SECOND COMMUNITY AGRICULTURAL RESOURCE MANAGEMENTAND COMPETITIVENESS PROJECT

IBRD Loan No. 8374-AMIDA Credit No. 5504-AMIDA Credit No. 5505-AM

IMPLEMENTED BY"AGRICULTURAL PROJECTS IMPLEMENTATION UNIT"

STATE INSTITUTIONUNDER THE MINISTRY OF AGRICULTURE OF THE REPUBLIC OF ARMENIA

SPECIAL PURPOSE FINANCIAL STATEMENTS

AND

INDEPENDENT AUDITOR'S REPORT

For the year ended 31 December 2016

YEREVANJune 2017

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CONTENT

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INDEPENDENT AUDITOR'SREPORT ................................................................................................ 3STATEMENT OF CASH RECEIPTS AND PAYMENTS...................................................................... 5STATEMENT OF USES OF FUNDS BY PROJECT ACTIVITY.......................................................... 6NOTES TO THE PROJECT SPECIAL PURPOSE FINANCIAL STATEMENTS................................ 7ANNEX 1. RECONCILIATION BETWEEN THE AMOUNTS SUBMITTED BY THE PROJECT ANDDISBURSED BY THE W ORLD BANK ............................................................................................... I8

"UOU-uflHTS" U ilt

"SOS-AUDIT" LTD

INDEPENDENT AUDITOR'S REPORT

To the Management of the "Agricultural Projects Implementation Unit" State Agency

Opinion

We have audited the accompanying special purpose financial statements of the "Second CommunityAgricultural Resource Management and Competitiveness Project" ("Project") financed by the IBRD LoanNo. 8374-AM, IDA Credit No. 5504-AM and IDA Credit No. 5505-AM, and implemented by the"Agricultural Projects Implementation Unit" State Agency ("APIU"), which comprise the statement ofcash receipts and payments, the statement of uses of funds by Project activity for the year ended 31December 2016, and a summary of significant accounting policies and other explanatory notes.

In our opinion,I. the special purpose financial statements present fairly in all material respects the cash receipts

and payments of the Project for the year ended 31 December 2016 in accordance withInternational Public Sector Accounting Standard: Financial Reporting Under the Cash Basis ofAccounting, (IPSAS-Cash Basis);

2. funds have been used in accordance with the conditions of the Loan Agreement No. 8374-AMconcluded between the International Bank for Reconstruction and Development (IBRD) and theRepublic of Armenia, Financing Agreement No. 5504-AM and 5505-AM between theInternational Development Association (IDA) and the Republic of Armenia both dated 6 August2014 ("Financing Agreements"), and World Bank related guidelines, with due attention toeconomy and efficiency, and only for the purposes for which the financing was provided;

3. supporting documents, records and accounts have been maintained to support claims forreimbursement of expenditures incurred. Expenditures included in the withdrawal applicationsand reimbursed against are eligible for financing under the Financing Agreements;

4. The Designated accounts used have been maintained in accordance with the provision of theFinancing Agreements, and World Bank related guidelines;

5. Works, Goods and Services financed have been procured in accordance with the FinancingAgreements and World Bank related guidelines.

6. Sub-Projects grants complied with eligibility criteria, procedures and requirements set forth in theProject Operational Manual and Sub-Project grants agreements.

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs) as issued byInternational Auditing and Assurance Standards Board (IAASB) of the International Federation ofAccountants (IFAC). Our responsibilities under those standards are further described in the Auditor'sResponsibilities for the Audit of the Financial Statements section of our report.We are independent of the Project and APIU in accordance with the International Ethics Standards Boardfor Accountants' Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled outother ethical requirements in accordance with IESBA Code. We believe that the audit evidence we haveobtained is sufficient and appropriate to provide a basis for our opinion.

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"UOU-Uf1SS" U%1!

"SOS-AUDIT" LTD

Management's Responsibility for the Special Purpose Financial Statements

The management of APIU is responsible for the preparation and fair presentation of these special purposefinancial statements in accordance with IPSAS-Cash Basis issued by the International Public SectorAccounting Standards Board (IPSASB) within the International Federation of Accountants (IFAC), andFinancial Management Manual for World Bank Financed Investment Operations (WB Guidelines), andfor such internal control as management determines is necessary to enable the preparation of specialpurpose financial statements that are free from material misstatements, whether due to fraud or error.

