on or after 1 January 1999. ADF requires borrowers to absorb exchange rate risks attributable to fluctuations in the value of the currencies disbursed.

In September 2007, the Board of Directors approved a new hard-term ADF lending facility. The facility had a fixed interest rate of 150 basis points below the weighted average of the ten-year fixed swap rates of the SDR component currencies plus the OCR lending spread, or the current ADF rate, whichever was higher. Other terms were similar to those of regular ADF loans. The interest rate was reset every January and applied to all hard-term loans approved that year and fixed for the life of the loan.

In June 2012, the Board of Directors approved the hardening of lending terms to blend countries: (a) for project and policy-based loans financed from ADF resources, a 25-year tenor including a 5-year grace period, 2.0% per year interest rate throughout the loan tenor, and equal amortization; and (b) for hardterm loans, a 25-year tenor including a 5-year grace period, an interest rate calculated as 150 basis points below the weighted average of the 10-year fixed swap rates of the SDR component currencies plus the OCR lending spread, or the applicable ADF interest rates, whichever is higher, throughout the loan tenor, and equal amortization. These new lending terms were applicable to loans for which formal loan negotiations were completed on or after 1 January 2013.

For hard-term ADF loans approved in 2016 and 2015, the interest rate was set at (i) 1.0% during the grace period and 1.5% thereafter for ADF-only countries; and (ii) 2.0% fixed for the life of the loans for blend countries. The hard-term ADF lending facility will be discontinued starting January 2017.

In April 2008, the Board of Governors adopted the resolution on providing HIPC Relief from ADF Debt which allowed ADB to participate in the HIPC Initiative. Subsequently, the Board of Directors approved the provision of debt relief under HIPC to Afghanistan.

ADB believes that because there is no comparable market for ADF loans and because they do not intend to sell these loans, using market data to calculate the FV of the loans is not meaningful. As such, the FV of loans is determined based on the terms at which a similar loan would currently be made by ADB to a similar borrower. For such loans, carrying amount approximates the FV. Any credit risks adjustment on the FV of loans is considered not to have a material effect based on ADB’s experience with its borrowers.

Undisbursed loan commitments and an analysis of loans by country as of 31 December 2016 are shown in ADF-6.

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As of 31 December 2016 and 2015, outstanding loans to borrowers that exceeded 5% of total outstanding loans were as follows:

($million)
Bangladesh Pakistan Viet Nam Sri Lanka Nepal Others (individually less than 5% of total loans) Total Outstanding Loans — Operations Allowance for HIPC Debt Relief Net Outstanding Loans — Operations	2016 2015 5,783 $ 5,864 $ 5,530 5,346 4,245 4,068 2,311 2,363 1,466 1,437 8,032 8,192 27,367 27,270 (61) (65) 27,306 $ 27,205 $

There were no outstanding loans in non-accrual status as of 31 December 2016 and 2015.

Credit Quality of Loans

ADF loans are provided for the economic and social development of the less developed member countries, which generally have lower credit quality than OCR borrowers. ADB uses a performance based allocation (PBA) system to allocate ADF resources among the many competing needs in the region and to direct the funds to where they will be used most effectively. ADB regularly reviews the borrowers’ debt sustaining capacity in determining the proportion of grant and loan that would be provided to each borrower.

The credit quality of ADF loans has been classified by mapping the external sovereign ratings of the borrowers to ADB’s internal risk rating scale used for OCR loans.

The credit quality of ADF loans was as follows:

($million)
Risk Class Low credit risk Medium credit risk High credit risk Total	Risk Rating 1–5 (AAA to BBB–) 6–11 (BB+ to B–) 12–14 (CCC+ to D)	2016 2015 1,001 $ 1,310 $ 24,142 23,614 2,224 2,346 27,367 $ 27,270 $

Provision for HIPC Debt Relief amounting to $82 million relating to the Afghanistan debt relief under the HIPC Initiative was recognized and charged to income in 2008. Of this amount, a total of $21 million was written-off as the loan service payments of affected loans fell due. This brought the balance of Allowance for HIPC debt relief as of 31 December 2016 to $61 million.

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NOTE E—RELATED PARTY TRANSACTIONS

The OCR and Special Funds resources are at all times used, committed, and invested entirely separate from each other.

Payable to related funds of $5 million ($51 million – 2015) is an amount due to OCR, representing the unpaid balance of ADF’s share in the administrative and operational expenses of ADB. The allocation of expenses is based on operational activities and are settled regularly. See Note G—ADMINISTRATIVE EXPENSES.

Under ADF XI and the fifth regularized replenishment of TASF, a specific portion of the total contributions is to be allocated to TASF. ADF receives contributions from members and subsequently transfers the specified portion to TASF. As of 31 December 2016, $95 thousand was payable to TASF (nil – 2015).

NOTE F—CONTRIBUTED RESOURCES AND ADVANCED CONTRIBUTIONS

In May 2016, the Board of Governors approved the transfer of $120 million to the ADF as part of OCR’s 2015 net income allocation.

ADF receives cash or nonnegotiable, noninterest-bearing demand obligations as payment for the contributions. Subject to certain restrictions imposed by applicable Board of Governors’ resolutions, demand obligations are encashable by ADB at par upon demand. The unencashed balance as of 31 December 2016 is reported as a reduction in the Fund Balances, which ADB currently expects to be encashed in varying amounts over the standard encashment period ending 31 December 2017 for ADF X, and 31 December 2021 for ADF XI.

As of 31 December 2016, contributions from 32 donors totaling $3,583 million were committed for ADF XI. Of these, $3,201 million including amortized discount of $4 million were received and recorded in Contributed Resources.

Advance contributions received from donors outstanding as of 31 December 2016 total $149 million ($167 million – 2015). Of this, contributions totaling $111 million ($120 million – 2015) were received in demand obligations, and are included in OTHER ASSETS. The remaining $38 million ($47 million – 2015) was received in cash.

NOTE G—ADMINISTRATIVE EXPENSES

Administrative expenses represent administration charges from OCR which is an apportionment of all administrative expenses of ADB (other than those pertaining directly to ordinary operations and special operations), in the proportion of the relative volume of operational activities.

NOTE H—SET-ASIDE RESOURCES

Pursuant to the provisions of Article 19, paragraph 1(i) of the Charter, the Board of Governors has authorized the setting aside of 10% of the unimpaired “paid-in” capital paid by members pursuant to Article 6, paragraph 2(a) of the Charter and of the convertible currency portion paid by members pursuant to Article 6, paragraph 2(b) of the Charter as of 28 April 1973, to be used as a part of the Special Funds of ADB. The set aside capital was allocated and transferred from the OCR to ADF as Set-Aside Resources.

The capital stock of ADB is defined in Article 4, paragraph 1 of the Charter, “in terms of US dollars of the weight and fineness in effect on 31 January 1966” (the 1966 dollar). Therefore, Set-Aside Resources had historically been translated into the current US dollar (ADB’s unit of account), on the basis of its par value in terms of gold. From 1973 until 31 March 1978, the rate arrived at on this basis was $1.20635 per 1966 dollar. Since 1 April 1978, at which time the Second Amendment to the Articles of Agreement of the International Monetary Fund (IMF) came into effect, currencies no longer had par values in terms of gold.

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Pending ADB’s selection of the appropriate successor to the 1966 dollar, the Set-Aside Resources have been valued for purposes of the accompanying special purpose financial statements in terms of the SDR, at the value in current US dollars as denominated by the IMF. As of 31 December 2016, the value of the SDR in terms of the current US dollar was $1.34433 ($1.38686 – 2015). On this basis, Set-Aside Resources amounted to $64 million ($66 million – 2015). If the capital stock of ADB as of 31 December 2016 had been valued in terms of $12,063.50 per share, Set-Aside Resources would have been $57 million.

These Set-Aside Resources were returned to OCR effective 1 January 2017 (See Note L).

NOTE I—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Comprehensive Income (Loss) has two major components: revenue less than expenses (ADF-2) and other comprehensive income (loss) (ADF-3). Other Comprehensive Income (Loss) includes unrealized gains and losses on “Available for Sale” securities and translation adjustments of assets and liabilities denominated in one of the functional currencies.

The changes in Accumulated Other Comprehensive Loss balances for the years ended 31 December 2016 and 2015 were as follows:

($million)
Balance, 1 January Other comprehensive (loss) income before reclassification Amounts reclassified from accumulated other comprehensive loss Net current-period other comprehensive (loss) income Balance, 31 December	Adjustments 2016 2015 (821) $ (235) $ (679) (586) – – (679) (586) (1,500) $ (821) $ Accumulated Translation		Investments for Liquidity Purpose 2016 2015 3 $ 22 $ 11 (12) (6) (7) 5 (19) 8 $ 3 $ Unrealized Holding Gains (Losses) on	Accumulated Other Comprehensive Loss
	2016		2016	2016 2015 (818) $ (213) $ (668) (598) (6) (7) (674) (605) (1,492) $ (818) $
	(821) $		3 $
	(679) –		11 (6)
	(679)		5
	(1,500) $		8 $
The reclassifications of Accumulated Other Comprehensive Loss to Revenue and Expenses for the year ended 31 December 2016 and 2015 were as follows:
($million)
Accumulated Other Comprehensive Loss Components Unrealized Holding Gains on Investments for Liquidity Purpose		Affected Line Item in the Special Purpose 2016 2015 Statement of Revenue and Expenses NET REALIZED GAINS FROM 6 $ 7 $ INVESTMENTS FOR LIQUIDITY PURPOSE from Accumulated Other Comprehensive Loss Amounts Reclassified
		2016 6 $

The reclassifications of Accumulated Other Comprehensive Loss to Revenue and Expenses for the year ended 31 December 2016 and 2015 were as follows:

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NOTE J—GRANTS AND UNDISBURSED GRANTS

ADF IX introduced financing in the form of grants for the first time. During 2016, 27 grants (15 – 2015) totaling $518 million ($358 million – 2015) were approved, while $376 million ($348 million – 2015), net of $4 million ($12 million – 2015) write-back of undisbursed grants for financially closed and/or cancelled grants, became effective.

The FV of undisbursed grants approximates the amount outstanding, because ADB expects that disbursements will substantially be made for all the projects/programs covered by the commitments.

NOTE K—OTHER FAIR VALUE DISCLOSURES

As of 31 December 2016 and 2015, ADF has no assets or liabilities measured at FV on a non-recurring basis. See Notes C, D, and J for discussions relating to investments for liquidity purpose, loans, and undisbursed grants, respectively. In all other cases, the carrying amounts of ADF’s assets and liabilities are considered to approximate FVs.

NOTE L—SUBSEQUENT EVENTS

ADB has evaluated subsequent events after 31 December 2016 through 17 March 2017, the date these Special Purpose Financial Statements are available for issuance. As a result of this evaluation, only the transfer of ADF assets to OCR as discussed below require disclosure.

Transfer of ADF loans and other assets to OCR

In 2014, ADB introduced a proposal to enhance ADB’s financial capacity in a sustainable manner through more efficient and effective management of its capital resources. The proposal entailed combining ADF lending operations with the OCR and retaining the ADF as a grant-only operation. ADB would continue concessional lending on the same terms and conditions as currently provided to ADF countries through the OCR window, while the ADF would continue to provide grant assistance.

In April 2015, the Board of Governors adopted a resolution authorizing the termination of ADF’s loan operations and the transfer of ADF’s loans and other assets to OCR effective 1 January 2017 (the 2015 Resolution). This resolution was further amended in June 2016. Accordingly, on 1 January 2017, ADB transferred ADF loans and other assets totaling $30,812 million from ADF to OCR. The transferred ADF assets composed of loans totaling $27,088 million and liquid assets totaling $3,724 million. The source of funding for ADF came from donor contributions, OCR net income transfer and set-aside resources.

The transfer of these assets was treated as a contribution from ADF to OCR and a return of the set-aside resources from ADF to OCR. This resulted in the recognition of one-time loss of $31,029 million in ADF and a return of the set-aside resources of $64 million.

The proportionate interest of ADF donors in the transferred assets as of 1 January 2017, taking into account the value of paid-in donor contributions that have been made available for operational commitments, which are deemed by ADB to be applied for the transferred assets, was determined in accordance with Article V of the Regulations of the Asian Development Fund. The value of each donor’s paid-in contributions was fixed in US dollar based on the SDR value of each donor contribution as of 1 January 2017. This was then used to determine the sources of funds in the transferred assets on 1 January 2017, the date of the termination of the ADF loan operations and transfer of assets to OCR. Under the 2015 Resolution, the proportionate interest of an ADF donor will be taken into account in the event of the withdrawal of that donor from ADB and ADB’s repurchase of its shares, and in the theoretical termination of ADB operations and liquidation of its assets.

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The following table shows the funding sources of the transferred assets:

Source of Funds in ADF $ million % Source of Funds in ADF

$ million %

Donor Contributions Australia 2,213 $ 7.18 Malaysia Austria 257 0.83 Nauru Belgium 231 0.75 The Netherlands Brunei Darussalam 17 0.06 New Zealand Canada 1,889 6.13 Norway China, People’s Republic of 84 0.27 Portugal Denmark 242 0.79 Singapore Finland 180 0.58 Spain France 1,270 4.12 Sweden Germany 1,679 5.45 Switzerland Hong Kong, China 93 0.30 Taipei,China India 24 0.08 Thailand Indonesia 14 0.05 Turkey Ireland 79 0.26 United Kingdom Italy 1,099 3.57 United States Japan 11,197 36.34 Subtotal Kazakhstan 4 0.01 OCR Net Income Transfers Korea, Republic of 484 1.57 Set Aside Resources Luxembourg 47 0.15 Total 0 = about $0.3 million, 0.00 = 0.001%.

24 0.08 0 0.00 716 2.32 157 0.51 266 0.86 79 0.26 18 0.06 432 1.40 436 1.42 359 1.17 90 0.29 15 0.05 114 0.37 1,440 4.67 4,060 13.18 29,309 95.13 1,439 4.67 64 0.20 30,812 $ 100.00

139

TECHNICAL ASSISTANCE SPECIAL FUND MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Asian Development Bank ("ADB") is responsible for designing, implementing, and maintaining effective internal control over financial reporting. ADB's internal control over financial reporting is a process designed to provide reasonable assurance regarding the preparation of reliable financial statements in accordance with generally accepted accounting principles in the United States of America.

ADB's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of ADB; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (iii) provide reasonable assurance regarding prevention, or timely detection and correction, of unauthorized acquisition, use, or disposition of ADB's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct, misstatements. Also, projections of any assessment of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

ADB's management assessed the effectiveness of ADB's internal control over financial reporting as of 31 December 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management concluded that, as of 31 December 2016, ADB's internal control over financial reporting is effective based on the criteria established in Internal Control – Integrated Framework (2013).

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Takehiko Nakao
President
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Ingrid van Wees Vice-President (Finance and Risk Management)

Chai S. Kim Controller

17 March 2017

140

141

142

143

144

TASF-1

ASIAN DEVELOPMENT BANK—TECHNICAL ASSISTANCE SPECIAL FUND STATEMENT OF FINANCIAL POSITION 31 December 2016 and 2015

Expressed in Thousands of US Dollars

ASSETS DUE FROM BANKS INVESTMENTS FOR LIQUIDITY PURPOSE (Notes C and G) Time deposits ACCRUED REVENUE DUE FROM CONTRIBUTORS (Note F) ADVANCES FOR TECHNICAL ASSISTANCE AND OTHER ASSETS (Note D)	2016 52,752 $ 302,020 59 40,946 2,985	2015
		6,972 $ 366,555 50 112,809 2,550
TOTAL	398,762 $	488,936 $
LIABILITIES AND UNCOMMITTED BALANCES ACCOUNTS PAYABLE AND OTHER LIABILITIES (Notes D and E) 1,374 $ UNDISBURSED TECHNICAL ASSISTANCE (Notes E and G) 356,442 TOTAL LIABILITIES 357,816 UNCOMMITTED BALANCES (TASF-2 and TASF-4) (Note F), represented by: Unrestricted net assets 40,946		1,443 $ 340,594
		342,037 146,899
TOTAL 398,762 $		488,936 $

The accompanying notes are an integral part of these financial statements (TASF-6).

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TASF-2

ASIAN DEVELOPMENT BANK—TECHNICAL ASSISTANCE SPECIAL FUND STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended 31 December 2016 and 2015

Expressed in Thousands of US Dollars

CHANGES IN UNRESTRICTED NET ASSETS CONTRIBUTIONS (TASF-4) (Note F) REVENUE From investments for liquidity purpose (Note C) From other sources (Notes D and E) Total EXPENSES Technical assistance—net (TASF-5) (Note E) Administrative expenses (Note D) Financial expenses Total CONTRIBUTIONS AND REVENUE LESS THAN EXPENSES EXCHANGE LOSSES—net DECREASE IN NET ASSETS NET ASSETS AT BEGINNING OF YEAR	2016 45,248 $ 2,461 6,480 54,189 (145,157) (6,465) (25) (151,647) (97,458) (8,495) (105,953) 146,899	2015
		68,407 $ 2,214 7,570
		78,191
		(123,601) (6,169) (13)
		(129,783)
		(51,592) (22,377)
		(73,969) 220,868
NET ASSETS AT END OF YEAR	40,946 $	146,899 $

The accompanying notes are an integral part of these financial statements (TASF-6).

146

TASF-3

ASIAN DEVELOPMENT BANK—TECHNICAL ASSISTANCE SPECIAL FUND STATEMENT OF CASH FLOWS For the Years Ended 31 December 2016 and 2015

Expressed in Thousands of US Dollars

CASH FLOWS FROM OPERATING ACTIVITIES Contributions received Interest received on investments for liquidity purpose Net cash received from other activities Other income received Technical assistance disbursed Financial expenses paid Net Cash Used In Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Maturities of investments for liquidity purpose Purchases of investments for liquidity purpose Receipts from securities purchased under resale arrangements Payments for securities purchased under resale arrangements Net Cash Provided by Investing Activities Effect of Exchange Rate Changes on Due from Banks Net Increase in Due from Banks Due from Banks at Beginning of Year Due from Banks at End of Year RECONCILIATION OF DECREASE IN NET ASSETS TO NET CASH USED IN OPERATING ACTIVITIES: Decrease in net assets (TASF-2) Adjustments to reconcile decrease in net assets to net cash used in operating activities: Change in accrued revenue Change in due from contributors Change in advances for technical assistance and other assets Change in accounts payable and other liabilities Change in undisbursed technical assistance Exchange gains—net Net Cash Used in Operating Activities	2016 118,738 $ 2,452 14 1 (129,679) (25) (8,499) 12,607,426 (12,549,314) 8,448 (8,478) 58,082 (3,803) 45,780 6,972 52,752 $ (105,953) $ (9) 94,570 (2,548) (50) 15,847 (10,356) (8,499) $	2015
		113,489 $ 2,245 6 1,395 (121,187) (13)
		(4,065)
		14,514,359 (14,504,112) 5,620 (5,537)
		10,330
		(521)
		5,744 1,228
		6,972 $
		(73,969) $ 30 66,469 3,623 980 217 (1,415)
		(4,065) $

The accompanying notes are an integral part of these financial statements (TASF-6).

147

TASF-4

ASIAN DEVELOPMENT BANK—TECHNICAL ASSISTANCE SPECIAL FUND STATEMENT OF RESOURCES 31 December 2016

Expressed in Thousands of US Dollars

Contributor	Contributions Committed During 2016	Direct Voluntary Contributions	Regularized Replenishment1	Total Contributions
Australia Austria Bangladesh Belgium Brunei Darussalam Canada China, People's Republic of Denmark Finland France Germany Hong Kong, China India Indonesia Ireland Italy Japan Kazakhstan Korea, Republic of Luxembourg Malaysia Nauru The Netherlands New Zealand Norway Pakistan Portugal Singapore Spain Sri Lanka Sweden Switzerland Taipei,China Thailand Turkey United Kingdom United States Total Transfer to Asian Development Fund Allocation from OCR Net Income Other Resources2	– $ – – – – – – – – – – – – – – – – – – – – – – – – 140 – – 5,108 – – – – – – – – 5,248 40,000	2,484 $ 159 47 1,394 – 3,346 1,600 1,963 237 1,697 3,315 100 4,494 250 – 774 47,710 – 1,900 – 909 – 1,337 1,096 3,279 2,226 – 1,100 190 6 861 1,035 200 – – 5,617 1,500 90,828	103,809 $ 10,582 – 8,535 917 58,087 8,358 7,656 6,979 43,704 59,811 6,120 – 40 5,771 36,458 447,634 410 33,347 1,502 1,572 67 26,869 7,400 11,430 – 3,635 1,398 21,672 – 18,209 13,498 5,215 875 3,694 64,238 130,457 1,149,948	106,294 $ 10,741 47 9,929 917 61,433 9,958 9,618 7,216 45,402 63,126 6,220 4,494 290 5,771 37,232 495,345 410 35,247 1,502 2,481 67 28,206 8,496 14,709 2,226 3,635 2,498 21,861 6 19,071 14,533 5,415 875 3,694 69,855 131,957
				1,240,776 (3,472) 989,000 213,669
TOTAL	45,248 $			2,439,974 $

Note: Numbers may not sum precisely because of rounding.

