Town Development Fund

Town Development Fund

Schedules attached to the Financial Statements

For the year ended Ashad 31, 2073(July 15, 2016)

Schedule 18: Significant Accounting Policies & Notes to Account

Background:

Town Development Fund (TDF) was established as TDF Board, notably as a financial intermediary for providing funds to municipalities, by Formation Order 1988 under the Development Board Act 1956. In 1997, TDF was made autonomous under a new act, called TDF Act 1997. The two main objectives of TDF, which remained unchanged till now, are

• To provide financial support to municipalities to implement social infrastructure and income-generating projects.
• To strengthen the technical, managerial and financial capabilities of municipalities in the formulation, implementation and evaluation of urban development plans and programs.

TDF is supporting Municipalities, Water Users Association in small towns of the country and 6 District Health Project through providing grant, soft loan and loan. TDF has been conducting the programs for the loan and grant disbursement to the Municipality, Water users association and District health projects i.e. TDP II & III of KfW,STWSSSP II & III, STIUEIP and IUDP of ADB, UGDP/ETP and GPOBA of World Bank/ IDA. Furthermore, TDF has been providing the loan and grant to the municipality through Revolving Fund and GoN grant.

A.Significant Accounting Policies

1Basis of Preparation of Financial Statements

1.1Financial statements are prepared using historical cost convention and on an accrual basis.

1.2 Fixed assets are depreciated on written down value method at the rates prescribed by Income Tax Act 2058.

1.3Loanloss provision is charged to revenue on the following bases:

1. In the case of loans disbursed out of KFW fund - as per the related provision in the agreement.
2. In the case of loans disbursed out of other funds - as per the provisions contained in the Accounting manual.
3. The rates so prescribed by the agreement and accounting manual are:

Loan Category / % of Provision
KfW / Others
Good Loan(Not overdue) / 2 / 1
Acceptable(Overdue for 1 month) / 2 / 1
Evident Sub-Standard(Overdue for 6 month) / 4 / 5
Sub Standard(Overdue between more than 6 month to 1 year) / 25 / 25
Doubtful(Overdue 1 year to 5 years) / 50 / 50
Bad (Overdue more than 5 years ) / 100 / 100

B. Notes to Account

2.Funds

2.1Capital Grant Fund represents balance of fund created by capitalization of fixed assets acquired through grant form UDLE/GiZ, UNDP and IDA /UGDP. During the period TDF hasreceived a vehicle (Toyota 4-wheeler) of Rs 2,639,329.00 from GiZ/CD-MUN.

2.2Development Finance Fund comprised of Loan Fund and Revolving Fund. Loan Fund represents the outstanding balance of loans disbursed out of the KFW Disposition Fund. Revolving Fund represents balance of funds collected from part of interest on loan and principal recovered from loan disbursed out of the Disposition Fund, which was intended to be used in financing new investment projects in town development.

2.3Disposition Fund represents the balance of fund transferred from donors after utilization for the intended purposes. The fund transferred from donors as disposition fund in foreign currency are booked at spot rates. The balances with bank in foreign currency are reinstated at closing rate of the NRB. The difference in exchange is taken to disposition fund. Similarly, the interest income in the balance of fund in foreign currency account with banks is also taken to disposition fund.

2.3.1KFW Disposition Fund – District Health Project

A financing agreement dated 31 March 2004 was entered into between Nepal Government and KFW for a financial contribution of EURO 3,476,784.79 to implement the District Health Project being financed in the framework of German Financial Contribution in cooperation with the Health Sector Support program of GIZ. TDF received the financial contribution under the Memorandum of Understanding between Nepal Government and TDF on April 2003. TDF was required to carry out certain functions for which TDF would receive service charges.

2.3.2KFW Disposition Fund – Town Development Programme

TDP II :-KFW under the financing agreement with Nepal Government dated November 30, 2000 committed a financial contribution of EURO 7,159,329.55 for the purpose of implementing the Town Development Programme, Phase II. KFW increased the commitment to EURO 7,553,287.18 as modified by the Supplemental Financing Agreement dated December 30, 2003, which also extended the closure date of withdrawal from June 30, 2005 to December 31, 2008. The commitment was further increased to EURO 7,904,812.07 with the transfer of the balance of Phase I commitment of EURO 199,263.58 in 2004/05 and the balance of EURO 152,261 in 2004/05 from KFW Project for the purpose of implementing the Town Development Programme, Phase II.

The budget, fund transfer, utilization of funds and balance related to the Disposition fund were as follows:

KfW Phase I & II

In Euro

KFW Commitment7,904,812.06

Fund transferred5,410,098.89

Balance Fund on commitment2,494,713.17

The details of loan disbursed and outstanding balance with municipalities Disposition Fund are as follows:

2.3.3 TDP III:-As per Financing and project agreement dated 10 March, 2010 with Project No. 2008 65 246, KFW increased the commitment to EURO 7,500,000 for the purpose of implementing the Town Development Programme, Phase III.