Auditor's Responsibility for the Audit of the Special Purpose Financial Statements

Our objectives are to obtain reasonable assurance about whether the special purpose financial statementsas a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor'sreport that includes our opinion. Reasonable assurance is high level of assurance, but is not a guarantythat an audit conducted in accordance with ISAs will always detect a material misstatement when itexists. Misstatements arise from fraud and error and are considered material if, individually or in theaggregate, they could reasonably be expected to influence the economic decisions of users taken on thebasis of these special purpose financial statements.As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professionalskepticism throughout the audit. We also:

* Identify and assess the risks of material misstatement of the special purpose financial statements,whether due to fraud or error, design and perform audit procedures responsive to those risks, andobtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The riskof not detecting a material misstatement resulting from fraud is higher than for one resulting fromerror, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or theoverride of internal control.

* Obtain an understanding of internal control relevant to the audit in order to design auditprocedures that are appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the internal control.

* Evaluate the appropriateness of accounting policies used and the reasonableness of accountingestimates and related disclosures made by management.

* Evaluate the overall presentation, structure and content of the special purpose financialstatements, including the disclosures, and whether the special purpose financial statementsrepresent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with management regarding, among other matters, the planned scope and timing of theaudit and significant audit findings, including any significant deficiencies in internal control that weidentify during our audit.

"SOS-Audit" LLC -14 June 2017

a Oha an- -Nazik ChitchyanDiroL(' Auditor

4

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NOTES TO THE PROJECT SPECIAL PURPOSE FINANCIAL STATEMENTS

Second CommunityAgricultural Resource Management and Competitiveness ProjectIBRD Loan No.8374-AM IDA Credit No. 5304- AM, IDA Credit No. 5505- AMFor theyear ended 31 December 2016

1. General Information

L L Th e Project

On 6 August 2014 the Loan agreement was signed between the Republic of Armenia andInternational Bank for Reconstruction and Development (IBRD), according to which IBRDprovided to the Republic of Armenia Loan No. 8374-AM at the amount of 23,000,000 UnitedStates dollars (USD).

On 6 August 2014 the Financing agreement was signed between the Republic of Armenia andInternational Development Association (IDA), according to which IDA provided to theRepublic of Armenia credit No. 5504-AM at the amount of 3,800,000 Special Drawing Rights(SDR) and credit No. 5505-AM at the amount of 2,460,000 Special Drawing Rights (SDR).

Loan and Credits were provided for implementation of Second Community AgriculturalResource Management and Competitiveness Project (the Project).

Both Loan Agreement and Financing agreement became effective on 23 January 2015.

The closing date of the Project is 31 May 2020. The Grace Period for submitting withdrawalapplications for the expenditures incurred before the Closing date is four months following theClosing date.

1.2.The Project's objectives

The objectives of the Project are to: (i) improve productivity and sustainability of pasture andlivestock systems in targeted communities; and (ii) increase the marketed production fromselected livestock and high value agri-food value chains.

The Project consists of the following components." Community pasture/livestock management system," Value chain development," Strengthening public sector institutions," Project coordination and management.

1.3.Project Budget

The Project is financed from the following sources:- International Bank for Reconstruction and Development (IBRD),- International Development Association (IDA),- The Government of the Republic of Armenia (GoA),- Beneficiaries.

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1.4.Project implementation

The Project is implemented by "Agricultural Projects Implementation Unit" State Institutionunder the Ministry of Agriculture of the Republic of Armenia (the APIU) that was establishedin accordance with the Republic of Armenia Government decree #765 dated 22 December1999.The APIU's legal address is: 54B/15 Komitas Avenue, Yerevan, Republic of Armenia.

2. Summary of significant accounting policies

ZLPreparation andpresentation offinancial statements

The special purpose financial statements are prepared in accordance with the InternationalPublic Sector Accounting Standard (IPSAS): Financial Reporting Under the Cash Basis ofAccounting, (IPSAS-Cash Basis) issued by the International Public Sector AccountingStandards Board (IPSASB) within the International Federation of Accountants (IFAC), andpresented in accordance with Financial Management Manual for World Bank FinancedInvestment Operations: RM 3 - Financial Reporting and Auditing (March 2010).

