FEDERATED STATES OF MICRONESIA NATIONAL...

FEDERATED STATES OF MICRONESIA NATIONAL GOVERNMENT

_______________________________________________

REPORT ON THE AUDIT OF FINANCIAL STATEMENTS IN ACCORDANCE

WITH OMB CIRCULAR A-133 _______________________________________________

YEAR ENDED SEPTEMBER 30, 2015

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INDEX Page No. INDEPENDENT AUDITORS' REPORT, FINANCIAL STATEMENTS AND ADDITIONAL INFORMATION 1 - 78 INDEPENDENT AUDITORS' REPORTS ON INTERNAL CONTROL AND ON COMPLIANCE 79 - 101


Table of Contents

Year Ended September 30, 2015

Page No. I. Independent Auditors' Report 1 II. 3 III. Basic Financial Statements:

Government-Wide Financial Statements: Statement of Net Position 12 Statement of Activities 13 Governmental Fund Financial Statements: Balance Sheet 14 Statement of Revenues, Expenditures, and Changes in Fund Balances 15 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities 16 Fiduciary Fund Financial Statements: Combining Statement of Fiduciary Net Position 17 Combining Statement of Changes in Fiduciary Net Position 18 Discretely Presented Component Unit Financial Statements: Combining Statement of Net Position 19 Combining Statement of Revenues, Expenses and Changes in Net Position 20 Notes to the Basic Financial Statements 21 VI. Required Supplementary Information - and Analysis 60 Schedule of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual - General Fund 61 Notes to Required Supplementary Information - Budgetary Reporting 62 V. Other Supplementary Information 64 Combined Schedule of Expenditures by Account Governmental Fund Types 65 General Fund: Schedule of Revenues, Expenditures by Function and Department, and Changes in Fund Balance (Fund 1) 66


Table of Contents, Continued


Page No. V. Other Supplementary Information, Continued Nonmajor Governmental Funds: Combined Balance Sheet 69 Combined Statement of Revenues, Expenditures by Function, and Changes in Fund Balances (Deficit) 70 Combining Statement of Revenues, Expenditures by Account, and Changes in Fund Balances (Deficit) 71 Grants Assistance Funds: Combining Balance Sheet 72 Combining Statement of Revenues and Expenditures by Function, and Changes in Fund Balances (Deficit) 73 Combining Statement of Revenues and Expenditures by Account, and Changes in Fund Balances (Deficit) 74 Statement of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual General Fund 75 VI. Schedule of World Bank Projects 78 VII. Independent Auditors' Reports on Internal Control and on Compliance

Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 79

Independent Auditors' Report on Compliance for Each Major Federal

Program; Report on Internal Control Over Compliance; and Report on Schedule of Expenditures of Federal Awards Required by OMB Circular A-133 81

Summary Schedule of Expenditures of Federal Awards, by Grantor 84

Schedule of Expenditures of Federal Awards 85 Notes to Schedule of Expenditures of Federal Awards 89 Schedule of Findings and Questioned Costs 91 Summary Schedule of Prior Audit Findings and Questioned Costs 101


_______________________________________________

INDEPENDENT AUDITORS' REPORT AND ADDITIONAL INFORMATION

AND FINANCIAL STATEMENTS _______________________________________________


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INDEPENDENT AUDITORS' REPORT Honorable Peter M. Christian President Federated States of Micronesia: Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the Federated States of Micronesia (FSM) National Government as of and for the year ended September 30, 2015, and the related notes to the financial statements, which collectively comprise the FSM National

I of the foregoing table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the

control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.

Deloitte & Touche LLP 361 South Marine Corps DriveTamuning, GU 96913-3911USA Tel: (671)646-3884 Fax: (671)649-4932 www.deloitte.com

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Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the FSM National Government as of September 30, 2015, and the respective changes in financial position for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information

Discussion and Analysis on pages 3 through 11 as well as the Schedule of Revenues, Expenditures, and Changes in Fund Balance - Budget and Actual - General Fund and notes thereto, on pages 61 through 63,be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and

statements, and other knowledge we obtained during our audit of the basic financial statements. Although our opinion on the basic financial statements is not affected, the following material departure from the prescribed guidelines exist whereby the original budget column does not include the automatic carryover of encumbrances. We do not express an opinion or provide any assurance on the information. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively

. The combining and individual fund financial statements, as set forth in Section V of the foregoing table of contents, are presented for purposes of additional analysis and are not a required part of the basic financial statements. The combining and individual fund financial statements are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. The information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the combining and individual fund financial statements are fairly stated, in all material respects, in relation to the basic financial statements as a whole. The information set forth in Section VI of the foregoing table of contents has not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we do not express and opinion or provide any assurance on it. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated June 30, 2016 on our consideration of the FSM National Government's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the FSM National Governmentfinancial reporting and compliance. June 30, 2016


September 30, 2015

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This discussion and analysis of the FSM overview of the financial activities of the FSM National Government for the year ended September 30, 2015 and of the financial position of the FSM National Government at September 30, 2015. This report is to be read in conjunction with the financial statements of the FSM National Government which begin on page 12. Fiscal Year 2014 comparative information has been included, where appropriate. This MD&A is prepared in compliance with GASB-34 requirement. FINANCIAL HIGHLIGHTS

For the fiscal year ended September 30, 2015, FSM National Government has total net position of $358,754,525 (FY14 $318,411,191). The increase is primarily due to the decrease of primary government expenses and an increase in fishing access collections.

During the year, FSM National Government expenses for governmental activities were

$65,205,177 (FY14 $95,359,867) and were funded by program revenues of $26,738,755 (FY14 $24,842,045) and were further funded with taxes and other general revenues that totaled $82,574,713 (FY14 $95,312,530).

During the year, the FSM National Government wrote-off old receivables of $6,966,019 (FY14

$0).

The net change in governmental funds increased by $23,829,735 (FY14 $49,804,289). Total revenues reported are $108,554,290 (FY14 $121,323,805) with total expenditures of $77,462,579 (FY14 $73,574,164). Total loan proceeds from ADB Loan are $2,042,680.

At September 30, 2015, the General Fund reported an unassigned surplus of $19,857,370

(FY14 $51,999,030). OVERVIEW OF THE FINANCIAL STATEMENTS This financial statements for the Year Ended September 30, 2015 consists of four parts -

statements, required supplementary information, and notes to financial statements. The basic financial statements include two kinds of statements that present different views of the FSM National Government. The Government-Wide Financial Statements The government -wide financial statements report information about the FSM National Government as a whole using accounting method similar to those used by the private-sector companies. It provides both long-term and short-term information about the government s financial status. The Statement of Net Position includes all of the FSM National GThe difference between the two is called net position. Overtime, increases or decreases in the FSM National Government net position serve as an indicator to measure the FSM National Government s financial position. The Statement of Activities, on the other hand, accounts for the FSM National Government s current year revenues and expenses regardless of when cash is received or paid.


September 30, 2015

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The Statement of Net Position and the Statement of Activities are divided into two reporting units: Governmental Activities - Most of the FSM

These include the services provided by the Executive Branch such as health, education, foreign affairs, transportation, resources and development, finance, the Attorney office, and general administration; the Judicial Branch; the Legislative Branch; other National Government programs; Boards and Commissions; and other legislative appropriations. These services are funded by Compact of Free Association funds, US Federal grants, FSM tax revenues, licenses, fees and investment earnings.

Components Units The FSM National Government has nine (9) component units namely, College

of Micronesia - FSM, National Fisheries Corporation, FSM Telecommunications Corporation, FSM Development Bank, FSM Social Security Administration, FSM Petroleum Corporation, Vital Energy, Inc., FSM National Government Employe and the Caroline Islands Air, Inc. These components units are entities which are legally separate from the FSM National Government, but are financially accountable to the FSM National Government, or whose relationship with the FSM National Government is such that exclusion would cause the FSM

Fund Financial Statements The analysis of the FSM jor funds begins on page 14. The fund financial statements provide detailed information about the most significant funds - not the FSM National Government as a whole. Some funds are required to be established by FSM law. However, the FSM National Government establishes many other funds to help control and manage funds provided for particular purposes to see that expenditures meet the legal requirements for using certain taxes, grants, and other grant funds received from outsiders. The FSM National Government has two kinds of funds - government and fiduciary each using different accounting approaches. Governmental funds - Most of the FSM

governmental funds, which focus on how money flows into and out of those funds and the balances left at year-end that are available for spending. These funds are reported using an accounting method called modified accrual accounting, which measures cash and all other financial assets that can readily be converted to cash. The governmental fund statements provide a detailed short-term view of the FSM National Government general operations and the basic services it provides. Governmental fund information helps determine whether there are more or fewer financial resources that can be spent in the near future to finance the FSM s. We describe the relationship (or differences) between governmental activities (reported in the Statement of Net Position and the Statement of Activities) and governmental funds in reconciliations at the bottom of the page 14 and 16.

