1.Organization

1.1 Legal Form of PKSF

Palli Karma-Sahayak Foundation (PKSF) was setup by the Government of Bangladesh (GOB) in 1990 as an association 'not for profit' and was registered under the Companies Act 1913 (replaced by the Companies Act 1994). PKSF was formed to sponsor, promote and provide assistance to various Semi-government, Non-governmental and Government organizations, voluntary agencies and societies to undertake activities with a view to generating income and/or employment opportunities and alleviating poverty.

The Registered Office of PKSF is situated at PKSF Bhaban, Plot: E-4/B, Agargaon Administrative Area, Sher-e-Bangla Nagar, Dhaka-1207, Bangladesh.

1.2 Nature of operations

The organization provides financial and institutional assistance to various organizations to support, promote and develop employment opportunities for the landless and assetless poor through micro credit financing. PKSF, an apex microfinance institution in the country, runs its microfinance operations out of its own funds and funds received from the Government of Bangladesh through bilateral agreement with different international funding agencies, namely IDA, ADB and IFAD. PKSF also acts as an executing agency of the Government of Bangladesh in running some microfinance special projects on behalf of the Government.

The credit operation of PKSF is not run directly by it but through the selected local Semi-government, Non-governmental organizations, Government organizations, voluntary agencies and societies termed as Partner Organizations (POs). More than 200 small, medium and big POs are presently executing PKSF's microfinance operation under sub-loan agreements with PKSF. Partner organizations are the extended arms of PKSF in executing microfinance operation under supervision, guidance and directives of PKSF.

PKSF provides loans to two categories of POs - Organizations Operating in Small Areas (OOSA) and Big Partner Organizations Operating in Large Areas (BIPOOL). PKSF also provides loans to POs for acquisition of computers, motor cycle, bi-cycle, photocopy machines, engine boat, etc. as part of its capacity building. The loan is being provided to PKSF at a rate of 1%.

1.3 Project Scope

Poverty Alleviation Microfinance Project (PAMFP) (MF-I) was successfully completed in December 2000 and Second Poverty Alleviation Microfinance Project (SPAMFP) (MF-II) has been embarked from January 2001. The SPAMFP has two broad components Microcredit and Institutional Development.

1.4 Management

PKSF is being run by a General Body of 16 members supported by a Governing Body of 7 members and the Managing Director supported by two Deputy Managing Directors, Officers and staff down the line.

General body gives overall policy guideline and direction for the efficient functioning of PKSF, while Governing Body is responsible for the management and administration of the affairs of PKSF.

2. Basis of Accounting

2.1 Accounting Policies and explanatory notes

a) Accounting convention and basis

These accounts have been prepared in accordance with International Accounting Standard (IAS) as adopted by the Institute of Chartered Accountants of Bangladesh (ICAB), on a going concern basis under Generally Accepted Accounting Principles. PKSF's accounts are maintained on accrual basis under historical cost convention. Accounting Policies have been consistently followed.

b) Integral components of the financial statements

i) Balance Sheet
ii) Statement of Income and Expenditure
iii) Statement of Cash Flow
iv) Statement of Changes in Equity
v) Notes to the financial statements

2.2 Property, plant and equipments

Assets purchased at a unit value of above Tk 500 is generally capitalized.

Property, plant and equipments are stated at cost less accumulated depreciation. Depreciation is provided on a reducing balance method at prescribed rates. These assets are free of charges.

2.3 Depreciation

Depreciation rates applicable to different categories of property, plant and equipments are shown below:

Assets are depreciated only when they are brought to use. Maintenance and repairing expenses are charged to the revenue as and when incurred.

2.4 Retirement benefit and severance allowances schemes

PKSF operates a gratuity scheme for permanent employees and severance allowances schemes for contractual/temporary employees, provision in respect of which is made annually covering all its eligible employees. As per PKSF's service rules, employees are entitled to gratuity and severance allowances as per following scheme.