The special purpose project financial statements consist of.,

- Statement of cash receipts and payments,- Statement of uses of funds by project activity,- Summary of significant accounting policies and other explanatory notes.

The principal accounting policies applied in the preparation of these special purpose financialstatements are set out below. These policies have been consistently applied to all the periodspresented.

2.2 Casit basis of accounting

The special purpose financial statements are prepared and presented using the cash basis ofaccounting.Cash basis means a basis of accounting under which transactions and other events arerecognized only when cash or its equivalent is received or paid.Financial statements prepared under the cash basis provide infon-nation about the sources ofcash raised during the period, the purpose for which cash was used and the cash balances at thereporting date.

23. Presentation currency

The presentation currency of these special purpose financial statements is United States Dollar(USD).

Z4. Foreign currency transactions

Foreign currency is a currency other than the presentation currency of the Project.Transactions in foreign currencies are translated to functional currency at exchange rates at thedates of the transactions. Settlement rate of foreign currency over presentation currencyestablished by the Central Bank of the Republic of Armenia is taken as the exchange rate.

9

Project accounts are maintained and transactions are made in USD and Armenian Dram(AMD). Transactions denominated in local currency are translated into USD as follows:

- Contributions of the Republic of Armenia and beneficiaries expressed in AMD arepresented in USD at the official exchange rate defined by the Central Bank of Armenia atthe date of transfer.

- Payments to contractors and suppliers expressed in AMD are presented in USD at theexchange rates defined by the CBA at the date of payment.

The currency exchange rate defined by the CBA as at 31.12.2015 is: USD I = 483.75 AMD.The currency exchange rate defined by the CBA as at 31.12.2016 is: USD I = 483.94 AMD.

2.5. Taxes

All applicable taxes are paid in accordance to common tax regulations of the Republic ofArmenia.

3. Summary of Summary reports and SOEs

3.1. IDA Credit No. 5505-AM

Application Value date I.Goods, works, non- 2.Community fund Totalnumber consulting services, financing and

consultant's services, training targeted sub-and incremental operating project grants undercosts under the Project (except Part I (b) and Part IIfor activities under Part I (b) (a) of the Projectand Part 11 (a) of the Project).

USD USD USD

8 13-Jan-2016 - 316,821.82 316,821.82

9 04-Feb-2016 173,571.24 - 173,571.24

Total 173,571.24 316,821.82 490,393.06

10

3.2. IDA Credit No. 5504-AM

Application Value date 1.Goods, works, non- 2.Community fund Totalnumber consulting services, financing and

consultant's services, training targeted sub-and incremental operating project grants undercosts under the Project (except Part I (b) and Part IIfor activities under Part 1 (b) (a) of the Projectand Part 11 (a) of the Project).

USD USD USD3 04-Feb-2016 13,829.03 240,710.14 254,539.174 15-Mar-2016 11,641.59 122,339.72 133,981.315 05-Apr-2016 109,099.09 197,394.36 306,493.456 06-May-2016 25,357.79 273,157.29 298,515.087 12-May-2016 14,047.41 180,033.19 194,080.608 09-Jun-2016 52,715.04 188,803.64 241,518.689 14-Jun-2016 45,010.63 195,696.56 240,707.19

10 28-Jun-2016 21,199.11 186,343.71 207,542.8211 30-Jun-2016 18,958.14 227,221.21 246,179.3512 12-Jul-2016 30,470.47 222,137.34 252,607.81

13 21-Jul-2016 410.70 297,818.65 298,229.35

14 27-Jul-2016 668.81 312,629.98 313,298.79

15 03-Aug-2016 37,699.87 138,137.74 175,837.6116 12-Aug-2016 1,073.48 187,722.94 188,796.42

17 26-Aug-2016 4,955.28 65,456.83 70,412.11

18 04-Oct-2016 95,852.39 175.65 96,028.04

19 20-Dec-2016 198,313.00 - 198,313.00

Total 681,301.83 3,035,778.95 3,717,080.78

3.3. IBRD Loan No. 8374-AM

Application Value date I.Goods, works, non- 2.Community fund Totalnumber consulting services, financing and

consultant's services, training targeted sub-and incremental operating project grants undercosts under the Project (except Part I (b) and Part IIfor activities under Part 1 (b) (a) of the Projectand Part 11 (a) of the Project).