1 Represents TASF portion of contributions to the replenishment of the Asian Development Fund and the Technical Assistance Special Fund authorized by Governors' Resolution Nos. 182, 214, 300, 333 and 357 at historical values.

2 Represents income, repayments, and reimbursements accruing to TASF since 1980.

The accompanying notes are an integral part of these financial statements (TASF-6).

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TASF-5

ASIAN DEVELOPMENT BANK—TECHNICAL ASSISTANCE SPECIAL FUND SUMMARY STATEMENT OF TECHNICAL ASSISTANCE APPROVED AND EFFECTIVE For the Year Ended 31 December 2016

Expressed in Thousands of US Dollars

Recipient	Project Preparation	Advisory	Research and Development	Policy and Advisory	Capacity Development	Total
Afghanistan Armenia Azerbaijan Bangladesh Bhutan Cambodia China, People's Republic of Fiji Georgia India Indonesia Kazakhstan Kiribati Kyrgyz Republic Lao People’s Democratic Republic Malaysia Maldives Marshall Islands Micronesia, Federated States of Mongolia Myanmar Nauru Nepal Pakistan Palau Papua New Guinea Philippines Samoa Solomon Islands Sri Lanka Tajikistan Thailand Timor-Leste Tonga Turkmenistan Uzbekistan Vanuatu Viet Nam Regional Total Regional Activities	400 $ 384 420 884 619 2,270 4,633 – 1,000 5,901 225 955 800 1,803 (324) – (636) – – – 1,479 900 1,845 6,128 – 1,500 1,882 – – 2,322 379 – 1,000 – 225 3,663 – 2,126 6,230	(183) $ – – – – – – – – – (85) – – – (82) – – – – – – – – – – – – – – – – – – – – – – – –	– $ – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 11,779	– $ 1,000 1,200 – – 1,000 7,227 200 1,413 (41) 1,500 – – – (31) (225) – – 500 3,685 634 – 1,000 581 – (173) 3,000 750 – – 600 (114) 975 – (275) (35) – (74) 4,643	– $ (36) 750 553 110 (480) 628 1,000 1,017 2,271 52 (25) 30 (144) 925 (36) 500 (3) (10) 2,626 2,250 (42) 1,111 (72) 500 699 703 100 783 599 223 (184) 1,497 (41) – (293) 340 206 38,335	217 $ 1,348 2,370 1,437 729 2,790 12,488 1,200 3,431 8,131 1,692 930 830 1,660 488 (261) (136) (3) 490 6,311 4,363 858 3,957 6,637 500 2,025 5,585 850 783 2,921 1,202 (298) 3,472 (41) (50) 3,336 340 2,258 60,986
	49,014 $	(351) $	11,779 $	28,940 $	56,441 $	145,824 (667)
TOTAL						145,157 $

Notes:

1. Numbers may not sum precisely because of rounding.

2. Negative amounts represent net undisbursed technical assistance written back to balances available for future commitments (Note E). The accompanying notes are an integral part of these financial statements (TASF-6).

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ASIAN DEVELOPMENT BANK—TECHNICAL ASSISTANCE SPECIAL FUND NOTES TO FINANCIAL STATEMENTS 31 December 2016 and 2015

NOTE A—NATURE OF OPERATIONS

The Asian Development Bank (ADB), a multilateral development financial institution, was established in 1966 with its headquarters in Manila, Philippines. ADB and its operations are governed by the Agreement Establishing the Asian Development Bank (the Charter). Its purpose is to foster economic development and co-operation in Asia and the Pacific region and to contribute to the acceleration of the process of economic development of the developing member countries (DMCs) in the region, collectively and individually. Since 1999, ADB’s corporate vision and mission has been to help DMCs reduce poverty in the region. This was reaffirmed under the long-term strategic framework for 2008-2020 (Strategy 2020). Under Strategy 2020, ADB’s corporate vision continues to be “An Asia and Pacific Free of Poverty” and its mission has been to help its DMCs reduce poverty and improve living conditions and quality of life. ADB has been pursuing its mission and vision by focusing on three complementary strategic agendas: inclusive growth, environmentally sustainable growth, and regional integration. ADB provides financial and technical assistance for projects and programs, which will contribute to achieve this purpose. These are financed through ordinary capital resources (OCR) and Special Funds.[1]

The TASF was established to provide technical assistance on a grant basis to DMCs of the ADB and for regional technical assistance. TASF resources consist of regularized replenishments and direct voluntary contributions by members, allocations from the net income of OCR, and revenue from investments and other sources.

In July 2012, the Board of Governors adopted the resolution providing for the tenth replenishment of the Asian Development Fund (ADF XI) and the fifth regularized replenishment of the TASF. The replenishment provides substantial resources to the ADF to finance ADB’s concessional program, and to the TASF to finance technical assistance operations. Total replenishment size was SDR8,415 million, of which SDR3,090 million will come from new donor contributions. The donors agreed to allocate 3% of the total replenishment size (equivalent to about 8% of total donor contributions) to TASF. The replenishment became effective on 4 June 2013. As of 31 December 2016, ADB had received instruments of contribution from all 32 donors including qualified contributions amounting to SDR410 million.

In July 2016, the Board of Governors adopted a resolution providing for the eleventh replenishment of the ADF and the sixth regularized replenishment of the TASF. The replenishment provides resources to finance the ADF grant program and the TASF operations during 2017-2020. As of 31 December 2016, total replenishment size is $3,798 million, of which $2,580 million will come from new donor contributions. Donors agreed to allocate $461 million out of the total donor contributions to TASF.

ADB is immune from taxation pursuant to Chapter VIII, Article 56, Exemption from Taxation , of the Charter.

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Presentation of the Financial Statements

The financial statements of the TASF are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP), and are presented on the basis of those for not-forprofit organizations.

TASF reports donors’ contributions of cash and other assets as unrestricted assets as these are made available to TASF without conditions other than for the purpose of pursuing its objectives.

1 Asian Development Fund (ADF), Technical Assistance Special Fund (TASF), Japan Special Fund (JSF), ADB Institute (ADBI), Regional Cooperation and Integration Fund (RCIF), Climate Change Fund (CCF), Asia Pacific Disaster Response Fund (APDRF), and Financial Sector Development Partnership Special Fund (FSDPSF).

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Functional and Reporting Currency

The US dollar is the functional and reporting currency, representing the currency of the primary economic operating environment of TASF.

Translation of Currencies

ADB adopts the use of daily exchange rates for accounting and financial reporting purposes. This allows transactions denominated in non-US dollar currencies to be translated to the reporting currency using exchange rates applicable at the time of the transactions. Contributions included in the financial statements during the year are recognized at applicable exchange rates as of the respective dates of commitment. At the end of each accounting month, translations of assets and liabilities which are denominated in non-US dollar currencies are adjusted using the applicable rates of exchange at the end of the reporting period. These translation adjustments are accounted for as exchange gains or losses and are credited or charged to operations.

Investments for Liquidity Purpose

All investment securities held by TASF are reported at fair value (FV). Realized and unrealized gains and losses are included in REVENUE From investments for liquidity purpose.

Interest income on time deposits is recognized as earned and reported in REVENUE From investments for liquidity purpose.

Securities Purchased Under Resale Arrangements

TASF accounts for the transfer of financial assets in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 860, “Transfers and Servicing.” Transfers are accounted for as sales under ASC 860 when control over the transferred assets has been relinquished. Otherwise, the transfers are accounted for as resale arrangements and collateralized financing arrangements. Securities purchased under resale arrangements are recorded as assets and are not re-pledged.

Contributions

The contributions from donors and the allocations from OCR net income are included in the financial statements from the date of effectivity of the contribution agreement, and the Board of Governors’ approval, respectively.

Technical Assistance, Grants and Related Undisbursed Amounts

Technical assistance (TA) and grants are recognized in the financial statements when the project is approved and becomes effective. Upon completion or cancellation of a TA project or grant, any undisbursed amount is written back as a reduction in TA or grants for the year and the corresponding undisbursed amount is eliminated accordingly.

Advances are provided from TA and grants to the executing agency or co-operating institution, for the purpose of making payments for eligible expenses. The advances are subject to liquidation and charged against undisbursed commitments. Any unutilized portion is required to be returned to the fund. These are included in ADVANCES FOR TECHNICAL ASSISTANCE AND OTHER ASSETS.

Fair Value of Financial Instruments

ASC 820, “Fair Value Measurement” defines FV as the price that would be received to sell an asset or paid to transfer a liability at measurement date in an orderly transaction among willing participants with an assumption that the transaction takes place in the entity’s principal market, or in the absence of principal

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market, in the most advantageous market for the asset or liability. The most advantageous market is the market where the sale of the asset or transfer of liability would maximize the amount received for the asset or minimize the amount paid to transfer the liability. The FV measurement is not adjusted for transaction costs.

Fair Value Hierarchy

ASC 820 establishes a FV hierarchy that gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), next priority to observable market inputs or market corroborated data (Level 2), and the lowest priority to unobservable inputs without market corroborated data (Level 3).

The FVs of ADB’s financial assets and liabilities are categorized as follows:

Level 1: FVs are based on unadjusted quoted prices for identical assets or liabilities in active markets. Level 2: FVs are based on quoted prices for similar assets or liabilities in active markets or markets that are not active; or valuation models for which significant inputs are obtained from market-based data that are observable.

Level 3: FVs are based on prices or valuation models for which significant inputs to the model are unobservable.

Inter-level transfers from one year to another may occur due to changes in market activities affecting the availability of quoted market prices or observable market data.

ADB’s policy is to recognize transfers in and transfers out of levels as of the end of the reporting period in which they occur.

Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make reasonable estimates and assumptions that affect the reported amounts of assets and liabilities and uncommitted balances as of the end of the year and the reported amounts of revenue and expenses during the year. The actual results could differ from those estimates.

Accounting and Reporting Developments

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-09 “Revenue from Contracts with Customers (Topic 606)” to improve financial reporting by creating common revenue recognition guidance for US GAAP and the International Financial Reporting Standards. In 2016, ASUs 2016-08, 2016-10, 2016-12 and 2016-20 were issued to clarify the implementation guidance on principal versus agent considerations, on identifying performance obligations and licensing, on assessing collectibility, noncash consideration, and completed contracts and contract modifications at transition, and to clarify the Codification and to correct unintended application of the guidance, respectively. A public business entity is required to apply the amendments retrospectively for annual reporting periods beginning after 15 December 2017. These ASUs are not expected to have a material impact on TASF’s financial statements on effectivity.

In August 2016, the FASB issued ASU 2016-14, “Not-for-Profit Entities (Topic 958) – Presentation of Financial Statements of Not-for-Profit Entities,” to improve the usefulness of information provided to donors and other users of not-for-profit entity (NFP) financial statements and reduce complexities or costs in preparing the financial statements. The update significantly changes how NFPs present net assets on the face of the financial statements, as well as requires additional disclosures for expenses by nature and function and for the liquidity and availability of resources. Amendments in this update should be applied retrospectively for annual financial statements issued for fiscal years beginning after 15 December 2017, and for interim periods within fiscal years beginning after 15 December 2018. Early adoption is permitted. ADB is currently assessing the impact of this ASU on TASF’s financial statements.

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In August and November 2016, FASB issued two ASUs related to statement of cash flows. ASU 2016-15, “ Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments ,” provides guidance for eight specific cash flow issues, where current standards are either unclear or deficient. ASU 2016-18, “ Statement of Cash Flows (Topic 230) – Restricted Cash ,” requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. Amendments in these updates should be applied retrospectively for annual financial statements issued for fiscal years beginning after 15 December 2017, and for interim periods within those fiscal years. Early adoption is permitted. ADB is currently assessing the impact of this ASU on TASF’s financial statements.

In January 2017, FASB issued ASU 2017-03, “ Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323) – Amendments to SEC Paragraphs Pursuant to Staff Announcements at the 22 September 2016 and 17 November 2016 EITF Meetings ,” which adds the Securities and Exchange Commission (SEC) Staff Announcement regarding disclosure of the impact that recently issued accounting standards, particularly ASU 2014-09, ASU 2016-02 and ASU 2016-13, will have on the entity’s financial statements when adopted in future period. Such disclosure should include (i) a description of the effect of the accounting policies that the entity expects to apply, if determined; (ii) a comparison with current accounting policies; and (iii) the entity’s progress in implementing the new standards and any significant implementation matters yet to be addressed. Appropriate disclosures were provided in the affected ASUs.

Statement of Cash Flows

For the purposes of the Statement of Cash Flows, the TASF considers that its cash and cash equivalents are limited to DUE FROM BANKS, which consists of cash on hand and current accounts in banks used for (i) operational disbursements, (ii) receipt of funds from encashment of donor countries’ promissory notes, and (iii) clearing accounts.

NOTE C—INVESTMENTS FOR LIQUIDITY PURPOSE

The main investment management objective is to maintain security and liquidity. Subject to these parameters, ADB seeks the highest possible return on its investments. Investments are governed by the Investment Authority approved by the Board of Directors.

All investments for liquidity purpose held as of 31 December 2016 and 2015 were in time deposits.

The currency composition of the investment for liquidity purpose portfolio as of 31 December 2016 and 2015 expressed in US dollars was as follows:

($thousand)
Currency US dollar Australian dollar Pound sterling Canadian dollar Total	2016 2015 170,647 $ 235,246 $ 71,473 67,763 30,445 38,078 29,455 25,468 302,020 $ 366,555 $

The annualized rate of return on the average investments held during the period ended 31 December 2016, including securities purchased under resale arrangements, based on the portfolio held at the beginning and end of each month, was 0.72% (0.60% – 2015).

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Fair Value Disclosure

The FV of INVESTMENTS FOR LIQUIDITY PURPOSE and related financial assets as of 31 December 2016 and 2015 was as follows:

($thousand)
31 December 2016 Investments for liquidity purpose Time deposits 31 December 2015 Investments for liquidity purpose Time deposits	Total 302,020 $ 366,555 $	Fair Value Measurements
		Level 1 – $ – $	Level 2 Level 3 302,020 $ – $ 366,555 $ – $

ADB maintains documented processes and internal controls to value investment securities. If available, investment securities are fair valued based on active market quotes. Time deposits are reported at cost, which approximates FV.

NOTE D—RELATED PARTY TRANSACTIONS

The OCR and Special Funds resources are at all times used, committed, and invested entirely separately from each other. Under ADF IX, ADF X, and ADF XI, a specific portion of the total contributions under each is to be allocated to the TASF as third, fourth and fifth regularized replenishments, respectively. ADF receives the contributions from members and subsequently transfers the specified portion to the TASF. Regional technical assistance projects and programs activities may be cofinanced by ADB’s other Special Funds and trust funds administered by ADB (Agency Trust Funds). Interfund accounts are settled regularly between the TASF and the other funds.

ADB does not allocate any service fees to TASF for administering TA which involves a range of personnel services. Effective 1 January 2015, TASF has estimated the FV of personnel services involved in administering TAs to be 5% of amounts disbursed for TA projects. For the year ended 31 December 2016, the calculated service fee was $6,465,000 and recorded as EXPENSES Administrative expenses and REVENUE From other sources ($6,169,000 – 2015). The transaction has no impact on the net assets of TASF.

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The interfund account balances included in ADVANCES FOR TECHNICAL ASSISTANCE AND OTHER ASSETS and ACCOUNTS PAYABLE AND OTHER LIABILITIES are as follows:

($thousand)
Receivable from: Asian Development Fund Regional Cooperation and Integration Fund Climate Change Fund Agency Trust Funds—net Total Payable to: Ordinary capital resources Climate Change Fund Total 0 = Less than $500.	2016 2015 95 $ – $ 15 162 0 – 311 335 421 $ 497 $ 109 $ 91 $ – 0 109 $ 91 $

The receivable from ADF mainly represents TASF allocations from 2 donors in relation to their ADF X and XI contributions.

NOTE E—UNDISBURSED TECHNICAL ASSISTANCE

Undisbursed technical assistance are denominated in US dollars and represent effective ongoing grantfinanced TA projects/programs which are not yet disbursed and unliquidated as of the end of the year. During 2016, $27,709,000 ($23,975,000 – 2015) representing completed and canceled TA projects was written back as a reduction in technical assistance for the period and the corresponding undisbursed commitment was eliminated. The FV of undisbursed commitments approximates the amounts undisbursed, because ADB expects that disbursements will be made for all projects/programs covered by the commitments.

ADB normally finances all TA on a grant basis. However, some TA operations are subject to arrangements for recovery of the full cost of the TA or provided on a reimbursable basis. During 2016, there was no reimbursement for the TA ($1,395,000 – 2015) that was included in REVENUE From other sources.

As of 31 December 2016, $1,240,000 ($1,240,000 – 2015) was included in ACCOUNTS PAYABLE AND OTHER LIABILITIES as reimbursement for the TA, received in advance of the TA approval.

NOTE F—CONTRIBUTIONS AND UNCOMMITTED BALANCES

Since inception in 1967, direct contributions have been made by 29 member countries. In 2016, TASF received direct and voluntary contribution commitments from Pakistan amounting to $140,000, of which $130,000 was received to date.

In 1986, 1992, 2005, 2009 and 2013, the Board of Governors of ADB, in authorizing replenishments of the ADF, provided for allocations to the TASF in aggregate amounts equivalent to $72,000,000, $141,000,000, $221,000,000, $339,000,000 and $376,000,000, respectively, to be used for technical assistance to ADF borrowing DMCs and for regional technical assistance. During the year, the fund received $99,671,000 ($2,831,000 – ADF IX; $767,000 – ADF X; $96,073,000 – ADF XI) in cash and promissory notes, leaving

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a total of $40,946,000 ($4,320,000 – ADF IX; $19,416,000 – ADF X; $17,200,000 – ADF XI; $10,000 – direct voluntary contribution) as DUE FROM CONTRIBUTORS.

In 2016, $40,000,000 was allocated from OCR net income to TASF bringing the accumulated allocation from OCR net income to $989,000,000.

Some of the direct contributions received can be subject to restricted procurement sources, while some are given on condition that the technical assistance be made on a reimbursable basis. The total contributions received for the years ended 31 December 2016 and 2015 were without any restrictions.

Uncommitted balances comprise amounts which have not been committed by ADB as of 31 December 2016 and 2015. These balances include approved TA projects/programs that are not yet effective.

NOTE G—OTHER FAIR VALUE DISCLOSURES

As of 31 December 2016 and 2015, TASF has no assets or liabilities measured at FV on a non-recurring basis. See Notes C and E for discussions relating to investments for liquidity purpose and undisbursed technical assistance, respectively. In all other cases, the carrying amount of TASF’s assets and liabilities is considered to approximate FV.

NOTE H—SUBSEQUENT EVENTS

ADB has evaluated subsequent events after 31 December 2016 through 17 March 2017, the date these Financial Statements are available for issuance. As a result of this evaluation, there are no subsequent events, as defined, that require recognition or disclosure in the TASF’s Financial Statements as of 31 December 2016.

156

JAPAN SPECIAL FUND MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Asian Development Bank ("ADB") is responsible for designing, implementing, and maintaining effective internal control over financial reporting. ADB's internal control over financial reporting is a process designed to provide reasonable assurance regarding the preparation of reliable financial statements in accordance with generally accepted accounting principles in the United States of America.

ADB's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of ADB; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (iii) provide reasonable assurance regarding prevention, or timely detection and correction, of unauthorized acquisition, use, or disposition of ADB's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct, misstatements. Also, projections of any assessment of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

ADB's management assessed the effectiveness of ADB's internal control over financial reporting as of 31 December 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management concluded that, as of 31 December 2016, ADB's internal control over financial reporting is effective based on the criteria established in Internal Control – Integrated Framework (2013).

