KIRIBATI NATIONAL AUDIT OFFICEAudit for an Impact for the Public

KP.0 Box 63Tel: (66) 21118\ N\O Bairki, Tarawa /Fax: (686) 21250

KiribatiEmail: auditorgeneral@knao.gov.ki

Independent Auditor's Report

To the readers ofKiribati Adaptation Project III

Financial statements for the period ended 31 December 2016

We have audited the financial statements of Kiribati Adaptation Project financed under the Pacific RegionInfrastructure Facility (PRIF), Global Environment Facility (GEF), Global Facility for Disaster Reductionand Recovery (GFDRR) and Japan Policy and Human Resources Development (PHRD) which comprisethe Statement of Cash Receipts and Payments as of December 31, 2016, and for the year then ended, anda summary of significant accounting policies and other explanatory information.

Management's ResponsibilityManagement (Executing Agency) is responsible for the preparation and fair presentation of these financialstatements in accordance with the Cash Basis IPSAS "Financial Reporting under the Cash Basis ofAccounting" described in Note I to the Financial Statement, and for such internal control as managementdetermines is necessary to enable the preparation of the financial statements that are free from materialmisstatement, whether due to fraud or error.

Auditor's ResponsibilityOur responsibility is to express an opinion on the accompanying statements based on our audit. Weconducted our audit in accordance with International Standards on Auditing. Those standards require thatwe comply with ethical requirements and plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free from material misstatement. Our audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financial statements. Our audit alsoincludes evaluating the appropriateness of accounting policies used and the reasonableness of accountingestimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis forour audit opinion.

The KAP III Management's policy is to prepare the accompanying statements in the format agreedbetween the Donor's and the Government of Kiribati as noted in the Grant Agreement, on a cash receiptsand disbursement basis in which cash is recognized when received and expenses are recognized whenpaid, rather than when incurred.

Unqualified OpinionIn our opinion, the aforementioned financial statements and appended notes that were also the subject ofthe audit, present fairly, in all material respects, the cash receipts and disbursements of KAP III for theyear ended December 31, 2016 in accordance with the cash receipts and disbursements basis ofaccounting described in Note 1.

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In addition:

With respect to Statements of Expenditure, adequate supporting documents have beenmaintained to support claims to the Donors for reimbursements of expenditures incurred;and which expenditures are eligible for financing under PRIF Grant 11351 KI/GEF GrantTF 10875 KI/GFDRR Grant TF 11818 KI and PHRD Grant TF 11448 KI.

Restriction of use

This report is intended solely for the use of the Management of the project, Pacific Region InfrastructureFacility (PRIF), Global Environment Facility (GEF), Global Facility for Disaster Reduction and Recovery(GFDRR) and Japan Policy and Human Resources Development (PHRD), and should not be used for anyother purpose.

3 0th June, 2017 Ms. Matereta B RaimanAuditor GeneralKiribati National Audit Office

KIRIBATI ADAPTATION PROJECT (PHASE III)

Funded by:Global Environment Facility (GEF)

Global Facility for Disaster Reduction and Recovery (GFDRR)Japan Policy and Human Resources Development (PHRD)

Pacific Region Infrastructure Facility (PRIF)Government of the Republic of Kiribati (GoK)

FINANCIAL STATEMENTS

YEAR ENDED 31 DECEMBER 2016

,q l

Government of KiribatiFinancial Statements for the Kiribati Adaptation Project (Phase ill)

(PRIF Grant No. TF 11351 KI/GEF Grant No. TF 10875 KIfGFDRR Grant No. TF 11818 KI/PHRD Grant No. TF 11448 KI)

For the Year Ended 31 December 2016

KIRIBATI ADAPTATION PROJECT (PHASE III)

Contents

Introduction 2

Statement of Cash Receipts and Payments 3

Statement of Comparison of Budget and Actual 5

Statement of Accounting Policies and Notes 6

1

Government of KiribatiFinancial Statements for the Kiribati Adaptation Project (Phase ill)

(PRIF Grant No. TF 11351 KI/GEF Grant No. TF 10875 Kl/GFDRR Grant No. TF 11818 Kl/PHRD Grant No. TF 11448 KI)

For the Year Ended 31 December 2016

KIRIBATI ADAPTATION PROJECT (PHASE III)

The Financial Reports for the project for its fifth year of implementation ending 31 December 2016 arebeing presented for auditing.