USD USD USD2 30-Aug-2016 - 727,632.31 727,632.31

3 13-Sep-2016 - 575,368.61 575,368.61

4 04-Oct-2016 - 575,360.06 575,360.06

5 20-Dec-2016 - 999,997.71 999,997.71

Total - 2,878,358.69 2,878,358.69

11

4. Statement of designated account

4.1. IDA Credit No. 5504-AM and IDA Credit No. 5505-AM

Designated Account IDA Credit No. 5504-AM and IDA Credit No. 5505-AM

Currency USDAccount number 900000900333Bank Central Treasury

4 Tigran Mets str., I-st floor, Yerevan, 0010Location Republic of Armenia

For the year ended 31 Dec 2016IDA Credit IDA Credit Total

No. 5504-AM No. 5505-AMUSD USD USD

1. Opening balance as at 01.01.2016 - 3,744.08 3,744.08

Add:2. Cumulated opening discrepancy* (80,448.55) 80,448.55 -

3. IDA Fund advance/replenishment 4,033,902.60 - 4,033,902.60

Less:4. Refund to IDA from DA -

5. Present outstanding amount advancedto DA 3,953,454.05 84,192.63 4,037,646.68

6. DA closing balance as at 31.12.2016 120,984.74 - 120,984.74

Add:7. Amount of eligible expenditures paid 3,832,469.31 84,192.63 3,916,661.94

Less:8. Interest earned (if credited into DA) -

9. Total advance accounted for 3,953,454.05 84,192.63 4,037,646.68

10. Discrepancy (5)-(9) -

(*) as at 31.12.2015 USD 80,448.55 total expenditures related to IDA 5504-AM were incurred fromamounts recevied on IDA 5505-AM. This represents balance between these two financing sources andwas settled on year 2016.

12

4.2. IBRD Loan 8374-AM

Designated Account IBRD Loan No. 8374-AM

Currency USDAccount number 900000902461Bank Central Treasury

4 Tigran Mets str., 1-st floor, Yerevan, 0010Location Republic of Armenia

For the year ended31 Dec 2016

USD1. Opening balance as at 01.01.2016 .

Add:2. Cumulated opening discrepancy

3. IBRD Fund advance/replenishment 3,928,358.69

Less:4. Refund to IBRD from DA .

5. Present outstanding amount advanced to DA 3,928,358.69

6. SA closing balance as at 31.12.2016 5,000.00

Add:7. Amount of eligible expenditures paid 3,923,358.69

Less:8. Interest earned (if credited into DA)

9. Total advance accounted ror 3,928,358.69

10. Discrepancy (5)-(9)

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5. Statement of financial position

The Statements of Financial Position discloses assets, liabilities and net assets of the Project asat reporting date. It is prepared in accrual basis that is transactions are recognized when theyoccur (and not only when cash is received or paid).

31.12.2016 31.12.2015USD USD

ASSETSCash 6 255,559.99 318,185.92Prepayments 164,498.87 124,299.15

Total assets 420,058.86 442,485.07

LIABILITIESPayables 274,225.41 74,052.46Total liabilities 274,225.41 74,052.46

NET ASSETSCumulative incomeIBRD Loan No. 8374-AM 8.1 3,985,858.69 57,500.00IDA Credit No. 5504-AM 8.2 4,033,902.60 -IDA Credit No. 5505-AM 8.3 2,410,189.09 2,410,189.09GoA fund 8.4 526,616.29 255,231.25Community fund 8.5 1,009,197.04 503,521.82Other beneficiary 8.5 438,542.34 -Bidding 3,259.56 -

12,407,565.61 3,226,442.16

Cumulative expensesProject expenses (12,271,382.73) (2,884,237.00)

(12,271,382.73) (2,884,237.00)