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Takehiko Nakao
President
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Ingrid van Wees Vice-President (Finance and Risk Management)

Chai S. Kim Controller

17 March 2017

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158

159

160

161

JSF-1

ASIAN DEVELOPMENT BANK—JAPAN SPECIAL FUND STATEMENT OF FINANCIAL POSITION 31 December 2016 and 2015

Expressed in Thousands of US Dollars

ASSETS DUE FROM BANKS INVESTMENTS FOR LIQUIDITY PURPOSE (Notes C and G) Time deposits ACCRUED REVENUE ADVANCES FOR TECHNICAL ASSISTANCE AND OTHER ASSETS (Note D)		2016	2016		2015	2015
	ACCSF	JSF Regular and Supplementary Total 1,091 $ 1,273 $ 69,021 106,032 7 13 – –		ACCSF	JSF Regular and Supplementary Total 2,010 $ 2,191 $ 68,708 105,553 4 7 0 0
	182 $ 37,011 6 –	1,091 $ 69,021 7 –	1,273 $ 106,032 13 –	181 $ 36,845 3 –	2,010 $ 68,708 4 0	2,191 $ 105,553 7 0
TOTAL	37,199 $	70,119 $	107,318 $	37,029 $	70,722 $	107,751 $
LIABILITIES AND NET ASSETS ACCOUNTS PAYABLE AND OTHER LIABILITIES (Note D) UNDISBURSED TECHNICAL ASSISTANCE (Notes E and G) TOTAL LIABILITIES NET ASSETS (JSF-2), represented by: Uncommitted balances (Note F) Unrestricted Temporarily restricted Net accumulated investment income (Note F) Temporarily restricted	– $ –	39 $ 1,412	39 $ 1,412	– $ –	39 $ 2,744	39 $ 2,744
	–	1,451	1,451	–	2,783	2,783
	– 28,199	68,668 –	68,668 28,199	– 28,199	67,939 –	67,939 28,199
	28,199 9,000	68,668 –	96,867 9,000	28,199 8,830	67,939 –	96,138 8,830
	37,199	68,668	105,867	37,029	67,939	104,968
TOTAL	37,199 $	70,119 $	107,318 $	37,029 $	70,722 $	107,751 $

0 = Less than $500.

The accompanying notes are an integral part of these financial statements (JSF-4).

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JSF-2

ASIAN DEVELOPMENT BANK—JAPAN SPECIAL FUND STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended 31 December 2016 and 2015

Expressed in Thousands of US Dollars

CHANGES IN UNRESTRICTED NET ASSETS REVENUE FROM INVESTMENTS FOR LIQUIDITY PUROSE (Note C) REVENUE FROM OTHER SOURCES NET ASSETS REVERTED FROM TEMPORARILY RESTRICTED ASSETS Total EXPENSES Technical assistance—net (Note E) Administrative and financial expenses Total REVENUE IN EXCESS OF EXPENSES EXCHANGE GAINS—net INCREASE IN UNRESTRICTED NET ASSETS CHANGES IN TEMPORARILY RESTRICTED NET ASSETS REVENUE FROM INVESTMENTS FOR LIQUIDITY PURPOSE AND OTHER SOURCES NET ASSETS TRANSFERRED TO UNRESTRICTED ASSETS INCREASE IN TEMPORARILY RESTRICTED NET ASSETS INCREASE IN NET ASSETS NET ASSETS AT BEGINNING OF YEAR		2016	2016		2015	2015
	ACCSF	JSF Regular and Supplementary Total 317 $ 317 $ 3 3 – 0 320 320 655 655 (246) (246) 409 409 729 729 – – 729 729 – 170 – (0) – 170 729 899 67,939 104,968		ACCSF	JSF Regular and Supplementary Total 138 $ 138 $ 9 9 – 0 147 147 2,631 2,631 (295) (295) 2,336 2,336 2,483 2,483 0 0 2,483 2,483 – 79 – (0) – 79 2,483 2,562 65,456 102,406
	– $ – 0	317 $ 3 –	317 $ 3 0	– $ – 0	138 $ 9 –	138 $ 9 0
	0	320	320	0	147	147
	– (0)	655 (246)	655 (246)	– (0)	2,631 (295)	2,631 (295)
	(0)	409	409	(0)	2,336	2,336
	0 –	729 –	729 –	– –	2,483 0	2,483 0
	0	729	729	–	2,483	2,483
	170 (0)	– –	170 (0)	79 (0)	– –	79 (0)
	170	–	170	79	–	79
	170 37,029	729 67,939	899 104,968	79 36,950	2,483 65,456	2,562 102,406
NET ASSETS AT END OF YEAR	37,199 $	68,668 $	105,867 $	37,029 $	67,939 $	104,968 $

0 = Less than $500. The accompanying notes are an integral part of these financial statements (JSF-4).

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JSF-3

ASIAN DEVELOPMENT BANK—JAPAN SPECIAL FUND STATEMENT OF CASH FLOWS For the Years Ended 31 December 2016 and 2015

Expressed in Thousands of US Dollars

CASH FLOWS FROM OPERATING ACTIVITIES Interest received on investments for liquidity purpose Net cash received from other sources Technical assistance disbursed Administrative and financial expenses paid Net Cash Provided by (Used in) Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Maturities of investments for liquidity purpose Purchases of investments for liquidity purpose Net Cash (Used in) Provided by Investing Activities Net Increase (Decrease) in Due from Banks Due from Banks at Beginning of Year Due from Banks at End of Year RECONCILIATION OF INCREASE IN NET ASSETS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Increase in net assets (JSF-2) Adjustments to reconcile increase in net assets to net cash provided by (used in) operating activities: Change in accrued revenue Change in advances for technical assistance and other assets Change in accounts payable and other liabilities Change in undisbursed technical assistance Exchange gains—net Net Cash Provided by (Used in) Operating Activities		2016	2016		2015	2015
	ACCSF	JSF Regular and Supplementary Total 313 $ 479 $ 3 4 (677) (677) (245) (245) (606) (439) 3,058,075 4,867,202 (3,058,388) (4,867,681) (313) (479) (919) (918) 2,010 2,191 1,091 $ 1,273 $ 729 $ 899 $ (3) (6) 0 0 (0) (0) (1,332) (1,332) 0 0 (606) $ (439) $		ACCSF	JSF Regular and Supplementary Total 139 $ 218 $ 9 9 (1,964) (1,964) (302) (302) (2,118) (2,039) 3,470,529 5,126,890 (3,466,688) (5,123,128) 3,841 3,762 1,723 1,723 287 468 2,010 $ 2,191 $ 2,483 $ 2,562 $ 1 1 15 15 (4) (4) (4,613) (4,613) (0) (0) (2,118) $ (2,039) $
	166 $ 1 – (0)	313 $ 3 (677) (245)	479 $ 4 (677) (245)	79 $ 0 – (0)	139 $ 9 (1,964) (302)	218 $ 9 (1,964) (302)
	167	(606)	(439)	79	(2,118)	(2,039)
	1,809,127 (1,809,293)	3,058,075 (3,058,388)	4,867,202 (4,867,681)	1,656,361 (1,656,440)	3,470,529 (3,466,688)	5,126,890 (5,123,128)
	(166)	(313)	(479)	(79)	3,841	3,762
	1 181	(919) 2,010	(918) 2,191	(0) 181	1,723 287	1,723 468
	182 $	1,091 $	1,273 $	181 $	2,010 $	2,191 $
	170 $ (3) – – – –	729 $ (3) 0 (0) (1,332) 0	899 $ (6) 0 (0) (1,332) 0	79 $ (0) – – – –	2,483 $ 1 15 (4) (4,613) (0)	2,562 $ 1 15 (4) (4,613) (0)
	167 $	(606) $	(439) $	79 $	(2,118) $	(2,039) $

0 = Less than $500.

The accompanying notes are an integral part of these financial statements (JSF-4).

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ASIAN DEVELOPMENT BANK—JAPAN SPECIAL FUND NOTES TO FINANCIAL STATEMENTS 31 December 2016 and 2015

NOTE A—NATURE OF OPERATIONS

The Asian Development Bank (ADB), a multilateral development financial institution, was established in 1966 with its headquarters in Manila, Philippines. ADB and its operations are governed by the Agreement Establishing the Asian Development Bank (the Charter). Its purpose is to foster economic development and co-operation in Asia and the Pacific region and to contribute to the acceleration of the process of economic development of the developing member countries (DMCs) in the region, collectively and individually. Since 1999, ADB’s corporate vision and mission has been to help DMCs reduce poverty in the region. This was reaffirmed under the long-term strategic framework for 2008-2020 (Strategy 2020). Under Strategy 2020, ADB’s corporate vision continues to be “An Asia and Pacific Free of Poverty” and its mission has been to help its DMCs reduce poverty and improve living conditions and quality of life. ADB has been pursuing its mission and vision by focusing on three complementary strategic agendas: inclusive growth, environmentally sustainable growth, and regional integration. ADB provides financial and technical assistance for projects and programs, which will contribute to achieve this purpose. These are financed through ordinary capital resources (OCR) and Special Funds.[1]

The JSF was established in March 1988 when the Government of Japan and ADB entered into a financial arrangement whereby the Government of Japan agreed to make an initial contribution and ADB became the administrator. The purpose of JSF is to help DMCs of ADB restructure their economies and broaden the scope of opportunities for new investments, thereby assisting the recycling of funds to DMCs of ADB. While JSF resources are used mainly to finance technical assistance (TA) operations, these resources may also be used for equity investment operations in ADB’s DMCs. Under the agreement between ADB and Japan, ADB may invest the proceeds of JSF pending disbursement.

In March 1999, the Board approved the acceptance and administration by ADB of the Asian Currency Crisis Support Facility (ACCSF) to assist Asian currency crisis-affected member countries (CAMCs). Funded by the Government of Japan, ACCSF was established within JSF to assist in the economic recovery of CAMCs through interest payment assistance (IPA) grants, TA grants, and guarantees. With the general fulfillment of the purpose of the facility, the Government of Japan and ADB agreed to terminate the ACCSF on 22 March 2002 and all projects were financially completed as of 31 December 2011. Subject to the Government of Japan’s instruction, the remaining funds will be retained in ACCSF.

ADB is immune from taxation pursuant to Chapter VIII, Article 56, Exemption from Taxation , of the Charter.

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Presentation of the Financial Statements

The financial statements of JSF are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP), and are presented on the basis of those for not-for-profit organizations and as unrestricted and temporarily restricted net assets. ACCSF funds are separately reported in the financial statements.

JSF reports the contributions of cash and other assets as restricted support if they are received with donor stipulations that limit the use of the donated assets. When the donor restriction expires, that is, when a stipulated time or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the Statement of Activities and Changes in Net Assets as NET ASSETS TRANSFERRED TO UNRESTRICTED ASSETS.

1 Asian Development Fund (ADF), Technical Assistance Special Fund (TASF), Japan Special Fund (JSF), ADB Institute (ADBI), Regional Cooperation and Integration Fund (RCIF), Climate Change Fund (CCF), Asia Pacific Disaster Response Fund (APDRF), and Financial Sector Development Partnership Special Fund (FSDPSF).

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Functional and Reporting Currency

The US dollar is the functional and reporting currency, representing the currency of the primary economic operating environment of JSF.

Translation of Currencies

ADB adopts the use of daily exchange rates for accounting and financial reporting purposes. This allows transactions denominated in non-US dollar currencies to be translated to the reporting currency using exchange rates applicable at the time of the transactions. Contributions included in the financial statements during the year are recognized at applicable exchange rates as of the respective dates of commitment. At the end of each accounting month, translations of assets and liabilities which are denominated in non-US dollar currencies are adjusted using the applicable rates of exchange at the end of the reporting period. These translation adjustments are accounted for as exchange gains or losses and are credited or charged to operations.

Investments for Liquidity Purpose

All investment securities held by JSF are reported at fair value (FV). Realized and unrealized gains and losses are included in REVENUE FROM INVESTMENTS FOR LIQUIDITY PURPOSE.

Interest income on time deposits is recognized as earned and reported, as REVENUE FROM INVESTMENTS FOR LIQUIDITY PURPOSE.

Technical Assistance, Grants and Related Undisbursed Amounts

Technical assistance (TA) and grants are recognized in the financial statements when the project is approved and becomes effective. Upon completion or cancellation of a TA project or grant, any undisbursed amount is written back as a reduction in the TA or grants for the year and the corresponding undisbursed commitment is eliminated accordingly.

Advances are provided from TA and grants to the executing agency or co-operating institution, for the purpose of making payments for eligible expenses. The advances are subject to liquidation and charged against undisbursed commitments. Any unutilized portion is required to be returned to the fund. These are included in ADVANCES FOR TECHNICAL ASSISTANCE AND OTHER ASSETS.

Fair Value of Financial Instruments

ASC 820, “Fair Value Measurement” defines FV as the price that would be received to sell an asset or paid to transfer a liability at measurement date in an orderly transaction among willing participants with an assumption that the transaction takes place in the entity’s principal market, or in the absence of principal market, in the most advantageous market for the asset or liability. The most advantageous market is the market where the sale of the asset or transfer of liability would maximize the amount received for the asset or minimize the amount paid to transfer the liability. The FV measurement is not adjusted for transaction costs.

Fair Value Hierarchy

ASC 820 establishes a FV hierarchy that gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), next priority to observable market inputs or market corroborated data (Level 2), and the lowest priority to unobservable inputs without market corroborated data (Level 3).

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The FVs of ADB’s financial assets and liabilities are categorized as follows:

Level 1: FVs are based on unadjusted quoted prices for identical assets or liabilities in active markets. Level 2: FVs are based on quoted prices for similar assets or liabilities in active markets or markets that are not active; or valuation models for which significant inputs are obtained from market-based data that are observable.

Level 3: FVs are based on prices or valuation models for which significant inputs to the model are unobservable.

Inter-level transfers from one year to another may occur due to changes in market activities affecting the availability of quoted market prices or observable market data.

ADB’s policy is to recognize transfers in and transfers out of levels as of the end of the reporting period in which they occur.

Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make reasonable estimates and assumptions that affect the reported amounts of assets and liabilities as of the end of the year and the reported amounts of revenue and expenses during the year. The actual results could differ from those estimates.

Accounting and Reporting Developments

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-09 “Revenue from Contracts with Customers (Topic 606)” to improve financial reporting by creating common revenue recognition guidance for US GAAP and the International Financial Reporting Standards. In 2016, ASUs 2016-08, 2016-10, 2016-12 and 2016-20 were issued to clarify the implementation guidance on principal versus agent considerations, on identifying performance obligations and licensing, on assessing collectibility, noncash consideration, and completed contracts and contract modifications at transition, and to clarify the Codification and to correct unintended application of the guidance, respectively. A public business entity is required to apply the amendments retrospectively for annual reporting periods beginning after 15 December 2017. These ASUs are not expected to have a material impact on JSF’s financial statements on effectivity.

In August 2016, the FASB issued ASU 2016-14, “Not-for-Profit Entities (Topic 958) – Presentation of Financial Statements of Not-for-Profit Entities,” to improve the usefulness of information provided to donors and other users of not-for-profit entity (NFP) financial statements and reduce complexities or costs in preparing the financial statements. The update significantly changes how NFPs present net assets on the face of the financial statements, as well as requires additional disclosures for expenses by nature and function and for the liquidity and availability of resources. Amendments in this update should be applied retrospectively for annual financial statements issued for fiscal years beginning after 15 December 2017, and for interim periods within fiscal years beginning after 15 December 2018. Early adoption is permitted. ADB is currently assessing the impact of this ASU on JSF’s financial statements.

In August and November 2016, FASB issued two ASUs related to statement of cash flows. ASU 2016-15, “ – Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments ,” provides guidance for eight specific cash flow issues, where current standards are either unclear or deficient. ASU 2016-18, “ Statement of Cash Flows (Topic 230) – Restricted Cash ,” requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. Amendments in these updates should be applied retrospectively for annual financial statements issued for fiscal years beginning after 15 December 2017, and for interim periods within those fiscal years. Early adoption is permitted. ADB is currently assessing the impact of this ASU on JSF’s financial statements.

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In January 2017, FASB issued ASU 2017-03, “ Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323) – Amendments to SEC Paragraphs Pursuant to Staff Announcements at the 22 September 2016 and 17 November 2016 EITF Meetings ,” which adds the Securities and Exchange Commission (SEC) Staff Announcement regarding disclosure of the impact that recently issued accounting standards, particularly ASU 2014-09, ASU 2016-02 and ASU 2016-13, will have on the entity’s financial statements when adopted in future period. Such disclosure should include (i) a description of the effect of the accounting policies that the entity expects to apply, if determined; (ii) a comparison with current accounting policies; and (iii) the entity’s progress in implementing the new standards and any significant implementation matters yet to be addressed. Appropriate disclosures were provided in the affected ASUs.

Statement of Cash Flows

For the purposes of the Statement of Cash Flows, the JSF considers that its cash and cash equivalents are limited to DUE FROM BANKS, which consists of cash on hand and current accounts in banks used for operational disbursements.

NOTE C—INVESTMENTS FOR LIQUIDITY PURPOSE

The main investment management objective is to maintain security and liquidity. Subject to these parameters, ADB seeks the highest possible return on its investments. Investments are governed by the Investment Authority approved by the Board of Directors.

All investments for liquidity purpose held as of 31 December 2016 and 2015 were in US dollar time deposits.

The annualized rates of return on the average investments for liquidity purpose held under ACCSF and JSF during the year, based on the portfolio held at the beginning and end of each month, were 0.46% and 0.46%, respectively (0.22% and 0.20%, respectively – 2015).

Fair Value Disclosure

The FV of INVESTMENTS FOR LIQUIDITY PURPOSE as of 31 December 2016 and 2015 was as follows:

($thousand)
31 December 2016 Total Investments for liquidity purpose Time deposits 106,032 $ 31 December 2015 Investments for liquidity purpose Time deposits 105,553 $		Fair Value Measurements
		Level 1 – $ – $	Level 2 Level 3 106,032 $ – $ 105,553 $ – $

ADB maintains documented processes and internal controls to value investment securities. Time deposits are reported at cost, which approximates FV.

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NOTE D—RELATED PARTY TRANSACTIONS

The OCR and Special Funds resources are at all times used, committed, and invested entirely separately from each other. The administrative and operational expenses pertaining to JSF are settled regularly with OCR and other funds. Regional technical assistance projects and programs may be combined activities financed by Special Funds and trust funds.

The interfund account balances included in ADVANCES FOR TECHNICAL ASSISTANCE AND OTHER ASSETS and ACCOUNTS PAYABLE AND OTHER LIABILITIES were as follows:

($thousand)
JSF from: Regional Cooperation Integration Fund JSF to: Ordinary Capital Resources 0 = less than $500. Amounts Receivable by: Amounts Payable by:	2016 2015 – $ 0 $ 31 $ 23 $

NOTE E—UNDISBURSED TECHNICAL ASSISTANCE

Undisbursed technical assistance are denominated in US dollars and represent effective TA projects/programs not yet disbursed and unliquidated. During 2016, $655,000 ($2,631,000 – 2015) representing completed but partially cancelled TA projects were written back as a reduction in technical assistance for the period, and the corresponding undisbursed commitments were eliminated. None of this amount corresponds to ACCSF in both years. The FV of undisbursed commitments approximates the amounts outstanding, because ADB expects that disbursements will substantially be made for all the projects/programs covered by the commitments.

NOTE F—UNCOMMITTED BALANCES

Effective 31 December 2002, all remaining temporarily restricted net assets under JSF were transferred and integrated into the unrestricted regular net assets, as concurred by Japan, to optimize the use of JSF. Similarly, Japan lifted the restriction over the use of net accumulated investment income, which under the original terms of agreement between ADB and Japan, may only be used for defraying JSF’s administrative expenses. Japan agreed to use the net accumulated investment income as additional resources for funding future JSF operations.