Fiduciary funds - These funds are used to account for assets held by the FSM National Government

in a trustee capacity for individuals, private organizations, and other governmental resources. These are used to account for operations that are financed and operated in a manner similar to private business enterprises where the intent is that costs (expenses, including amortization and depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges.


September 30, 2015

5

THE FSM NATIONAL GOVERNMENT AS A WHOLE Net Position may serve over time as a useful indicator of a ion. At the end of Fiscal Year 2015, FSM National Government assets exceeded liabilities by $358,754,525. Of the total net position, $234,945,367 is restricted as to purposes for which they may be used for or is invested in capital assets. The FSM National Government uses these capital assets to provide services to its citizens; consequently, these assets are not available for future spending. Although FSM National Government investments in capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. Table 1 shows the schedule of the FSM position as of September 30, 2015.

Table 1 - Net Position

Governmental Activities 2015 2014 Change % Current assets: $ 200,384,656 $ 166,764,232 $ 33,620,424 20.2% Other assets 22,698,347 23,457,525 (759,178) -3.2% Capital assets 212,998,974 202,866,121 10,132,853 5.0% Total assets $ 436,081,977 $393,087,878 $ 42,994,099 10.9% Current and other liabilities: $ 28,026,904 $ 17,683,916 $ 8,987,078 50.8% Long-term debt 49,300,548 56,992,771 (6,336,313) -11.1% Total liabilities 77,327,452 74,676,687 2,650,765 3.5% Net position: Net investment in capital assets 212,998,974 202,866,121 10,132,853 5.0% Restricted 21,946,393 19,662,823 2,283,570 11.6% Unrestricted 123,809,158 95,882,247 27,926,911 29.1% Total net position 358,754,525 318,411,191 40,343,334 12.7% Total liabilities and net position $436,081,977 $393,087,878 $ 42,994,099 10.9%

At the end of FY15, the FSM National Government unrestricted net position shows a surplus of $123,809,158 compared to $95,882,247 at the end of FY14.


September 30, 2015

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Table 2 shows the changes in Net Position of the FSM National Government for the years ended September 30, 2015 and 2014.

Table 2

Governmental Activities 2015 2014 Change %

Revenues: Program Revenues:

Charges for services $ 6,135,219 $ 2,377,046 $ 3,758,173 158.1%

Operating grants and contributions 9,740,733 12,243,034 (2,502,301) -20.4%

Capital grants and contributions 10,862,803 10,221,965 640,838 6.3%

General Revenues: Income tax 4,195,769 4,070,210 125,559 3.1%

Fishing rights fees 65,164,718 47,517,815 17,646,903 37.1%

Fuel 212,600 127,328 85,272 67.0%

Import 3,709,855 3,463,801 246,054 7.1%

Tobacco revenue share 569,624 307,985 261,639 85.0%

Gross receipt 4,170,042 4,380,072 (210,030) -4.8%

Corporate tax 4,138,339 27,630,004 (23,491,665) -85.0%

Unrestricted investment earnings (880,190) 6,204,783 (7,084,973) -114.2%

Other 1,293,956 1,610,532 (316,576) -19.7%

Total revenue 109,313,468 120,154,575 (10,841,107) -9.0%

Expenses: Executive 43,409,555 53,963,647 (10,554,092) -19.6%

Judicial 1,470,233 1,363,394 106,839 7.8%

Legislative 5,482,488 4,475,252 1,007,236 22.5%

Office of Public Auditor 1,685,855 1,502,546 183,309 12.2%

Other National government programs 543,363 153,930 389,433 253.0%

Agencies, boards and commissions 3,497,876 2,674,309 823,567 30.8%

Payments to components units 1,101,192 2,092,654 (991,462) -47.4%

Legislative Public projects 3,762,365 7,972,694 (4,210,329) -52.8%

Capital projects 4,252,250 21,161,441 (16,909,191) -79.9%

Total expenses 65,205,177 95,359,867 (30,154,690) -31.6%

Excess before special items 44,108,291 24,794,708 19,313,583 -77.9%

Special items: Gain on SDR foreign exchange 3,960,240 - 3,960,240 100%

Receivable written off (6,966,019) - (6,966,019) 100%

Contribution to permanent funds (759,178) 1,169,230 (1,928,408) -164.9%

Change in net position 40,343,334 25,963,938 14,379,396 55.4%

Net position at beginning of year 318,411,191 292,447,253 25,963,938 8.9%

Net position at end of year $358,754,525 $318,411,191 $40,343,334 12.7%


September 30, 2015

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FSM National Government revenues from governmental activities, including local revenues, gain on investments, Compact and other grants funding totaled $109,313,468 (FY14 $120,154,575). In FY15, the cost of governmental activities totaled $65,205,177 (FY14 $95,359,867). The difference between the two including special items represents an increase in net position of $40,343,334 (FY14 $25,963,938). To assist in appreciating the details of governmental activities, the above governmental activities information is shown in pictorial form in the following graphs:


September 30, 2015

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Governmental Funds As noted earlier, the FSM National Government uses fund accounting to ensure and demonstrate compliance with finance related requirements. The focus of the FSM National Government governmental funds is to provide information on near-term inflows, outflows, and balances of expendable resources. Such information is useful in assessing the FSM National Government financing requirements. In particular, unassigned fund balance may serve

year. As of the end of the current fiscal year, the FSM National Government governmental funds reported combined ending fund balances of $193.3 million, which represents an increase of $23.8 million (or 14%) in comparison with the prior year. This increase is primarily attributable to an increase in fund balance of the General Fund. Of the total combined fund balance, (1) $68.5 million is reserved for non-spendable. The non spendable includes amounts that cannot be spent because they are either (a) not in spendable form or (b) legally or contractually required to be maintained intact such as loans receivable from States and component units of $40.3 million, equity investments of $4.9 million, equity shares for membership of $8.1 million, and permanent fund $14.6 million and reserved of cash of $1.3 million (2) $2.5 million is reserved for restricted as to its use of resources by laws through constitutional provisions or enabling legislation for the general government (3) $98.8 million is restricted to be committed for specific purposes pursuant to constraints imposed by Congress (a) to indicate that it is not available for new spending because it has already been committed such as loan payments of $2.1 million, $58.8 million for future operations-FSM Trust Fund, and $3.1 for revolving funds (b) to continuing appropriations through grant awards or enabling legislation and general governments of $34.8 million (4) $3.6 million is restricted as assigned to be used for specific purposes but are neither restricted nor committed to liquidate contracts and purchase orders of the prior period. The combined unassigned fund balance of the FSM National Government governmental funds is $19.9 million, a decrease of $32.1 million from the prior year. The decrease in unassigned fund balance was due to the increase in appropriation to FSM Trust Fund. The General Fund is the chief operating fund of the FSM National Government. At the end of the current fiscal year, the unassigned fund surplus of the General Fund was $19.9 million as compared with the prior year ending unreserved fund surplus $52 million, a decrease of $32.1 (or 62%), while total fund balance was $171.7 million compared with a total fund balance of $149.4 million at the end of the prior fiscal year, an increase of $22.3 million. The increase in the overall fund balance in the General Fund was due to the increase in domestic revenue specifically in the fishing access fees. The Grants Assistance Fund has a total restricted fund balance of $2.4 million compared to prior year ending restricted fund balance of $2.2 million. The Compact Trust Fund has a total fund balance of $14.6 million, all of which is reserved for the funding of future operations of the primary government commencing in fiscal year 2023. The net decrease in fund balance during the current year in the Compact Trust Fund was $0.8 million. The Other governmental funds has a total fund balance of $4.5 million, all of which is reserved for future operations of the primary government.


September 30, 2015

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Table 3 shows the FSM National Government changes in fund balances for the years ended September 30, 2015 and 2014.