The budget, fund transfer, utilization of funds and balance related to the Disposition Fund were as follows:

KfW Phase III

In Euro

KFW Commitment7,500,000.00

Fund transferred2,312,627.99

Unutilized Fund in Euro5,187,372.01

The details of loan disbursed and outstanding balance with municipalities Disposition Fund are as follows:

2.4Amount based on fixed percentage of 2%/interest rate on the loan disbursement out of the Disposition fund was taken to revenue. The equal amount was takento Special Reserve Fund and balance of amount was taken to revolving fund in accordance with the termsof agreement with KfW. Accordingly; the apportionment of interest income this year was Rs.6,971,925.55 to Revenue, Rs. 12,745,691.60 to Revolving Fund and Rs. 6,971,925.55 to Special Reserve. No interest increment has been effected on rescheduled loans with interest capitalization.

2.5Grant Fund for supervision & study has been paid to the consultancy by TDF as per the request of municipalities instead of transferring such amount to the account of local authority as per the KfW III loan and grant policy and the TDF intends to review the issue for consideration with KfW for such practice continuations.

2.6Long Term GoN Loan (ADB Loan –Small Town Water Supply and Sanitation Project Phase-II)

Nepal Government under the subsidiary loan agreement with the TDF dated 27 July 2010 committed a subsidiary loan in NRs. equivalent to USD $ 17,000,000.00 for the implementation of the Small Town Water Supply and Sanitation Sector Project (STWSSSP) Phase II under the main agreement entered into between ADB and Nepal Government dated 27th November 2009 (GN 0157-NEP (S.F.)The total withdrawal amount of loan up to 15 July 2016 is Rs. 128,070,000.00(Total received loan amount Rs. 1,628,070,000.00 among this amount Rs. 1,500,000,000.00 was transferred to GON Equity as per the decision of Nepal Government.)

2.6.1Loan Term Investment – Small Town Water Supply and Sanitation Project (Phase II ):

The loan investment under the small town water supply and sanitation Project Phase II was granted to various User Association formed under the Water Sources Act 2049 and Water Supply Regulation 2055. The total outstanding loan amount under the STWSSSP Phase II remained at Rs.1,869,832,910.25 as at fiscal year endwith interest capitalization Rs.167,813,833.82.Similarly, the total outstanding loan amount under the STWSSP Project Phase I remained at Rs.575,266,189.80as at fiscal year end with interest capitalization.

2.7Long Term GoN Loan (ADB Loan – STIUEIP):

Nepal Government under the subsidiary loan agreement with the TDF dated 22 July 2011 committed a subsidiary loan in NRs. equivalent to SDR 8,700,000.00 for the implementation of the Secondary Towns Integrated Urban Environmental Improvement Projects (STIUEIP) under the main agreement entered into between ADB and Nepal Government dated 26th October 2010 (2650 –NEP (S.F.) and between TDF and ADB dated 26 October 2010. The total withdrawal amount of loan up to Ashad 31, 2073(15 July 2016) Rs. 719,847,000.00 remained at the end of the fiscal year.

2.7.1 Loan Investment – STIUEIP:

The loan investment under the Secondary Towns Integrated Urban Environmental Improvement Projects. Total outstanding loan amount under the STIUEIP project remained at Rs. 571,247,726.73 as at fiscal year end with interest capitalization of Rs. 57,063,623.28.Installment releases under tripartite agreement with Municipalities were made directly to Kavre Valley Integrated Drinking Water Project under the authority letter of respective municipality (Banepa, Panauti and Dhulikhel), to Biratnagar and Birgunj Sub-Metropolitan City .

2.8Long Term GoN Loan ADB Loan –Urban Environmental Improvement Project (UEIP) :

NepalGovernment under the subsidiary loan agreement with TDF dated 15 September 2003 committed a subsidiary loan in NRs equilvalent SDR2,562,000 for the implementation of the Urban Environment Improvement Project (UEIP) under the main agreement entered into between ADB and Nepal Government dated 20th June 2003. The total outstanding loan payable to GoN remained atRs. 140,677,557.42 as at fiscal yearend.

2.8.1Loan Investment - Urban Environmental Improvement Project (UEIP)

The loan investment under the Urban Environmental Improvement Project was granted to municipalities. Total outstanding loan amount under the UEIP project remained at Rs. 139,386,313.05 as at fiscal year end.

2.9Urban Governance Development Program:Emerging Town Project (UGDP/ETP)

TDF secured a long-term loanSDR64,00,000 and Grant SDR 40,50,000 under a subsidiary Loan agreement dated 27/2/2012 with Nepal Governmentbased on the agreement dated June 30,2011 between Nepal Government and IDA (Credit No 4905-NP and Grant No. H661-NP). Additional Subsidiary agreement was signed between TDF and GoN on 29/11/2012 for making investment in the priority sub-project selected by the concerned municipalities and for the socio and economic infrastructure development component under the project.