Uncommitted balances comprise amounts which have not been committed by ADB as of 31 December 2016 and 2015. These balances include approved TA projects/programs that are not yet effective. As of 31 December 2016 and 2015 these balances were as follows:

($thousand)
Uncommitted balances available for new commitments		2016	Total 96,867 $		2015
	ACCSF	JSF Regular and Supplementary		ACCSF	JSF Regular and Supplementary Total 67,939 $ 96,138 $
	28,199 $	68,668 $		28,199 $

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The temporarily restricted uncommitted balance remaining available as of 31 December 2016 corresponds to funds under ACCSF of $28,199,000 ($28,199,000 – 2015) and the amount of net accumulated income from investment for liquidity purpose of $9,000,000 ($8,830,000 – 2015) for settlement of all administrative expenses.

Net assets transferred to unrestricted assets under ACCSF relate to savings on financially completed technical assistance net of amounts from accumulated income from investment for liquidity purpose, released from restrictions to defray the administrative expenses of ACCSF.

NOTE G—OTHER FAIR VALUE DISCLOSURES

As of 31 December 2016 and 2015, JSF has no assets or liabilities measured at FV on a non-recurring basis. See Notes C and E for discussions relating to investments for liquidity purpose and undisbursed technical assistance, respectively. In all other cases, the carrying amount of JSF’s assets and liabilities is considered to approximate FV.

NOTE H—SUBSEQUENT EVENTS

ADB has evaluated subsequent events after 31 December 2016 through 17 March 2017, the date these Financial Statements are available for issuance. As a result of this evaluation, there are no subsequent events, as defined, that require recognition or disclosure in the JSF’s Financial Statements as of 31 December 2016.

170

171

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ADBI-1

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT BANK INSTITUTE STATEMENT OF FINANCIAL POSITION 31 December 2016 and 2015

Expressed in Thousands of US Dollars

ASSETS DUE FROM BANKS PROPERTY, FURNITURE, AND EQUIPMENT (Note C) Property, Furniture, and Equipment Less—allowance for depreciation DUE FROM CONTRIBUTORS (Note F) LONG-TERM GUARANTEE DEPOSITS (Note D) OTHER ASSETS (Note I)	11,473 $ 2,653 $ 2,643 10 5,744 1,368 326 2016	2015
		10,396 $ 2,889 $ 2,850 39 6,076 1,328 279
TOTAL	18,921 $	18,118 $
LIABILITIES AND UNCOMMITTED BALANCES ACCOUNTS PAYABLE AND OTHER LIABILITIES Accrued pension and postretirement medical benefit costs (Note J) Asset reinstatement obligations (Note E) Others (Note I) UNCOMMITTED BALANCES (ADBI-2) Unrestricted net assets	7,037 $ 924 952 8,913 $ 10,008	6,716 $ 897 1,116 8,729 $ 9,389
TOTAL	18,921 $	18,118 $

The accompanying notes are an integral part of these financial statements (ADBI-4).

173

ADBI-2

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT BANK INSTITUTE STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended 31 December 2016 and 2015

Expressed in Thousands of US Dollars

CHANGES IN UNRESTRICTED NET ASSETS CONTRIBUTIONS (Note F) REVENUE From rental (Note G) From securities purchased under resale arrangements From other sources—net (Note I) Total EXPENSES Administrative expenses (Notes H and I) Program expenses Total CONTRIBUTIONS AND REVENUE IN EXCESS OF EXPENSES EXCHANGE GAINS (LOSSES)—net TRANSLATION ADJUSTMENTS POST RETIREMENT BENEFIT LIABILITY ADJUSTMENTS INCREASE IN NET ASSETS NET ASSETS AT BEGINNING OF YEAR	2016 13,084 $ 361 0 36 13,481 (9,064) (4,090) (13,154) 327 115 190 (13) 619 9,389	2015
		12,260 $ 324 1 54
		12,639
		(8,183) (3,002)
		(11,185)
		1,454 (60) (28) 430
		1,796 7,593
NET ASSETS AT END OF YEAR	10,008 $	9,389 $

0 = less than $500.

The accompanying notes are an integral part of these financial statements (ADBI-4).

174

ADBI-3

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT BANK INSTITUTE STATEMENT OF CASH FLOWS For the Years Ended 31 December 2016 and 2015

Expressed in Thousands of US Dollars

CASH FLOWS FROM OPERATING ACTIVITIES Contributions received Interest on securities purchased under resale arrangements Expenses paid Others—net Net Cash Provided by Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Receipts from securities purchased under resale arrangements Payments for securities purchased under resale arrangements Maturities of investments Net Cash (Used in) Provided by Investing Activities Effect of Exchange Rate Changes on Due from Banks Net Increase in Due from Banks Due from Banks at Beginning of Year Due from Banks at End of Year RECONCILIATION OF INCREASE IN UNRESTRICTED NET ASSETS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Increase in unrestricted net assets (ADBI-2) Adjustments to reconcile increase in unrestricted net assets to net cash provided by operating activities: Depreciation Change in due from contributors Change in long-term guarantee deposits Change in other assets Change in accrued pension and postretirement medical benefit costs Change in asset reinstatement obligations Change in other liabilities Translation adjustments Net Cash Provided by Operating Activities	2016 13,532 $ 0 (13,038) 512 1,006 128,001 (128,447) – (446) 517 1,077 10,396 11,473 $ 619 $ 33 447 (40) (47) 321 27 (164) (190) 1,006 $	2015
		11,863 $ 1 (10,131) 317
		2,050
		1,404,045 (1,398,303) 1,000
		6,742
		373
		9,165 1,231
		10,396 $
		1,796 $ 29 (399) 12 86 63 (8) 443 28
		2,050 $

0 = less than $500.

The accompanying notes are an integral part of these financial statements (ADBI-4).

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ADBI-4

ASIAN DEVELOPMENT BANK—ASIAN DEVELOPMENT BANK INSTITUTE NOTES TO FINANCIAL STATEMENTS 31 December 2016 and 2015

NOTE A—NATURE OF OPERATIONS

The Asian Development Bank (ADB), a multilateral development financial institution, was established in 1966 with its headquarters in Manila, Philippines. ADB and its operations are governed by the Agreement Establishing the Asian Development Bank (the Charter). Its purpose is to foster economic development and co-operation in Asia and the Pacific region and to contribute to the acceleration of the process of economic development of the developing member countries (DMCs) in the region, collectively and individually. Since 1999, ADB’s corporate vision and mission has been to help DMCs reduce poverty in the region. This was reaffirmed under the long-term strategic framework for 2008-2020 (Strategy 2020). Under Strategy 2020, ADB’s corporate vision continues to be “An Asia and Pacific Free of Poverty” and its mission has been to help its DMCs reduce poverty and improve living conditions and quality of life. ADB has been pursuing its mission and vision by focusing on three complementary strategic agendas: inclusive growth, environmentally sustainable growth, and regional integration. ADB provides financial and technical assistance for projects and programs, which will contribute to achieve this purpose. These are financed through ordinary capital resources (OCR) and Special Funds.[1]

In 1996, ADB approved the establishment of the Asian Development Bank Institute (the Institute) in Tokyo, Japan as a subsidiary body of ADB. The Institute commenced its operations upon the receipt of the first funds from Japan on 24 March 1997, and it was inaugurated on 10 December 1997. The Institute’s funds may consist of voluntary contributions, donations, and grants from ADB members, non-government organizations, and foundations. The Special Fund for the Institute is administered by ADB. The objectives of the Institute, as defined under its Statute, are to identify effective development strategies and capacity improvement for sound development management in developing member countries.

ADB is immune from taxation pursuant to Chapter VIII, Article 56, Exemption from Taxation , of the Charter.

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Presentation of the Financial Statements

The financial statements of the Institute are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP), and are presented on the basis of those for not-forprofit organizations.

The Institute reports donor’s contributed cash and other assets as unrestricted support as these are made available to the Institute without conditions other than for the purposes of pursuing the objectives of the Institute.

Functional Currency and Reporting Currency

The functional currency of the Institute is yen, representing the currency of primary economic operating environment of the Institute. The reporting currency is the US dollar.

Translation of Currencies

Assets and liabilities are translated from the functional currency to the reporting currency at the applicable rates of exchange at the end of a reporting period. Commitments included in the financial statements during

1 Asian Development Fund (ADF), Technical Assistance Special Fund (TASF), Japan Special Fund (JSF), ADB Institute (ADBI), Regional Cooperation and Integration Fund (RCIF), Climate Change Fund (CCF), Asia Pacific Disaster Response Fund (APDRF), and Financial Sector Development Partnership Special Fund (FSDPSF).

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the year are recognized at the applicable exchange rates as of the end of the month of commitment. Revenue and expense amounts are translated at the applicable rates of exchange at the end of each month; such practice approximates the application of average rates in effect during the period. Translation adjustments are recorded as TRANSLATION ADJUSTMENTS and included in CHANGES IN UNRESTRICTED ASSETS.

Monetary assets and liabilities denominated in currency other than yen are translated into yen at year-end exchange rates. Exchange gains and losses are recorded as EXCHANGE GAINS (LOSSES)–net and included in the CHANGES IN UNRESTRICTED ASSETS.

Securities Purchased Under Resale Arrangements

The Institute accounts for transfer of financial assets in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 860, “Transfers and Servicing.” Transfers are accounted for as sales under ASC 860 when control over the transferred assets has been relinquished. Otherwise, the transfers are accounted for as resale arrangements and collateralized financing arrangements. Securities purchased under resale arrangements are recorded as assets and are not repledged.

Interest income on investment securities is recognized as earned and reported net of amortizations of premiums and discounts in REVENUE From investments.

Property, Furniture, and Equipment

Property, furniture, and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method. Maintenance, repairs and minor betterments are charged to expense.

Expenditures amounting to more than $30,000 for a single asset or a combination of assets forming an integral part of a separate asset are capitalized.

Contributions

Contributions from donors are included in the financial statements from the date committed.

Fair Value of Financial Instruments

ASC 820, “Fair Value Measurement” defines fair value (FV) as the price that would be received to sell an asset or paid to transfer a liability at measurement date in an orderly transaction among willing participants with an assumption that the transaction takes place in the entity’s principal market, or in the absence of principal market, in the most advantageous market for the asset or liability. The most advantageous market is the market where the sale of the asset or transfer of liability would maximize the amount received for the asset or minimize the amount paid to transfer the liability. The FV measurement is not adjusted for transaction cost.

Fair Value Hierarchy

ASC 820 establishes a FV hierarchy that gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), next priority to observable market inputs or market corroborated data (Level 2), and the lowest priority to unobservable inputs without market corroborated data (Level 3).

The FVs of ADB’s financial assets and liabilities are categorized as follows:

Level 1: FVs are based on unadjusted quoted prices for identical assets or liabilities in active markets.

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Level 2: FVs are based on quoted prices for similar assets or liabilities in active markets or markets that are not active; or valuation models for which significant inputs are obtained from market-based data that are observable.

Level 3: FVs are based on prices or valuation models for which significant inputs to the model are unobservable.

Inter-level transfers from one year to another may occur due to changes in market activities affecting the availability of quoted market prices or observable market data.

ADB’s policy is to recognize transfers in and transfers out of levels as of the end of the reporting period in which they occur.

Accounting Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and uncommitted balances as of the end of the year and the reported amounts of revenue and expenses during the year. Actual results could differ from those estimates.

Accounting and Reporting Developments

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-09 “Revenue from Contracts with Customers (Topic 606)” to improve financial reporting by creating common revenue recognition guidance for US GAAP and the International Financial Reporting Standards. In 2016, ASUs 2016-08, 2016-10 and 2016-12 were issued to clarify the implementation guidance on principal versus agent considerations, on identifying performance obligations and licensing, and on assessing collectibility, noncash consideration, and completed contracts and contract modifications at transition, respectively. A public entity is required to apply the amendments retrospectively for annual reporting periods beginning after 15 December 2017. These ASUs are not expected to have a material impact on the Institute’s financial statements.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities.” This Update enhances the reporting requirements for financial instruments. Specifically, this Update (i) requires that investments in equity securities measured at FV, recognize changes in FV in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable FV by requiring entities to perform a qualitative assessment to identify impairment, (iii) amends certain disclosure requirements associated with the FV of financial instruments, and (iv) requires to present separately in other comprehensive income the portion of the total change in the FV resulting from a change in the instrument-specific credit risk of liabilities that an entity has elected to measure at FV in accordance with the FV option. This Update is effective for fiscal years beginning after 15 December 2017 and interim periods thereafter. Early adoption is permitted. ADB is currently assessing the impact of this ASU on the Institute’s financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842). ” This amendment requires the recognition by lessees of lease assets and lease liabilities for the rights and obligations arising from operating leases with terms of more than 12 months. It also requires qualitative disclosures along with specific quantitative disclosures. This Update is effective for fiscal years beginning after 15 December 2018 and interim periods thereafter. The ASU is not expected to have a material impact on the Institute’s financial statements.

In August 2016, the FASB issued ASU 2016-14, “Not-for-Profit Entities (Topic 958) – Presentation of Financial Statements of Not-for-Profit Entities,” to improve the usefulness of information provided to donors and other users of not-for-profit entity (NFP) financial statements and reduce complexities or costs

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in preparing the financial statements. The Update significantly changes how NFPs present net assets on the face of the financial statements, as well as requires additional disclosures for expenses by nature and function and for the liquidity and availability of resources. Amendments in this Update should be applied retrospectively for annual financial statements issued for fiscal years beginning after 15 December 2017, and for interim periods within fiscal years beginning after 15 December 2018. Early adoption is permitted. ADB is currently assessing the impact of this ASU on the Institute’s financial statements.

In August and November 2016, FASB issued two ASUs related to statement of cash flows. ASU 2016-15, “ Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments ,” provides guidance for eight specific cash flow issues, where current standards are either unclear or deficient. ASU 2016-18, “ Statement of Cash Flows (Topic 230) – Restricted Cash ,” requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. Amendments in these Updates should be applied retrospectively for annual financial statements issued for fiscal years beginning after 15 December 2017, and for interim periods within those fiscal years. Early adoption is permitted. ADB is currently assessing the impact of this ASU on the Institute’s financial statements.

In January 2017, FASB issued ASU 2017-03, “ Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323) – Amendments to SEC Paragraphs Pursuant to Staff Announcements at the 22 September 2016 and 17 November 2016 EITF Meetings ,” which adds the Securities and Exchange Commission (SEC) Staff Announcement regarding disclosure of the impact that recently issued accounting standards, particularly ASU 2014-09, ASU 2016-02 and ASU 2016-13, will have on the entity’s financial statements when adopted in future period. Such disclosure should include (i) a description of the effect of the accounting policies that the entity expects to apply, if determined; (ii) a comparison with current accounting policies; and (iii) the entity’s progress in implementing the new standards and any significant implementation matters yet to be addressed. Appropriate disclosures were provided in the affected ASUs.

In February 2017, the FASB issued ASU 2017-05 “Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) – Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets,” which clarifies the scope of recognizing gains and losses from the transfer of nonfinancial assets and adds guidance for partial sales of nonfinancial assets. A public business entity is required to apply the amendments retrospectively for annual reporting periods beginning after 15 December 2017. ADB is currently assessing the impact of this ASU on the Institute’s financial statements.

Statement of Cash Flows

For the purposes of the Statement of Cash Flows, the Institute considers that its cash and cash equivalents are limited to Due from Banks, which consists of cash on hand and current accounts in banks used for operational disbursements.

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continued

NOTE C—PROPERTY, FURNITURE, AND EQUIPMENT

Property, furniture and equipment consist of one-time establishment cost (comprising the office furniture, fixtures and equipment purchased at inception for use in the operations of the Institute), and subsequently purchased furniture and equipment.

The changes in the property, furniture, and equipment during 2016 and 2015, as well as information pertaining to accumulated depreciation, were as follows:

($thousand)
2016 Cost: Balance, 1 January 2016	Property, Furniture and Equipment
	One-time establishment cost Furniture Equipment Leased Property	Grand Total
	2,363 $ 50 $ 294 $ 182 $	2,889 $
Additions during the year Disposals during the year Translation adjustments Balance, 31 December 2016	– – – – (136) – – (188) 72 1 9 6	– (324) 88
	2,299 51 303 –	2,653
Accumulated Depreciation:
Balance, 1 January 2016 Depreciation during the year Disposals during the year Translation adjustments Balance, 31 December 2016 Net Book Value, 31 December 2016	(2,363) (50) (255) (182) – – (33) – 136 – – 188 (72) (1) (5) (6)	(2,850) (33) 324 (84)
	(2,299) (51) (293) –	(2,643)
	– $ – $ 10 $ – $	10 $
2015 Cost: Balance, 1 January 2015	2,385 $ 50 $ 296 $ 184 $	2,915 $
Additions during the year Disposals during the year Translation adjustments Balance, 31 December 2015	– – – – – – – – (22) – (2) (2)	– – (26)
	2,363 50 294 182	2,889
Accumulated Depreciation:
Balance, 1 January 2015 Depreciation during the year Disposals during the year Translation adjustments Balance, 31 December 2015 Net Book Value, 31 December 2015	(2,385) (50) (227) (184) – – (29) – – – – – 22 – 1 2	(2,846) (29) – 25
	(2,363) (50) (255) (182)	(2,850)
	– $ – $ 39 $ – $	39 $

In 2016, the Institute returned the IT equipment under leased property to the lessor.

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NOTE D—LONG-TERM GUARANTEE DEPOSITS

The Institute leases office space and deposits the equivalent of six months of office rent to the lessor, as stipulated in the contract of lease signed in 1997. The amount is updated every contract renewal. The last renewal date was 1 April 2014.

NOTE E—ASSET REINSTATEMENT OBLIGATIONS

The Institute has recorded the estimated asset reinstatement obligations related to leased office space.

NOTE F—CONTRIBUTIONS AND UNCOMMITTED BALANCES

In December 2016, the Government of Japan committed its 28th contribution to the Institute amounting to ¥672,069,000 ($5,744,000 equivalent). This was received on 6 January 2017.

In November 2016, the Government of Republic of Korea committed its second installment of the 2nd contribution to the Institute amounting to $700,000. This was received on 14 November 2016

In July 2016, the Government of Japan committed its 27th contribution to the Institute amounting to ¥672,070,000 ($6,640,000 equivalent). This was received on 5 August 2016.

In December 2015, the Government of Japan committed its 26th contribution to the Institute amounting to ¥672,069,000 ($5,576,000). This was received on 15 January 2016.

In December 2015, the Government of Republic of Korea committed its first installment of its 2nd contribution to the Institute amounting to $700,000. This was received on 15 December 2015.

In September 2015, the Government of Indonesia committed its 1st contribution to the Institute amounting to $500,000. This was received on 5 January 2016.

In June 2015, the Government of Japan committed its 25th contribution to the Institute amounting to ¥672,070,000 ($5,484,000 equivalent). This was received on 1 July 2015.

Uncommitted balances comprise amounts which have not been committed by the Institute as of 31 December 2016 and 2015.

NOTE G—REVENUE FROM RENTAL

REVENUE From rental in 2016 consists of sublease rental income of $361,000 ($324,000 – 2015), received according to a space-sharing agreement with the Japanese Representative Office of ADB. The transactions with ADB were made in the ordinary course of business and were negotiated at arm’s length.

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NOTE H—LEASES

The Institute leases office space and other assets. Rental expenses under operating leases for the years ended 31 December 2016 and 2015 were $3,044,000 and $2,731,000, respectively. As of 31 December 2016, the Institute has the following operating lease commitments:

			Minimum future rentals
**Year ending **	31	December	($ thousand)
2017			2,591
2018			2,516
2019			2,516
2020			629

NOTE I—RELATED PARTY TRANSACTIONS

ADB has not allocated service fees to the Institute for a range of administrative and financial services such as managing the investments or administering the Staff Retirement Plan (SRP) and Post-Retirement Group Medical Insurance Plan (PRGMIP). Effective 1 January 2015, the fair value of those personnel services has been estimated to be 10 basis points of the average balance of the Institute’s liquid assets. For the year ended 31 December 2016, the calculated service fee was $13,000 ($11,000 – 2015) and recorded as Administrative expenses and REVENUE From other sources—net. The transaction has no impact on the net assets of the Institute.

Included in ACCOUNTS PAYABLE AND OTHER LIABILITIES were the amounts net payable to OCR of $111,000 at 31 December 2016 ($237,000 – 31 December 2015). The payable resulted from transactions in the normal course of business.