Table 3 Changes in Fund Balances General Fund Other Funds Total

2015 2014 2015 2014 2015 2014

Revenues:

Compact funding $ - $ - $ 8,619,887 $ 6,029,285 $ 8,619,887 $ 6,029,285

Federal and other grants - - 11,983,649 16,435,714 11,983,649 16,435,714

Taxes 16,806,209 39,876,736 190,020 102,664 16,996,229 39,979,400

Fishing rights fees 65,164,718 47,517,815 - - 65,164,718 47,517,815 Net increase in fair value of investments

(1,155,288)

5,739,133

(759,178)

1,169,230

(1,914,466)

6,908,363

Other 1,755,247 2,276,089 5,949,026 2,177,139 7,704,273 4,453,228

Total revenues 82,570,886 95,409,773 25,983,404 25,914,032 108,554,290 121,323,805

Expenditures 52,823,202 49,319,806 24,639,377 24,254,358 77,462,579 73,574,164

Excess of revenues over expenditures

29,747,684

46,089,967

1,344,027

1,659,674

31,091,711

47,749,641

Net financing sources 1,842,680 3,090,108 200,000 (1,035,460) 2,042,680 2,054,648

Net special items (9,304,656) - - - (9,304,656) -

Net Change in fund balance $22,285,708 $49,180,075 $ 1,544,027 $ 624,214 $ 23,829,735 $49,804,289 Analysis of budgetary Variations- General Fund: During the year, the FSM National Government revised its budget several times to accommodate supplemental funding for departments and offices. As can be seen in the following table, actual revenue collections exceeded budgets by $2,861,569 or 3.5% while expenditures were less than budgets by $11,366,142 or 18.7%. There were no material budget overruns at any level. Variance

Budget Original

Budget Final

Actual mounts

Positive (Negative)

Revenues $ 60,886,705 $ 81,386,705 $ 83,604,248 $ 2,217,543 Expenditures 65,152,944 60,651,085 42,318,924 18,332,161

Excess of revenues (4,266,239) 20,735,620 41,285,324 20,549,704 Other financing sources (uses) - - (200,000) (200,000) Net special items - - (6,966,019) (6,966,019)

Net Changed Unassigned $ (4,266,239) $ 20,735,620 $ 34,119,305 $ 13,383,685

During the year, the FSM National Government revised its budget by $22.5 million for the increase in the fishing rights fees. During the year, the FSM National Government additional supplemental appropriations for operations and CFSM Projects under Public laws Nos. 18-89, 18-102, 18-110, 18-116, 19-02, 19-09, 19-27, 19-28 and 19-31.


September 30, 2015

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CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets At the end of the September 30, 2015, the FSM National Government had invested $212,998,974 (FY14 $202,866,121) in capital assets. These assets consist basically of infrastructure, office equipment and machinery, buildings, ship, and motor vehicles and construction in progress. The summary of capital assets is shown below:

Primary Government Governmental Activities

2015 2014 Change %

Buildings $ 66,495,168 $ 55,545,429 $ 10,949,739 20% Boats and ships 22,182,407 22,569,231 (368,824) -2% Infrastructure 125,428,068 107,540,266 17,887,802 17% Motor vehicles 3,084,055 6,570,990 (3,486,935) -53% Computer equipment 1,941,688 5,103,886 (3,162,198) -62% Aircraft 709,207 709,207 - 0% Furniture, fixture, equipment 7,363,616 9,868,082 (2,504,466) -25% Total assets 227,204,209 207,907,091 19,297,118 9% Less: Accumulated depreciation (59,747,890) (59,909,601) 161,711 0% Land 10,000 10,000 - 0% Construction in progress 45,532,654 54,858,631 (9,325,977) -17% Total Assets $ 212,998,974 $ 202,866,121 $ 10,132,853 5%

Further i capital assets can be obtained in note 5 to the accompanying financial statements. Long Term Debt At the end of fiscal year 2015, the FSM National Government had long term debt of $50,656,458 (FY14 $56,992,771) relating to Governmental Activities as shown below:

Description No. 2015 2014 Change % Fisheries 1257 $ 3,956,653 $ 4,834,613 $ (877,960) -18.16% Water and Sanitation 1459 7,400,296 8,782,726 (1,382,430) -15.74% Early retirement 1520 14,748,908 17,494,504 (2,745,596) -15.69% Private Sector 1816 2,568,033 3,130,667 (562,634) -17.97% Private Sector 1873 2,215,888 2,797,543 (581,655) -20.79% Basic Social Services 1874 4,859,154 5,837,362 (978,208) -16.76% Omnibus (OIDP) 2099 10,693,306 10,253,026 440,280 4.29% Omnibus (OCR) 2100 4,214,220 3,862,330 351,890 9.11% Total $ 50,656,458 $ 56,992,771 $(6,336,313) -11.12%


September 30, 2015

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During the year, the FSM National Government received loan proceeds of $2,042,680 for loans under 2100 FSM (SF) and 2099 FSM (SF) Omnibus Infrastructure Development Project. During the year, the FSM National Government made principal payments of $2,080,116 and recognized a gain on foreign exchange adjustment due SDR of $6,298,877. Of this amount, $2,338,637 was allocated to the States, which also resulted in decrease in loans receivable from the States of the same amount.

seen in note 7 to the accompanying financial statements. Economic Factors and Next Y

Fiscal year 2015 represents the eleventh full year the FSM is implementing the economic assistance provisions available under the Amended compact. The total funds appropriated for the FSM National Government operations and programs during the fiscal year amounted to $97.8 million. Funding under the amended Compact represents 3% of the FSM National Government FY15 annual budget. The remaining 97% came from locally generated tax revenues, fishing access fees, investment earnings and related government services fees. The FSM National Government ended fiscal year 2015 with a positive unassigned general fund surplus. For FY2016, the total revenue projection is approximately $79,417,205, of which $77,366,659 or 97% will come from domestic source, $2,050,546 or 3% will come from the amended compact sector grants. In the beginning of FY2015, the first annual appropriation amounts to $75,429,823 of which $73,373,627 or 97% is to be funded by locally generated revenues of the FSM National Government and $2,056,196 or 3% will come from amended sector grants. In addition to receiving Compact grant assistance, the FSM receives substantial programs assistance from agencies of the United States Federal Government, Peoples Republic of China, Japan and other foreign governments. Grants and other technical assistance programs are also made available to the FSM from international and regional organizations. FINANCIAL MANAGEMENT CONTACT NATIONAL GOVERNMENT This financial report is designed to provide all interested users with a general overview of the National

Secretary of the Department of Finance and Administration, P.O. Box PS 158, Palikir, Pohnpei, FM 96941.

Primary ComponentGovernment Units

ASSETSCurrent assets: Cash and cash equivalents 50,526,073$ 32,983,219$ Cash and cash equivalents - restricted 7,269,057 - Time certificates of deposit 4,015,597 1,713,603 Investments 81,366,918 3,031,691 Receivables, net of allowance for uncollectibles 57,207,011 17,077,859 Due from component units - 10,240,918 Inventories - 13,219,962 Other current assets - 3,281,300 Total current assets 200,384,656 81,548,552 Noncurrent assets: Investments - 22,963,187 Investments - restricted 14,621,055 - Receivables, net of current portion - 16,040,721 Capital assets: Nondepreciable capital assets 45,542,654 5,927,750 Capital assets, net of accumulated depreciation 167,456,320 62,388,806 Deposits and other assets 8,077,292 3,970,865 Total noncurrent assets 235,697,321 111,291,329 Total assets 436,081,977$ 192,839,881$ LIABILITIESCurrent liabilities: Current portion of long-term obligations 2,088,840$ 5,991,536$ Accounts payable 5,566,948 5,848,671 Current portion of compensated absences payable 340,525 771,445 Due to component units - 10,240,918 Other liabilities and accruals 3,663,827 11,295,322 Tax refunds payable 154 - Retention payable 1,331,699 - Due to federal agencies 1,126,478 - Due to FSM State Governments 5,507,713 - Unearned revenues 8,400,720 3,422,969 Total current liabilities 28,026,904 37,570,861 Noncurrent liabilities: Long-term obligations, net of current portion 48,567,618 26,806,009 Compensated absences payable, net of current portion 732,930 - Total noncurrent liabilities 49,300,548 26,806,009 Total liabilities 77,327,452 64,376,870 NET POSITIONNet investment in capital assets 212,998,973 41,856,178 Restricted for: Nonexpendable: Future operations 14,621,055 - Other purposes - 4,122,830 Expendable: Compact related 2,770,679 - Other purposes 4,554,659 - Unrestricted 123,809,159 82,484,003 Total net position 358,754,525 128,463,011 Total liabilities and net position 436,081,977$ 192,839,881$

See accompanying notes to basic financial statements.

