## cr1922-somalia-ta — Preface

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---

### Mission context and logistics
- A Monetary and Capital Markets (MCM) Department mission visited Kampala, Uganda during March 10–21, 2018 at the request of the Central Bank of Somalia (CBS) to assist in developing frameworks for internal auditing and accounting toward internationally accepted norms.
- Training sessions were conducted on relevant topics.
- The mission met with members of the internal audit and accounting teams.
- Logistical support was provided by Ms. Fowzia Ibrahim of the Somalia Resident Representative office located in Nairobi, Kenya.
- The report’s key takeaways and recommendations were discussed and agreed with participants during the mission and subsequently with management and the governor.

### Executive summary — main findings and high-priority recommendations
- Institutional steps taken
  - CBS approved the Internal Audit and Audit Committee Charters.
  - Internal Audit Department (IAD) initiated risk assessments of various CBS business units and recruited an Information Technology (IT) professional to join the team.
  - Accounting and Finance Department (AFD) is making progress in implementing accrual accounting, accounting for foreign exchange operations (International Accounting Standard (IAS) 21), and created a new role of Reconciliation Officer.
- Key shortcoming
  - The IAD functions without a director, limiting authority and effectiveness.
  - CBS had not formally indicated it will adopt International Financial Reporting Standards (IFRS) at the time of the mission.
- Accounting system and IFRS transition
  - The new Oracle system was expected to go live in April 2018.
  - Technical issues related to IAS 21 were resolved; instructions provided on accounting for gold holdings and IMF accounts not specifically addressed by IFRS.
  - Components of an IFRS transition plan and need for a roadmap were reviewed.
- IMF accounts and transparency
  - Assets and liabilities related to the IMF accounts are not recognized, significantly decreasing transparency and the reliability of financial statements.
  - By recognizing the IMF accounts, the impact would be a net effect of SDR 224 million.
  - The mission recommended presenting Somalia’s financial position with the Fund on the CBS balance sheet and bringing this omission to the external auditors’ attention if they are not already aware.
- Accounting policies
  - No formal accounting policies exist to shape the accounting framework and provide consistent guidance for implementing IFRS.
  - The mission and CBS accounting team prepared four draft policies during the mission; the CBS accounting team was requested to prepare formal draft policies as homework.
- Internal audit progress and needs
  - BoD approved Audit Committee Charter and Internal Audit Charter in March 2018.
  - Internal audit team completed the majority of previous homework, increased knowledge of risk-based auditing, and needs to complete risk assessments of the remaining eight business processes and start audit fieldwork.
  - An IT professional was scheduled to join the IAD in April 2018.
  - High-priority recommendation: governor should appoint a director to lead the IAD, approve the internal audit manual and strategy note, adopt a flatter IAD organization structure, and provide budgetary resources for an Institute of Internal Auditors (IIA) group membership.

### Table of agreed high-priority assignments (selected deadlines preserved)
- Governor/Board of Directors
  - Issue formal commitment to adopt IFRS. (High Priority) — By next mission
  - Appoint a director to lead and manage the IAD. (High Priority) — June 30, 2018
- Senior Management
  - Approve the five potential audits proposed by the internal audit team. — June 30, 2018
  - Circulate the Internal Audit Charter approved by the BoD to raise awareness of internal audit within the CBS. — June 30, 2018
  - Approve the proposed Internal Audit Manual. — June 30, 2018
  - Provide budgetary support for the internal audit team to obtain a group membership to the IIA (or IIA Kenya). — June 30, 2018
- Internal Audit
  - Continue to complete the risk assessment of the remaining six auditable entities included in the audit universe. — By next mission
  - Prepare an Audit Notification and Terms of Reference (ToR) for the audit of financial controls. — By next mission
  - Complete the fieldwork of the audit of financial controls in accordance with the auditing program collaboratively developed by the IMF and CBS team. — By next mission
- Accounting
  - Draft accounting policies for IAS 21, PP&E, Accruals, Currency in Circulation, and Gold Holdings; assign someone in charge of the Accounting Manual. — April-September 2018 / April 2018
  - Develop transition plan and roadmap for IFRS implementation including deadlines for each phase. — September 2018
  - Complete the Gap analysis including calculating the financial impact on CBS financial statements of adopting IFRS. — September 2018
  - Identify new operations that will need to be accounted for under IFRS going forward. — September 2018

*Prepared from IMF mission report: cr1922-somalia-ta - Preface (March 10–21, 2018).*

### Mission series and training schedule
- This was the second mission in a series; the first mission took place during September 24–October 5, 2017.
- Training sessions were conducted over a two-week period with participatory group exercises.
- Two parallel streams: Internal Auditing Stream and Accounting Stream.
- Planned mission timeline:
  - Mission #1: September/Oct 2017
  - Mission #2: First Quarter 2018
  - Mission #3: Second Quarter 2018
  - Future Missions: assumes two week training sessions for each stream for missions #3 and future missions.

---

### Internal Audit — progress, findings, and immediate actions
- Progress since previous mission
  - BoD approved the Audit Committee Charter and Internal Audit Charter in March 2018.
  - IAD assessed risks of six business processes, identified one potential audit, and updated the strategy note of internal audit.
- Accomplishments during this mission
  - Reviewed and edited results of six risk assessments and introduced a cross-checking technique to ensure consistent risk ratings.
  - Agreed to increase weights of financial risk and fraud risk factors to reflect cash-heavy transactions, where a single transaction could involve US$3–5 million.
  - Internal audit team led a risk assessment of the CBS governance structure.
  - Identified five potential audits (subject to governor approval):
    - (i) financial controls over accounting and cash payments;
    - (ii) the cash handling process (generates about 90 percent of the CBS’s revenue and delivers hundreds of millions of cash on behalf of the Somalia government);
    - (iii) the budgeting process, which lacks budgetary controls of various levels and monitoring;
    - (iv) the SWIFT process, which directs transactions between the CBS and its corresponding banks;
    - (v) the procurement process.
  - Developed an audit program for financial controls over accounting and cash payments; evaluation of control designs was accomplished during the mission; testing/auditing procedures (fieldwork) to be carried out by IAD.
- Remaining work and immediate actions
  - Complete the risk assessment of the remaining six business processes.
  - Update the risk ratings and the rationale documentation for the eight business processes that were reviewed during the mission.
  - Circulate an audit notification to relevant departments prior to fieldwork.
  - Prepare a Terms of Reference (ToR) including objective, scope, approach, duration, and resources before the kick-off meeting.
  - Complete the fieldwork of the audit of financial controls in accordance with the audit program.
- Organizational recommendations
  - Appoint a director to lead the IAD: ideal qualifications include Certified Internal Auditor (CIA) or equivalent (e.g., Certified Public Accountant, Chartered Accountant), substantial experience in risk-based auditing methodology, and management skills; if local talent limited, hire conditionally requiring certification within one or two years.
  - Update the internal audit organizational structure to a flatter, two-level structure: director/deputy director at management level and auditors (including a Risk Officer) at the professional level.
  - Circulate the approved Internal Audit Charter within the CBS to promote awareness and cooperation.
  - Provide budgetary support for IAD to obtain a group IIA membership.