NOTE J—STAFF PENSION AND POSTRETIREMENT MEDICAL BENEFITS

Staff Retirement Plan

Eligible employees of the Institute are entitled by its Statute to be participants of ADB’s defined benefit SRP. An eligible employee, as defined under SRP, shall, as a condition of service, become a participant from the first day of service, provided the employee has not reached the normal retirement age of 60 at that time. Retirement benefits are based on an annual accrual rate, length of service and the highest average remuneration during two years of eligible service. The SRP assets are segregated in a separate fund. The costs of administering the SRP are absorbed by ADB, except for fees paid to the investment managers and related charges, including custodian fees, which are borne by the SRP.

Participants hired prior to 1 October 2006 are required to contribute 9 1/3% of their salary to the SRP while those hired on or after 1 October 2006 are not required to contribute. The annual accrual rate is 2.95% for staff hired prior to 1 October 2006 and 1.5% for those hired on or after 1 October 2006. Participants may also make discretionary contributions. The Institute’s contribution is determined at a rate sufficient to cover that part of the costs of the SRP not covered by the participants’ contributions.

Expected Contributions

The Institute is expected to contribute $296,000 to the SRP for 2017 based on the budgeted contribution of 23% of salary of Institute participants. The Institute’s staff members are expected to contribute $204,000 representing participants' mandatory contribution of $16,000 assuming full year service and discretionary contributions of $188,000.

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Investment Strategy

Contributions in excess of current benefits payments are invested in international financial markets and in a variety of investment vehicles. The SRP employs 13 external asset managers and one global custodian who are required to operate within the guidelines established by the SRP’s Investment Committee. The investment of these assets, over the long term, is expected to produce returns higher than short-term investments. The investment policy incorporates the SRP’s package of desired investment return and tolerance for risk, taking into account the nature and duration of its liabilities. The SRP’s assets are diversified among different markets and different asset classes. The use of derivatives for speculation, leverage or taking risks is prohibited. Selected derivatives are used for hedging and transactional efficiency purposes.

The SRP’s investment policy is periodically reviewed and revised to reflect the best interest of the SRP’s participants and beneficiaries. As approved by the Pension Committee on 27 October 2015, the SRP’s new long-term target asset-mix, which was implemented in 2016, is 35% US equity, 30% non-US equity, 15% global fixed income, 10% global high yield, and 10% diversified asset.

For the year ended 31 December 2016, the net return on the SRP assets was 6.36% (-0.47% – 2015). ADB expects the long-term rate of return on the assets to be 7.0% (7.0% – 2015).

Assumptions

The assumed overall rate of return takes into account long-term return expectations of the underlying asset classes within the investment portfolio mix, and the expected duration of the SRP’s liabilities. Return expectations are forward looking and, in general, not much weight is given to short-term experience. Unless there is a drastic change in investment policy or market environment, as well as in the liability/benefit policy side, the assumed average long term investment return of 7.0% on the SRP’s assets is expected to remain on average broadly the same, year to year.

Effective for the 2015 actuarial valuation, as part of the regular assumptions review, some revisions were made to the previous actuarial assumptions based on the 2010-2014 experience. The assumptions that were revised include changes to the investment return, salary progression, pension increases, rates of withdrawal, early and incapacity retirement rates, retirement and post-incapacity retirement mortality rates, and percent of international staff who commute, and other commutation factors.

Post-Retirement Group Medical Insurance Plan

The Institute participates in the cost-sharing arrangement of ADB’s PRGMIP. Under this plan, the Institute is obligated to pay 75% of the PRGMIP premiums for its retirees, which includes retired members and their eligible dependents who elected to participate. Currently, no Institute retiree has elected to participate.

The Retiree Medical Plan Fund (RMPF) was established in 2014 to hold the assets in trust that will fund the accumulated obligations of the PRGMIP. The income of RMPF consists of ADB’s contributions and investment earnings; it does not have any component attributable to participants’ share of PRGMIP costs. In 2016 and 2015, insurance premium paid by ADB for the PRGMIP is considered ADB’s contribution to the fund. The costs of administering the RMPF are absorbed by ADB, while investment management and custodian fees are paid from the RMPF.

The SRP Pension Committee is responsible for the overall financial management of the RMPF and is assisted by the SRP Investment Committee.

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Expected Contribution

Subsequent to the establishment of the RMPF, ADB transferred $315 million into the RMPF, none of which relates to the Institute’s contribution. The Institute’s expected contribution to the RMPF will be determined based on the recommendation of the SRP Pension Committee. For 2016, the Institute is not expected to contribute to the RMPF.

Investment Strategy

The RMPF employs three external asset managers and one global custodian who are required to operate within the guidelines established by the SRP’s Investment Committee. The investment of these assets, over the long term, is expected to produce returns higher than short-term investments. Similar to SRP, the investment policy incorporates the RMPF’s package of desired investment return and tolerance for risk, taking into account the nature and duration of its liabilities. The RMPF’s assets are diversified among different markets and asset classes. The use of derivatives for speculation, leverage or taking risks is prohibited. Selected derivatives are used for hedging and transactional efficiency purposes.

In October 2015, the Pension Committee approved the RMPF’s investment policy. Based on the approved policy, the RMPF’s long-term target asset-mix is 40% US equity, 30% non-US equity, and 30% global fixed income. For the year ended 31 December 2016, the net return on the RMPF assets was 5.89% (-2.06% – 2015).

Assumptions

The overall long-term rate of return is 7.0% per annum, similar to the SRP.

Effective for the 2015 actuarial valuation, as part of the regular assumptions review, some revisions were made to the previous actuarial assumptions based on the 2010-2014 experience. The assumptions that were revised include retirement mortality rates and PRGMIP election rates, among others.

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The following table sets forth the Institute’s participants’ pension and postretirement medical benefits at 31 December 2016 and 2015:

($ thousand)

Change in benefit obligation: Projected benefit obligation at beginning of year Service cost Interest cost Plan participants’ contributions Actuarial loss (gain) Benefits paid Projected benefit obligation at end of year Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer’s contribution Plan participants’ contributions Benefits paid Fair value of plan assets at end of year Funded Status Amounts recognized in the Balance sheet consist of: Noncurrent liabilities Amounts recognized in the Unrestricted net assets consist of: Net actuarial loss (gain) Weighted-average assumptions as of 31 December	Pension	Benefits	Postretirement Medical Benefits
	2016	2015	2016 2015 332 $ 457 $ 53 107 18 23 – – (50) (233) – (22) 353 $ 332 $ – $ – $ – – – 22 – – – (22) – $ – $ (353) $ (332) $ (353) $ (332) $ (630) $ (629) $
	11,552 $ 331 536 292 71 (430)	11,427 $ 468 492 182 (536) (481)
	12,352 $ 5,168 $ 334 304 292 (430)	11,552 $
		5,231 $ (17) 253 182 (481)
	5,668 $ (6,684) $ (6,684) $ 2,048 $	5,168 $
		(6,384) $ (6,384) $
		2,034 $
Discount rate Expected return on plan assets Rate of compensation increase varies with age and averages	4.40% 7.00% 3.25%	4.55% 7.00% 3.25%	4.70% 4.55% 7.00% 7.00% N/A N/A

For measurement purposes, a 7.0% annual rate of increase in the per capita cost of covered postretirement medical care benefits was assumed for the valuation as of 31 December 2016 and 2015. The rate was assumed to decrease gradually to 5.0% by 2022 and remain at the level thereafter.

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The following table summarizes the benefit costs associated with pension and postretirement medical benefits for the years ended 31 December 2016 and 2015:

($ thousand)

Components of net periodic benefit cost: Service cost Interest cost Expected return on plan assets Recognized actuarial loss (gain) Net periodic benefit cost	Pension	Benefits	Postretirement Medical Benefits
	2016	2015	2016 2015 53 $ 107 $ 18 23 (1) (1) (48) (38) 22 $ 91 $
	331 $ 536 (372) 95	468 $ 492 (398) 115
	590 $	677 $

The Institute’s accumulated benefit obligation of the pension plan as of 31 December 2016 was $12,221,000 ($11,392,000 – 2015).

The estimated net loss for the defined benefit pension plan that will be amortized from unrestricted net assets into net periodic benefit cost over the next fiscal year amounted to $112,000. The estimated net gains for the postretirement medical benefits plan that will be amortized from unrestricted net assets into net periodic benefit cost over the next fiscal year is $50,000.

Assumed postretirement medical benefits cost trend rates have a significant effect on the amounts reported for the postretirement medical benefits plan. A one-percentage-point change in the assumed trend rates would have the following effects:

($thousand)
	1-Percentage- 1-Percentage- Point Increase Point Decrease
Effect on total service and interest cost components	23 $ (16) $
Effect onpostretirement medical benefit obligation	88 (68)

Estimated Future Benefits Payments

The following table shows the benefit payments expected to be paid in each of the next five years and subsequent five years. The expected benefit payments are based on the same assumptions used to measure the benefit obligation at 31 December 2016:

($ thousand)

2017 2018 2019 2020 2021 2022–2026	Pension Postretirement Benefits Medical Benefits 452 $ 0 $ 570 1 830 4 525 4 535 5 3,579 59

0 = less than $500.

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Fair Value Disclosure

The FV of the Institute’s SRP asset’s measured on a recurring basis as of 31 December 2016 and 2015 was shown below:

($thousand)
		Fair Value Measurements
	Total	Level 1	Level 2	Level 3
31 December 2016 Cash and cash equivalents 523 $ Common/preferred stocks 974 Investment funds 2,611 Government or government- guaranteed securities 528 Corporate debt securities 876 Mortgage/asset-backed securities: Mortgage-backed securities 118 Collateralized mortgage obligations 9 Asset-backed securities 2 Short-term investments 73		– $ 974 2,611 524 831 49 – – 72	523 $ – – 4 41 69 5 1 1	– $ – – – 4 0 4 1 –
Derivatives Other asset/liabilitiesa—net	14 (60)	0 –	14 (60)	– –
Total fair value of SRP assets	5,668 $	5,061 $	598 $	9 $
31 December 2015 Cash and cash equivalents 128 $ Common/preferred stocks 997 Investment funds 2,309 Government or government- guaranteed securities 768 Corporate debt securities 655 Mortgage/asset-backed securities: Mortgage-backed securities 152 Collateralized mortgage obligations 24 Asset-backed securities 3 Short-term investments 225		– $ 997 2,309 756 632 96 – – 14	128 $ – – 12 10 56 19 2 211	– $ – – – 13 – 5 1 –
Derivatives Other asset/liabilitiesa—net	(10) (83)	(0) –	(10) (83)	– –
Total fair value of SRP assets	5,168 $	4,804 $	345 $	19 $

0 = Less than $500. a Incudes receivables and liabilities carried at amounts that approximate fair value.

The SRP’s Investment Committee and SRP investment unit meet periodically and oversee the activities and performance of the investment portfolios. The FV of the SRP investments is provided by the SRP’s global custodian from various independent pricing providers. ADB’s accounting division, in coordination with data management unit of treasury services division, evaluates the FV in determining the hierarchy level. All investments including equity securities, fixed income securities and derivatives are provided by independent pricing providers. Equity securities include common and preferred stocks and mutual funds. Fixed income securities include government or government-guaranteed securities, corporate obligations, asset and mortgage-backed securities, and short-term investments. Derivatives include futures, swaps and currency forward contracts.

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The table below provides details of transfers of the Institute’s SRP’s assets between Levels 1 and 2, which are attributed to the availability or absence of market quotes, for the years ended 31 December 2016 and 2015:

($ thousand)

($thousand)
	2016		2015
Investments	Level 1	Level 2	Level 1 Level 2
Government or government-
guaranteed securities
Transfers into (out of) Transfers (out of) into	– $ (1)	– $ 1	– $ – $ (9) 9
Corporate debt securities
Transfers into (out of) Transfers (out of) into	5 (1)	(5) 1 (3) $	4 (4) (4) 4 (9) $ 9 $
	3 $

The following tables present the changes in the carrying amounts of the Institute’s SRP Level 3 investments for the years ended 31 December 2016 and 2015:

($thousand)
Balance, 31 December 2015 Total realized/unrealized (losses)/gains in: Net increase in net assets available for benefits Purchases Sales/Maturities Settlement and others Transfers out of Level 3		Investments
		Corporate debt securities 12 $ 0 3 (4) – (7)	Mortgage/ Asset-backed securities / Collaterized Mortgage Obligations
			7 $ 0 3 (3) (2)
Balance, 31 December 2016		4 $	5 $
Total unrealized gains (losses) included in income related to financial assets and liabilities still held at the reporting date 0 = Less than $500.		0 $	(0) $

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($ thousand)

Balance, 31 December 2014 Total realized/unrealized (losses)/gains in: Net (decrease) increase in net assets available for benefits Purchases Sales/Maturities Settlement and others Transfers out of Level 3 Balance, 31 December 2015 Total unrealized (losses) gains included in income related to financial assets and liabilities still held at the reporting date 0 = Less than $500.		Investments
		Corporate debt securities Mortgage/ Asset-backed securities / Collaterized Mortgage Obligations 3 $ 11 $ (1) (0) 43 2 (32) (2) (1) (2) – (2) 12 $ 7 $ (0) $ 0 $

Transfers out of Level 3 in 2016 and 2015 are due to the availability of market observable inputs.

NOTE K—OTHER FAIR VALUE DISCLOSURES

As of 31 December 2016 and 2015, the Institute has no assets or liabilities measured at FV on a nonrecurring basis. In all other cases, the carrying amounts of the Institute’s assets and liabilities are considered to approximate FVs.

NOTE L—SUBSEQUENT EVENTS

The Institute has evaluated subsequent events after 31 December 2016 through 17 March 2017, the date these Financial Statements are available for issuance. As a result of this evaluation, there are no subsequent events, as defined, that require recognition or disclosure in the Institute’s Financial Statements as of 31 December 2016.

189

REGIONAL COOPERATION AND INTEGRATION FUND MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Asian Development Bank ("ADB") is responsible for designing, implementing, and maintaining effective internal control over financial reporting. ADB's internal control over financial reporting is a process designed to provide reasonable assurance regarding the preparation of reliable financial statements in accordance with generally accepted accounting principles in the United States of America.

ADB's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of ADB; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (iii) provide reasonable assurance regarding prevention, or timely detection and correction, of unauthorized acquisition, use, or disposition of ADB's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct, misstatements. Also, projections of any assessment of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

ADB's management assessed the effectiveness of ADB's internal control over financial reporting as of 31 December 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management concluded that, as of 31 December 2016, ADB's internal control over financial reporting is effective based on the criteria established in Internal Control – Integrated Framework (2013).

==> picture [83 x 22] intentionally omitted <==

----- Start of picture text -----

Takehiko Nakao
President
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Ingrid van Wees Vice-President (Finance and Risk Management)

Chai S. Kim Controller

17 March 2017

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192

193

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RCIF-1

ASIAN DEVELOPMENT BANK—REGIONAL COOPERATION AND INTEGRATION FUND

STATEMENT OF FINANCIAL POSITION 31 December 2016 and 2015

Expressed in Thousands of US Dollars

ASSETS DUE FROM BANKS INVESTMENTS FOR LIQUIDITY PURPOSE (Notes C and G) Time deposits ACCRUED REVENUE ADVANCES FOR TECHNICAL ASSISTANCE AND OTHER ASSETS (Note D)	2016 2,053 $ 11,851 2 99	2015
		2,503 $ 14,692 1 64
TOTAL	14,005 $	17,260 $
LIABILITIES AND UNCOMMITTED BALANCES ACCOUNTS PAYABLE AND OTHER LIABILITIES (Note D) UNDISBURSED TECHNICAL ASSISTANCE (Notes E and G) TOTAL LIABILITIES UNCOMMITTED BALANCES (RCIF-2) (Note F), represented by: Unrestricted net assets	63 $ 8,092 8,155 5,850	241 $ 9,177
		9,418 7,842
TOTAL	14,005 $	17,260 $

The accompanying notes are an integral part of these financial statements (RCIF-4).

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RCIF-2

ASIAN DEVELOPMENT BANK—REGIONAL COOPERATION AND INTEGRATION FUND

STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended 31 December 2016 and 2015

Expressed in Thousands of US Dollars

CHANGES IN UNRESTRICTED NET ASSETS REVENUE From investments for liquidity purpose (Note C) From other sources Total EXPENSES Technical assistance—net (Note E) Administrative and financial expenses (Note D) Total REVENUE LESS THAN EXPENSES EXCHANGE GAINS (LOSSES)—net DECREASE IN NET ASSETS NET ASSETS AT BEGINNING OF YEAR	2016 59 $ 3 62 (1,890) (165) (2,055) (1,993) 1 (1,992) 7,842	2015
		24 $ 5
		29
		(115) (115)
		(230)
		(201) (5)
		(206) 8,048
NET ASSETS AT END OF YEAR	5,850 $	7,842 $

The accompanying notes are an integral part of these financial statements (RCIF-4).

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RCIF-3

ASIAN DEVELOPMENT BANK—REGIONAL COOPERATION AND INTEGRATION FUND

STATEMENT OF CASH FLOWS For the Years Ended 31 December 2016 and 2015

Expressed in Thousands of US Dollars

CASH FLOWS FROM OPERATING ACTIVITIES Contributions received Interest received on investments for liquidity purpose Cash received from other sources Technical assistance disbursed Administrative and financial expenses paid Net Cash Used in Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Maturities of investments for liquidity purpose Purchases of investments for liquidity purpose Net Cash Provided by Investing Activities Net (Decrease) Increase in Due From Banks Due from Banks at Beginning of Year Due from Banks at End of Year RECONCILIATION OF DECREASE IN NET ASSETS TO NET CASH USED IN OPERATING ACTIVITIES: Decrease in net assets (RCIF-2) Adjustments to reconcile decrease in net assets to net cash used in operating activities: Change in due from contributors Change in accrued revenue Change in advances for technical assistance and other assets Change in accounts payable and other liabilities Change in undisbursed technical assistance Exchange gains—net Net Cash Used in Operating Activities	2016 – $ 58 3 (3,161) (192) (3,292) 689,950 (687,108) 2,842 (450) 2,503 2,053 $ (1,992) $ – (1) (35) (178) (1,085) (1) (3,292) $	2015
		1,215 $ 24 5 (1,608) (42)
		(406)
		756,696 (754,120)
		2,576
		2,170 333
		2,503 $
		(206) $ 1,226 (1) 288 166 (1,871) (8)
		(406) $

The accompanying notes are an integral part of these financial statements (RCIF-4).

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RCIF-4

ASIAN DEVELOPMENT BANK—REGIONAL COOPERATION AND INTEGRATION FUND NOTES TO FINANCIAL STATEMENTS 31 December 2016 and 2015

NOTE A—NATURE OF OPERATIONS

The Asian Development Bank (ADB), a multilateral development financial institution, was established in 1966 with its headquarters in Manila, Philippines. ADB and its operations are governed by the Agreement Establishing the Asian Development Bank (the Charter). Its purpose is to foster economic development and co-operation in Asia and the Pacific region and to contribute to the acceleration of the process of economic development of the developing member countries (DMCs) in the region, collectively and individually. Since 1999, ADB’s corporate vision and mission has been to help DMCs reduce poverty in the region. This was reaffirmed under the long-term strategic framework for 2008-2020 (Strategy 2020). Under Strategy 2020, ADB’s corporate vision continues to be “An Asia and Pacific Free of Poverty” and its mission has been to help its DMCs reduce poverty and improve living conditions and quality of life. ADB has been pursuing its mission and vision by focusing on three complementary strategic agendas: inclusive growth, environmentally sustainable growth, and regional integration. ADB provides financial and technical assistance for projects and programs, which will contribute to achieve this purpose. These are financed through ordinary capital resources (OCR) and Special Funds.[1]

The RCIF, together with the Regional Cooperation and Integration (RCI) Trust Funds, was established on 26 February 2007 under the umbrella of the Regional Cooperation and Integration Financing Partnership Facility (RCIFPF), in response to the increasing demand for regional cooperation and integration activities among ADB’s members in Asia and the Pacific. Its main objective is to enhance regional cooperation and integration in Asia and the Pacific by facilitating the pooling and provision of additional financial and knowledge resources to support RCI activities.

Financial assistance will be provided in the form of untied grants for technical assistance (TA), including advisory, project preparatory, and regional TA.

RCIF’s resources may consist of contributions from ADB and other bilateral, multilateral, and individual sources, including companies and foundations.

ADB is immune from taxation pursuant to Chapter VIII, Article 56, Exemption from Taxation , of the Charter.

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Presentation of the Financial Statements

The financial statements of the RCIF are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP), and are presented on the basis of those for not-forprofit organizations.