Foreign exchange gain/(loss) 9,650.57 26,227.45

Total net assets 145,833.45 368,432.61

6. CashAccount Underlying 31.12.2016 31.12.2015held at Currency USD USD

Designated Account IDA Credit5504-AM, 5505-AM Treasury USD 120,984.74 3,744.08Designated Account IBRD Loan8374-AM Treasury USD 5,000.00 -Government Co-financing account Treasury AMD - 69,531.55Community Co-financing account Treasury AMD 126,536.99 244,910.29Bidding account Treasury AMD 3,038.26 -

Total 255,559.99 318,185.92

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7. Project expenditures

7.1. Project expenditures per funds

Expenditure IBRD Loan IDA Credit IDA Credit Govern Communi Other Total8374-AM 5504-AM 5505-AM ment of the ty fund beneficia

RA riesUSD USD USD USD USD USD

Reporting yearI.Goods, works, non-consulting services,consultant's services,training and incrementaloperating costs under theProject (except foractivities under Part I (b)and Part 11 (a) of theProject). - 961,331.55 - 319,784.60 - 88.61 1,281,204.762.Community fundfinancing and targetedsub-project grants underPart I (b) and Part II (a)of the Project 3,923,358.69 2,871,137.76 84,192.63 21,914.49 626,429.03 438,542.34 7,965,574.943.Front-end fee - - - - . .Total 3,923,358.69 3,832,469.31 84,192.63 341,699.09 626,429.03 438,630.95 9,246,779.70

Cumulative as at31.12.2016

1.Goods, works, non-consulting services,consultant's services,training and incrementaloperating costs under theProject (except foractivities under Part I (b)and Part II (a) of theProject). - 961,331.55 549,914.17 503,381.00 - 88.61 2,014,715.332.Community fundfinancing and targetedsub-project grants underPart I (b) and Part 11 (a)of the Project 3,923,358.69 2,951,586.31 1,860,274.92 21,914.49 882,600.09 438,542.34 10,078,276.843.Front-end fee 57,500.00 - - - - - 57,500.00Total 3,980,858.69 3,912,917.86 2,410,189.09 525,295.49 882,600.09 438,630.95 12,150,492.17

7.2.Expenditure budget execution

CumulativeExpendituresCategory as at 31 Dec 2016 Total budget Execution

USD USD %.Goods, works, non- consulting services, consultant's services,

training and incremental operating costs under the Project (exceptfor activities under Part I (b) and Part 11 (a) of the Project). 2,014,715.33 9,160,140.00 22%2.Community fund financing and targeted sub-project grantsunder Part I (b) and Part 11 (a) of the Project 10,078,276.84 30,182,224.00 33%3.Front-end fee 57,500.00 57,500.00 100%Unallocated - 2,231,538.00 -

Total 12,150,492.17 41,631,402.00 29%

IS

8. Financing

8.1. IBRD Loan 8374-AMReporting Cumulative as

year at 31 Dec 2016USD USD

Advances/ (advance recovery) 1,050,000.00 1,050,000.00SOE and Summary Report 2,878,358.69 2,878,358.69Front-end fee - 57,500.00Total 3,928,358.69 3,985,858.69

Total financing budget 23,000,000.00Percentage of finance provided as at 31 Dec 2016 17%

8.2. IDA Credit 5504-AM

Reporting Cumulative asyear at 31 Dec 2016USD USD

Advances/ (advance recovery) 316,821.82 316,821.82SOE and Summary Report 3,717,080.78 3,717,080.78Total 4,033,902.60 4,033,902.60

Total financing budget 5,249,183.00Percentage of finance provided as at 31 Dec 2016 77%

8.3. IDA Credit 5505-AM

Reporting Cumulative asyear at 31 Dec 2016USD USD

Advances/ (advance recovery) (490,393.06) 9,606.94SOE and Summary Report 490,393.06 2,400,582.15Total - 2,410,189.09

Total financing budget 3,386,682.00Percentage of finance provided as at 31 Dec 2016 71%

8.4. Government of RoAReporting Cumulative as

year at 31 Dec 2016USD USD

Financed 271,385.04 526,616.29Total financing budget 4,267,537.00Percentage of finance provided as at 31 Dec 2016 12%

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8.5. BeneficiariesReporting Cumulative as

year at 31 Dec 2016USD USD

Community funds 505,675.22 1,009,197.04Other beneficiaries 438,542.34 438,542.34

944,217.56 1,447,73938

Total financing budget 5,728,000.00Percentage of finance provided as at 31 Dec 2016 25%

9. Events after the reporting date

9.1. IDA Credit 5504-AM

The application No.20 in the total amount 239,369.96 USD, that includes expenditures relating to thereporting period in the amount of 205,444.02 USD, was submitted to WB and approved on 9 February2017.