In compliance with the project agreements the audit report is required to be submitted to the World Bankby 30 June 2017, and we would request your kind offices if the auditing could be completed by the duedate.

All financial records for the project are held within the Kiribati Fiduciary Services Unit at the Ministry ofFinance & Economic Planning.

Manikaoti Timeon Atanteora BeiatauProject Manager, KAP Ill

Manager, KFSU

Date: 28 February 2017

2

Government of KiribatiFinancial Statements for the Kiribati Adaptation Project (Phase III)

(PRIF Grant No. TF 11351 KI/GEF Grant No. TF 10875 KI/GFDRR Grant No. TF 11818 KI/PHRD Grant No. TF 11448 KI)

For the Year Ended 31 December 2016

STATEMENT OF CASH RECEIPTS AND PAYMENTS - BY DONOR, CATEGORY AND COMPONENT (AU$) (1)FOR THE YEAR ENDED 31 DECEMBER 2016

Account Description Notes 2016 2015 CumulativeCASH RECEIPTS1. TF 11351

Designated Account 2 543,127 477,167 2,591,329Direct Payments 2 667,446 - 761,912Total 1,210,572 477,167 3,353,241

2. TF 10875Designated Account 2 377,898 303,882 1,759,442Direct Payments 2 688,151 - 688,151Total 1,066,049 303,882 2,447,592

3. TF 11818Designated Account 2 62,826 43,157 419,803Direct Payments 2 632,191 - 632,191Total 695,017 43,157 1,051,994

4. TF 11448Designated Account 2 234,374 217,809 899,651Direct Payments 2 -Total 234,374 217,809 899,651

TOTAL CASH RECEIPTSDesignated Account 1, 2 1,218,225 1,042,016 5,670,224Direct Payments 1,2 1,987,787 - 2,082,254Grand Total 3,206,012 1,042,016 7,752,478

CASH PAYMENTS BY CATEGORY AND COMPONENTAs per attached schedule 3 3,209,651 1,197,537 7,367,387

CASH RECEIPTS LESS CASH PAYMENTS (3,639) (155,521) 385,090

IMPRESTS 8 6,598 (2,896) 17,002VAT RECEIVABLE 9 27,212 - 27,212BALANCE FROM KAP II 10 2,581 -NET CHANGE IN CASH (40,029) (152,626) 340,877

PAYABLES 13 0

ADD OPENING CASH BALANCE AS AT 1 JANUARY 380,906 533,532 -

CLOSING CASH BALANCE AS AT 31 DECEMBER 4 340,877 380,906 340,877

3

Government of KiribatiFinancial Statements for the Kiribati Adaptation Project (Phase III)

(PRIF Grant No. TF 11351 KI/GEF Grant No. TF 10875 KI/GFDRR Grant No. TF 11818 KI/PHRD Grant No. TF 11448 KI)

For the Year Ended 31 December 2016

STATEMENT OF CASH RECEIPTS AND PAYMENTS - BY DONOR, CATEGORY AND COMPONENT (AU$) (2)FOR THE YEAR ENDED 31 DECEMBER 2016

Notes 2016 2015 CumulativeCASH PAYMENTS 3A. CATEGORY 11. TF 11351

Component 1 460,676 443,027 1,558,881Component 2 655,326 32,989 1,058,262Component 3 44,774 4,539 83,651Component 4 2,914 101,583 434,535

Total 1,163,690 582,139 3135,329

2. TF 10875

Component 1 272,095 232,418 915,600Component 2 566,134 36,290 862,418Component 3 - 1,462 56,987Component 4 54,970 55,383 342,260

TotalTtl893,199 325,554 2,177,265

3. TF 11818

Component 1 - (52,356) -Component 2 732,454 8,282 756,933Component 3 21,595 43,414 90,717Component 4 - 49,583 220,785