---

### Accounting — status, accomplishments, and recommendations

- Staffing and capacity
  - Capacity constraints and vacancies persist, partly due to Oracle system implementation.
  - A Reconciliation Officer role has been created within the AFD to reconcile all cash accounts on a monthly basis.
  - Two new staff hired to lead the financial reporting and financial management teams; department reorganized into these two areas.
  - Lead accountant recently promoted to deputy director.
  - External recruits are from Pakistan and Uganda, have Master’s degrees in accounting and five years of experience.
  - Three additional staff are being recruited for accounting officer roles, increasing department staff from 11 to 14.
  - Recommendation: consider appointing one person to dedicate the majority of his/her time to be in charge of accounting reform at the CBS as part of a transition plan or IFRS roadmap.
- External audits and qualifications
  - The 2015 and 2016 audited financial statements, which will continue to carry a qualified opinion, have not been issued to date.
  - Delay appears related to receiving confirmations of the CBS’s gold holdings at the Federal Reserve.
  - A new appraiser will be hired to conduct an appraisal for the revaluation of PP&E to address the qualification.
  - Article 48 of the Central Bank Law limits consecutive auditor appointments to three years; CBS has interviewed other audit firms but has been unable to rotate firms. A new team of auditors from the current audit firm will be assigned to the CBS 2017 audit.
- Outstanding tasks with no progress
  - No progress on drafting accounting policies for the Accounting Manual.
  - No progress on completing the IFRS Gap analysis.
  - No progress on establishing a fixed asset register.
- Accomplishments during the mission
  - Prepared initial draft accounting policies collaboratively; outlined major points for IAS 21 and PP&E; drafted policies for gold holdings and currency in circulation.
  - Reviewed IMF accounts and CBS’s current IMF balance sheet position as of January 31, 2018:
    - IMF accounts reflect approximately US$155 million in assets and US$479 million in liabilities as of January 31, 2018.
    - The IMF accounts are not recognized on the CBS’s financial statements, which is a significant deviation from standards under any credible accounting framework.
  - Reviewed IFRS 1 requirements and discussed roadmap design for transition.
    - Typical IFRS conversion for central banks takes about 3–5 years.
    - Roadmap components: policy decision, transition plan (Gap analysis of financial, IT, and processes impacts), and resources (including support from external auditors and management).
- IAS 21 implementation and foreign currency guidance
  - CBS functional currency is the US dollar; limited Euro transactions occur via Euro accounts in foreign banks.
  - Mission recommended using the average weighted cost method (following IAS 2) for determining the cost of Euro holdings and for calculating results of purchases and sales of foreign currencies.
  - Mission prepared documents describing the average weighted cost method with journal entry examples.
- Currency in Circulation (CIC) accounting
  - Reviewed CIC accounting and lifecycle; emphasized need for a strong system of internal controls for CIC lifecycle stages.
  - Noted counterfeit shilling banknotes circulate in the country; the CBS handles residual cash operations involving these notes.
  - Counterfeit banknotes will represent a loss and an adjustment to equity when withdrawn from circulation; conversion process should be very short.
  - Mission suggested discussions with the Cash Management Department and CIC operations team prior to drafting CIC policy.

- Accounting governance and policy recommendations
  - While the CBS law provides for IFRS to be followed, no implementing accounting policy statement has been issued by the BoD, Audit Committee, or Management.
  - Mission recommends the CBS move forward with the implementation of IFRS and issue an accounting policy supporting the law.
  - Management should appoint one person in charge of ensuring accounting policies are drafted for the Accounting Manual to promote accountability and continuity.

- Scheduling of subsequent missions
  - Next internal audit mission scheduled for the second quarter of 2018.
  - Next accounting mission scheduled for the third quarter of 2018.
  - These schedules are dependent on the homework assignments being completed.

---

### IMF accounts and Somalia statement of position (As of January 31, 2018) — selected figures preserved
- Selected assets and liabilities (SDRs, US Dollars, Local Currency)
  - Quota: 44,200,000 SDRs; 64,159,231 US Dollars; 1,442,563,454,842 Local Currency
  - Securities: 128,563 SDRs; 186,618 US Dollars; 4,195,909,422 Local Currency
  - No. 1 Account: 44,066,254 SDRs; 63,965,090 US Dollars; 1,438,198,362,266 Local Currency
  - No. 2 Account: 6,345 SDRs; 9,210 US Dollars; 207,089,719 Local Currency
  - Currency Valuation Accounts: 1,395 SDRs; 2,025 US Dollars; 45,555,708 Local Currency
  - Total Current Accounts due to IMF: 44,202,557 SDRs; 64,162,943 US Dollars; 1,442,646,917,115 Local Currency
  - Total Current GRA Borrowings: 96,250,000 SDRs; 139,713,258 US Dollars; 3,141,328,790,238 Local Currency (Stand-by Arrangements 67,720,000 SDRs; Contingency and Compensatory 28,530,000 SDRs)
  - Total Other Borrowings: 15,300,000 SDRs; 22,208,965 US Dollars (Trust Fund 6,460,000 SDRs; SAF 8,840,000 SDRs)
  - Total Overdue Interest and Special Charges: 127,540,110 SDRs; 185,132,927 US Dollars
  - Total Accrued Interest and Charges: 430,211 SDRs; 624,480 US Dollars
  - SDR Holdings (International Reserves): 18,148,829 SDRs; 26,344,229 US Dollars
  - SDR Allocation: 46,462,893 SDRs; 67,443,970 US Dollars
  - Total SDR Holdings (presented line): 62,382,632 SDRs; 90,552,527 US Dollars
  - Total SDR Allocation (presented line): 46,549,436 SDRs; 67,569,593 US Dollars
  - Total Assets: 106,582,632 SDRs; 154,711,758 US Dollars; 1,442,563,454,842 Local Currency
  - Total Liabilities Due to the IMF: 330,272,314 SDRs; 479,412,165 US Dollars; 4,583,975,707,353 Local Currency
  - Net Effect (Assets-Liabilities): -223,689,682 SDRs; -324,700,407 US Dollars; -3,141,412,252,511 Local Currency
- Exchange rates shown
  - Exchange Rate USD/SDR: 1 USD = 0.6889114/4/18
  - Exchange Rate SDR/Somali Schillings = 0.000030639900
- Note: "The functional and presentational currency for Somalia is the U.S. dollar."

---

### Currency in Circulation (CIC) — conceptual framework and accounting entries
- Core concepts
  - Banknotes assume two “lives”:
    - Currency in Circulation (CIC) — a liability for a central bank and includes the total banknotes issued by the central bank.
    - “Simple paper” — held as inventory by the central bank and does not represent a liability.
- CIC accounting framework elements
  - Record transactions that reflect the life cycle of CIC in the financial statements.
  - Record the cost of printing or minting in the financial statements.
  - Control the inventory of “simple paper” or banknotes not placed in circulation or withdrawn from circulation by recording related transactions in off-balance sheet accounts.
- Typical CIC lifecycle stages identified
  - Printing process; Receiving new banknotes; Placing into circulation; Withdrawing from circulation; Counting and sorting withdrawn notes (fit for recirculation, non-suitable, counterfeit); Destruction of non-suitable notes; Transferring to branches; Printing cost.
- Use of control (off-balance-sheet) accounts and representative journal entries (preserved format)
  - Reception of new banknotes (control accounts off-balance sheet):
    - Debit Notes on hand XXXX / Credit Notes on existence XXXX
  - Placing banknotes in circulation:
    - Debit Accounts receivable XXX / Credit Currency in circulation XXXX
    - Off-balance sheet reduction: Debit Notes on existence XXXX / Credit Notes on hand XXXX
  - Withdrawing banknotes from circulation:
    - Debit Currency in circulation XXX / Credit Accounts payable XXXX
    - Off-balance sheet: Debit Notes on hand XXXX / Credit Notes on existence XXXX
  - Counting and sorting withdrawn banknotes: use Notes on hand and Notes in existence control accounts; classification outcomes recorded accordingly.
  - Banknotes in transit: entries only in off-balance-sheet accounts reflecting "on transit".
- Accounting for printing cost and suggested initial treatment
  - Inventory recognition upon shipment receipt:
    - Debit Inventory XXX / Credit Accounts payable XXXX
  - Recognition of printing cost as banknotes are issued into circulation:
    - Debit Banknotes printing cost expense XXX / Credit Inventory XXXX
  - Suggested initial-period treatment: establish a deferred asset for notes issued during introduction period and amortize production cost over a reasonable "useful" life (example amortization: amortize over four years using the sum-of-years digits cost formula).
  - Definition of "introduction period": the lesser of (i) the timeframe over which the CBS expects to issue approximately 90 percent of its target level of notes; and (ii) one year.