September 30, 2015

12


Statement of Net Position

Operating Capital

Charges for Grants and Grants and Primary ComponentExpenses Services Contributions Contributions Government Units

Functions/ProgramsPrimary government: Governmental activities: Office of the President 3,209,675$ -$ -$ -$ (3,209,675)$ -$ Foreign affairs 4,412,998 - - - (4,412,998) - Finance and administration 5,265,491 - 1,897,590 - (3,367,901) - Resources and development 1,771,039 - 439,574 - (1,331,465) - Transportation, communication and infrastructure 5,171,762 110,516 232,547 - (4,828,699) - Health and social affairs 6,729,366 7,350 5,152,191 - (1,569,825) - Education 6,454,083 - 1,006,455 - (5,447,628) - Justice 6,884,115 4,644,687 - - (2,239,428) - Office of the Public Defender 576,099 - - - (576,099) - SBOC Office 938,868 - 30,014 - (908,854) - Environment and emergency management 1,840,862 - 327,183 - (1,513,679) - National archives, cultural and historic preservation 155,197 - 25,199 - (129,998) - Legislature 5,482,488 - - - (5,482,488) - Judiciary 1,470,233 - - - (1,470,233) - Office of the National Public Auditor 1,685,855 - 625,692 - (1,060,163) - National government programs 543,363 - - - (543,363) - Agencies, boards and commissions 3,497,876 1,372,666 4,288 - (2,120,922) - Payments to component units 1,101,192 - - - (1,101,192) - Legislative public projects 3,762,365 - - - (3,762,365) - Capital projects 3,659,710 - - 10,862,803 7,203,093 - Unallocated interest on long-term debt 592,540 - - - (592,540) - Total primary government 65,205,177$ 6,135,219$ 9,740,733$ 10,862,803$ (38,466,422) -Component units: FSM Telecommunications Corporation 14,501,535$ 13,365,927$ 512,677$ -$ - (622,931) FSM Development Bank 1,840,452 2,174,304 - - - 333,852 National Fisheries Corporation 414,512 468,637 - - - 54,125 College of Micronesia - FSM 18,323,629 19,731,589 - - - 1,407,960 FSM Coconut Development Authority - - - - - - FSM Petroleum Corporation 42,185,221 47,565,277 35,711 - - 5,415,767 Vital Energy Inc. 10,831,703 11,277,666 386,671 - - 832,634 Caroline Islands Air, Inc. 367,020 432,754 10,000 - - 75,734 MiCare Plan, Inc. 6,369,124 5,941,554 80,000 - - (347,570) Total component units 94,833,196$ 100,957,708$ 1,025,059$ -$ - 7,149,571

General revenues: Taxes: Income 4,195,769 - Import 3,709,855 - Gross receipts 4,170,042 - Corporate tax 4,138,339 - Fuel 212,600 - Tobacco revenue share 569,624 - Fishing rights 65,164,718 - Unrestricted investment earnings (880,190) (1,628,305) Other 1,293,956 (226,658) Total general revenues 82,574,713 (1,854,963) Special item - gain on SDR foreign exchange 3,960,240 -Special item - write-off of receivable balances (6,966,019) -Contributions to permanent funds (759,178) - Total general revenues and contributions 78,809,756 (1,854,963) Change in net position 40,343,334 5,294,608Net position at the beginning of the year 318,411,191 123,168,403Net position at the end of the year 358,754,525$ 128,463,011$


13


Statement of ActivitiesYear Ended September 30, 2015

Net (Expenses) RevenuesProgram Revenues and Changes in Net Position

Special Revenue PermanentOther

Grants Compact GovernmentalGeneral Assistance Trust Funds Total

ASSETSCash and cash equivalents 50,526,073$ -$ -$ -$ 50,526,073$ Time certificates of deposit 4,015,597 - - - 4,015,597 Equity in internal investment pool 73,847,382 2,637,473 - - 76,484,855 Investments 4,882,063 - - - 4,882,063 Receivables, net: General 3,038,881 - - - 3,038,881 Taxes 4,149,042 - - - 4,149,042 Federal agencies - 3,914,784 - - 3,914,784 Loans 40,314,394 - - - 40,314,394 Advances 1,454,072 88,782 - - 1,542,854 Accrued interest 27,184 - - - 27,184 Due from other funds 125,508 12,793,564 - 4,520,505 17,439,577 Deposits and other assets 8,077,292 - - - 8,077,292 Restricted assets: Cash and cash equivalents 7,269,057 - - - 7,269,057 Investments - - 14,621,055 - 14,621,055

Total assets 197,726,545$ 19,434,603$ 14,621,055$ 4,520,505$ 236,302,708$

LIABILITIES AND FUND BALANCES

Liabilities: Accounts payable 2,483,970$ 3,098,193$ -$ (15,215)$ 5,566,948$ Retention payable - 1,331,699 - - 1,331,699 Other liabilities and accruals 3,663,827 - - - 3,663,827 Tax refunds payable 154 - - - 154 Due to federal agencies - 1,126,478 - - 1,126,478 Due to FSM State Governments 2,581,426 2,926,287 - - 5,507,713 Due to other funds 17,314,069 125,508 - - 17,439,577 Unearned revenues - 8,400,720 - - 8,400,720

Total liabilities 26,043,446 17,008,885 - (15,215) 43,037,116

Fund balances: Non-spendable 53,864,434 - 14,621,055 - 68,485,489 Restricted 83,716 2,450,393 - - 2,534,109 Committed 94,269,059 - - 4,535,720 98,804,779 Assigned 3,608,520 - - - 3,608,520 Unassigned: General fund 19,857,370 - - - 19,857,370 Special revenue funds - (24,675) - - (24,675)

Total fund balances 171,683,099 2,425,718 14,621,055 4,535,720 193,265,592

Total liabilities and fund balances 197,726,545$ 19,434,603$ 14,621,055$ 4,520,505$ Amounts reported for governmental activities in the statement of net position are different because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported in the funds 212,998,974 Loans receivable from FSM State Governments 4,219,872 Long-term liabilities, including loans payable, are not due and payable in the current period and, therefore, are not reported in the funds. These liabilities include:

Loans payable (50,656,458) Compensated absences payable (1,073,455)

165,488,933 Net position of governmental activities 358,754,525$


14


Balance SheetGovernmental FundsSeptember 30, 2015

Permanent Other

Grants Compact GovernmentalGeneral Assistance Trust Funds Total

Revenues: Compact funding -$ 8,619,887$ -$ -$ 8,619,887$ Taxes 16,806,209 - - 190,020 16,996,229 Federal and other grants - 11,983,649 - - 11,983,649 Fishing rights 65,164,718 - - - 65,164,718 Interest and dividends 275,098 - - - 275,098 Fees and charges 333,281 - - 5,801,938 6,135,219 Net change in the fair value of investments (1,155,288) - (759,178) - (1,914,466) MiCare reimbursible 243,451 - - - 243,451 Other 903,417 - - 147,088 1,050,505 Total revenues 82,570,886 20,603,536 (759,178) 6,139,046 108,554,290

Expenditures: Current: General government: Office of the President 3,215,701 - - - 3,215,701 Foreign affairs 4,465,653 - - - 4,465,653 Finance and administration 3,386,186 1,897,590 - - 5,283,776 Resources and development 1,320,723 439,574 - - 1,760,297 Transportation, communication and infrastructure 4,947,233 232,598 - 86,390 5,266,221 Health and social affairs 1,270,314 5,152,191 - - 6,422,505 Education 5,266,591 1,006,455 - 47,920 6,320,966 Justice 3,269,805 - - 3,299,306 6,569,111 Office of the Public Defender 722,436 - - - 722,436 SBOC Office 880,598 30,014 - - 910,612 Environment and emergency management 1,499,349 327,183 - - 1,826,532 National archives, cultural and historic preservation 128,093 25,199 - - 153,292 Legislature 5,498,279 - - - 5,498,279 Judiciary 1,415,718 - - - 1,415,718 Office of the National Public Auditor 1,050,469 625,692 - - 1,676,161 Agencies, boards and commissions 3,118,632 4,288 - 602,174 3,725,094 Payments to component units and fiduciary fund 1,101,192 - - - 1,101,192 Legislative public projects 7,593,574 - - - 7,593,574 Capital projects - 10,862,803 - - 10,862,803 Debt service: Principal and interest payments 2,672,656 - - - 2,672,656