Year of Service

Less than 3 years : Nil

3 years to less than 5 years : 1 month basic pay for each completed year of service

5 years and above : 2 months basic pay for each completed year of service

There is also a recognized Contributory Provident Fund for all employees, other than contractual/temporary employees, which is operated by a Board of Trustee independent of PKSF operation. PKSF contributes @ 10% of the basic salary to the Provident Fund and the employees also contribute at the same rate.

2.5 Cash and cash equivalent

Cash in hand, cash at bank and short term investments in FDR have been considered as cash and cash equivalent for the preparation of these financial statements, which were held and were readily available for use by PKSF without any restriction.

2.6 Taxation

PKSF is exempted from income tax as per letter no. 3(4)Ki-7/AvtAvtwet/96/227(3) dated 19 November 1998 issued by NBR.

2.7 Capital fund

PKSF was incorporated as a company limited by guarantee not having any share capital under the provisions of the Companies Act 1913 (replaced by the Companies Act 1994). The origin of the capital fund is the receipts of grants from the Government of Bangladesh and accumulation of capital fund through transfer of surplus of income over expenditure over the years.

Capital fund is restricted to be exclusively used for the purpose of PKSF only and the surplus of income over expenditure or the capital fund can not be distributed as dividend to its members.

2.8 Revenue recognition

Service charge is calculated in accordance with the loan agreement made between PKSF and its Partner Organizations (POs). Service charge is calculated in the following rates:

Under PAMFP (MF-I) the rate of service charge for OOSA was between 3 to 4.5% and for BIPOOL 5% per annum respectively.

Service charges on loans to POs and interest income from short-term investment in FDR are recognized as income calculated on accrual basis.

Service charge has not been charged on any overdue amount of loans to POs (overdue by 60 days). Service charge on regular loans i.e. loans where no amount is overdue as at the end of the reporting period, is recognized as income.

2.9 Loan Classification and Loan Loss Provision

Outstanding amount of loan due from POs under Core Programs and Other Projects as on Balance Sheet date has beenclassified as per the approved Loan Loss Classification, Provisioning and Write-off policy of PKSF and provisions for losses on loans have been made in the financial statements.

Loan Loss Provision policy of PKSF states that provision for losses on loans to POs under Core Program, Capacity Building and Other Projects is required to be made as follows:

During this year 'Debt Management Reserve' has been renamed as "Loan Loss Provision".

2.10 Recognition of Government Grants

Grant for revenue expenses of current year is recognized as income.
Grants for capital expenditure are considered as grant for assets as shown in Balance Sheet. Amount equivalent tocurrent year's depreciation on these assets is recognized as income for the year.

2.11 Borrowing cost

*Borrowing costs are recognized on accrual basis of accounting at varying rates on different projects as follows:

*1% simple interest on the loan amount received under the Poverty Alleviation Microfinance Project (PAMFP) of the Government of Bangladesh.

*1% simple interest on the loan amount received under the Second Poverty Alleviation Microfinance Project (SPAMFP) of the Government of Bangladesh.

* 1% simple interest on the loan amount received under the Microfinance and Technical Support Project (MFTSP).

* 1.25% simple interest on the loan amount received under Participatory Livestock Development Project (PLDP-I) and Second Participatory Livestock Development Project (PLDP-II).

* 1.25% simple interest on the loan amount received under Financial Services for the Poorest Project (FSPP).

* No interest is applicable on the loans received under IFADEP, TEIGP (JMBA) and SRF projects.

2.12 General information

No material events occurred after the Balance Sheet date, which would affect the financial position of the company.

· All material liabilities and provisions have been included in the financial statements.

· Previous year's figures have been rearranged wherever considered necessary to conform to current year's presention.

· All of PKSF's assets, liabilities, capital fund, income and expenditure are denominated in terms of Taka, the local currency. Hence, PKSF is not subject to foreign currency rate fluctuation risks.