---

### Foreign currency operations, weighted-average cost method, and forex spreadsheet guidance

- Appendix VIII — foreign currency operations overview and basic assumption
  - Current situation: CBS conducting operations using a single currency, the USD (functional currency).
  - With introduction of a national currency, cross-currency operations will increase.
  - Cross-currency operation definition: use of two foreign currencies to complete an operation (e.g., initiating a transfer in EUR using a USD account).
  - Proposed rule for cross-currency conversions: use domestic-currency price of one of the foreign currencies involved as reference; consider the currency purchased as Leg 1 and the currency sold as Leg 2; rate associated with selling currency (Leg 2) used as relevant rate.
  - Worked example preserved:
    - IN: Account in USD, transfer received on behalf of CBS 100 USD, IN-PURCHASE.
    - OUT: Account in EUR, withdrawn from the CBS account, to send to the correspondent in USD 85 EUR, OUR-SALE.
    - Relevant rate: 20 units of local currency = 1 EUR.
    - OUT in local currency for 85 EUR = 20 * 85 = 1,700.
    - Relevant USD rate: 17 units of local currency per 1 USD.
    - IN in local currency for 100 USD = 100 * 17 = 1,700.
    - Result: local-currency equivalence aligns IN and OUT at 1,700.
- Accounting conventions and ledger examples
  - All monetary holdings of a single foreign currency are fungible and share the same cost regardless of account nature.
  - Holdings and cost must be maintained in a separate register able to determine holdings, cost, and gain/loss.
  - The Weighted average cost formula (IAS 2 Inventories) is used to calculate cost of holdings and exchange gain or loss.
  - Representative journal entry examples with preserved dates and amounts:
    - 02-01-2001: Debit Accounts in Foreign Currency — Purchase of 25 units of FC — 300 / Credit Accounts in LC — 300
    - 04-01-2001: Debit Accounts in LC — 220 / Debit Profit and loss for the current year — 20 / Credit Accounts in Foreign Currency — Sale of 20 units of FC — 240
    - 09-01-2001 (purchase): Debit Accounts in Foreign Currency — Purchase of 1.000 units of FC — 13.000 / Credit Accounts in LC — 13.000
    - 09-01-2001 (sale): Debit Accounts in LC — 1.188 / Debit Profit and loss for the current year — 99 / Credit Accounts in Foreign Currency — Sale of 99 units of FC — 1.287
    - 10-01-2001 (purchase): Debit Accounts in Foreign Currency — Purchase of 100 units of FC — 1.200 / Credit Accounts in LC — 1.200
    - 10-01-2001 (sale): Debit Accounts in LC — 1.800 / Credit Accounts in Foreign Currency — Sale of 120 units of FC — 1.457,43 / Credit Profit and loss for the current year — 342,57
- Forex calculations spreadsheet — method and column logic (column numbers preserved)
  - Holdings: (2) initial and (16) final FC Inventories; (3) initial and (17) final LC; (4) initial and (18) final rate (4 = 3 / 2; 18 = 17 / 16).
  - IN Purchases: (5) FC; (7) Rate; (6) LC = (7) x (5).
  - OUT Sales: (8) FC; (10) Rate; (9) LC = (8) x (10).
  - Net In-Out: (11) = (5) – (8); (12) LC treatment rules preserved.
  - Cost of Sales Net: (13) determines cost of total sales per rules preserved.
  - Gains/Losses: (14) daily gain/loss rules preserved; (14) accumulates gains/losses for the current year.
  - End-of-year treatment examples preserved:
    - 01-12-31: Holdings at year end, FC 621, LC 7.946,80, Rate 12,796778; valuation at closing rate 13 => 621 * 13,10 = 8.135,10; revaluation = 188,30.
    - Year-end 2002: holdings 610.00 FC, LC 7.761,63, average rate 12,723978; closing rate 12,40 produces loss -197,63 computed as (610 * (12,40 – 12,723978)) = -197,63.
- Appendix IX — average method summary (selected preserved line items)
  - 12/31/2001: holdings 621.00 FC, LC 7.946,80, rate 12.796778; year-end revaluation to LC 8.135,10 at rate 13.100000, revaluation 188.30.
  - New-year 1/1/2002 opening: 621.00 FC, 8.135,10 LC, rate 13.100000; year-end 2002: holdings 610.00 FC, LC 7.761,63, average rate 12.723978; closing rate 12.40 produces loss -197.63.

- Governance, systems, and operational recommendations (procedural)
  - Establish and document a single reliable source for published exchange rates accessible to CBS operations.
  - Define conventions for trade-date versus settlement-date treatment (e.g., "Settlement date = Date trade + 2 (working days)").
  - Define rules for decimal precision when calculating exchange rates.
  - Maintain separate registers for holdings, costs, and realized/unrealized gains/losses per foreign currency.
  - Adopt Weighted average cost formula (IAS 2 Inventories) for cost of holdings and gain/loss computation.
  - Apply IAS 21 guidance for initial recognition, end-of-period translation (closing rate), and recognition of exchange differences in profit or loss (Paras. 21, 22, 23(a), 28).

*Prepared from IMF mission report: cr1922-somalia-ta - Preface (March 10–21, 2018).*

### Preface.................................................................................................................

### cr1922-somalia-ta - Preface

### Preface — mission context and logistics
- A Monetary and Capital Markets (MCM) Department mission visited Kampala, Uganda during March 10–21, 2018 at the request of the Central Bank of Somalia (CBS) to assist in developing frameworks for internal auditing and accounting toward internationally accepted norms.
- Training sessions were conducted on relevant topics.1
- The mission met with members of the internal audit and accounting teams.
- Logistical support was provided by Ms. Fowzia Ibrahim of the Somalia Resident Representative office located in Nairobi, Kenya.
- The report’s key takeaways and recommendations were discussed and agreed with participants during the mission and subsequently with management and the governor.
- Footnote: 1 Ms. Wen led the internal audit training sessions and Ms. Rawlings led the accounting training sessions. Mr. Garcia Hernando provided accounting expertise.