TotalTtl754,049 48,924 1,068,436

4. TF 11448

Component 1 - (104,346) 350Component 2 184 159,659 233,926Component 3 12,972 (10,474) 42,650Component 4 385,557 196,082 709,431

Total 398,713 240,21 986,357Total -Category 1 3,209,651 1,197,537 7,367,387

B. CATEGORY 2

TOTAL CASH PAYMENTS 3,209,651 1,197,537 7367387

TFs 11351, 10875, 11818, 11448Component 1 732,771 518,743 2,474,831Component 2 1,954,098 237,221 2,911,539Component 3 79,340 38,941 274,006Component 4 443,441 402,632 1,707,011Grand Total

3,209,651 1,197,537 7,367,387

4

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Financial Statements for the Kiribati Adaptation Project (Phase Ill)For the Year Ended 31 December 2016

Statement of Accounting Policies and Notes

1. Accounting Policies

Basis of Preparation

The financial statements of the project have been prepared in accordance with therequirement of the Public Finance (Control & Audit) Act, which includes the requirement tocomply with generally accepted accounting practice.

The financial statements have been prepared in accordance with Cash Basis IPSAS "FinancialReporting under the Cash Basis of Accounting".

In previous years, financial statements were prepared largely in accordance with the cashbasis of accounting, but with certain modifications. There have been no other changes inaccounting policies during the financial year.

Reporting Entity

These financial statements are prepared specifically for a project that is managed by theOffice of the President, which forms part of the Government of Kiribati (GoK). The project isfunded jointly by the Global Environment Facility (GEF; under its Least Developed CountryFund {LDCF}), the Pacific Region Infrastructure Facility (PRIF), the Japan Policy and HumanResources Development Fund (PHRD), the Global Facility for Disaster Reduction andRecovery (GFDRR), and the GoK, as follows:

o GEF - Grant of US$ 3.00 million (with originally estimated AU$ equivalent of AU$3.00 million); established through a Financing Agreement dated 14 October 2011.

o PRIF - Grant of US$ 4.99 million (with originally estimated AU$ equivalent of AU$4.99 million); established through a Financing Agreement dated 15 December 2011.

o PHRD - Grant of US$ 1.80 million (with originally estimated AU$ equivalent of AU$1.80 million); established through a Financing Agreement dated 25 January 2012.

o GFDRR - Grant of US$ 0.90 million (with originally estimated AU$ equivalent of AU$0.90 million); established through a Financing Agreement dated 27 February 2012.

o GoK - estimated contribution of US$ 0.25 million (with originally estimated AU$equivalent of AU$ 0.25 million).

GoK funding is an in kind contribution, and does not form part of the core funding of theproject upon which the Financial Statements are based.

WB administers all the funding under the four grants.

The objective of the project is to improve the resilience of Kiribati to the impacts of climatechange on freshwater supply and coastal infrastructure.

Under the Grant Agreements, different Categories of expenditure are provided for (in US$amounts) as follows:

Category 1 Category 2 Total

6

Financial Statements for the Kiribati Adaptation Project (Phase Ill)For the Year Ended 31 December 2016

PRIF 4,498,254 500,000 4,998,2 54GEF 3,000,000 3,000,000GFDRR 900.000 900,000PHRD 1,803,600 - 1,803,600Total (US$) 10,201,854 500,000 10,701,854

Category 1 covers Goods, works, non-consulting services, operating costs, consultants'services, and training for all Parts of the project except Part 3(e), while Category 2 coversPart 3(e) of the project. Part 3 (e) of the project refers to the small grants, now coveredunder the "Resilience Fund".

In addition to the above Category provisions, the Financing Agreements provide that thefollowing expenditures may be covered:

(i) PRIF - all Parts(ii) GEF - all Parts except 3(e)(iii) GFDRR - Parts 2, 3 and 4(iv) PHRD - Parts 2(b), 2(c), 3(a), 3(b) and 4

The allocation of expenditure by Category is managed accordingly through thecomponent/subcomponent structure. The project activities and budget is managedaccording to the component/subcomponent structure, within the above Category limits.

The grant agreements identified the budget activities according to the following fourcomponents ("Parts") to be implemented under the project:

(i) Part A - Improving Water Resource Use and Management: through the provision ofworks, equipment and technical assistance.