Outstanding loan payable to GoN under the program amounted to Rs. 248,947,000.00 as at end of fiscal year. Grant expenditure and Income Rs. 10,787,699.65 under project was incorporated in the financial statement from the UGDP grant fund. A total loan and grant disbursed to municipalities were Rs. 45,175,858.00 and Rs.110,656,991.00during the fiscal year end.

2.10Output Based Aid Municipal Solid Waste Management Project:

TDF entered in to a subsidiary agreement with Nepal Government on 18/6/2013 and Memorandum of Understanding with SWMTSC (as a Technical implementing Partner) on 19 June 2013 for the implementing of the Output- based Aid in Municipal Solid Waste Management in Nepal Project based on Grant Agreement NO. TF 013464 dated 25the March 2013 between GoN and the International Bank for Reconstruction and Development and International Development Association ( "the World Bank") whereby TDF received commitment from the Nepal Government to finance an amount equivalent to USD 4,288,381/- as a grant in order to improve access to high quality and financially sustainable solid waste management services in the participating municipalities.

During the period, the total fund transferred from government of Nepal was Rs 89,650,000.00 only.

Out of the total designated account USD 174,161.69 was transferred to GoN account in the same year. Total fund utilization was Rs. 49,672,538.00(including advance amount Rs. 10,600,000 to Lalitpur Sub-Metropolitan city and Rs. 577,426.00 as service charge). The statutory audit report of the SWMTSC is to be received by TDF.

2.11Long Term GoN Loan (ADB Loan- IUDP):

Nepal Government under subsidiary loan agreement with the TDF dated 10 May 2012 committed a subsidiary loan in Nrs. Equivalent to SDR 12,000,000 for the implementing of the Integrated Urban Development Project (IUDP) under the main agreement entered into between ADB and Nepal Government dated 8 May 2012 (2851-NEP(S.F.) and between TDF and ADB dated 8 May 2012. The total withdrawal amount of loan up to Ashad 31, 2073 (15 July 2016) was remained Rs. 456,370,000.00 from GoN.

2.11.1 Loan Investment - IUDP:

The total outstanding loan investment under the Integrated Urban Development Project remained Rs. 469,626,243.91at the end of the fiscal year. Disbursement loan was made to Dharan, Nepalgunj, Janakpur and Siddarthanagar.

2.12 Long Term GoN Loan (ADB Loan – Small Town Water Supply and Sanitation Project Phase- III)

Nepal Government under subsidiary loan agreement with the TDF dated 28/10/2071 committed a subsidiary loan in NRs equivalent to USD 18,000,000.00 for the implementation of the Small Town Water Supply and Sanitation Project Phase- III under the main agreement entered into between ADB and Nepal Government dated 25 November 2015 (3157 -NEP (S.F.). The total withdrawal amount of loan up to 15 July 2016 Rs. 425,170,000.00 remained at the end of fiscal year.

2.13 Long Term Investment (ADB Loan – Small Town Water Supply and Sanitation Project Phase- III) :

The loan investment under the small town water supply and sanitation Project Phase III was granted to various User Association Formed under the Water Sources Act 2049 and Water Supply Regulation 2055. The total outstanding loan amount under the STWSSSP III remained at Rs. 162,634,786.84 as at fiscal year end with interest capitalization at the end of year

2.14Revolving Fund (RF) Projects & Rehabilitation (STWSSSP Phase I) Project:

TDF has started to disburse loans from its Revolving Fund with maximum total limit exposure fixed at Rs. 6 million with 30% to 60% credit and grant financing as per the project categories and 10 % self - financing by the project itself for the Revolving Fund project. Similarly, TDF has started to disburse loan from the repayment amount under STWSSSP - I (Converted in to equity) to rehabilitation of problematic project (25% of total project cost to be borne by TDF).

TDF has financed Rs. 23,289,702.45 as loan under STWSSSP-I, to rehabilitation of problematic project and Rs. 61,601,361.52 as loan under Revolving Fund.

1. Matching grant fund received from Nepal government and disbursed to grantees are carried forward cumulatively and are shown as liabilities and asset respectively in the balance sheet and are due for square off based on project completion report. As regards grants funds received form donors including KFW grant disbursed to grantees are squared off to nil in order to show utilization of such funds pending receipt of project completion reports as required under the terms and conditions of the grant.

4.Provision for loan and the loan was made in the income statement as per the policy of TDF, which does not necessary match if compared with current banking practices in Nepal

5.Interest Income was recognized on accrual basis. Interest income included interest not received and capitalized to respective loan accounts during the grace period. This practice does not resemble if compared with current banking norms in Nepal.

6.Income Tax has been provisioned as per the Income Tax Act 2058. An amount of Rs. 24,152,088.80 was paid as advance income tax during the year. No accounting of Deferred Tax has been done. However, if incorporated it would not have material effect on the financial statement.

7.Previous year’s figures were restated and reclassified where necessary for the sake of comparison with the current year’s figures.

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