### Executive Summary — main findings and high-priority recommendations
- Institutional steps taken
  - CBS approved the Internal Audit and Audit Committee Charters.
  - Internal Audit Department (IAD) initiated risk assessments of various CBS business units and recruited an Information Technology (IT) professional to join the team.
  - Accounting and Finance Department (AFD) is making progress in implementing accrual accounting, accounting for foreign exchange operations (International Accounting Standard (IAS) 21), and created a new role of Reconciliation Officer.
- Key shortcoming
  - The IAD functions without a director, limiting authority and effectiveness.
  - CBS had not formally indicated it will adopt International Financial Reporting Standards (IFRS) at the time of the mission.2
- Accounting system and IFRS transition
  - The new Oracle system was expected to go live in April 2018.
  - Technical issues related to IAS 21 were resolved; instructions provided on accounting for gold holdings and IMF accounts not specifically addressed by IFRS.
  - Components of an IFRS transition plan and need for a roadmap were reviewed.
- IMF accounts and transparency
  - Assets and liabilities related to the IMF accounts are not recognized, significantly decreasing transparency and the reliability of financial statements.
  - By recognizing the IMF accounts, the impact would be a net effect of SDR 224 million.4
  - The mission recommended presenting Somalia’s financial position with the Fund on the CBS balance sheet and bringing this omission to the external auditors’ attention if they are not already aware.
- Accounting policies
  - No formal accounting policies exist to shape the accounting framework and provide consistent guidance for implementing IFRS.
  - The mission and CBS accounting team prepared four draft policies during the mission; the CBS accounting team was requested to prepare formal draft policies as homework.
- Internal audit progress and needs
  - BoD approved Audit Committee Charter and Internal Audit Charter in March 2018.
  - Internal audit team completed the majority of previous homework, increased knowledge of risk-based auditing, and needs to complete risk assessments of the remaining eight business processes and start audit fieldwork.
  - An IT professional was scheduled to join the IAD in April 2018.
  - High-priority recommendation: governor should appoint a director to lead the IAD, approve the internal audit manual and strategy note, adopt a flatter IAD organization structure, and provide budgetary resources for an Institute of Internal Auditors (IIA) group membership.
- Table 1: Assignments and Recommendations for Internal Audit and Accounting — agreed assignments with suggested deadlines (listed below).

Footnotes in Executive Summary:
- 2 Post-mission, on May 19, the governor, who is also the Chairman of the Board, signed a proposal to implement IFRS and on May 26 established an IFRS team to undertake the implementation project.
- 3 These missions are designed to address shortcomings in the accounting and internal audit frameworks which are part of Somalia’s financial sector roadmap.
- 4 By recognizing the IMF accounts, the impact would be a net effect of SDR 224 million.
- 5 Articles 36 and 37 of the CBS law indicate that the central bank is the fiscal agent for the government and acts as a depository for currency holdings owned by the IMF. The mission assumes that the institutional arrangements are such that the CBS recognize all assets and liabilities regarding their membership in the IMF and Special Drawing Rights department and loan obligations on the balance sheet.

### Table 1 — Assignments and Recommendations (Governor/Board of Directors, Senior Management, Internal Audit, Accounting)
- Governor/Board of Directors
  - 1 Issue formal commitment to adopt IFRS. (High Priority) — By next mission
  - 2 Appoint a director to lead and manage the IAD. (High Priority) — June 30, 2018
- Senior Management
  - 3 Approve the five potential audits proposed by the internal audit team. — June 30, 2018
  - 4 Circulate the Internal Audit Charter approved by the BoD to raise awareness of internal audit within the CBS. — June 30, 2018
  - 5 Approve the proposed Internal Audit Manual (follow-up of a previous recommendation). — June 30, 2018
  - 6 Provide budgetary support for the internal audit team to obtain a group membership to the IIA (or IIA Kenya). — June 30, 2018
- Internal Audit
  - 7 Continue to complete the risk assessment of the remaining six auditable entities (e.g., business processes) included in the audit universe. — By next mission
  - 8 Prepare an Audit Notification for the audit of financial controls. — By next mission
  - 9 Prepare the Terms of Reference (ToR) of the audit of financial controls for the kick-off meeting with the CBS auditees. — By next mission
  - 10 Complete the fieldwork of the audit of financial controls in accordance with the auditing program collaboratively developed by the IMF and CBS team. — By next mission
- Accounting
  - 11 Draft accounting policies for IAS 21, Property, Plant, and Equipment (PP&E), Accruals, Currency in Circulation, and Gold Holdings; and assign someone to be incharge of the Accounting Manual to prepare initial drafts of policies, maintain the manual, etc. — April-September 2018 / April 2018
  - 12 Develop transition plan and roadmap for IFRS implementation including deadlines for each phase. — September 2018
  - 13 Complete the Gap analysis started in the first mission including calculating the financial impact on CBS financial statements of adopting IFRS. — September 2018
  - 14 Identify new operations that will be conducted by the CBS in the future that will need to be accounted for properly under IFRS. — September 2018

### I. Introduction — mission series and activities
- This was the second mission in a series; the first mission took place during September 24–October 5, 2017.6
- The mission met with IAD and AFD in Kampala, Uganda; discussions focused on international standards and principles related to internal audit and accounting as applicable to the CBS.
- Training sessions were conducted over a two-week period with participatory group exercises.
- Appendices include training agenda, participants, materials, guidance notes, and a matrix for future missions.

Footnotes in Introduction:
- 6 See DMSDR1S-#6335020 for full report.
- 7 Both the IAD and the AFD suffer from limited capacity and experience; however, each of the newly recruited three-member teams is committed to obtaining professional certifications.

### II. Internal Audit — progress, accomplishments, challenges, and recommendations

A. Progress Since the Previous Mission
- BoD approved the Audit Committee Charter and Internal Audit Charter in March 2018.
- IAD assessed risks of six business processes, identified one potential audit, and updated the strategy note of internal audit (see Appendix V for implementation status of previous recommendations).

B. Accomplishments of this Mission
- Improved understanding of risk assessment methodology:
  - Mission reviewed and edited results of six risk assessments and introduced a cross-checking technique to ensure consistent risk ratings.
  - Mission and IAD agreed to increase weights of financial risk and fraud risk factors to reflect cash-heavy transactions, where a single transaction could involve US$3–5 million.
  - Internal audit team led a risk assessment of the CBS governance structure.
- Five potential audits identified (subject to governor approval):
  - (i) financial controls over accounting and cash payments;
  - (ii) the cash handling process (generates about 90 percent of the CBS’s revenue and delivers hundreds of millions of cash on behalf of the Somalia government);
  - (iii) the budgeting process, which lacks budgetary controls of various levels and monitoring;
  - (iv) the SWIFT process, which directs transactions between the CBS and its corresponding banks;
  - (v) the procurement process.
- An audit program for financial controls over accounting and cash payments was developed collaboratively; evaluation of control designs was accomplished during the mission, testing/auditing procedures (fieldwork) to be carried out by IAD (see Appendix VII for the audit program).

C. Challenges and Recommendations
- IAD lacks a director, resulting in:
  - resistance from other business departments;
  - exclusion from the management communication loop (e.g., not represented at the Disciplinary Committee).
- Ideal director candidate qualifications:
  - Certified Internal Auditor (CIA) certification or equivalent (e.g., Certified Public Accountant, Chartered Accountant);
  - substantial experience in risk-based auditing methodology; and management skills.
  - If local talent limited, hire conditionally requiring certification within one or two years.
- Awareness and resourcing actions:
  - Circulate the approved Internal Audit Charter within the CBS to promote IAD awareness and cooperation; an email draft has been prepared on behalf of the governor.
  - Governor should provide budgetary support for IAD to obtain a group IIA membership to access IIA knowledge body and standards.
  - Internal Audit Manual updated with new risk ratings during the mission but not yet approved; IAD should seek governor and Audit Committee approval to formalize it as a guide.