Total expenditures 52,823,202 20,603,587 - 4,035,790 77,462,579

Excess (deficiency) of revenues over (under) expenditures 29,747,684 (51) (759,178) 2,103,256 31,091,711

Other financing sources (uses): Proceeds from issuance of long-term debt 2,042,680 - - - 2,042,680 Operating transfers in - 200,000 - - 200,000 Operating transfers out (200,000) - - - (200,000)

Total other financing sources (uses), net 1,842,680 200,000 - - 2,042,680Special items: Noncash reduction in loans receivable (2,338,637) - - - (2,338,637) Write-off of receivable balances (6,966,019) - - - (6,966,019)

Total other financing sources (uses), net (9,304,656) - - - (9,304,656)

Net change in fund balances 22,285,708 199,949 (759,178) 2,103,256 23,829,735Fund balances at the beginning of the year 149,397,391 2,225,769 15,380,233 2,432,464 169,435,857

Fund balances at the end of the year 171,683,099$ 2,425,718$ 14,621,055$ 4,535,720$ 193,265,592$



Statement of Revenues, Expenditures, and Changes in Fund BalancesGovernmental Funds


15

Special Revenue


Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund

Balances of Governmental Funds to the Statement of Activities Year Ended September 30, 2015

16

Amounts reported for governmental activities in the statement of activities are different because: Net change in fund balances - total governmental funds $ 23,829,735 Capital outlays are reported as expenditures in governmental funds.

However, in the statement of activities, the cost of capital assets is allocated over their estimated useful lives and reported as depreciation expense. For the current year, these amounts consist of:

Capital outlays, net of disposals $ 19,645,437 Depreciation expense, net (9,512,584) 10,132,853

Special item associated with gain on SDR foreign exchange adjustment 6,298,877 The issuance of long-term debt (e.g. bonds, leases) provides current

financial resources to governmental funds, while the repayment of principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction has any effect on net position.

Loan proceeds received from ADB loans. (2,042,680) Repayment of ADB loans 2,080,116

Some expenses reported in the statement of activities do not require the use of current financial resources and, therefore, are not reported as expenditures in governmental funds.

Change in compensated absences payable 44,433

Change in net position of governmental activities $ 40,343,334 See accompanying notes to basic financial statements.

FSM Yap StateSocial Security DevelopmentAdministration Loan Fund Total

ASSETS

Cash and cash equivalents 3,165,615$ 118,427$ 3,284,042$ Time certificates of deposit - 148,203 148,203 Receivables, net: Contributions 2,943,789 - 2,943,789 Other 1,009,645 633 1,010,278 Investments 43,005,195 - 43,005,195 Capital assets, net of accumulated depreciation 99,865 - 99,865

Total assets 50,224,109$ 267,263$ 50,491,372$

LIABILITIES

Accounts payable 176,412$ 12,282$ 188,694$ Other liabilities and accruals 29,494 - 29,494

Total liabilities 205,906 12,282 218,188

NET POSITION

Held in trust for: Social security benefits 50,018,203 - 50,018,203 Restricted - 633 633 Other purposes - 254,348 254,348

Total net position 50,018,203 254,981 50,273,184

50,224,109$ 267,263$ 50,491,372$


FEDERATED STATES OF MICRONESIANATIONAL GOVERNMENT

Combining Statement of Fiduciary Net PositionFiduciary Funds - Private Purpose Trusts

September 30, 2015

17

FSM Yap StateSocial Security DevelopmentAdministration Loan Fund Total

Additions: Contributions 17,623,995$ -$ 17,623,995$

Investment earnings: Net change in the fair value of investments - 575 575 Interest and dividends 710,005 353 710,358

Total investment earnings 710,005 928 710,933

Less investment expense (239,643) - (239,643)

Net investment earnings 470,362 928 471,290

Contributions from primary government 2,000,000 - 2,000,000 Other 295,849 - 295,849

Total additions 20,390,206 928 20,391,134

Deductions: Benefits 19,423,941 - 19,423,941 Refunds/distribution 20,053 - 20,053 Administrative expenses 1,245,286 - 1,245,286

Total deductions 20,689,280 - 20,689,280

Change in net position (299,074) 928 (298,146)

Net position at the beginning of the year 50,317,277 254,053 50,571,330

Net position at the end of the year 50,018,203$ 254,981$ 50,273,184$



Combining Statement of Changes in Fiduciary Net PositionFiduciary Funds - Private Purpose Trusts


18


Combining Statement of Net Position Component Units

September 30, 2015

FSM Tele- FSM National College of FSM Coconut FSM Vital Caroline FSM NationalCommunications Development Fisheries Micronesia- Development Petroleum Energy Islands Employees' Health

Corporation Bank Corporation FSM Authority Corporation Inc. Air, Inc. Insurance Plan Total

ASSETS

Current assets: Cash and cash equivalents 1,065,899$ 8,627,124$ 685,870$ 7,227,101$ -$ 7,091,808$ 7,957,922$ 251,039$ 76,456$ 32,983,219$ Time certificates of deposit 277,222 936,381 - - - 500,000 - - - 1,713,603 Investments 1,548,609 - - - - - - - 1,483,082 3,031,691 Receivables, net: General 797,648 8,146 50,000 6,529,856 - 1,917,485 662,118 - 248,034 10,213,287 Loans - 5,840,000 - - - - - - - 5,840,000 Interest 170,968 122,571 - - - - - - - 293,539 Other 359,319 197,448 1,907 171,897 - 462 - - - 731,033 Due from component units - - - - - 10,240,918 - - - 10,240,918 Inventories 635,707 - - 1,329,986 - 5,584,546 5,632,808 36,915 - 13,219,962 Prepaid expenses 332,450 90,703 - 1,263,216 - 1,095,497 132,022 10,377 357,035 3,281,300

Total current assets 5,187,822 15,822,373 737,777 16,522,056 - 26,430,716 14,384,870 298,331 2,164,607 81,548,552

Noncurrent assets: Indefeasible right of use 2,851,915 - - - - - - - - 2,851,915 Capital assets: Nondepreciable capital assets 146,537 - - 1,455,685 - 4,171,328 - - 154,200 5,927,750 Capital assets, net of accumulated depreciation 40,814,185 1,633,285 43,282 6,850,481 - 12,815,321 160,140 10,136 61,976 62,388,806 Other assets - - - - - 938,282 180,668 - - 1,118,950 Investments - 16,204,021 765,113 4,122,830 - 1,871,223 - - - 22,963,187 Loans receivable, net - 16,040,721 - - - - - - - 16,040,721

Total noncurrent assets 43,812,637 33,878,027 808,395 12,428,996 - 19,796,154 340,808 10,136 216,176 111,291,329

Total assets 49,000,459$ 49,700,400$ 1,546,172$ 28,951,052$ -$ 46,226,870$ 14,725,678$ 308,467$ 2,380,783$ 192,839,881$

LIABILITIES

Current liabilities: Current portion of long-term debt 1,752,305$ 128,449$ 3,225,000$ -$ -$ -$ -$ -$ -$ 5,105,754$ Current portion of long-term contract 885,782 - - - - - - - - 885,782 Compensated absences payable 141,653 - - 629,792 - - - - - 771,445 Accounts payable 281,121 128,021 11,249 169,817 - 3,009,996 226,222 9,267 2,012,978 5,848,671 Due to component units - - - - - - 10,240,918 - - 10,240,918 Other liabilities and accruals 1,032,807 91,726 11,098 1,219,758 - 5,621,669 3,316,474 1,790 - 11,295,322 Unearned revenues 346,833 124,010 - 2,952,126 - - - - - 3,422,969

Total current liabilities 4,440,501 472,206 3,247,347 4,971,493 - 8,631,665 13,783,614 11,057 2,012,978 37,570,861

Noncurrent liabilities: Noncurrent portion of long-term contract 1,694,466 - - - - - - - - 1,694,466 Noncurrent portion of long-term debt 23,956,646 1,154,897 - - - - - - - 25,111,543

Total noncurrent liabilities 25,651,112 1,154,897 - - - - - - - 26,806,009

Total liabilities 30,091,613 1,627,103 3,247,347 4,971,493 - 8,631,665 13,783,614 11,057 2,012,978 64,376,870

NET POSITION

Net investment in capital assets 14,500,344 1,633,285 43,282 8,306,166 - 16,986,649 160,140 10,136 216,176 41,856,178Restricted for: Nonexpendable - - - 4,122,830 - - - - - 4,122,830Unrestricted 4,408,502 46,440,012 (1,744,457) 11,550,563 - 20,608,556 781,924 287,274 151,629 82,484,003