RCIF reports donors’ contributions of cash and other assets as unrestricted assets as these are made available to RCIF without conditions other than for the purpose of pursuing its objectives.

Functional and Reporting Currency

The US dollar is the functional and reporting currency, representing the currency of the primary economic operating environment of RCIF.

1 Asian Development Fund (ADF), Technical Assistance Special Fund (TASF), Japan Special Fund (JSF), ADB Institute (ADBI), Regional Cooperation and Integration Fund (RCIF), Climate Change Fund (CCF), Asia Pacific Disaster Response Fund (APDRF), and Financial Sector Development Partnership Special Fund (FSDPSF).

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Translation of Currencies

ADB adopts the use of daily exchange rates for accounting and financial reporting purposes. This allows transactions denominated in non-US dollar currencies to be translated to the reporting currency using exchange rates applicable at the time of the transactions. Contributions included in the financial statements during the year are recognized at applicable exchange rates as of the respective dates of commitment. At the end of each accounting month, translations of assets and liabilities which are denominated in non-US dollar currencies are adjusted using the applicable rates of exchange at the end of the reporting period. These translation adjustments are accounted for as exchange gains or losses and are credited or charged to operations.

Investments for Liquidity Purpose

All investment securities held by RCIF are reported at fair value (FV). Realized and unrealized gains and losses are included in REVENUE From investments for liquidity purpose.

Interest income on time deposits is recognized as earned and reported in REVENUE From investments for liquidity purpose.

Contributions

The contributions from donors and the allocations from net income of OCR are included in the financial statements, from the date of effectivity of the contributions agreement, and the Board of Governors’ approval, respectively.

Technical Assistance, Grants and Related Undisbursed Amounts

Technical assistance (TA) and grants are recognized in the financial statements when the project is approved and becomes effective. Upon completion or cancellation of a TA project or grant, any undisbursed amount is written back as a reduction in TA or grants for the year and the corresponding undisbursed commitment is eliminated accordingly.

Advances are provided from TA and grants to the executing agency or co-operating institution, for the purpose of making payments for eligible expenses. The advances are subject to liquidation and charged against undisbursed commitments. Any unutilized portion is required to be returned to the fund. These are included in ADVANCES FOR TECHNICAL ASSISTANCE AND OTHER ASSETS.

Fair Value of Financial Instruments

ASC 820, “Fair Value Measurement” defines FV as the price that would be received to sell an asset or paid to transfer a liability at measurement date in an orderly transaction among willing participants with an assumption that the transaction takes place in the entity’s principal market, or in the absence of principal market, in the most advantageous market for the asset or liability. The most advantageous market is the market where the sale of the asset or transfer of liability would maximize the amount received for the asset or minimize the amount paid to transfer the liability. The FV measurement is not adjusted for transaction costs.

Fair Value Hierarchy

ASC 820 establishes a FV hierarchy that gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), next priority to observable market inputs or market corroborated data (Level 2), and the lowest priority to unobservable inputs without market corroborated data (Level 3).

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The FVs of ADB’s financial assets and liabilities are categorized as follows:

Level 1: FVs are based on unadjusted quoted prices for identical assets or liabilities in active markets. Level 2: FVs are based on quoted prices for similar assets or liabilities in active markets or markets that are not active; or valuation models for which significant inputs are obtained from market-based data that are observable.

Level 3: FVs are based on prices or valuation models for which significant inputs to the model are unobservable.

Inter-level transfers from one year to another may occur due to changes in market activities affecting the availability of quoted market prices or observable market data.

ADB’s policy is to recognize transfers in and transfers out of levels as of the end of the reporting period in which they occur.

Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make reasonable estimates and assumptions that affect the reported amounts of assets and liabilities and uncommitted balances as of the end of the year and the reported amounts of revenue and expenses during the year. The actual results could differ from those estimates.

Accounting and Reporting Developments

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-09 “Revenue from Contracts with Customers (Topic 606)” to improve financial reporting by creating common revenue recognition guidance for US GAAP and the International Financial Reporting Standards. In 2016, ASUs 2016-08, 2016-10, 2016-12 and 2016-20 were issued to clarify the implementation guidance on principal versus agent considerations, on identifying performance obligations and licensing, on assessing collectibility, noncash consideration, and completed contracts and contract modifications at transition, and to clarify the Codification and to correct unintended application of the guidance, respectively. A public business entity is required to apply the amendments retrospectively for annual reporting periods beginning after 15 December 2017. These ASUs are not expected to have a material impact on RCIF’s financial statements on effectivity.

In August 2016, the FASB issued ASU 2016-14, “ Not-for-Profit Entities (Topic 958) – Presentation of Financial Statements of Not-for-Profit Entities,” to improve the usefulness of information provided to donors and other users of not-for-profit entity (NFP) financial statements and reduce complexities or costs in preparing the financial statements. The update significantly changes how NFPs present net assets on the face of the financial statements, as well as requires additional disclosures for expenses by nature and function and for the liquidity and availability of resources. Amendments in this update should be applied retrospectively for annual financial statements issued for fiscal years beginning after 15 December 2017, and for interim periods within fiscal years beginning after 15 December 2018. Early adoption is permitted. ADB is currently assessing the impact of this ASU on RCIF’s financial statements.

In August and November 2016, FASB issued two ASUs related to statement of cash flows. ASU 2016-15, “ Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments ,” provides guidance for eight specific cash flow issues, where current standards are either unclear or deficient. ASU 2016-18, “ Statement of Cash Flows (Topic 230) – Restricted Cash ,” requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. Amendments in these updates should be applied retrospectively for annual financial statements issued for fiscal years beginning after 15 December 2017, and for interim periods within those fiscal years. Early adoption is permitted. ADB is currently assessing the impact of this ASU on RCIF’s financial statements.

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RCIF-4

continued

In January 2017, FASB issued ASU 2017-03, “ Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323) – Amendments to SEC Paragraphs Pursuant to Staff Announcements at the 22 September 2016 and 17 November 2016 EITF Meetings ,” which adds the Securities and Exchange Commission (SEC) Staff Announcement regarding disclosure of the impact that recently issued accounting standards, particularly ASU 2014-09, ASU 2016-02 and ASU 2016-13, will have on the entity’s financial statements when adopted in future period. Such disclosure should include (i) a description of the effect of the accounting policies that the entity expects to apply, if determined; (ii) a comparison with current accounting policies; and (iii) the entity’s progress in implementing the new standards and any significant implementation matters yet to be addressed. Appropriate disclosures were provided in the affected ASUs.

Statement of Cash Flows

For the purposes of the Statement of Cash Flows, RCIF considers that its cash and cash equivalents are limited to DUE FROM BANKS, which consists of cash on hand and current accounts in banks used for operational disbursements.

NOTE C—INVESTMENTS FOR LIQUIDITY PURPOSE

The main investment management objective is to maintain security and liquidity. Subject to these parameters, ADB seeks the highest possible return on its investments. Investments are governed by the Investment Authority approved by the Board of Directors.

All investments for liquidity purpose held as of 31 December 2016 and 2015 were in US dollar time deposits.

The annualized rate of return on the average investments for liquidity purpose held during the period ended 31 December 2016, based on the portfolio held at the beginning and end of each month, was 0.45% (0.17% – 2015).

Fair Value Disclosure

The FV of INVESTMENTS FOR LIQUIDITY PURPOSE as of 31 December 2016 and 2015 was as follows:

($thousand)
31 December 2016 Investments for liquidity purpose Time deposits 31 December 2015 Investments for liquidity purpose Time deposits	Total 11,851 $ 14,692 $	Fair Value Measurements
		Level 1 – $ – $	Level 2 Level 3 11,851 $ – $ 14,692 $ – $

ADB maintains documented processes and internal controls to value investment securities. Time deposits are reported at cost, which approximates FV.

NOTE D—RELATED PARTY TRANSACTIONS

The OCR and Special Funds resources are at all times used, committed, and invested entirely separately from each other. The administrative and operational expenses pertaining to RCIF are settled regularly with OCR and the other funds. Regional technical assistance projects and programs may be combined activities financed by Special Funds and trust funds. ADB charges a service fee to cover ADB’s incremental cost for the administration, management, supervision and operation of the RCIF and RCI Trust Fund, a trust fund

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RCIF-4

continued

administered by ADB. The service fee is currently 5% of the amount disbursed for technical assistance and 2% of the amount disbursed for grant components of investment projects.

The interfund account balances included in ADVANCES FOR TECHNICAL ASSISTANCE AND OTHER ASSETS and ACCOUNTS PAYABLE AND OTHER LIABILITIES are as follows:

($thousand)
Receivable from: Agency Trust Funds—net Payable to: Ordinary capital resources Technical Assistance Special Fund Japan Special Fund Financial Sector Development Partnership Special Fund Agency Trust Funds—net Total 0 = Less than $500.	2016 2015 – $ 37 $ 15 $ 39 $ 15 162 – 0 – 24 24 – 54 $ 225 $

NOTE E—UNDISBURSED TECHNICAL ASSISTANCE

Undisbursed technical assistance are denominated in US dollars and represent effective TA not yet disbursed and unliquidated. During 2016, $860,000 ($1,334,000 – 2015) representing completed and canceled TA projects and grants were written back as a reduction in technical assistance for the period and the corresponding undisbursed commitment was eliminated. The FV of undisbursed commitments approximates the amounts outstanding, because ADB expects that disbursements will substantially be made for all the projects/programs covered by the commitments.

NOTE F—CONTRIBUTIONS AND UNCOMMITTED BALANCES

No contributions were received during 2016. The second contribution of the Government of Japan amounting to ¥145,500,000 ($1,226,000 equivalent) was received on 9 January 2015.

Uncommitted balances comprise amounts which have not been committed by ADB as of 31 December 2016 and 2015.

NOTE G—OTHER FAIR VALUE DISCLOSURES

As of 31 December 2016 and 2015, RCIF has no assets or liabilities measured at FV on a non-recurring basis. See Notes C and E for discussions relating to investments for liquidity purpose and undisbursed technical assistance, respectively. In all other cases, the carrying amount of RCIF’s assets and liabilities is considered to approximate FV.

NOTE H—SUBSEQUENT EVENTS

ADB has evaluated subsequent events after 31 December 2016 through 17 March 2017, the date these Financial Statements are available for issuance. As a result of this evaluation, there are no subsequent events, as defined, that require recognition or disclosure in the RCIF’s Financial Statements as of 31 December 2016.

202

CLIMATE CHANGE FUND MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Asian Development Bank ("ADB") is responsible for designing, implementing, and maintaining effective internal control over financial reporting. ADB's internal control over financial reporting is a process designed to provide reasonable assurance regarding the preparation of reliable financial statements in accordance with generally accepted accounting principles in the United States of America.

ADB's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of ADB; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (iii) provide reasonable assurance regarding prevention, or timely detection and correction, of unauthorized acquisition, use, or disposition of ADB's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct, misstatements. Also, projections of any assessment of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

ADB's management assessed the effectiveness of ADB's internal control over financial reporting as of 31 December 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management concluded that, as of 31 December 2016, ADB's internal control over financial reporting is effective based on the criteria established in Internal Control – Integrated Framework (2013).

==> picture [83 x 22] intentionally omitted <==

----- Start of picture text -----

Takehiko Nakao
President
----- End of picture text -----

Ingrid van Wees Vice-President (Finance and Risk Management)

Chai S. Kim Controller

17 March 2017

203

204

205

206

207

CCF-1

ASIAN DEVELOPMENT BANK—CLIMATE CHANGE FUND STATEMENT OF FINANCIAL POSITION 31 December 2016 and 2015

Expressed in Thousands of US Dollars

ASSETS DUE FROM BANKS INVESTMENTS FOR LIQUIDITY PURPOSE (Notes C and G) Time deposits ACCRUED REVENUE ADVANCES FOR TECHNICAL ASSISTANCE AND GRANTS AND OTHER ASSETS (Note D)	2016 1,539 $ 16,607 2 681	2015
		1,562 $ 20,725 2 669
TOTAL	18,829 $	22,958 $
LIABILITIES AND UNCOMMITTED BALANCES ACCOUNTS PAYABLE AND OTHER LIABILITIES (Note D) UNDISBURSED TECHNICAL ASSISTANCE AND GRANTS (Notes E and G) TOTAL LIABILITIES UNCOMMITTED BALANCES (CCF-2) (Note F), represented by: Unrestricted net assets	139 $ 10,473 10,612 8,217	133 $ 12,114
		12,247 10,711
TOTAL	18,829 $	22,958 $

The accompanying notes are an integral part of these financial statements (CCF-4).

208

CCF-2

ASIAN DEVELOPMENT BANK—CLIMATE CHANGE FUND STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended 31 December 2016 and 2015

Expressed in Thousands of US Dollars

CHANGES IN UNRESTRICTED NET ASSETS REVENUE From investments for liquidity purpose (Note C) From other sources Total EXPENSES Technical assistance and grants—net (Note E) Administrative and financial expenses (Note D) Total REVENUE (LESS THAN) IN EXCESS OF EXPENSES EXCHANGE LOSSES—net (DECREASE) INCREASE IN NET ASSETS NET ASSETS AT BEGINNING OF YEAR	2016 83 $ 4 87 (1,485) (1,096) (2,581) (2,494) (0) (2,494) 10,711	2015
		37 $ –
		37
		830 (617)
		213
		250 (3)
		247 10,464
NET ASSETS AT END OF YEAR	8,217 $	10,711 $

0 = Less than $500.

The accompanying notes are an integral part of these financial statements (CCF-4).

209

CCF-3

ASIAN DEVELOPMENT BANK—CLIMATE CHANGE FUND STATEMENT OF CASH FLOWS For the Years Ended 31 December 2016 and 2015

Expressed in Thousands of US Dollars

CASH FLOWS FROM OPERATING ACTIVITIES Interest received on investments for liquidity purpose Cash received from other activities Technical assistance and grants disbursed Administrative and financial expenses paid Net Cash Used in Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Maturities of investments for liquidity purpose Purchases of investments for liquidity purpose Net Cash Provided by Investing Activities Net (Decrease) Increase in Due From Banks Due from Banks at Beginning of Year Due from Banks at End of Year RECONCILIATION OF (DECREASE) INCREASE IN NET ASSETS TO NET CASH USED IN OPERATING ACTIVITIES: (Decrease) Increase in net assets (CCF-2) Adjustments to reconcile (decrease) increase in net assets to net cash used in by operating activities: Change in accrued revenue Change in advances for technical assistance and grants and other assets Change in accounts payable and other liabilities Change in undisbursed technical assistance and grants Exchange gains—net Net Cash Used in Operating Activities	2016 82 $ 4 (3,911) (316) (4,141) 960,066 (955,948) 4,118 (23) 1,562 1,539 $ (2,494) $ (0) (12) 6 (1,641) (0) (4,141) $	2015
		36 $ – (4,276) (276)
		(4,516)
		1,129,661 (1,124,097)
		5,564
		1,048 514
		1,562 $
		247 $ (1) 436 36 (5,234) –
		(4,516) $

0 = less than $500.

The accompanying notes are an integral part of these financial statements (CCF-4).

210

CCF-4

ASIAN DEVELOPMENT BANK—CLIMATE CHANGE FUND NOTES TO FINANCIAL STATEMENTS 31 December 2016 and 2015

NOTE A—NATURE OF OPERATIONS

The Asian Development Bank (ADB), a multilateral development financial institution, was established in 1966 with its headquarters in Manila, Philippines. ADB and its operations are governed by the Agreement Establishing the Asian Development Bank (the Charter). Its purpose is to foster economic development and co-operation in Asia and the Pacific region and to contribute to the acceleration of the process of economic development of the developing member countries (DMCs) in the region, collectively and individually. Since 1999, ADB’s corporate vision and mission has been to help DMCs reduce poverty in the region. This was reaffirmed under the long-term strategic framework for 2008-2020 (Strategy 2020). Under Strategy 2020, ADB’s corporate vision continues to be “An Asia and Pacific Free of Poverty” and its mission has been to help its DMCs reduce poverty and improve living conditions and quality of life. ADB has been pursuing its mission and vision by focusing on three complementary strategic agendas: inclusive growth, environmentally sustainable growth, and regional integration. ADB provides financial and technical assistance for projects and programs, which will contribute to achieve this purpose. These are financed through ordinary capital resources (OCR) and Special Funds.[1]

The CCF was established on 7 April 2008 to facilitate greater investments in DMCs to address the causes and consequences of climate change alongside ADB’s own assistance in various related sectors. The CCF is a key mechanism to pool resources within ADB to address climate change through (i) technical assistance (TA), (ii) investment components for both private and public sector projects, and (iii) any other form of cooperation that ADB and its partners may agree upon for a defined program of activities.

Financial assistance is provided in the form of untied grants for components of investment projects, for advisory, project preparatory, and regional TA; as well as for any other activities that may be agreed between external contributors and ADB.

CCF’s resources may consist of contributions from ADB and other bilateral, multilateral, and individual sources, including companies and foundations.

ADB is immune from taxation pursuant to Chapter VIII, Article 56, Exemption from Taxation , of the Charter.

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Presentation of the Financial Statements

The financial statements of the CCF are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP), and are presented on the basis of those for not-forprofit organizations.

CCF reports donors’ contributions of cash and other assets as unrestricted assets as these are made available to CCF without conditions other than for the purpose of pursuing its objectives.

Functional and Reporting Currency

The US dollar is the functional and reporting currency, representing the currency of the primary economic operating environment of CCF.

1 Asian Development Fund (ADF), Technical Assistance Special Fund (TASF), Japan Special Fund (JSF), ADB Institute (ADBI), Regional Cooperation and Integration Fund (RCIF), Climate Change Fund (CCF), Asia Pacific Disaster Response Fund (APDRF), and Financial Sector Development Partnership Special Fund (FSDPSF).

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CCF-4

continued

Translation of Currencies

ADB adopts the use of daily exchange rates for accounting and financial reporting purposes. This allows transactions denominated in non-US dollar currencies to be translated to the reporting currency using exchange rates applicable at the time of the transactions. Contributions included in the financial statements during the year are recognized at applicable exchange rates as of the respective dates of commitment. At the end of each accounting month, translations of assets and liabilities which are denominated in non-US dollar currencies are adjusted using the applicable rates of exchange at the end of the reporting period. These translation adjustments are accounted for as exchange gains or losses and are credited or charged to operations.

Investments for Liquidity Purpose

All investment securities held by CCF are reported at fair value (FV). Realized and unrealized gains and losses are included in REVENUE From investments for liquidity purpose.

Interest income on time deposits is recognized as earned and reported in REVENUE From investments for liquidity purpose.

Contributions

The contributions from donors and the allocations from net income of OCR are included in the financial statements, from the date of effectivity of the contributions agreement, and the Board of Governors’ approval, respectively.

Technical Assistance, Grants and Related Undisbursed Amounts

Technical assistance and grants are recognized in the financial statements when the project is approved and becomes effective. Upon completion or cancellation of a TA project or grant, any undisbursed amount is written back as a reduction in TA or grants for the year and the corresponding undisbursed commitment is eliminated accordingly.

Advances are provided from TA and grants to the executing agency or co-operating institution, for the purpose of making payments for eligible expenses. The advances are subject to liquidation and charged against undisbursed commitments. Any unutilized portion is required to be returned to the fund. These are included in ADVANCES FOR TECHNICAL ASSISTANCE AND GRANTS AND OTHER ASSETS.

Fair Value of Financial Instruments

ASC 820, “Fair Value Measurement” defines FV as the price that would be received to sell an asset or paid to transfer a liability at measurement date in an orderly transaction among willing participants with an assumption that the transaction takes place in the entity’s principal market, or in the absence of principal market, in the most advantageous market for the asset or liability. The most advantageous market is the market where the sale of the asset or transfer of liability would maximize the amount received for the asset or minimize the amount paid to transfer the liability. The FV measurement is not adjusted for transaction costs.

Fair Value Hierarchy

ASC 820 establishes a FV hierarchy that gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), next priority to observable market inputs or market corroborated data (Level 2), and the lowest priority to unobservable inputs without market corroborated data (Level 3).

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CCF-4

continued

The FVs of ADB’s financial assets and liabilities are categorized as follows:

Level 1: FVs are based on unadjusted quoted prices for identical assets or liabilities in active markets. Level 2: FVs are based on quoted prices for similar assets or liabilities in active markets or markets that are not active; or valuation models for which significant inputs are obtained from market-based data that are observable.