*Prepared from IMF mission report: cr1922-somalia-ta - Preface (March 10–21, 2018).*

### 10. Although the internal audit team has made progress in understanding the risk

### 10. Although the internal audit team has made progress in understanding the risk assessment methodology, they still lack sufficient experience in applying the concepts and principles consistently

### Internal audit — findings and immediate actions
- The internal audit team has made progress in understanding the risk assessment methodology but lacks sufficient experience to apply concepts and principles consistently.
- Remaining work:
  - Complete the risk assessment of the remaining six business processes.
  - Update the risk ratings and the rationale documentation for the eight business processes that were reviewed during the mission.
- Audit fieldwork preparation:
  - Complete the fieldwork of the audit of financial controls in accordance with the audit program developed collaboratively during the mission.
  - Before starting fieldwork, circulate an audit notification to relevant departments.
  - Prepare a Terms of Reference (ToR) of the audit to include the audit objective, scope, approach, duration, and resources before the kick-off meeting.
  - Components of the audit notification and the ToR were discussed and listed collaboratively during the mission.
- Organizational structure:
  - Recommendation to update the internal audit organizational structure to a flatter, two-level structure: director/deputy director at management level and auditors (including a Risk Officer) at the professional level.
  - Rationale: better mobilize limited resources and provide more exposure for individual auditors for professional growth.
- Note: The CBS’s internal audit team completed six risk assessments as homework assignments and two risk assessments during this mission and the previous ones.

### Accounting — progress since previous mission
- Capacity constraints and vacancies persist, partly due to Oracle system implementation.
- New roles and staffing changes:
  - A Reconciliation Officer role has been created within the AFD to reconcile all cash accounts on a monthly basis.
  - Two new staff hired to lead the financial reporting and financial management teams; department reorganized into these two areas.
  - Lead accountant recently promoted to deputy director.
  - External recruits are from Pakistan and Uganda, have Master’s degrees in accounting and five years of experience.
  - Three additional staff are being recruited for accounting officer roles, increasing department staff from 11 to 14.
  - Recommendation: consider appointing one person to dedicate the majority of his/her time to be in charge of accounting reform at the CBS as part of a transition plan or IFRS roadmap (see Para. 20).
- External audits and qualifications:
  - The 2015 and 2016 audited financial statements, which will continue to carry a qualified opinion, have not been issued to date.
  - Delay appears related to receiving confirmations of the CBS’s gold holdings at the Federal Reserve.
  - A new appraiser will be hired to conduct an appraisal for the revaluation of PP&E to address the qualification.
  - Article 48 of the Central Bank Law limits consecutive auditor appointments to three years; CBS has interviewed other audit firms but has been unable to rotate firms. A new team of auditors from the current audit firm will be assigned to the CBS 2017 audit.
- Outstanding tasks with no progress:
  - No progress on drafting accounting policies for the Accounting Manual.
  - No progress on completing the IFRS Gap analysis.
  - No progress on establishing a fixed asset register.

### Accounting — accomplishments during the mission
- Draft accounting policies:
  - Mission worked collaboratively on developing initial draft accounting policies and discussed components of a high-quality accounting policy and how policies could serve as accounting policy notes in the financial statements.
  - Accounting team outlined major points for foreign exchange operations (IAS 21) and PP&E; mission guided drafting policies for gold holdings and currency in circulation.
- IMF accounts:
  - Accounting team’s exposure to IMF accounts limited; mission reviewed accounting and discussed the CBS’s current IMF balance sheet position.
  - As of January 31, 2018, the CBS’s IMF accounts reflect approximately US$155 million in assets and US$479 million in liabilities.
  - The IMF accounts are not recognized on the CBS’s financial statements, which is a significant deviation from standards under any credible accounting framework.
- IFRS transition guidance:
  - Mission reviewed IFRS 1 requirements and discussed designing a proper roadmap for the transition.
  - Typical IFRS conversion for central banks takes about 3–5 years and can be managed similarly to other large-scale projects such as the Oracle implementation.
  - Roadmap components: policy decision, transition plan (Gap analysis of financial, IT, and processes impacts), and resources (including support from external auditors and management).
- IAS 21 implementation and foreign currency:
  - CBS functional currency is the US dollar; limited Euro transactions occur via Euro accounts in foreign banks.
  - Mission recommended using the average weighted cost method (following IAS 2) for determining the cost of Euro holdings and for calculating the results of purchases and sales of foreign currencies.
  - Mission prepared documents describing the average weighted cost method with journal entry examples (see Appendix IX).
- Currency in Circulation (CIC) accounting:
  - Mission reviewed CIC accounting and lifecycle; emphasized need for a strong system of internal controls for CIC lifecycle stages.
  - Counterfeit shilling banknotes circulate in the country; the CBS handles residual cash operations involving these notes (deposits and withdrawals by the same clients). No US dollars are swapped for shillings.
  - Counterfeit banknotes will represent a loss and an adjustment to equity when withdrawn from circulation; conversion process should be very short.
  - Mission suggested discussions with the Cash Management Department and CIC operations team prior to drafting CIC policy (see Appendix VIII for Accounting Guidance Note on CIC).

### Challenges and recommendations — accounting
- Legal and governance gap:
  - While the CBS law provides for the IFRS to be followed, no implementing accounting policy statement has been issued by the BoD, Audit Committee, or Management.
  - Management responsibilities cited: preparation, presentation, and integrity of financial statements; appropriateness of accounting principles and reporting policies; establishing and maintaining effective internal control over financial reporting.
  - Issuing an accounting statement policy would establish a fundamental pillar of the accounting infrastructure and forms a vital element of the overall IFRS roadmap and Accounting Manual.
  - Mission recommends the CBS move forward with the implementation of IFRS and issue an accounting policy supporting the law.
- Need for documented policies and leadership:
  - Without documented accounting policies, the accounting framework and team suffer; documented policies and procedures ensure accountability, consistency, training, and continuity.
  - Management should appoint one person in charge of ensuring accounting policies are drafted for the Accounting Manual to promote accountability and efficient use of resources.

### Subsequent missions and scheduling
- Next missions contingent on homework completion:
  - Next internal audit mission scheduled for the second quarter of 2018.
  - Next accounting mission scheduled for the third quarter of 2018.
  - These schedules are dependent on the homework assignments being completed.

*IMF mission report — Internal Audit and Accounting support for the Central Bank of Somalia*

### Introduction and Stocktaking

### Introduction and Stocktaking of Current Assignments and Steps taken since September 2017

### Training program overview and proposed mission schedule
- Mission timeline and streams:
  - Mission #1: September/Oct 2017
  - Mission #2: First Quarter 2018
  - Mission #3: Second Quarter 2018
  - Future Missions
- Two parallel streams: Internal Auditing Stream and Accounting Stream.
- Internal Auditing Stream topics (selected highlights):
  - Basic concepts of internal control, risk management, and internal audit
  - Internal Audit Infrastructure (internal audit charter, audit committee charter, internal audit organizational chart, and strategy note)
  - Macro-level and micro-level risk assessment methodology; development of an audit universe
  - Development of an audit program for a specific audit project; review of fieldwork and audit reporting
  - Develop 3 year audit plan; Audit Recommendations; Auditing techniques such as interviewing, flowcharting, and root cause analysis
  - Controls over central-bank-specific processes; Quality assurance; Internal self-assessment; Identify main gaps in complying with IPPF
- Accounting Stream topics (selected highlights):
  - IFRS Application for Central Banks; IFRS Conceptual Framework
  - Accounting Manuals; Chart of Accounts; IAS 1; IAS 16; IAS 21
  - IFRS Gap analysis; Key Requirements for IFRS 1; First Time Adoption
  - Obtaining accurate year-end balances for 2017; Currency in Circulation; Gold Holdings; IMF accounts; Notes to Financial Statements
  - Bank Note Production Cost; Impact on Equity position; Detailed Project Plan
- Training logistics note: "Assumes two week training sessions for each stream for missions #3 and future missions."