(ii) Part B - Increasing Coastal Resilience: through the provision of works, equipment andtechnical assistance.

(iii) Part C - Strengthening the Capacity to Manage the Effects of Climate Change and NaturalHazards: through the provision of works, equipment and technical assistance.

(iv) Part D - Project Management, Monitoring and Evaluation.

The project is implemented under the overall guidance, coordination and monitoring of theNational Adaptation Steering Committee, chaired by the Office of the President. The projectis supported by a Project Management Unit under the Office of the President; financialmanagement support services for KAP III is structured through the Kiribati Fiduciary ServicesUnit (KFSU), which is established under the Ministry of Finance and Economic Development.

The project officially commenced in April 2012, being the date when all the grants (exceptGEF) were made available, and follows earlier phases of the KAP program. The closure datefor each grant has been amended as follows:

Original Date Revised DatePRIF 31 Aug 2016 28 Feb 2018GEF 31 Aug 2016 28 Feb 2018

7

Financial Statements for the Kiribati Adaptation Project (Phase III)For the Year Ended 31 December 2016

GFDRR 30 June 2016 30 June 2017PHRD 31 Aug 2016 31 Aug 2017

A further four months (two months for GFDRR) is available for settling expenditures incurredby the respective closure date.

Accounting Period

IPSAS cash accounting standards require that general purpose financial statements beprepared at least annually (IPSAS cash para 1.4.1). These financial statements cover thefiscal year 2016. The balance of undrawn grants as at 31 December 2016 is as follows:

PRIF US$ 2,156,312, which is approximately AU$ 2.99 million

GEF US$ 930,439, which is approximately AU$ 1.29 million

GFDRR US$ 65,054, which is approximately AU$ 0.90 million

PHRD US$ 1,035,373, which is approximately AU$ 1.44 million

Currency

Reporting Currency

The reporting currency is Australian Dollars (AU$).

Foreign Currency

In-country payments made in foreign currencies and reported in these financialstatements have been converted to AU$ by the ANZ Bank at the applicable rate as of thedate of transaction. Direct Payments made in foreign currencies and reported in thesefinancial statements have been converted to AU$ based on the exchange rate as perwww.xe.com as of the transaction value date.

The in-country fund receipts transferred from the World Bank were all in AU$.Withdrawals from the grants are charged against the grants, in the respective grantcurrency, based on exchange rates applied by the World Bank.

Cash and Cash Equivalents

Cash equivalents are short-term, highly liquid investments that are readily convertible toknown amounts of cash, which are subject to an insignificant risk of changes in value.

Direct Payments made by World Bank

GoK also benefits from payments made directly by the World Bank. These payments do notconstitute in-country cash receipts and payments of GoK, but do benefit GoK. They aredisclosed as Direct Payments in the Statement of Cash Receipts and Payments, and in theseNotes.

During the year, payments to the Kiribati Road Rehabilitation Project (KRRP) totalingAU$ 1.58 million were made directly by the World Bank; these payments covered the

8

Financial Statements for the Kiribati Adaptation Project (Phase Ill)

For the Year Ended 31 December 2016

shoreline protection works carried out by the KRRP contractor (McConnell Dowell Limited)on behalf of the project.

2. Cash Receipts (AUD)

Details of the cash receipts, for each of the four grants, are given in the table on thefollowing pages.

The Designated Account (DA) is the locally-managed, account; funds are transferred fromWB periodically, from which payments are made. Direct Payments are made by WB directlyto the supplier/consultant, based on the official request of the authorized signatories of theproject.

GoK receives the funds into the DA (covering all four grants), which are managed by theOffice of the President/KFSU, with signatories as agreed by GoK. Under this arrangementthe Office of the President carries out the implementation of the project, with support fromthe PMU, and KFSU makes payments on their behalf after appropriate authorization anddocumentation provided by the Office of the President/PMU.

9

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Financial Statements for the Kiribati Adaptation Project (Phase Ill)For the Year Ended 31 December 2016

3. Cash Payments (AUD)

The summary of payments is given in the Statement of Cash Receipts and Payments, and isfurther detailed in the table on the following page.