Level 3: FVs are based on prices or valuation models for which significant inputs to the model are unobservable.

Inter-level transfers from one year to another may occur due to changes in market activities affecting the availability of quoted market prices or observable market data.

ADB’s policy is to recognize transfers in and transfers out of levels as of the end of the reporting period in which they occur.

Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make reasonable estimates and assumptions that affect the reported amounts of assets and liabilities and uncommitted balances as of the end of the year and the reported amounts of revenue and expenses during the year. The actual results could differ from those estimates.

Accounting and Reporting Developments

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-09 “Revenue from Contracts with Customers (Topic 606)” to improve financial reporting by creating common revenue recognition guidance for US GAAP and the International Financial Reporting Standards. In 2016, ASUs 2016-08, 2016-10, 2016-12 and 2016-20 were issued to clarify the implementation guidance on principal versus agent considerations, on identifying performance obligations and licensing, on assessing collectibility, noncash consideration, and completed contracts and contract modifications at transition, and to clarify the Codification and to correct unintended application of the guidance, respectively. A public business entity is required to apply the amendments retrospectively for annual reporting periods beginning after 15 December 2017. These ASUs are not expected to have a material impact on CCF’s financial statements on effectivity.

In August 2016, the FASB issued ASU 2016-14, “Not-for-Profit Entities (Topic 958) – Presentation of Financial Statements of Not-for-Profit Entities,” to improve the usefulness of information provided to donors and other users of not-for-profit entity (NFP) financial statements and reduce complexities or costs in preparing the financial statements. The update significantly changes how NFPs present net assets on the face of the financial statements, as well as requires additional disclosures for expenses by nature and function and for the liquidity and availability of resources. Amendments in this update should be applied retrospectively for annual financial statements issued for fiscal years beginning after 15 December 2017, and for interim periods within fiscal years beginning after 15 December 2018. Early adoption is permitted. ADB is currently assessing the impact of this ASU on CCF’s financial statements.

In August and November 2016, FASB issued two ASUs related to statement of cash flows. ASU 2016-15, “ Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments ,” provides guidance for eight specific cash flow issues, where current standards are either unclear or deficient. ASU 2016-18, “ Statement of Cash Flows (Topic 230) – Restricted Cash ,” requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. Amendments in these updates should be applied retrospectively for annual financial statements issued for fiscal years beginning after 15 December 2017, and for interim periods within those fiscal years. Early adoption is permitted. ADB is currently assessing the impact of this ASU on CCF’s financial statements.

213

CCF-4

continued

In January 2017, FASB issued ASU 2017-03, “ Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323) - Amendments to SEC Paragraphs Pursuant to Staff Announcements at the 22 September 2016 and 17 November 2016 EITF Meetings ,” which adds the Securities and Exchange Commission (SEC) Staff Announcement regarding disclosure of the impact that recently issued accounting standards, particularly ASU 2014-09, ASU 2016-02 and ASU 2016-13, will have on the entity’s financial statements when adopted in future period. Such disclosure should include (i) a description of the effect of the accounting policies that the entity expects to apply, if determined; (ii) a comparison with current accounting policies; and (iii) the entity’s progress in implementing the new standards and any significant implementation matters yet to be addressed. Appropriate disclosures were provided in the affected ASUs.

Statement of Cash Flows

For the purposes of the Statement of Cash Flows, CCF considers that its cash and cash equivalents are limited to DUE FROM BANKS, which consists of cash on hand and current accounts in banks used for operational disbursements.

NOTE C—INVESTMENTS FOR LIQUIDITY PURPOSE

The main investment management objective is to maintain security and liquidity. Subject to these parameters, ADB seeks the highest possible return on its investments. Investments are governed by the Investment Authority approved by the Board of Directors.

All investments for liquidity purpose held as of 31 December 2016 and 2015 were in US dollar time deposits.

The annualized rate of return on the average investments for liquidity purpose held during the period ended 31 December 2016, based on the portfolio held at the beginning and end of each month, was 0.45% (0.17% – 2015).

Fair Value Disclosure

The FV of INVESTMENTS FOR LIQUIDITY PURPOSE as of 31 December 2016 and 2015 was as follows:

($ thousand)

($thousand)
31 December 2016 Investments for liquidity purpose Time deposits 31 December 2015 Investments for liquidity purpose Time deposits	Total 16,607 $ 20,725 $	Fair Value Measurements
		Level 1 – $ – $	Level 2 Level 3 16,607 $ – $ 20,725 $ – $

ADB maintains documented processes and internal controls to value investment securities. Time deposits are reported at cost, which approximates FV.

NOTE D—RELATED PARTY TRANSACTIONS

The OCR and Special Funds resources are at all times used, committed, and invested entirely separately from each other. The administrative and operational expenses pertaining to CCF are settled regularly with OCR and the other funds. Regional technical assistance projects and programs may be combined activities financed by Special Funds and trust funds. ADB charges a service fee to cover ADB’s incremental cost for

214

CCF-4

continued

the administration, management, supervision and operation of the CCF. The service fee is currently 5% of the amount disbursed for technical assistance and 2% of the amount disbursed for grant components of investment projects.

The interfund account balances included in ADVANCES FOR TECHNICAL ASSISTANCE AND GRANTS AND OTHERS ASSETS and ACCOUNTS PAYABLE AND OTHER LIABILITIES are as follows:

($thousand)
Receivable from: Technical Assistance Special Fund Agency Trust Funds Total Payable to: Ordinary capital resources Technical Assistance Special Fund Agency Trust Funds Total	2016 2015 – $ 0 $ – 0 – $ 0 $ 74 $ 118 $ 0 – 57 – 131 $ 118 $

0 = Less than $500.

NOTE E—UNDISBURSED TECHNICAL ASSISTANCE AND GRANTS

Undisbursed technical assistance and grants are denominated in US dollars and represent effective TA and grants not yet disbursed and unliquidated. During 2016, $672,000 ($830,000 – 2015) representing completed and canceled TA projects were written back as a reduction in technical assistance and grants for the period and the corresponding undisbursed commitment was eliminated. The FV of undisbursed commitments approximates the amounts outstanding, because ADB expects that disbursements will substantially be made for all the projects/programs covered by the commitments.

NOTE F—CONTRIBUTIONS AND UNCOMMITTED BALANCES

No contributions were received during 2016 and 2015.

Uncommitted balances comprise amounts which have not been committed by ADB as of 31 December 2016 and 2015. These balances include approved TA projects/programs that are not yet effective.

NOTE G—OTHER FAIR VALUE DISCLOSURES

As of 31 December 2016 and 2015, CCF has no assets or liabilities measured at FV on a non-recurring basis. See Notes C and E for discussions relating to investments for liquidity purpose and undisbursed technical assistance and grants, respectively. In all other cases, the carrying amount of CCF’s assets and liabilities is considered to approximate FV.

NOTE H—SUBSEQUENT EVENTS

ADB has evaluated subsequent events after 31 December 2016 through 17 March 2017, the date these Financial Statements are available for issuance. As a result of this evaluation, there are no subsequent events, as defined, that require recognition or disclosure in the CCF’s Financial Statements as of 31 December 2016.

215

ASIA PACIFIC DISASTER RESPONSE FUND MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Asian Development Bank ("ADB") is responsible for designing, implementing, and maintaining effective internal control over financial reporting. ADB's internal control over financial reporting is a process designed to provide reasonable assurance regarding the preparation of reliable financial statements in accordance with generally accepted accounting principles in the United States of America.

ADB's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of ADB; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (iii) provide reasonable assurance regarding prevention, or timely detection and correction, of unauthorized acquisition, use, or disposition of ADB's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct, misstatements. Also, projections of any assessment of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

ADB's management assessed the effectiveness of ADB's internal control over financial reporting as of 31 December 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management concluded that, as of 31 December 2016, ADB's internal control over financial reporting is effective based on the criteria established in Internal Control – Integrated Framework (2013).

==> picture [83 x 22] intentionally omitted <==

----- Start of picture text -----

Takehiko Nakao
President
----- End of picture text -----

Ingrid van Wees Vice-President (Finance and Risk Management)

Chai S. Kim Controller

17 March 2017

216

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218

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APDRF-1

ASIAN DEVELOPMENT BANK—ASIA PACIFIC DISASTER RESPONSE FUND STATEMENT OF FINANCIAL POSITION 31 December 2016 and 2015

Expressed in Thousands of US Dollars

ASSETS DUE FROM BANKS INVESTMENTS FOR LIQUIDITY PURPOSE (Notes C and G) Time deposits ACCRUED REVENUE ADVANCES FOR GRANTS	2016 1,234 $ 6,742 1 7,200	2015
		6,345 $ 11,018 1 10,008
TOTAL	15,177 $	27,372 $
LIABILITIES AND UNCOMMITTED BALANCES ACCOUNTS PAYABLE AND OTHER LIABILITIES (Note D) UNDISBURSED GRANTS (Notes E and G) TOTAL LIABILITIES UNCOMMITTED BALANCES (APDRF-2) (Note F), represented by: Unrestricted net assets	16 $ 7,200 7,216 7,961	15 $ 10,008
		10,023 17,349
TOTAL	15,177 $	27,372 $

The accompanying notes are an integral part of these financial statements (APDRF-4).

221

APDRF-2

ASIAN DEVELOPMENT BANK—ASIA PACIFIC DISASTER RESPONSE FUND STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended 31 December 2016 and 2015

Expressed in Thousands of US Dollars

CHANGES IN UNRESTRICTED NET ASSETS CONTRIBUTIONS (Note F) REVENUE From investments for liquidity purpose (Note C) From other sources Total EXPENSES Grants—net (Note E) Administrative and financial expenses (Note D) Total (DECREASE) INCREASE IN NET ASSETS NET ASSETS AT BEGINNING OF YEAR	2016 – $ 24 10 34 (9,166) (256) (9,422) (9,388) 17,349	2015
		20,000 $ 19 4
		20,023
		(6,975) (29)
		(7,004)
		13,019 4,330
NET ASSETS AT END OF YEAR	7,961 $	17,349 $

The accompanying notes are an integral part of these financial statements (APDRF-4).

222

APDRF-3

ASIAN DEVELOPMENT BANK—ASIA PACIFIC DISASTER RESPONSE FUND

STATEMENT OF CASH FLOWS For the Years Ended 31 December 2016 and 2015

Expressed in Thousands of US Dollars

CASH FLOWS FROM OPERATING ACTIVITIES Contributions received Interest received on investments for liquidity purpose Cash received from other sources Grants disbursed Administrative and financial expenses paid Net Cash (Used in) Provided by Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Maturities of investments for liquidity purpose Purchases of investments for liquidity purpose Net Cash Provided by (Used in) Investing Activities Net (Decrease) Increase in Due From Banks Due from Banks at Beginning of Year Due from Banks at End of Year RECONCILIATION OF (DECREASE) INCREASE IN NET ASSETS TO NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES: (Decrease) Increase in net assets (APDRF-2) Adjustments to reconcile (decrease) increase in net assets to net cash (used in) provided by operating activities: Change in accrued revenue Change in advances for grants Change in accounts payable and other liabilities Change in undisbursed grants Net Cash (Used in) Provided by Operating Activities	2016 – $ 24 10 (9,166) (255) (9,387) 295,927 (291,651) 4,276 (5,111) 6,345 1,234 $ (9,388) $ 0 2,808 1 (2,808) (9,387) $	2015
		20,000 $ 18 4 (6,975) (28)
		13,019
		682,322 (693,340)
		(11,018)
		2,001 4,344
		6,345 $
		13,019 $ (1) 6,279 1 (6,279)
		13,019 $

0 = Less than $500.

The accompanying notes are an integral part of these financial statements (APDRF-4).

223

APDRF-4

ASIAN DEVELOPMENT BANK—ASIA PACIFIC DISASTER RESPONSE FUND NOTES TO FINANCIAL STATEMENTS 31 December 2016 and 2015

NOTE A—NATURE OF OPERATIONS

The Asian Development Bank (ADB), a multilateral development financial institution, was established in 1966 with its headquarters in Manila, Philippines. ADB and its operations are governed by the Agreement Establishing the Asian Development Bank (the Charter). Its purpose is to foster economic development and co-operation in Asia and the Pacific region and to contribute to the acceleration of the process of economic development of the developing member countries (DMCs) in the region, collectively and individually. Since 1999, ADB’s corporate vision and mission has been to help DMCs reduce poverty in the region. This was reaffirmed under the long-term strategic framework for 2008-2020 (Strategy 2020). Under Strategy 2020, ADB’s corporate vision continues to be “An Asia and Pacific Free of Poverty” and its mission has been to help its DMCs reduce poverty and improve living conditions and quality of life. ADB has been pursuing its mission and vision by focusing on three complementary strategic agendas: inclusive growth, environmentally sustainable growth, and regional integration. ADB provides financial and technical assistance for projects and programs, which will contribute to achieve this purpose. These are financed through ordinary capital resources (OCR) and Special Funds.[1]

The APDRF was established on 1 April 2009, to provide timely incremental grant resources to DMCs affected by a natural disaster. The APDRF will help bridge the gap between existing ADB arrangements that assist DMCs to reduce disaster risk through hazard mitigation loans and grants, and longer-term postdisaster reconstruction lending. The APDRF will provide quick-disbursing grants to assist DMCs in meeting immediate expenses to restore life-saving services to affected populations following a declared disaster and to augment aid provided by other donors in times of national crisis.

Financial assistance will be provided in the form of grants in an amount totaling up to $3,000,000 per event.

APDRF’s resources may consist of contributions from ADB and other bilateral, multilateral, and individual sources, including companies and foundations.

ADB is immune from taxation pursuant to Chapter VIII, Article 56, Exemption from Taxation , of the Charter.

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Presentation of the Financial Statements

The financial statements of the APDRF are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP), and are presented on the basis of those for not-forprofit organizations.

APDRF reports donors’ contributions of cash and other assets as unrestricted assets as these are made available to APDRF without conditions other than for the purpose of pursuing its objectives.

Functional and Reporting Currency

The US dollar is the functional and reporting currency, representing the currency of the primary economic operating environment of APDRF.

1 Asian Development Fund (ADF), Technical Assistance Special Fund (TASF), Japan Special Fund (JSF), ADB Institute (ADBI), Regional Cooperation and Integration Fund (RCIF), Climate Change Fund (CCF), Asia Pacific Disaster Response Fund (APDRF), and Financial Sector Development Partnership Special Fund (FSDPSF).

224

APDRF-4

continued

Translation of Currencies

ADB adopts the use of daily exchange rates for accounting and financial reporting purposes. This allows transactions denominated in non-US dollar currencies to be translated to the reporting currency using exchange rates applicable at the time of the transactions. Contributions included in the financial statements during the year are recognized at applicable exchange rates as of the respective dates of commitment. At the end of each accounting month, translations of assets and liabilities which are denominated in non-US dollar currencies are adjusted using the applicable rates of exchange at the end of the reporting period. These translation adjustments are accounted for as exchange gains or losses and are credited or charged to operations.

Investments for Liquidity Purpose

All investment securities held by APDRF are reported at fair value (FV). Realized and unrealized gains and losses are included in REVENUE From investments for liquidity purpose.

Interest income on time deposits is recognized as earned and reported in REVENUE From investments for liquidity purpose.

Contributions

The contributions from donors and the allocations from net income of OCR are included in the financial statements, from the date of effectivity of the contributions agreement, and the Board of Governors’ approval, respectively.

Technical Assistance, Grants and Related Undisbursed Amounts

Technical assistance (TA) and grants are recognized in the financial statements when the project is approved and becomes effective. Upon completion or cancellation of a TA project or grant, any undisbursed amount is written back as a reduction in TA or grants for the year and the corresponding undisbursed commitment is eliminated accordingly.

Advances are provided from TA and grants to the executing agency or co-operating institution, for the purpose of making payments for eligible expenses. The advances are subject to liquidation and charged against undisbursed commitments. Any unutilized portion is required to be returned to the fund. These are included in ADVANCES FOR GRANTS.

Fair Value of Financial Instruments

ASC 820, “Fair Value Measurement” defines FV as the price that would be received to sell an asset or paid to transfer a liability at measurement date in an orderly transaction among willing participants with an assumption that the transaction takes place in the entity’s principal market, or in the absence of principal market, in the most advantageous market for the asset or liability. The most advantageous market is the market where the sale of the asset or transfer of liability would maximize the amount received for the asset or minimize the amount paid to transfer the liability. The FV measurement is not adjusted for transaction costs.

Fair Value Hierarchy

ASC 820 establishes a FV hierarchy that gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), next priority to observable market inputs or market corroborated data (Level 2), and the lowest priority to unobservable inputs without market corroborated data (Level 3).

225

APDRF-4

continued

The FVs of ADB’s financial assets and liabilities are categorized as follows:

Level 1: FVs are based on unadjusted quoted prices for identical assets or liabilities in active markets. Level 2: FVs are based on quoted prices for similar assets or liabilities in active markets or markets that are not active; or valuation models for which significant inputs are obtained from market-based data that are observable.

Level 3: FVs are based on prices or valuation models for which significant inputs to the model are unobservable.

Inter-level transfers from one year to another may occur due to changes in market activities affecting the availability of quoted market prices or observable market data.

ADB’s policy is to recognize transfers in and transfers out of levels as of the end of the reporting period in which they occur.

Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make reasonable estimates and assumptions that affect the reported amounts of assets and liabilities and uncommitted balances as of the end of the year and the reported amounts of revenue and expenses during the year. The actual results could differ from those estimates.

Accounting and Reporting Developments

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-09 “Revenue from Contracts with Customers (Topic 606)” to improve financial reporting by creating common revenue recognition guidance for US GAAP and the International Financial Reporting Standards. In 2016, ASUs 2016-08, 2016-10, 2016-12 and 2016-20 were issued to clarify the implementation guidance on principal versus agent considerations, on identifying performance obligations and licensing, on assessing collectibility, noncash consideration, and completed contracts and contract modifications at transition, and to clarify the Codification and to correct unintended application of the guidance, respectively. A public business entity is required to apply the amendments retrospectively for annual reporting periods beginning after 15 December 2017. These ASUs are not expected to have a material impact on APDRF’s financial statements on effectivity.

In August 2016, the FASB issued ASU 2016-14, “ Not-for-Profit Entities (Topic 958) – Presentation of Financial Statements of Not-for-Profit Entities,” to improve the usefulness of information provided to donors and other users of not-for-profit entity (NFP) financial statements and reduce complexities or costs in preparing the financial statements. The update significantly changes how NFPs present net assets on the face of the financial statements, as well as requires additional disclosures for expenses by nature and function and for the liquidity and availability of resources. Amendments in this update should be applied retrospectively for annual financial statements issued for fiscal years beginning after 15 December 2017, and for interim periods within fiscal years beginning after 15 December 2018. Early adoption is permitted. ADB is currently assessing the impact of this ASU on APDRF’s financial statements.

In August and November 2016, FASB issued two ASUs related to statement of cash flows. ASU 2016-15, “ Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments ,” provides guidance for eight specific cash flow issues, where current standards are either unclear or deficient. ASU 2016-18, “ Statement of Cash Flows (Topic 230) – Restricted Cash ,” requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. Amendments in these updates should be applied retrospectively for annual financial statements issued for fiscal years beginning after 15 December 2017, and for interim periods within those fiscal years. Early adoption is permitted. ADB is currently assessing the impact of this ASU on APDRF’s financial statements.

226

APDRF-4

continued

In January 2017, FASB issued ASU 2017-03, “ Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323) - Amendments to SEC Paragraphs Pursuant to Staff Announcements at the 22 September 2016 and 17 November 2016 EITF Meetings ,” which adds the Securities and Exchange Commission (SEC) Staff Announcement regarding disclosure of the impact that recently issued accounting standards, particularly ASU 2014-09, ASU 2016-02 and ASU 2016-13, will have on the entity’s financial statements when adopted in future period. Such disclosure should include (i) a description of the effect of the accounting policies that the entity expects to apply, if determined; (ii) a comparison with current accounting policies; and (iii) the entity’s progress in implementing the new standards and any significant implementation matters yet to be addressed. Appropriate disclosures were provided in the affected ASUs.

Statement of Cash Flows

For the purposes of the Statement of Cash Flows, APDRF considers that its cash and cash equivalents are limited to DUE FROM BANKS, which consists of cash on hand and current accounts in banks used for operational disbursements.