### Internal Audit — status of assignments (First Mission: September 24–28, 2017)
- Completed items:
  - Update the proposed internal audit charter with the CBS circumstances and submit it to governor and Audit and Governance Committee or the BoD for discussion and approval. — Completed. The Charter was updated by IAD and approved by BoD in March 2018.
  - Update and submit the drafted audit committee charter to the governor and the Audit and Governance Committee (or the BoD) for discussion and approval. — Completed. The Charter was updated by IAD and approved by BoD in March 2018.
  - Update the strategy note to set specific objectives for next 12 months (i) develop the first risk-based annual audit plan; and (ii) at least one staff sits for the CIA exam. — Completed. The Strategy Note was updated by IAD and reviewed by IMF team.
  - Selected one auditable entity from the audit universe, complete the risk assessment in line with proposed internal auditing manual (Para. 17). — Completed. The financial control processing (including both financial reporting and cash payments) was selected.
- Underway or partial progress:
  - Update and adopt the proposed internal audit manual. — Underway. Revised deadline: June 30, 2018.
  - Upon feedback, continue and finish the risk assessment of all remaining auditable entities in the audit universe. — Underway. IAD has completed six out of eighteen auditable entities. Revised deadline: June 30, 2018.
  - Download and read IIA Standards — Underway. Recommendation replaced by obtaining group membership of IIA. Revised deadline: June 30, 2018.
- Not started:
  - Update the organizational chart to reflect a flatter structure to mobilize the limited resources. — Not started. Revised deadline: June 30, 2018.

### Accounting — status of assignments (First Mission: October 1–5, 2017)
- Completed items:
  - Reconcile all bank statements and SWIFT notifications as of September 30, 2017 to the cash accounts and prepare and post adjusting entries if necessary. — Completed. Established new function: Reconciliation Officer. Revised deadline: September 2018.
  - Complete organizational chart and allocate 12 resources to various functions and define tasks. — Completed. Have established a new organizational chart with 14 positions.
- Underway items:
  - Resolve disagreement regarding the PP&E revaluation between external auditor and management; consider obtaining a new appraisal for land and buildings for 2017. — Underway. Will hire a new appraiser for 2017 after auditor releases 2016; the governor will travel to Kenya and find appraiser. 2015 and 2016 audit opinions will reflect qualified opinions. Revised deadline: September 2018.
  - Revise Chart of Accounts to reflect more simple structure (three levels of accounts, not five); update based on financial statement presentational preferences and IFRS analysis. — Underway. Continue to revise Chart of Accounts as Oracle implementation moves forward. Revised deadline: September 2018.
  - Develop sufficient accounting test scenarios and obtain feedback from users on interface and data entry gaps. — Underway. Oracle implementation is expected to go live in April 2018. The second mock run was underway at the time of the second mission in March. Revised deadline: September 2018.
- Not started items:
  - Calculate the impact on income of adopting IFRS by completing the IFRS Gap analysis. — Not started. Discussed road map components during second mission. Revised deadline: September 2018.
  - Prepare proper Note for the financial statements for Property, Plant, and Equipment including roll forward from January 1, 2015 to December 31, 2017, separate land and buildings, calculate depreciation, and post adjusting entries. — Not started. Practiced drafting accounting policies during second mission. Revised deadline: September 2018.
  - Set up Fixed Asset Register based on information provided by Administration Department. — Not started. Created new area and hired a new leader; will establish the register once leader is on board. Revised deadline: September 2018.
  - Draft accounting policies for the Accounting Manual related to Cash and Cash Equivalents; PP&E; Salary Expenses. — Not started. Reviewed components and practiced drafting policies for PP&E and IAS 21 during second mission. Revised deadline: September 2018.

### Balance sheet presentation with IMF accounts (Somalia Statement of Position As of January 31, 2018)
- Selected assets and liabilities (SDRs, US Dollars, Local Currency columns present in source):
  - Quota: 44,200,000 SDRs; 64,159,231 US Dollars; 1,442,563,454,842 Local Currency
  - Securities: 128,563 SDRs; 186,618 US Dollars; 4,195,909,422 Local Currency
  - No. 1 Account: 44,066,254 SDRs; 63,965,090 US Dollars; 1,438,198,362,266 Local Currency
  - No. 2 Account: 6,345 SDRs; 9,210 US Dollars; 207,089,719 Local Currency
  - Currency Valuation Accounts: 1,395 SDRs; 2,025 US Dollars; 45,555,708 Local Currency
  - Total Current Accounts due to IMF: 44,202,557 SDRs; 64,162,943 US Dollars; 1,442,646,917,115 Local Currency
  - Total Current GRA Borrowings: 96,250,000 SDRs; 139,713,258 US Dollars; 3,141,328,790,238 Local Currency (Stand-by Arrangements 67,720,000 SDRs; Contingency and Compensatory 28,530,000 SDRs)
  - Total Other Borrowings: 15,300,000 SDRs; 22,208,965 US Dollars (Trust Fund 6,460,000 SDRs; SAF 8,840,000 SDRs)
  - Total Overdue Interest and Special Charges: 127,540,110 SDRs; 185,132,927 US Dollars
  - Total Accrued Interest and Charges: 430,211 SDRs; 624,480 US Dollars
  - SDR Holdings (International Reserves): 18,148,829 SDRs; 26,344,229 US Dollars
  - SDR Allocation: 46,462,893 SDRs; 67,443,970 US Dollars
  - Total SDR Holdings (presented line): 62,382,632 SDRs; 90,552,527 US Dollars
  - Total SDR Allocation (presented line): 46,549,436 SDRs; 67,569,593 US Dollars
  - Total Assets: 106,582,632 SDRs; 154,711,758 US Dollars; 1,442,563,454,842 Local Currency
  - Total Liabilities Due to the IMF: 330,272,314 SDRs; 479,412,165 US Dollars; 4,583,975,707,353 Local Currency
  - Net Effect (Assets-Liabilities): -223,689,682 SDRs; -324,700,407 US Dollars; -3,141,412,252,511 Local Currency
- Exchange rates shown:
  - Exchange Rate USD/SDR: 1 USD = 0.6889114/4/18
  - Exchange Rate SDR/Somali Schillings = 0.000030639900
- Note: "The functional and presentational currency for Somalia is the U.S. dollar."