9.2. IBRD Loan 8374-AM

The application No. 7 in the total amount of 1,045,000.00 USD, that consists expenditures relating tothe reporting period was submitted to WB and approved on 13 January 2017.

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ANNEX 1. RECONCILIATION BETWEEN THE AMOUNTS SUBMITTED BY THEPROJECT AND DISBURSED BY THE WORLD BANK

Second Community Agricultural Resource Management and Competitiveness ProjectIBRD Loan No.8374-AM, IDA Credit No. 5504- AM, IDA Credit No, 5505- AMFor the year ended 31 December 2016In USD

IBRD Loan No. 8374-AM

Category Appl. N Project WB DifferenceAdvanccl(rcpayment) 1 1,000,000.00 1,000,000.00

6 50,000.00 50,000.00

1,050,000.00 1,050,000.002.Community Fund financing and Targeted Sub-Project 2 727,632.31 727,632.31 -Grants under Part I (b) and Part I (a) of the Project 575,368.61 575,368.61

4 575,360.06 575,360.06 -5 999,997.71 999,997.71 -

2,878,358.69 2,878,358.69

3,928,358.69 3,928,358.69

IDA Credit No. 5505- AM

Category Appl. N Project WB Difference

Advance/(repayment) 8 (316,821.82)9 (173,571.24)

(490,393.06)I.Goods, works, non-consulting services, consultants' 9 173,571.24 173,571.24 -services, training and incremental operating costs underthe Project (except for activities under Part 1(b) andPart 11 (a) of the Project) 173,571.24 173,571.242.Community Fund financing and Targeted Sub-Project 8 316,821.82 316,821.82 -Grants under Part I (b) and Part 11 (a) of the Project 316,821.82 316,821.82

490,393.06 -

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IDA Credit No. 5504-AMCategory Appl. N Project WB Difference

Advance/(repayment) 1 316,821.82 316,821.82 -

316,821.82 316,821.821.Goods, works, non-consulting services, consultants' 3 13,829.03 13,829.03 -services, training and incremental operating costs underthe Project (except for activities under Part I (b) and 4 11,641.59 11,641.59 -Part 11(a) of the Project) 5 109,099.09 109,099.09 -

6 25,357.79 25,357.79 -

7 14,047.41 14,047.41 -

8 52,715.04 52,715.04 -

9 45,010.63 45,010.63 -

10 21,199.11 21,199.11 -

11 18,958.14 18,958.14 -

12 30,470.47 30,470.47 -

13 410.70 410.70

14 668.81 668.81 -

15 37,699.87 37,699.87 -

16 1,073.48 1,073.48 -

17 4,955.28 4,955.28 -

18 95,852.39 95,852.39 -

19 198,313.00 198,313.00 -

681,301.83 681,301.832.Community Fund financing and Targeted Sub-Project 3 240,710.14 240,710.14 -Grants under Part I (b) and Part 11 (a) of the Project 4 122,339.72 122,339.72

5 197,394.36 197,394.36 -

6 273,157.29 273,157.29

7 180,033.19 180,033.19 -

8 188,803.64 188,803.64 -

9 195,696.56 195,696.56 -

10 186,343.71 186,343.71 -

11 227,221.21 227,221.2112 222,137.34 222,137.34 -13 297,818.65 297,818.65 -14 312,629.98 312,629.98 -

15 138,137.74 138,137.74 -16 187,722.94 187,722.94 -

17 65,456.83 65,456.83 -18 175.65 175.65 -

3,035,778.95 3,035,778.95

4,033,902.60 4,033,902.60

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