NOTE C—INVESTMENTS FOR LIQUIDITY PURPOSE

The main investment management objective is to maintain security and liquidity. Subject to these parameters, ADB seeks the highest possible return on its investments. Investments are governed by the Investment Authority approved by the Board of Directors.

All investments for liquidity purpose held as of 31 December 2016 and 2015 were in US dollar time deposits.

The annualized rate of return on the average investments for liquidity purpose held during the period ended 31 December 2016, based on the portfolio held at the beginning and end of each month, was 0.42% (0.20% – 2015).

Fair Value Disclosure

The FV of INVESTMENTS FOR LIQUIDITY PURPOSE as of 31 December 2016 and 2015 was as follows:

($thousand)
31 December 2016 Investments for liquidity purpose Time deposits 31 December 2015 Investments for liquidity purpose Time deposits	Total 6,742 $ 11,018 $	Fair Value Measurements
		Level 1 – $ – $	Level 2 Level 3 6,742 $ – $ 11,018 $ – $

ADB maintains documented processes and internal controls to value investment securities. Time deposits are reported at cost, which approximates FV.

227

APDRF-4

continued

NOTE D—RELATED PARTY TRANSACTIONS

The OCR and Special Funds resources are at all times used, committed, and invested entirely separately from each other. The administrative and operational expenses pertaining to APDRF are settled regularly with OCR and the other funds. Regional technical assistance projects and programs may be combined activities financed by Special Funds and trust funds. ADB charges a service fee to cover ADB’s cost for the administration, management, supervision and operation of the APDRF. The service fee is currently 2% of the amount disbursed for investment projects. As of 31 December 2016, $8,000 (nil – 2015) was payable to OCR which is included in ACCOUNTS PAYABLE AND OTHER LIABILITIES.

NOTE E—UNDISBURSED GRANTS

Undisbursed grants are denominated in US dollars and represent grants not yet disbursed and unliquidated. During 2016, $34,000 ($25,000 – 2015) undisbursed amounts were written back from financially completed and/or cancelled grant. The FV of undisbursed commitments approximates the amounts outstanding, because ADB expects that disbursements will substantially be made for all the projects/programs covered by the commitments.

NOTE F—CONTRIBUTIONS AND UNCOMMITTED BALANCES

In May 2015, $20,000,000 was allocated from OCR’s 2014 net income to APDRF.

Uncommitted balances comprise amounts which have not been committed by ADB as of 31 December 2016 and 2015.

NOTE G—OTHER FAIR VALUE DISCLOSURES

As of 31 December 2016 and 2015, APDRF has no assets or liabilities measured at FV on a nonrecurring basis. See Notes C and E for discussions relating to investments for liquidity purpose and undisbursed grants, respectively. In all other cases, the carrying amount of APDRF’s assets and liabilities is considered to approximate FV.

NOTE H—SUBSEQUENT EVENTS

ADB has evaluated subsequent events after 31 December 2016 through 17 March 2017, the date these Financial Statements are available for issuance. As a result of this evaluation, there are no subsequent events, as defined, that require recognition or disclosure in the APDRF’s Financial Statements as of 31 December 2016.

228

FINANCIAL SECTOR DEVELOPMENT PARTNERSHIP SPECIAL FUND MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Asian Development Bank ("ADB") is responsible for designing, implementing, and maintaining effective internal control over financial reporting. ADB's internal control over financial reporting is a process designed to provide reasonable assurance regarding the preparation of reliable financial statements in accordance with generally accepted accounting principles in the United States of America.

ADB's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of ADB; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of ADB are being made only in accordance with authorizations of management and directors of ADB; and (iii) provide reasonable assurance regarding prevention, or timely detection and correction, of unauthorized acquisition, use, or disposition of ADB's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct, misstatements. Also, projections of any assessment of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

ADB's management assessed the effectiveness of ADB's internal control over financial reporting as of 31 December 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management concluded that, as of 31 December 2016, ADB's internal control over financial reporting is effective based on the criteria established in Internal Control – Integrated Framework (2013).

==> picture [83 x 22] intentionally omitted <==

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Takehiko Nakao
President
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Ingrid van Wees Vice-President (Finance and Risk Management)

Chai S. Kim Controller

17 March 2017

229

230

231

232

233

FSDPSF-1

ASIAN DEVELOPMENT BANK—FINANCIAL SECTOR DEVELOPMENT PARTNERSHIP SPECIAL FUND

STATEMENT OF FINANCIAL POSITION

31 December 2016 and 2015

Expressed in Thousands of US Dollars

ASSETS DUE FROM BANKS INVESTMENTS FOR LIQUIDITY PURPOSE (Notes C and G) Time deposits DUE FROM CONTRIBUTORS (Note F) ADVANCES FOR TECHNICAL ASSISTANCE AND OTHER ASSETS (Note D)	2016 1,445 $ 7,635 1,578 2	2015
		2,097 $ 5,417 1,640 59
TOTAL	10,660 $	9,213 $
LIABILITIES AND UNCOMMITTED BALANCES ACCOUNTS PAYABLE AND OTHER LIABILITIES (Note D) UNDISBURSED TECHNICAL ASSISTANCE (Notes E and G) TOTAL LIABILITIES UNCOMMITTED BALANCES (FSDPSF-2) (Note F), represented by: Unrestricted net assets	22 $ 3,638 3,660 7,000	21 $ 2,266
		2,287 6,926
TOTAL	10,660 $	9,213 $

The accompanying notes are an integral part of these financial statements (FSDPSF-4).

234

FSDPSF-2

ASIAN DEVELOPMENT BANK—FINANCIAL SECTOR DEVELOPMENT PARTNERSHIP SPECIAL FUND STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended 31 December 2016 and 2015

Expressed in Thousands of US Dollars

CHANGES IN UNRESTRICTED NET ASSETS CONTRIBUTIONS (Note F) REVENUE From investments for liquidity purpose (Note C) From other sources Total EXPENSES Technical assistance (Note E) Administrative and financial expenses (Note D) Total CONTRIBUTION AND REVENUE IN EXCESS OF EXPENSES EXCHANGE LOSSES—net INCREASE (DECREASE) IN NET ASSETS NET ASSETS AT BEGINNING OF YEAR	2016 2,818 $ 18 13 2,849 (2,650) (80) (2,730) 119 (45) 74 6,926	2015
		1,650 $ 9 4
		1,663
		(1,556) (72)
		(1,628) 35 (95)
		(60) 6,986
NET ASSETS AT END OF YEAR	7,000 $	6,926 $

The accompanying notes are an integral part of these financial statements (FSDPSF-4).

235

FSDPSF-3

ASIAN DEVELOPMENT BANK—FINANCIAL SECTOR DEVELOPMENT PARTNERSHIP SPECIAL FUND

STATEMENT OF CASH FLOWS For the Years Ended 31 December 2016 and 2015

Expressed in Thousands of US Dollars

CASH FLOWS FROM OPERATING ACTIVITIES Contributions received Interest received on investments for liquidity purpose Cash received from other sources Technical assistance disbursed Administrative and financial expenses paid Net Cash Provided by Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Maturities of investments for liquidity purpose Purchases of investments for liquidity purpose Net Cash (Used in) Provided by Investing Activities Net (Decrease) Increase in Due From Banks Due from Banks at Beginning of Year Due from Banks at End of Year RECONCILIATION OF INCREASE (DECREASE) IN NET ASSETS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Increase (Decrease) in net assets (FSDPSF-2) Adjustments to reconcile increase (decrease) in net assets to net cash provided by operating activities: Change in due from contributors Change in advances for technical assistance and other assets Change in accounts payable and other liabilities Change in undisbursed technical assistance Exchange losses—net Net Cash Provided by Operating Activities	2016 2,836 $ 18 13 (1,214) (87) 1,566 213,816 (216,034) (2,218) (652) 2,097 1,445 $ 74 $ 58 31 26 1,372 5 1,566 $	2015
		1,736 $ 9 4 (1,210) (68)
		471
		296,828 (295,637)
		1,191
		1,662 435
		2,097 $
		(60) $ 183 (54) (31) 433 –
		471 $

The accompanying notes are an integral part of these financial statements (FSDPSF-4).

236

FSDPSF-4

ASIAN DEVELOPMENT BANK—FINANCIAL SECTOR DEVELOPMENT PARTNERSHIP SPECIAL FUND NOTES TO FINANCIAL STATEMENTS 31 December 2016 and 2015

NOTE A—NATURE OF OPERATIONS

The Asian Development Bank (ADB), a multilateral development financial institution, was established in 1966 with its headquarters in Manila, Philippines. ADB and its operations are governed by the Agreement Establishing the Asian Development Bank (the Charter). Its purpose is to foster economic development and co-operation in Asia and the Pacific region and to contribute to the acceleration of the process of economic development of the developing member countries (DMCs) in the region, collectively and individually. Since 1999, ADB’s corporate vision and mission has been to help DMCs reduce poverty in the region. This was reaffirmed under the long-term strategic framework for 2008-2020 (Strategy 2020). Under Strategy 2020, ADB’s corporate vision continues to be “An Asia and Pacific Free of Poverty” and its mission has been to help its DMCs reduce poverty and improve living conditions and quality of life. ADB has been pursuing its mission and vision by focusing on three complementary strategic agendas: inclusive growth, environmentally sustainable growth, and regional integration. ADB provides financial and technical assistance for projects and programs, which will contribute to achieve this purpose. These are financed through ordinary capital resources (OCR) and Special Funds.[1]

The Financial Sector Development Partnership Special Fund (FSDPSF) was approved by the Board of Directors and established on 31 January 2013 to strengthen regional, subregional, and national financial systems in Asia and the Pacific. The FSDPSF will provide financial assistance through grants for components of investments projects and technical assistance (TA) projects.

FSDPSF’s resources may consist of contributions from ADB and other bilateral, multilateral, and individual sources, including companies and foundations.

ADB is immune from taxation pursuant to Chapter VIII, Article 56, Exemption from Taxation , of the Charter.

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Presentation of the Financial Statements

The financial statements of the FSDPSF are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP), and are presented on the basis of those for not-for-profit organizations.

FSDPSF reports donors’ contributions of cash and other assets as unrestricted assets as these are made available to FSDPSF without conditions other than for the purpose of pursuing its objectives.

Functional and Reporting Currency

The US dollar is the functional and reporting currency, representing the currency of the primary economic operating environment of FSDPSF.

Translation of Currencies

ADB adopts the use of daily exchange rates for accounting and financial reporting purposes. This allows transactions denominated in non-US dollar currencies to be translated to the reporting currency using exchange rates applicable at the time of the transactions. Contributions included in the financial statements during the year are recognized at applicable exchange rates as of the respective dates of commitment. At the end of each accounting month, translations of assets and liabilities which are denominated in non-US dollar

1 Asian Development Fund (ADF), Technical Assistance Special Fund (TASF), Japan Special Fund (JSF), ADB Institute (ADBI), Regional Cooperation and Integration Fund (RCIF), Climate Change Fund (CCF), Asia Pacific Disaster Response Fund (APDRF), and Financial Sector Development Partnership Special Fund (FSDPSF).

237

FSDPSF-4

continued

currencies are adjusted using the applicable rates of exchange at the end of the reporting period. These translation adjustments are accounted for as exchange gains or losses and are credited or charged to operations.

Investments for Liquidity Purpose

All investment securities held by FSDPSF are reported at fair value (FV). Realized and unrealized gains and losses are included in REVENUE From investments for liquidity purpose.

Interest income on time deposits is recognized as earned and reported in REVENUE From investments for liquidity purpose.

Contributions

The contributions from donors and the allocations from net income of OCR are included in the financial statements, from the date of effectivity of the contributions agreement, and the Board of Governors’ approval, respectively.

Technical Assistance, Grants and Related Undisbursed Amounts

Technical assistance and grants are recognized in the financial statements when the project is approved and becomes effective. Upon completion or cancellation of a TA project or grant, any undisbursed amount is written back as a reduction in TA or grants for the year and the corresponding undisbursed commitment is eliminated accordingly.

Advances are provided from TA and grants to the executing agency or co-operating institution, for the purpose of making payments for eligible expenses. The advances are subject to liquidation and charged against undisbursed commitments. Any unutilized portion is required to be returned to the fund.

Fair Value of Financial Instruments

ASC 820, “Fair Value Measurement” defines FV as the price that would be received to sell an asset or paid to transfer a liability at measurement date in an orderly transaction among willing participants with an assumption that the transaction takes place in the entity’s principal market, or in the absence of principal market, in the most advantageous market for the asset or liability. The most advantageous market is the market where the sale of the asset or transfer of liability would maximize the amount received for the asset or minimize the amount paid to transfer the liability. The FV measurement is not adjusted for transaction costs.

Fair Value Hierarchy

ASC 820 establishes a FV hierarchy that gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), next priority to observable market inputs or market corroborated data (Level 2), and the lowest priority to unobservable inputs without market corroborated data (Level 3).

The FVs of ADB’s financial assets and liabilities are categorized as follows:

Level 1: FVs are based on unadjusted quoted prices for identical assets or liabilities in active markets. Level 2: FVs are based on quoted prices for similar assets or liabilities in active markets or markets that are not active; or valuation models for which significant inputs are obtained from market-based data that are observable.

Level 3: FVs are based on prices or valuation models for which significant inputs to the model are unobservable.

Inter-level transfers from one year to another may occur due to changes in market activities affecting the availability of quoted market prices or observable market data.

238

FSDPSF-4

continued

ADB’s policy is to recognize transfers in and transfers out of levels as of the end of the reporting period in which they occur.

Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make reasonable estimates and assumptions that affect the reported amounts of assets and liabilities and uncommitted balances as of the end of the year and the reported amounts of revenue and expenses during the year. The actual results could differ from those estimates.

Accounting and Reporting Developments

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-09 “Revenue from Contracts with Customers (Topic 606)” to improve financial reporting by creating common revenue recognition guidance for US GAAP and the International Financial Reporting Standards. In 2016, ASUs 2016-08, 2016-10, 2016-12 and 2016-20 were issued to clarify the implementation guidance on principal versus agent considerations, on identifying performance obligations and licensing, on assessing collectibility, noncash consideration, and completed contracts and contract modifications at transition, and to clarify the Codification and to correct unintended application of the guidance, respectively. A public business entity is required to apply the amendments retrospectively for annual reporting periods beginning after 15 December 2017. These ASUs are not expected to have a material impact on FSDPSF’s financial statements on effectivity.

In August 2016, the FASB issued ASU 2016-14, “ Not-for-Profit Entities (Topic 958) – Presentation of Financial Statements of Not-for-Profit Entities,” to improve the usefulness of information provided to donors and other users of not-for-profit entity (NFP) financial statements and reduce complexities or costs in preparing the financial statements. The update significantly changes how NFPs present net assets on the face of the financial statements, as well as requires additional disclosures for expenses by nature and function and for the liquidity and availability of resources. Amendments in this update should be applied retrospectively for annual financial statements issued for fiscal years beginning after 15 December 2017, and for interim periods within fiscal years beginning after 15 December 2018. Early adoption is permitted. ADB is currently assessing the impact of this ASU on FSDPSF’s financial statements.

In August and November 2016, FASB issued two ASUs related to statement of cash flows. ASU 2016-15, “ Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments ,” provides guidance for eight specific cash flow issues, where current standards are either unclear or deficient. ASU 2016-18, “ Statement of Cash Flows (Topic 230) – Restricted Cash ,” requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. Amendments in these updates should be applied retrospectively for annual financial statements issued for fiscal years beginning after 15 December 2017, and for interim periods within those fiscal years. Early adoption is permitted. ADB is currently assessing the impact of this ASU on FSDPSF’s financial statements.

In January 2017, FASB issued ASU 2017-03, “ Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323) – Amendments to SEC Paragraphs Pursuant to Staff Announcements at the 22 September 2016 and 17 November 2016 EITF Meetings ,” which adds the Securities and Exchange Commission (SEC) Staff Announcement regarding disclosure of the impact that recently issued accounting standards, particularly ASU 2014-09, ASU 2016-02 and ASU 2016-13, will have on the entity’s financial statements when adopted in future period. Such disclosure should include (i) a description of the effect of the accounting policies that the entity expects to apply, if determined; (ii) a comparison with current accounting policies; and (iii) the entity’s progress in implementing the new standards and any significant implementation matters yet to be addressed. Appropriate disclosures were provided in the affected ASUs.

239

FSDPSF-4

continued

Statement of Cash Flows

For the purposes of the Statement of Cash Flows, FSDPSF considers that its cash and cash equivalents are limited to DUE FROM BANKS, which consists of cash on hand and current accounts in banks used for operational disbursements.

NOTE C—INVESTMENTS FOR LIQUIDITY PURPOSE

The main investment management objective is to maintain security and liquidity. Subject to these parameters, ADB seeks the highest possible return on its investments. Investments are governed by the Investment Authority approved by the Board of Directors.

All investments for liquidity purpose held as of 31 December 2016 and 2015 were in US dollar time deposits.

The annualized rate of return on the average investments for liquidity purpose held during the period ended 31 December 2016, based on the portfolio held at the beginning and end of each month, was 0.43% (0.16% – 2015).

Fair Value Disclosure

The FV of INVESTMENTS FOR LIQUIDITY PURPOSE as of 31 December 2016 and 2015 was as follows:

($thousand)
31 December 2016 Investments for liquidity purpose	Total	Fair Value Measurements
		Level 1	Level 2	Level 3
Time deposits	7,635 $	– $	7,635 $	– $
31 December 2015 Investments for liquidity purpose Time deposits	5,417 $	– $	5,417 $	– $

ADB maintains documented processes and internal controls to value investment securities. Time deposits are reported at cost, which approximates FV.

NOTE D—RELATED PARTY TRANSACTIONS

The ordinary capital resources (OCR) and Special Funds resources are at all times used, committed, and invested entirely separately from each other. The administrative and operational expenses pertaining to FSDPSF are settled regularly with OCR and the other funds. Grant programs may be combined activities financed by Special Funds and trust funds. ADB charges a service fee to cover ADB’s incremental cost for the administration, management, supervision, and operation of the FSDPSF. The service fees are set at (i) 5% of amounts disbursed for TA projects; and (ii) 5% of amounts disbursed for grant components of investment projects up to $5,000,000, or 2% of amounts disbursed for grant components of investment projects above $5,000,000 with a minimum of $250,000, whichever is greater.

240

FSDPSF-4

continued

The interfund account balances included in ADVANCES FOR TECHNICAL ASSISTANCE AND OTHER ASSETS and ACCOUNTS PAYABLE AND OTHER LIABILITIES are as follows:

($thousand)
Receivable from: Regional Cooperation and Integration Fund Agency Trust Funds—net Payable to: Ordinary capital resources	2016 2015 – $ 24 $ – 1 – $ 25 $ 14 $ 6 $

NOTE E—UNDISBURSED TECHNICAL ASSISTANCE

Undisbursed technical assistance are denominated in US dollars and represent effective TA not yet disbursed and unliquidated. During 2016, $175,000 ($64,000 – 2015) representing completed and cancelled TA projects were written back as a reduction in technical assistance for the period and the corresponding undisbursed commitment was eliminated. The FV of undisbursed commitments approximates the amounts outstanding, because ADB expects that disbursements will substantially be made for all the projects/programs covered by the commitments.

NOTE F—CONTRIBUTIONS AND UNCOMMITTED BALANCES

The committed contributions in 2016 and 2015 were from the Government of Luxembourg. As of 31 December 2016, the amount committed in 2016 was reported in the Statement of Financial Position as DUE FROM CONTRIBUTORS.

Uncommitted balances comprise amounts which have not been committed by ADB as of 31 December 2016 and 2015. These balances include approved TA projects/programs that are not yet effective.

NOTE G—OTHER FAIR VALUE DISCLOSURES

As of 31 December 2016 and 2015, FSDPSF has no assets or liabilities measured at FV on a non-recurring basis. See Notes C and E for discussions relating to investments for liquidity purpose and undisbursed technical assistance, respectively. In all other cases, the carrying amount of FSDPSF’s assets and liabilities is considered to approximate FV.

NOTE H—SUBSEQUENT EVENTS

ADB has evaluated subsequent events after 31 December 2016 through 17 March 2017, the date these Financial Statements are available for issuance. As a result of this evaluation, there are no subsequent events, as defined, that require recognition or disclosure in the FSDPSF’s Financial Statements as of 31 December 2016.