### Guidance on Currency in Circulation (Appendix VII) — conceptual framework and accounting entries
- Core concepts:
  - Banknotes assume two “lives”:
    - Currency in Circulation (CIC) — a liability for a central bank and includes the total banknotes issued by the central bank.
    - “Simple paper” — held as inventory by the central bank and does not represent a liability.
  - Framework for accounting for CIC consists of three elements:
    - Recording transactions that reflect the life cycle of CIC in the financial statements;
    - Recording the cost of the printing or minting of banknotes in the financial statements;
    - Controlling the inventory of “simple paper” or banknotes not placed in circulation or withdrawn from circulation by recording related transactions in off-balance sheet accounts.
- Typical CIC life-cycle stages identified:
  - Printing process
  - Receiving new banknotes in the central bank from the printing company and storing in vaults
  - Placing banknotes into circulation
  - Withdrawing banknotes from circulation
  - Counting and sorting used banknotes (a. Good for recirculation; b. Non-suitable for recirculation; c. Counterfeit banknotes)
  - Destruction of banknotes non-suitable for recirculation
  - Transferring currency to branches
  - Printing cost
- Control Accounts (off-balance sheet) and journal-entry examples:
  - Reception of new banknotes (control accounts off-balance sheet):
    - Debit Notes on hand XXXX / Credit Notes on existence XXXX — to reflect total face value of new printed banknotes stored in central bank vaults.
  - Placing banknotes in circulation:
    - Debit Accounts receivable XXX / Credit Currency in circulation XXXX — to reflect obligation when banknotes are placed in circulation. (Account Receivable represents consideration received for currency.)
    - Off-balance sheet reduction: Debit Notes on existence XXXX / Credit Notes on hand XXXX
  - Withdrawing banknotes from circulation:
    - Debit Currency in circulation XXX / Credit Accounts payable XXXX — to reflect decrease in central bank liability when banknotes are withdrawn.
    - Off-balance sheet: Debit Notes on hand XXXX / Credit Notes on existence XXXX
  - Counting and sorting withdrawn banknotes:
    - Control accounts used: Notes on hand (pending to be counted and sorted) and Notes in existence (pending to be counted and sorted). Both accounts reflect same outstanding balance.
    - Classification outcomes: fit to be recirculated (stored in vaults pending circulation); not suitable (stored pending destruction); suspicious of being counterfeit (stored pending further analysis).
  - Banknotes in transit:
    - Banknotes outside the central bank but under its control (e.g., in transit between branches) are not considered CIC; entries only in off-balance sheet accounts reflecting "on transit".
- Accounting for printing cost and proposed treatment:
  - Inventory recognition upon shipment receipt:
    - Debit Inventory XXX / Credit Accounts payable XXXX — to reflect total printing cost due.
  - Recognition of printing cost as banknotes are issued into circulation:
    - Debit Banknotes printing cost expense XXX / Credit Inventory XXXX — to recognize expense after banknotes are issued into circulation.
  - Suggested policy for initial introduction period:
    - Given rapid early issuance, support establishing a deferred asset for notes issued during the introduction period and amortize production cost over a reasonable "useful" life rather than expensing all at once.
    - Example amortization: amortize over four years using the sum-of-years digits cost formula; create a notional banknote asset or deferred cost account charged for expense over the four year period.
    - Definition of "introduction period": the lesser of (i) the timeframe over which the CBS expects to issue approximately 90 percent of its target level of notes; and (ii) one year.
    - Rationale: sum-of-years digit formula provides a smooth expense profile as replacement notes are introduced in years subsequent to the initial introduction.

*Source: Introduction and Stocktaking — Current Assignments and Steps taken since September 2017 (IMF).*

### introduction on a regular basis would be accounted for under the inventory approach described

### cr1922-somalia-ta - introduction on a regular basis would be accounted for under the inventory approach described

### Use of "Control" accounts
- Purpose: Off-balance sheet accounts to reflect only the banknotes physically inside the central bank; used to "control" the inventory of notes.
- Account pairs:
  - Notes on hand — reflects the asset side of the off-balance sheet account.
  - Notes in existence (in vaults) — reflects the liability side of the off-balance sheet account.
  - Both accounts offset each other: if one is debited the other must be credited by the same amount, and vice versa.
  - Both accounts can be split into subaccounts to reflect different banknote face values.
- Operational practice:
  - Normally at the end of each working day, a single entry either increasing or decreasing the banknotes in the central bank must be made to reflect the total movements of banknotes during the day.
  - Additional off-balance-sheet classifications can include: banknotes pending to be sorted and classified; banknotes pending to be destroyed; banknotes in transit.

### Appendix VIII. Foreign Currency Operations — overview and basic assumption
- Current situation and outlook:
  - Currently the CBS is conducting operations using a single currency, the USD, which can be considered their functional currency.
  - With the introduction of a national currency in Somalia, the USD should not be the functional currency; cross-currency (foreign currency) operations will increase.
- Definition:
  - Cross-currency operation: use of two foreign currencies to complete an operation (e.g., initiating a transfer in EUR using a USD account, or receiving funds in EUR to credit a USD account).
- Basic assumption / required rule:
  - CBS should establish a source and criteria to determine the rate of exchange to use in forex operations to obtain an equivalent in local currency.
  - For operations involving two foreign currencies, an additional condition is necessary to register the operation.
  - Proposal: use, as reference, the domestic-currency price of one of the foreign currencies involved and use that to derive the cross/currency rate.
  - Convention in the exposition: consider the currency purchased as Leg 1 and the currency sold as Leg 2; in the example the rate associated with selling currency (Leg 2) is used as the relevant rate.

- Worked example (linked statements):
  - Statement 1: Account in USD, transfer received on behalf of CBS 100 USD, IN-PURCHASE.
  - Statement 2: Account in EUR, withdrawn from the CBS account, to send to the correspondent in USD 85 EUR, OUR-SALE.
  - Local-rule conversion example:
    - Relevant rate: 20 units of local currency is equivalent to 1 EUR.
    - OUT in local currency for 85 EUR = 20 * 85 = 1,700.
    - Relevant USD rate: 17 units of local currency per 1 USD.
    - IN in local currency for 100 USD = 100 * 17 = 1,700.
    - Result: local-currency equivalence aligns IN and OUT at 1,700.

### Accounting treatment and ledger examples
- Accounting conventions:
  - All monetary holdings of a single foreign currency (FC) are fungible and share the same cost regardless of account nature (correspondent bank accounts, deposits, securities, loans, etc.).
  - Holdings and cost must be maintained in a separate register able to determine holdings, cost, and gain/loss.
  - The Weighted average cost formula (IAS 2 Inventories) is used to calculate cost of holdings and exchange gain or loss.
- Representative journal entry examples (dates and amounts preserved exactly):
  - 02-01-2001
    - Debit: Accounts in Foreign Currency — Any account in FC — Purchase of 25 units of FC — 300
    - Credit: Accounts in LC — 300
    - Note: reflects purchase of FC (transfer received in correspondent bank); LC amount determined by local rate rules.
  - 04-01-2001
    - Debit: Accounts in LC — 220
    - Debit: Profit and loss for the current year — 20
    - Credit: Accounts in Foreign Currency — Any account in FC — Sale of 20 units of FC — 240
    - Note: sale of FC; second debit reflects gain/loss according to supporting calculations.
  - 09-01-2001 (purchase)
    - Debit: Accounts in Foreign Currency — Any account in FC — Purchase of 1.000 units of FC — 13.000
    - Credit: Accounts in LC — Any account in LC — 13.000
  - 09-01-2001 (sale)
    - Debit: Accounts in LC — 1.188
    - Debit: Profit and loss for the current year — 99
    - Credit: Accounts in Foreign Currency — Any account in FC — Sale of 99 units of FC — 1.287
  - 10-01-2001 (purchase)
    - Debit: Accounts in Foreign Currency — Any account in FC — Purchase of 100 units of FC — 1.200
    - Credit: Accounts in LC — Any account in LC — 1.200
  - 10-01-2001 (sale)
    - Debit: Accounts in LC — 1.800
    - Credit: Accounts in Foreign Currency — Any account in FC — Sale of 120 units of FC — 1.457,43
    - Credit: Profit and loss for the current year — 342,57
    - Note: sale amount equals cost of purchases of the day plus net sale of 20 multiplied by average cost of holdings; second credit reflects gain/loss.