Total net position 18,908,846 48,073,297 (1,701,175) 23,979,559 - 37,595,205 942,064 297,410 367,805 128,463,011

Total liabilities and net position 49,000,459$ 49,700,400$ 1,546,172$ 28,951,052$ -$ 46,226,870$ 14,725,678$ 308,467$ 2,380,783$ 192,839,881$


19

FSM NationalGovernment

FSM Tele- FSM National College of FSM Coconut FSM Vital Caroline Employees'Communications Development Fisheries Micronesia- Development Petroleum Energy Islands Health

Corporation Bank Corporation FSM Authority Corporation Inc. Air, Inc. Insurance Plan Total

Operating revenues: Charges for services 13,222,898$ 2,089,169$ 468,637$ 19,553,948$ -$ 47,541,504$ 11,277,666$ 432,754$ 5,903,649$ 100,490,225$ Other 143,029 85,135 - 177,641 - 23,773 - - 37,905 467,483

Total operating revenues 13,365,927 2,174,304 468,637 19,731,589 - 47,565,277 11,277,666 432,754 5,941,554 100,957,708

Operating expenses: Cost of services 370,726 90,061 - - - 31,238,620 9,120,361 330,447 5,815,946 46,966,161 Depreciation and amortization 4,248,057 118,162 7,987 765,162 - 1,732,001 56,448 - 19,247 6,947,064 Administrative costs 9,882,752 1,632,229 406,525 17,558,467 - 9,214,600 1,654,894 36,573 533,931 40,919,971

Total operating expenses 14,501,535 1,840,452 414,512 18,323,629 - 42,185,221 10,831,703 367,020 6,369,124 94,833,196

Operating income (loss) (1,135,608) 333,852 54,125 1,407,960 - 5,380,056 445,963 65,734 (427,570) 6,124,512

Nonoperating revenues (expenses): Net change in the fair value of investments (32,248) 250,000 50,000 (366,380) - (128,777) - - 15,356 (212,049) Interest income (expense) (1,458,665) 24,523 - - - 17,886 - - - (1,416,256) Contributions from primary government 512,677 - - - - 35,711 386,671 10,000 80,000 1,025,059 Other income (expense) - (1,390) 299 - (229,596) - - 1,592 2,437 (226,658)

Total nonoperating revenues (expenses), net (978,236) 273,133 50,299 (366,380) (229,596) (75,180) 386,671 11,592 97,793 (829,904)

Net income (loss) (2,113,844) 606,985 104,424 1,041,580 (229,596) 5,304,876 832,634 77,326 (329,777) 5,294,608

Net position at the beginning of the year 21,022,690 47,466,312 (1,805,599) 22,937,979 229,596 32,290,329 109,430 220,084 697,582 123,168,403

Net position at the end of the year 18,908,846$ 48,073,297$ (1,701,175)$ 23,979,559$ -$ 37,595,205$ 942,064$ 297,410$ 367,805$ 128,463,011$



Combining Statement of Revenues, Expenses, and Changes in Net PositionComponent Units


20


Notes to Financial Statements

September 30, 2015

21

(1) Summary of Significant Accounting Policies The Federated States of Micronesia (FSM) was constituted on July 12, 1978 under the provisions of the FSM Constitution (the Constitution) as approved by the people of Chuuk, Kosrae, Pohnpei and Yap. The ratification of the Constitution by these four districts recognized their sovereign right to form the Federated States of Micronesia and make the FSM Constitution the supreme law of the land. The Constitution provides for the separation of powers of the executive, legislative, and judicial branches of the government. The accompanying financial statements of the FSM National Government have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The Governmental Accounting Standards Board (GASB) is the recognized standard-setting body for establishing governmental accounting and financial reporting principles. The more significant of the FSM National Government's accounting policies are described below.

A. Reporting Entity

The FSM is an independent sovereign nation made up of the four states of Chuuk, Kosrae, Pohnpei, and Yap (the States). The FSM National Government is a constitutional government comprised of three branches: the Legislative Branch (the Congress), consisting of 14 members (one from each State who are elected for a term of four years, and ten who are elected for a term of two years, whose seats are apportioned by population); the Executive Branch, headed by the President and Vice President who are primarily responsible for executing the laws and administering national government services; and the Judiciary Branch made up of the FSM Supreme Court, which consists of a Chief Justice and up to five Associate Justices. The Congress elects two of its four-year members at its first session following an election to serve as President and Vice President.

For financial reporting purposes, the FSM National Government has included all funds, organizations, agencies, boards, commissions and institutions. The FSM National Government has also considered all potential component units for which it is financially accountable as well as other entities for which the nature and significance of their relationship with the FSM National Government are such that exclusion would cause the FSM National

considered in determining financial accountability include whether the FSM National Government, as the primary government, has governing body and either has the ability to impose its will on that organization or there is potential for the organization to provide specific financial benefits to or impose specific financial burdens on the FSM National Government. Financial accountability also exists if an organization is determined to be fiscally dependent on the primary government, although the

. Each component unit of the FSM National Government has a September 30 year-end except for the FSM Social Security Administration, the FSM Development Bank, and the FSM Petroleum Corporation, which each have a December 31 year-end.



September 30, 2015

22

(1) Summary of Significant Accounting Policies, Continued A. Reporting Entity, Continued

Component units are entities that are legally separate organizations for which the FSM

which the nature and significance of their relationship with the FSM National Government are

to be misleading or incomplete. The FSM National Government is financially accountable because it appoints the members of the governing authorities of each of the component units and because it is able to impose its will on these organizations or because the organizations provide specific financial benefits or impose specific financial burdens on the FSM National Government. The financial statements of the component units have been included in the financial reporting entity as discretely presented component units in accordance with GASB Statement No. 14, The Financial Reporting Entity, as amended by GASB Statement No. 39, Determining Whether Certain Organizations are Component Unitsbasic financial statements includes the financial data of the following discretely presented component units: FSM Telecommunications Corporation (FSMTC): FSMTC was incorporated under FSM

Public Law No. 2-10 to engage in the business of providing telecommunications services, except radio and television broadcasting, throughout the FSM and to points outside the FSM. FSMTC is governed by a five-member Board of Directors, which includes one appointee by the President (with the advice and consent of the Congress) and four appointees by the Governor of each State (with the advice and consent of the respective State Legislatures). The FSM National Government provides financial support to FSMTC through legislative appropriations and has the ability to impose its will on FSMTC.

FSM Development Bank (FSMDB): FSMDB was established under FSM Public Law No. 8-47 to advance the economic development of the FSM through the provision of economic development loans. FSMDB is governed by a seven-member Board of Directors appointed by election at the annual shareholders meeting by the plurality of votes thereof. As of December 31, 2014, FSMDB has issued 2,997,883 shares to the FSM National Government (98.7%), the State of Chuuk (1%), and the State of Kosrae (0.3%). The FSM National Government provides financial support to FSMDB through legislature appropriations and has the ability to impose its will on FSMDB.

National Fisheries Corporation (NFC): NFC was established under FSM Public Law No. 3-14 to promote the development of pelagic fisheries and related industries within the extended fishery zone for the benefit of the people of the FSM. NFC is governed by a seven-member Board of Directors, which includes one appointee by the President (with the advice and consent of the Congress), four appointees by the Governor of each State (with the advice and consent of the respective State legislatures), the Executive Director of the Micronesian Maritime Authority, and the Secretary of the Department of Economic Affairs. The FSM National Government has the ability to impose its will on NFC.



September 30, 2015

23


College of Micronesia-FSM (COM-FSM): COM-FSM was established under FSM Public Law No. 7-79 to serve the varied post-secondary and adult educational needs of the FSM. COM-FSM is governed by a five-member Board of Regents appointed by the President with the advice and consent of the Congress. The FSM National Government provides financial support to COM-FSM through legislature appropriations and has the ability to impose its will on COM-FSM.

FSM Coconut Development Authority (CDA): CDA was established under FSM Public

Law No. 1-156 to engage in the manufacture and processing of all products derived from the coconut tree; to buy, collect, market, sell, export, inspect, improve the quality, and deal with, in general, all products derived from the coconut tree; to establish prices to producers or sellers of coconut products in the FSM; to collect and receive all monies derived from the sales of coconut products; and to stabilize the price of these products. CDA is governed by a five-member Board of Directors, which includes one appointee by the President (with the advice and consent of the Congress) and four appointees by the Governor of each State (with the advice and consent of the respective State legislatures).The FSM National Government provides financial support to CDA through legislative appropriations. Public Law 18-68 dissolved CDA and transferred operations to the FSM Petroleum Corporation, which took effect during the year ended September 30, 2015.