· There were no sums for which PKSF was contingently liable as on the Balance Sheet date.

· Figures have been rounded off to the nearest taka.

2.13 Comparative information

Comparative data have been provided in respect of the year 2003-2004 in the financial statements and also the narrative description where it is relevant for understanding of the current year's financial statements.

3. Compliance of BAS and IAS/IFRS

The financial statements have been prepared in compliance with the International Accounting Standards (IAS), wherever applicable, as adopted by the Institute of Chartered Accountants of Bangladesh, which are consistent in all material respects with the International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS). No separate IAS/IFRS has been introduced/adopted on Microfinancial Institutions. IAS-30 and BAS-30 are meant for banks and financial institutions. IAS-30 defines that "This standard should be applied in the financial statements of banks and similar financial institutions (subsequently referred to as banks). For the purposes of this standard, the term bank includes all financial institutions, one of whose principal activities is to take deposits and borrow with the objective of lending and investing and which are within the scope of banking or similar legislation. The standard is relevant to such enterprises whether or not they have the word 'bank' in their names". From the definition itself, it is clear that IAS-30 is not applicable to Micro-finance, Financing Institutions, like PKSF.

4. Cash and cash equivalent - Tk 13,044,500,835

4.1 Cash at banks - Tk 1,384,461,168

4.2           Short-term investment in FDR - Tk 11,660,000,000

Project wise break-up of the above amount is as follows:

4.3       Short-term investment in FDR - Core Program - Tk 11,210,000,000

4.4       Short-term investment in FDR PLDP-I - Tk 450,000,000

Schedule of Fixed Deposits are shown in Annexure-4.

5.            Advances, deposits and prepayments - Tk 23,463,173

Project-wise break-up of the above amount is as under:

5.1            Advances, deposits and prepayments - Core Program - Tk 22,864,180

Break-up of the above amount is as under:

6.            Interest and other receivables - Tk 303,006,432

Project-wise break-up of the above amount is given below:

6.1            Interest and other receivables - Core Program - Tk 219,898,361

Break-up of the above amount is as follows:

*    Out of Tk 21,936,213, an amount of Tk 6,622,627 is receivable against grant
for assets and Tk 1,531,586 against revenue expenditure from GOB.

7.            Service charges receivable - Tk 109,514,026

Project-wise break-up of the above amount is as under:

7.1            Service charges receivable - core program - Tk 102,617,847

This consists:

8.            Overdue service charges receivable - Tk 11,611,423

This represents service charges not received within the specified period from different POs
and projects:

8.1            Overdue service charge - Core Program - Tk 11,298,845

This consists:

9.         Loan to POs under Core Program - Tk 9,840,421,844

The above amount represents loans outstanding to POs-OOSA and BIPOOL under PAMFP (MF-I) and SPAMFP (MF-II) as on 30 June 2005, which is repayable (a) in case of OOSA in three years time with a grace period of 6 months by quarterly installments and (b) in case of BIPOOL (i) in ten years time with a grace period of four years by half yearly installments and (ii) in four years time with a grace period of one year by quarterly installments for MF-I and MF-II respectively. New loans are normally extended to POs before full recovery of previous loan to facilitate continuity of funds. No collateral is taken for these loans. Legal action has been instituted against 18 (eighteen) POs for misuse of fund, unsatisfactory repayment performance and unacceptable management environment.

Program-wise break-up of loan to POs under Core Program:

9.1       Loan to OOSAs under Core Program - Tk 4,535,255,848

Break-up of the above amount is as follows:

10.       Loan to POs for Capacity Building - Tk 58,787,728

PKSF provides loan to POs under OOSA to purchase computers, motor cycles, bi-cycles, photocopiers, training centre cum office complex etc. as part of capacity building support to the POs. PKSF charges service charge @ 1% per annum for loans under this head disbursed from 15 May 2001.

Project-wise break-up of the above amount is given below: