VII. NOTES TO THE FINANCIAL STATEMENTS

1. THE ORGANIZATION

The Food and Agriculture Organization (the Organization), was established on 16 October 1945. Its headquarters are in Rome, Italy. The purpose of the Organization is to raise levels of nutrition and standards of living; secure improvements in the efficiency of the production and distribution of all food and agricultural products; better the condition of rural populations; and thus contribute toward an expanding world economy and ensure humanity's freedom from hunger.

The Organization's Programme of Work (Regular Programme) is approved by the Conference of Member Nations. The related budget appropriations voted are financed by annual contributions based on an assessment on Member Nations and Associate Members by the Conference. Unutilised appropriations at the close of the financial period are cancelled, except for the Technical Cooperation Programme (TCP) appropriation which remains available for obligations during the financial period following that for which the funds were voted.

Voluntary contributions for special purposes, which are consistent with the policies, aims and activities of the Organization, may be accepted by the Director-General and Trust and Special Funds established accordingly. In addition, the Organization receives funds under an inter-organizational arrangement with the United Nations Development Programme (UNDP) to participate as an executing agency for UNDP technical cooperation projects or act as implementing agency for UNDP funded projects executed by other executing agencies. Voluntary contributions and funds received include payment towards recovering certain costs relating to technical, managerial and administrative services (support costs) which are a necessary part of extra-budgetary projects.

In agreement with the main multilateral financing agencies for agriculture, the Organization provides investment support services under jointly financed missions to individual countries, for which it receives reimbursement of an agreed share of costs. The Organization also renders technical, management and administrative services to the UN/FAO World Food Programme (WFP) on a cost reimbursement basis.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Period

The financial period is a biennium consisting of two consecutive calendar years.

Basis of Preparation

The financial statements are prepared under the historical cost convention and in accordance with applicable accounting standards.

Income

Income is recognised when the Organization becomes entitled to it with the exception of voluntary contributions and funds received under inter-organizational arrangement. This income is recognised proportionately with the degree of project activity completed as measured in terms of expenditure.

Expenditure

Expenditure is recognised as costs are incurred.

Equipment, Furniture and Vehicles

The cost of equipment, furniture and vehicles is fully expensed in the year of purchase.

Foreign currencies

The financial statements are expressed in US dollars. Income and expenditure in currencies other than US dollars are translated into US dollars at the UN operational rates of exchange which approximate the market rate in effect at the date of the underlying transactions. Assets and liabilities in currencies other than US dollars are translated at the UN operational rate of exchange in effect at 31 December 2001. Exchange differences are taken to the income and expenditure account.

Investments

Investments are stated at the lower of cost and market value determined on a total portfolio basis.

End of Service and Retirement Benefits

The end of service and retirement benefit are charged to expenditure on an accruals basis. The resultant unrecorded liability for After Service Medical Care and the Terminal Payments is being amortised over 30 years and 15 years, respectively.

3. ASSESSMENT ON MEMBER NATIONS

4. VOLUNTARY CONTRIBUTIONS

5. FUNDS RECEIVED UNDER INTER-ORGANIZATIONAL ARRANGEMENT

6. JOINTLY FINANCED ACTIVITIES

7. MISCELLANEOUS

8. SUNDRY

9. EXPENDITURE

The expenditure of the General and Related Funds above which amounts to $669.8 million includes $580.9 million in respect of the 2000/01 appropriation; $64.6 million in respect of 1998/99 TCP appropriation; $22.9 million in respect of Jointly financed activities; and $1.4 million in respect of the Information Products Revolving Fund.

10. REDEPLOYMENT AND SEPARATION COSTS

Conference Resolution 3/99 authorised the Director-General to spend up to $9 million for the purposes of meeting redeployment and separation costs over and above the net budgetary appropriations approved for 2000/01. The same resolution authorised the advance of Working Capital Fund up to the amount of $9 million to complete restructuring pending eventual receipt of assessed contributions in arrears from the major contributor.

11. PROVISION FOR CONTRIBUTIONS

12. INVESTMENTS

The investments of the General and Related Funds are held by Northern Trust Company and managed by the Fiduciary Trust Company. The investments above have a market value of $179.8 million and include $19.1million held on behalf of the UN/FAO World Food Programme.

13. CONTRIBUTIONS RECEIVABLE

Voluntary Contributions under (b) Trust and UNDP Funds include $2.2 million receivable from the World Bank for expenditures incurred and reported as Unliquidated Obligations (see Note 16). This amount is covered by two Letters of Credit issued by the World Bank. There is accordingly no receipt or disbursement of these funds through the Organization’s bank. Instead, the Organization takes to account the effective income and expenditure arising from payment of the supplier, upon receipt of documentary confirmation that payment has been duly made.

14. ACCOUNTS RECEIVABLE

15. CONTRIBUTIONS RECEIVED IN ADVANCE

Interest transferred to Trust Funds and UNDP donor accounts included above amounted to $13.0 million.

16. UNLIQUIDATED OBLIGATIONS

Unliquidated obligations include liabilities for the cost of personnel services incurred and contracts and purchase orders entered into at 31 December 2001. The increase in the amount outstanding at the end of the financial period of some $47 million is mainly attributable to accrued expenditures of the Office of Special Relief Operations (mainly in respect of relief operations in Iraq).

17. ACCOUNTS PAYABLE

Staff fiduciary accounts

Staff fiduciary accounts represent funds related to the operation of the contributory medical and insurance arrangements for staff. The funds are used for related purposes such as settling claims received after the expiry of the medical and insurance contracts.