4. Cash Balance

The closing cash balance in these financial statements is reconciled with the balance in theDA as at 31 December 2016. The closing cash balance is summarized in the table below.

2016 2015Balance as per bank statement 344,474.95 395,973.34Less: Outstanding cheques 3,598.01 15,067.06DA Balance as per books 340,876.94 380,906.28

5. Employee Entitlements

No provision is required for employee entitlements.

6. Budget

The approved budget is developed on the same accounting basis (cash basis), sameclassification basis, and for the same period during which withdrawals from the grantaccounts are made as for the financial statements. It encompasses the same entities as thefinancial statements.

The lifetime budget in AU$ as per these financial statements is as per the budget agreed bythe Office of the President. The remaining budget available is expected to be utilized overthe remaining period of the project, taking account of the closure dates of each grant.

No annual budget was developed for 2015 and 2016; it is expected that an annual budgetwill be developed for 2017, taking account of the closure dates of each grant.

The lifetime budget is monitored against the likely amount of AU$ to be generated from theUS$ grants, to ensure that the grants are not over-committed.

14

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Financial Statements for the Kiribati Adaptation Project (Phase 111)

For the Year Ended 31 December 2016

7. Commitments

The outstanding (unpaid) contract commitments, as at 31 December 2016 is AU$ 2,134,933 (2015 -

AU$ 1,047,096) as follows:

Component 1 1,555,129 648,116Component 2 233,837 138,962Component 3 91,391 18,813Component 4 254,576 241,205Total 2,134,933 1,047,096

All commitments are due within one year. Commitments for contracts in currencies other than AUD

have been converted to AUD using the exchange rate as at 31 December 2016.

8. Imprests

As at 31 December 2016, imprests totalling AU$ 17,001.59 (2015 - AU$ 10,403.89) had not been retired

yet, as per the following summary:

Name Date 2016 2015Amon Timan 389.90 1695-00Arawaia Moiua 4088.00 4088.00Benjamin Tokataake 950.00 0.00Claire Anterea 2770.90 1130.70George Taoaba 5827.70 0.00Kirata Temamaka 1025.10 1025.10Mimitong Kirata 1250.00 0.00Marion Tekautu 700.00 0.00Martin Moreti -0.01 -0.01Teiwaki Areieta 0.00 2465-10Total 17,001.59 10,403.89

9. VAT Receivable

During 2016, GoK agreed that VAT incurred by the project may be recovered from GoK. From the

commencement of VAT in April 2014 up to 31 December 2016, AU$ 27,211.94 of VAT has been incurred

and is now reflected in the books of the project as a receivable amount. The project is now VAT

registered and it is expected that the VAT to 31 December 2016 will be recovered during the first

quarter of 2017.

10. Balance From KAP 11

As at 31 December 2015, an amount of AU$ 2,581.20, representing the balance of funds under KAP 11

that belonged to GoK, was deposited in the project's DA bank account. During 2016, this was recovered

by GoK.

16

Financial Statements for the Kiribati Adaptation Project (Phase Ill)

For the Year Ended 31 December 2016

11. Property, Plant & Equipment

Payments for Property Plant & Equipment (PPE) are charged fully as c)jsbursements under the respective

Component, and included in the Statement of Cash Receipts and Payments, at cost; these are recorded

in a PPE Register, for the purposes of inventory control. The PPE Register is shown on the following

page.

There is no PPE purchased on hire purchase schemes and no depreciation is being charged.

12. Related Parties

There were no related party transactions during the year.

The ultimate owner of the project is GoK, as set out in the Grant Agreements.

13. Creditors

(i) income tax and provident fund contributions are recorded in the books at the time of payment of

salaries. In previous years financial statements, the payable amount at 31 December had beenincluded as expenses, with the payable amount also shown. In these financial statements, theincome tax and provident fund payable amounts at 31 December 2016 are not included. The

payable amounts at 31 December are as follows:

2016 2015

Component 1 1,011.76Component 2 627.88 -

Component 3 5,004.80 _ _

Component 4 0.01Total 6,644.44 0.01

(ii) There was a total amount of AU$ 49,765.19for 2015 invoices, which were paid in 2016.

17

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