FSM Petroleum Corporation (FSMPC): FSMPC was established under FSM Public Law

15-08 for the purpose of providing oil and gas distribution for the entire FSM. FSMPC is governed by a seven-member Board of Directors, which includes one appointee by the President (with the advice and consent of the Congress) and four appointees by the Governor of each State (with the advice and consent of the respective State legislatures), and two appointees from the private sector by the President (with the advice and consent of the Congress). The FSM National Government has the ability to impose its will on FSMPC.

Vital Energy, Inc. (Vital): Vital was incorporated on February 10, 2012 for the purpose of

carrying on the operation of importation and sale of petroleum products, and operation, management and maintenance of petroleum storage terminals, international marine bunkering services, operation of road and aviation bridging tankers, and aviation refueling operations. The FSM National Government has the ability to impose its will on Vital.

Caroline Islands Air, Inc. (CIA): CIA was established under FSM Public Law No. 10-72 to

operate, maintain, and administer an inter-island air service based in Pohnpei State. CIA is governed by a five-member Board of Directors, which includes one appointee by the President (with the advice and consent of the Congress) and four appointees by the Governor of each State (with the advice and consent of the respective State Legislatures). The FSM National Government provides financial support to CIA through legislative appropriations and has the ability to impose its will on CIA.



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also known as MiCare Plan, Inc. (the Plan) was initially created by Public Law 3-82 in 1984 and amended by Public Law 12-77 of the Twelfth Congress of the Federated States of Micronesia (FSM) National Government in 2003. The purpose of the Plan is to provide, arrange for, pay for, or reimburse the costs of medical, dental and vision treatment and care, hospitalization, surgery, prescription drugs, medicine, prosthetic appliances, out-patient care, and other medical care benefits, in cash or the equivalent in medicines and supplies. The Plan is under the governance of a seven-member Board of Directors, four of whom represents each of the four states of the FSM, one represents the FSM National Government, and one the private healthcare sector. These six members are appointed by the FSM President with the confirmation of the FSM Congress. The seventh member of the Board is the Plan Administrator who is selected by the Board and serves as an ex-officio member.

In addition, the fiduciary component units are subject to legislative and executive controls. These component units, while meeting the definition of a component unit and while legally separate, are presented in the fund financial statements of the FSM National Government. They have been omitted from the government-wide financial statements as their resources are not available to fund operations of the FSM National Government. The fiduciary component units are as follows: FSM Social Security Administration (FSMSSA), a Fiduciary Fund Type - Private Purpose

Trust Fund. FSMSSA was established under FSM Public Law No. 2-74 to provide retirement, disability and survivor benefits for the citizens of the FSM. FSMSSA is governed by a five-member Board of Directors appointed by the President with the advice and consent of the Congress.

Yap State Development Loan Fund (YDLF), a Fiduciary Fund Type - Private Purpose Trust Fund. YDLF is administered by the FSM Development Bank in a Trust capacity for the purpose of providing loans for the economic development of the State of Yap.

separately audited issue their own financial statements. These statements may be obtained by directly contacting the various entities or obtaining them directly from the Office of the FSM National Public Auditor:

P.O. Box PS05

Palikir, Pohnpei State, FM, 96941



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(1) Summary of Significant Accounting Policies, Continued

B. Government-Wide Financial Statements The Statement of Net Position and the Statement of Activities report financial information on all non-fiduciary activities of the primary government and its component units. For the most part, the effect of interfund activity has been eliminated from these statements except for other charges between the primary government and the discretely presented component units. Elimination of these charges would distort the direct costs and program revenues reported for the various functions concerned. Primary government activities are defined as either governmental or business-type activities. Governmental activities, which normally are supported by taxes, intergovernmental revenues and other non-exchange revenues, are reported separately from business-type activities, which rely to a significant extent on fees charged to external parties for goods or services. As such, business-type activities account for operations similarly to a for-profit business.Likewise, the primary government is reported separately from certain legally separate component units for which the primary government is financially accountable. Discretely presented component unit activities are presented with their business-type focus. The Statement of Net Position -fiduciary assets, deferred outflows of resources, liabilities, and deferred inflows of resources, with the difference reported as net position. Net position is reported in the following categories: Net investment in capital assets consists of capital assets, net of accumulated

depreciation and reduced by outstanding balances for bonds, notes and other debt that are attributed to the acquisition, construction or improvement of those assets.

Restricted net position - nonexpendable consists of permanent funds in which donors or other outside sources have stipulated that the principal is to be maintained inviolate and in perpetuity, and invested for the purpose of producing present and future income, which may either be expended or added to the principal.

Restricted net position - expendable consists of resources in which the FSM National Government is legally or contractually obligated to spend resources in accordance with restrictions either externally imposed by creditors, grantors, contributors, and the like, or imposed by law.

Unrestricted net position consists of net position, which does not meet the definition of the two preceding categories. Unrestricted net position often is designated, (for example, internally restricted), to indicate that management does not consider such to be available for general operations.

The government-wide Statement of Net Position reports $21,946,393 of restricted net position, of which $4,554,659 is restricted by enabling legislation.



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B. Government-Wide Financial Statements, Continued

The Statement of Activities demonstrates the degree to which the direct expenses of given functions or segments are offset by program revenues. Direct expenses are those that are clearly identifiable within a specific function or segment. Program revenues include charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges that are restricted to meeting the operational or capital requirements of a particular function. Taxes and other items not meeting the definition of program revenues are, instead, reported as general revenue and offset or supplant the net operating deficit or surplus from governmental operations.

C. Fund Financial Statements

The fund financial statements present a balance sheet and a statement of revenues, expenditures, and changes in fund balances for its major and aggregated non-major funds. Separate financial statements are provided for governmental funds and fiduciary funds even though the latter are excluded from the government-wide financial statements. Major individual governmental funds are reported as separate columns in the fund financial statements pursuant to GASB reporting standards, with nonmajor governmental funds being combined into a single column. The FSM National Government reports its financial position and results of operations in funds, each of which is considered a separate accounting entity. The operations of each fund are accounted for with a set of self-balancing accounts that comprise its assets, liabilities, fund equity, revenues and expenditures/expenses. Transactions between funds within a fund type, if any, have not been eliminated.

D. Measurement Focus and Basis of Accounting

Government-Wide Financial Statements - the government-wide financial statements are reported using the economic resources management focus and the full accrual basis of accounting, as are the fiduciary fund and component unit financial statements. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Grants and similar items are recognized as revenues as soon as all eligibility requirements imposed by the provider have been met. Amounts reported as program revenue include 1) charges to customers or applicants for goods, services, or privileges provided, 2) operating grants and contributions, and 3) capital grants and contributions. Internally dedicated resources are reported as general revenues rather than as program revenues. General revenue is derived from taxation, investment income and other fees that are not allocated to specific programs.



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D. Measurement Focus and Basis of Accounting, Continued

Governmental Fund Financial Statements - the governmental fund financial statements account for the general governmental activities of the FSM National Government and are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as they become susceptible to accrual; generally when they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the FSM National Government considers most revenues to be available if they are collected within 90 days of the end of the current fiscal period. Federal grants and assistance awards made on the basis of entitlement periods are recorded as revenues when available and entitlement occurs, which is generally within 12 months of the end of the current fiscal period.

Significant revenues susceptible to accrual include income and gross receipts taxes, federal grants, federal reimbursements and other reimbursements for use of materials and services. Miscellaneous revenues from other financing sources are recognized when received in cash because they are generally not measurable until actually received. Investment earnings are recorded as earned, since they are both measurable and available. Investments and related investment earnings are recorded at fair value. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Expenditures generally are recorded in the period in which the related fund liability is incurred, as under accrual accounting. However, debt service expenditures, as well as expenditures related to compensated absences and claims and judgments, are recorded only when payment is due. Fiduciary Fund and Component Unit Financial Statements - the fiduciary funds and discretely presented component units financial statements are reported using the economic measurement focus and the accrual basis of accounting, similar to government-wide financial statements, as described above. Discretely presented component units distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a principal ongoing operations. All other revenues are reported as nonoperating. Operating expenses includes the cost of sales and services, administrative expenses, and depreciation on capital assets. All expenses not meeting this definition are reported as nonoperating and expenses.