18. STAFF RELATED SCHEMES

Conference Resolution 10/99 and 10/2001 approved, inter alia, that (i) any income generated from the investments held in respect of the Separation Payments Scheme and Staff Compensation Plan be applied to ensure the adequacy of those funds to extinguish the respective liabilities, (ii) should there be an excess in the investment income then this should in principle be earmarked for the After Service Medical Care liability (see note 23) firstly and subsequently for the Terminal Payments liability. The amount of the investment income earmarked for Staff Related Schemes amounted to $5.3 million.

Separation Payments

Separation Payments are due to General Service category staff at Headquarters who are entitled to receive a separation payment equivalent to 1/13.5 of yearly salary for each year of service completed after 1 January 1975. Separation Payments are subject to actuarial review to ascertain the liabilities and recommend rates of contribution. The valuation method used is the projected unit cost method. The details of the last actuarial valuation as at 31 December 2001 are as follows:

Compensation Payments

Compensation Payments are due to staff members and their dependants in case of death, injury or illness attributable to the performance of official duties and, in certain circumstances, to supplement the disability and survivors' pensions paid by the United Nations Joint Staff Pension Fund. Compensation Payments are subject to actuarial review to ascertain the liabilities and recommend rates of contribution. The valuation method used is the one-year cost method. The details of the last review as at 31 December 2001 are as follows:

After Service Medical Care

The After Service Medical Care Plan provides for worldwide coverage for necessary medical expenses of eligible former staff members and their dependants. After Service Medical Care is subject to actuarial review to ascertain the related liabilities and recommend rates of contribution. The valuation method used is the projected unit credit method. The details of the last review as at 31 December 2001 are as follows:

Based on the above actuarial review the unrecorded liabilities for after service medical care at 31 December 2001 amounted to some $104.0 million (1999 - $109.6 million).

Terminal Payments

Terminal Payments relate to payment of accrued annual leave, repatriation grant, termination indemnity, the cost of repatriation travel and the removal of household goods for all eligible staff. Terminal Payments are subject to actuarial review to ascertain the related liabilities and recommend rates of contribution. The valuation method used is the aggregate cost method. The details of the last valuation as at 31 December 2001 are as follows:

Based on the above actuarial review, the unrecorded liabilities for terminal payments at 31 December 2001 amounted to some $22.4 million (1999 - $23.6 million).

Pensions

The Organisation is a member of the United Nations Joint Staff Pension Fund (UNJSPF) established by the General Assembly of the United Nations to provide retirement, death disability and related benefits to staff of member organizations. The scheme is of the defined benefit type and the Organization's obligation is limited to specified contributions to the Fund.

19. WORKING CAPITAL FUND

The purpose of the Working Capital Fund is to advance moneys on a reimbursable basis to the General Fund in order to finance budgetary expenditures pending receipt of contributions to the budget; finance emergency expenditures not provided for in the current budget; and make loans for such purposes as the Council may authorise in specific cases. The authorised level of the Working Capital Fund is $25 million in accordance with Conference resolution 15/91 of which the amount paid up is $23.8 million. In accordance with Conference resolution 3/99, $8,360 was advanced from the Working Capital Fund to cover redeployment and separation costs to complete restructuring, pending eventual receipt of assessed contributions in arrears from the major contributor.

20. SPECIAL RESERVE ACCOUNT

The purpose of the Special Reserve Account is to protect the Organization's Programme of Work against the effects of unbudgeted extra costs arising from adverse currency fluctuations and unbudgeted inflationary trends. The authorised level of the Special Reserve Account is set by Conference Resolution 13/81 at 5% of the effective working budget for the respective subsequent biennium. Net gains or losses on exchange in addition to the currency variance on staff standard costs are charged to the Special Reserve Account. The currency variance on staff standard costs represents the difference between staff costs expressed in US Dollars at the budget rate for the biennium (Lire 1875 to $1) and the UN operational rates at the time of payment.

21. DEFERRED INCOME

22. FUND BALANCES, END OF PERIOD

23. CONTINGENT LIABILITIES

FAO received an assessment for garbage collection tax from the Rome Municipality for 1995 of the Lire equivalent of $1.1 million representing an increase of 425% from the previous year. By Note Verbale of June 1995, FAO informed the Italian Permanent Representation of the impossibility of accepting such a request due to both legal and financial considerations. As of the end of 2001 the total garbage tax assessed on FAO amounted to $6.9 million which resulted in a contingent liability of $5.1 million since $1.8 million had already been accounted for. FAO has a legal obligation under provisions of relevant treaties to pay that portion of garbage collection tax that corresponds to the cost of the service rendered. Therefore, pending conclusion of an agreement with all parties involved, any amount charged by the Rome Municipality for garbage services rendered constitutes a potential liability for the Organization. Despite repeated efforts and discussions with Italian Authorities, the matter remains substantially unresolved.

24. FINANCIAL INSTRUMENTS

In July 2001, the Organization entered into a forward exchange contract for the purchase of its Euro requirements for the 2002/03 biennium. The total liability under this contract is $300 million payable in instalments of $12.5 million per month from January 2002 to December 2003. Based on the UN operational rate of exchange prevailing at 31 December 2001 (Euro 0.89 to $1), the dollar equivalent of the Euro to be purchased amounted to $303 million. The unrealised exchange difference at that date amounted to $3 million.

25. OTHER DISCLOSURES

Equipment, Furniture and Vehicles

The historical cost of fully expended FAO equipment, furniture and vehicles at the end of the biennium was as follows:

Voluntary Contributions in-kind

The Headquarters premises in Rome are provided rent-free by the Host Country in accordance to the Headquarters agreement. It is estimated that the commercial rental value of the Headquarters and Field property is approximately $11.2 and $1.7 million per year (1998/99 - $14.7 and $1.3 million) respectively.

Non-convertible Currencies

At 31 December 2001, cash balances held in non-convertible currencies amounted to $3.3 million (1998/99 - $3.0 million).