### Forex calculations spreadsheet — explanatory notes and method
- Organization:
  - A. Basic definitions
  - B. Previous considerations
  - C. Explanation of the columns and in/outs and the spreadsheet
- Key definitions (IAS 21 references preserved):
  - Spot exchange rate: exchange rate for immediate delivery.
  - Closing rate: spot exchange rate at the end of the reporting period.
  - Exchange difference: difference resulting from translating a given number of units of one currency into another currency at different exchange rates.
  - Exchange rate: ratio of exchange for two currencies.
  - Monetary items: units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.
  - Para. 21: initial foreign currency transaction recorded by applying the spot exchange rate at the date of the transaction.
  - Para. 22: date of transaction = date on which the transaction first qualifies for recognition in accordance with IFRS.
  - Para. 23(a): at the end of each reporting period foreign currency monetary items shall be translated using the closing rate.
  - Para. 28: exchange differences on settlement or translation of monetary items at different rates shall be recognized in profit or loss in the period in which they arise, except as described in Para. 32.
- Previous considerations:
  - Establish a reliable, easily accessible source of exchange rates (e.g., European Central Bank daily rates as an example).
  - Distinguish trade date and settlement date; a common convention: "Settlement date = Date trade + 2 (working days)".
  - Number of decimal positions when calculating rates must be determined.
  - Purchase and sale rates for FX may differ; sales may include surcharges producing small discretionary gains.
- Spreadsheet columns and formulas (column numbers preserved where used):
  - Holdings:
    - (2) initial and (16) final FC Inventories in Foreign currency (total inventories in one single foreign currency).
    - (3) initial and (17) final LC — holdings of foreign currency valued in local currency.
    - (4) initial and (18) final rate — (4) = (3) / (2); (18) = (17) / (16).
  - IN Purchases:
    - (5) FC — amount from correspondent statement (transfer received).
    - (7) Rate — rate to convert FC into LC.
    - (6) LC — (6) = (7) x (5).
  - OUT Sales:
    - (8) FC — amount from correspondent statement (transfer sent).
    - (10) Rate — rate to convert FC into LC.
    - (9) LC — (9) = (8) x (10).
  - Net In-Out:
    - (11) = (5) – (8) — total FC to include in or deduct from holdings.
    - (12) LC treatment:
      - If Purchase >= Sales: total purchases in LC minus Sales in FC transformed in LC with the average rate of purchases.
      - If Purchases < Sales: net sales multiplied by the average rate of exchange in column 4.
      - If Purchases = Sales in LC are equal at Purchases in LC.
  - Cost of Sales Net:
    - (13) determines cost of total sales. Sales of the day are first compared with purchases of the day; if purchases < sales, cost of sales = purchases of the day in LC plus difference (sales net) multiplied by average cost at beginning of day.
  - Gains/Losses:
    - (14) shows the gain/loss of the day; rules:
      - If column (11) is a purchase net, gain/loss = (rate of purchases – rate of sales) * FC sold.
      - If FC purchase > FC sold: net gain/loss = (rate of purchases – rate of sales) * FC sold.
      - If column (11) is a sale net: gain/loss composed of two amounts: (a) comparison between purchase rate of the day and sale rate for sales equal in FC to purchases; (b) difference between sale rate and average holdings rate at beginning of day for the rest of sales.
      - If FC purchases < FC sold: net gain/loss = (rate of purchases – rate of sales) * FC purchases + (rate of sales – average holdings rate at beginning of day) * net sales FC.
    - Column (14) is also the accumulation of gains and losses for the current year.
- Explanation of representative lines and end-of-year treatment (numbers preserved):
  - 01-01-01: opening holdings are data in FC and LC; rate = (4) = (3) / (2).
  - 01-01-02: column (5) is purchases of the day; (6) = (5) * (7).
  - 01-01-03: Column (16) is sum of previous holdings and net purchase of the day; Column (18) is new rate after purchases.
    - THE AVERAGE RATE OF EXCHANGE CHANGES WHEN THERE ARE PURCHASES NET AND REMAIN CONSTANT WHEN THERE ARE SALES NET.
  - 01-01-04: column (8) sales of the day; (9) = (8) * (10); when no purchases, all sales valued at average cost of holdings to determine deduction and gain/loss.
    - Example: sale of 20 at rate 11,00000 => LC = (20 * 11 = 220); compared with holdings (20 * 12 (average cost) = 240) => net out 240 and net loss of 20 (column (14)).
  - Year-end example (preserved numbers):
    - 01-12-31: Holdings at year end, FC 621, LC 7.946,80, Rate of exchange 12,796778.
    - Closing rate convention: 13 => valuation at year-end = (621 * 13,10 = 8.135,10).
    - Revaluation at year-end = difference between 8.135,10 and holdings LC 7.946,80 = 188,30.
    - Carried forward holdings: FC 621, LC 8.135,10 with rate 13,10.
    - Year 2002 example: year-end holdings FC 610, LC 7.761,63, average rate 12,723978; closing rate 12,40 => loss of 197,63 computed as (610 * (12,40 – 12,723978)) = -197,63.

### Appendix IX. Average Method of Calculating the Exchange Rate — summary of tabular movements
- The worksheet demonstrates the weighted-average cost method with line items preserved (selected year-end and line figures shown in the source):
  - 12/31/2001: holdings 621.00 FC, LC 7.946,80, rate 12.796778; year-end revaluation to LC 8.135,10 at rate 13.100000, revaluation 188.30.
  - New-year 1/1/2002 opening: 621.00 FC, 8.135,10 LC, rate 13.100000; subsequent dated movements and computations maintain the pattern of purchases, sales, rates, cost of sales, gains, and accumulated gains/losses as per the explanatory methodology.
  - Year-end 2002: holdings 610.00 FC, LC 7.761,63, average rate 12.723978; closing rate 12.40 produces loss -197.63.
  - New-year 2003: opening 610.00 FC, LC 7.564,00, rate 12.400000; subsequent operations for early January 2003 illustrate transactional impacts on holdings and accumulated gains/losses.

### Governance, systems, and operational recommendations (implied by procedural guidance)
- Establish and document:
  - A single reliable source for published exchange rates accessible to CBS operations.
  - Clear conventions for trade-date versus settlement-date treatment (e.g., "Settlement date = Date trade + 2 (working days)" or other defined convention).
  - Rules for decimal precision when calculating exchange rates.
  - Procedures to maintain separate registers for holdings, costs, and realized/unrealized gains/losses per foreign currency.
  - End-of-day consolidation practice: post a single balancing entry to reflect total movements of banknotes or foreign currency holdings.
- Accounting methodology:
  - Adopt Weighted average cost formula (IAS 2 Inventories) for cost of holdings and gain/loss computation.
  - Apply IAS 21 guidance for initial recognition, end-of-period translation (closing rate), and recognition of exchange differences in profit or loss (Paras. 21, 22, 23(a), 28).

*IMF Country Report content: cr1922-somalia-ta - introduction on a regular basis would be accounted for under the inventory approach described*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/cr1922-somalia-ta.pdf_