GASB Statement No. 34, Basic Financial Statements - ion and Analysis - For State and Local Governments, as amended by GASB Statement No. 37, Basic Financial Statements - - For State and Local Governments: Omnibus, sets forth minimum criteria (percentage of the assets, liabilities, revenues or expenditures/expenses for either fund category or the governmental and enterprise combined) for the determination of major funds. The FSM National Government has elected to add an additional major fund that is of specific public interest, namely the Compact Trust Fund. Major individual governmental funds are reported as separate columns in the fund financial statements. The nonmajor funds are combined in a column in the fund financial statements and detailed in the combining statements. The FSM National Government reports the following major funds:



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D. Measurement Focus and Basis of Accounting, Continued

General Fund - this fund is the primary operating fund of the FSM National Government. It is used to account for all governmental transactions, except those required to be accounted for in another fund.

Grants Assistance Fund - a Special Revenue Fund that accounts for funds received under sector grants pursuant to the amended Compact of Free Association; all financial transactions of federally assisted funds, which are subgranted to the FSM National Government, as well as other direct federal grants that the FSM National Government received from the United States government, and foreign assistance grants.

Section 215 Compact Trust Fund - a Permanent Fund that accounts for the FSM National

of the Compact of Free Association, as amended, to provide for an additional source of revenue for the government budget that will be needed to substitute for the absence of Compact of Free Association funding.

The nonmajor governmental funds are comprised of special revenue funds, which account forfinancial resources obtained from specific revenue sources and used for restricted purposes. In addition, the FSM National Government reports the following fund types:

Private Purpose Trust Fund - this fund accounts for resources held in trust by the FSM

National Government of the: (i) FSM Social Security Retirement Fund under which principal and income benefit certain individuals; and (ii) the Yap State Development Loan Fund, which is held in trust by the FSM Development Bank for the benefit of the State of Yap.

E. Cash and Cash Equivalents and Time Certificates of Deposit Cash and cash equivalents of the primary government and the discretely presented

component units include cash held in demand accounts as well as short-term investments with a maturity date within three months of the date acquired by the FSM National Government. Deposits maintained in time certificates of deposit with original maturity dates greater than ninety days are separately classified on the statement of net position.

F. Investments

Investments and related investment earnings of the primary government and the discretely presented component units are carried at fair value, which is the amount at which an investment could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

An investment of 20% or more of the voting stock of an investee is presumed to give the investor significant influence. Under the equity method, the investor records, as earnings or loss, its proportiona



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G Receivables In general, tax revenue is recognized on the government-wide financial statements, when

assessed or levied and on the governmental fund financial statements to the extent that it is both measurable and available. Receivables are stated net of estimated allowances for uncollectible accounts. Reimbursements due to the FSM National Government for expenditures on federally funded reimbursement and grant programs are reported as

on the governmental funds balance sheet. Receivables of the primary government and the discretely presented component units are

primarily due from businesses and individuals residing in the FSM. The allowance for uncollectible amounts primarily represents estimated allowances for uncollectible amounts that are determined based upon past collection experience and aging of the accounts.

H. Prepaid Items

Certain payments made to vendors or persons for services reflecting costs applicable to future accounting periods are recorded as prepaid items in both government-wide and fund financial statements.

I. Interfund Receivables/Payables During the course of its operations, the FSM National Government records transactions

between individual funds for goods provided or services rendered. Receivables and

tal funds balance sheet.

These balances result from time lag between the dates that 1) interfund goods and services are provided or reimbursable expenditures occur, 2) transactions are recorded in the accounting system, and 3) payments between funds are made, and are scheduled to be collected in the subsequent year.

J. Inventories

Inventories of materials and supplies recorded by the discretely presented component units are valued at the lower of cost (principally average cost) or market.

K. Restricted Assets

Certain assets of the primary government are classified as restricted assets because their use is completely restricted through loan agreements or enabling legislation. Investments recorded in the Compact Trust Fund of $14,621,055 are restricted in that they are not available to be used in current operations.



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K. Restricted Assets, Continued

As of September 30, 2015, cash and cash equivalents of the primary government were restricted for the following uses: Deposit accounts established for the purpose of receiving payments pursuant to the Compact of Free Association, as amended $ 5,306,843 Deposit accounts maintained for certain non-U.S. donor agencies (ADB, Peoples Republic of China, Japan, European Union) 1,296,840 Deposit account established for the Airport Improvement Program 3,847 Deposit account maintained for proceeds from dormant bank accounts established in accordance with Public Law 13-56 574,763 Deposit accounts established for imprest funds in accordance with ADB Loans 2099 and 2100 83,716 Other miscellaneous deposit accounts 3,048 $ 7,269,057

L. Indefeasible Right of Use The FSM National Government has capitalized the cost of acquisition of the executive right to

use a specified amount of fiber capacity for a period of time, which is amortized over the length of the term of the capacity agreement on the straight line method.

M. Capital Assets Capital assets, which include property, plant, equipment and infrastructure (e.g. roads,

bridges, ramps and other similar items), are reported in the governmental activity column of the government-wide financial statements. Singular pieces of equipment, vehicles, computer equipment and software that equal or exceed $1,000 are capitalized. Buildings and infrastructure projects with a cost that equals or exceeds $50,000 are capitalized. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at fair market value at the date of donation.

Property, plant and equipment of the primary government and the component units are depreciated using the straight-depreciation charged in the year of acquisition and disposal, regardless of date. Estimated useful lives are as follows:

Buildings and improvements 20 - 50 years

Infrastructure 20 years Computer equipment 5 years Furniture, equipment and machinery 3 - 20 years Boats 25 years Aircraft 20 years Motor vehicles 3 - 10 years



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N. Deferred Outflows of Resources

In addition to assets, the statement of net position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources represents a consumption of net position that applies to a future period and so will not be recognized as an outflow of resources (deduction of net position) until then. The FSM National Government has no items that qualify for reporting in this category.

O. Unearned Revenues In the government-wide financial statements, unearned revenues are recognized when cash, receivables or other assets are recorded prior to their being earned. In the governmental fund financial statements, unearned revenues represent monies received or revenues

recognition under the modified accrual basis of accounting. The unearned revenue in the governmental fund types has primarily resulted from grants assistance funds received in advance of eligible expenditures.

P. Compensated Absences

employees to accumulate earned but unused vacation and sick pay benefits. There is no liability for unpaid accumulated sick leave since the government does not have a policy to pay any amounts when employees separate from service with the government. All vacation pay is accrued when incurred in the government-wide and fiduciary fund financial statements. A liability for these amounts is reported in governmental funds only if they have matured, for example, as a result of employee resignations and retirements. Annual leave accumulates at the rate of 4 hours bi-weekly, if less than 3 years of service, 6 hours bi-weekly, if between 3 and 10 years of service, and 8 hours bi-weekly if over 10 years of service, limited to 45 working days.

Q. Deferred Inflows of Resources

In addition to liabilities, the statements of net position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources represents an acquisition of net position that applies to a future period and so will not be recognized as an inflow of resources (additions to net position) until then. The FSM National Government has no items that qualify for reporting in this category.

R. Fund Balance

Fund balance classifications are based on the extent to which the FSM National Government is bound to honor constraints on the specific purposes for which amounts in those funds can be spent and are reported under the following fund balance classifications:

Non-spendable - includes fund balance amounts that cannot be spent either because it is

not in spendable form or because of legal or contractual constraints.



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R. Fund Balance, Continued

Restricted - includes fund balance amounts that are constrained for specific purposes which are externally imposed by providers, such as creditors or amounts constrained due to constitutional provisions or enabling legislation.

Committed - includes fund balance amounts that are constrained for specific purposes that are internally imposed by the government through formal action of the highest level of decision making authority and does not lapse at year-end.

Assigned - includes fund balance amounts that are intended to be used for specific

purposes that are neither considered restricted or committed.

Unassigned includes negative fund balances in other governmental funds.

The FSM National Government has a general policy to first use restricted resources for expenditures incurred for which both restricted and unrestricted (committed, assigned, and unassigned) resources are available. When expenditures are incurred for which only unrestricted resources are available, the general policy of the FSM National Government is to use committed resources first, followed by assigned, and then unassigned. The use of restricted/committed resources may be deferred based on a review of the specific transaction.

A formal minimum fund balance policy has not been adopted. S. Interfund/Intrafund Transactions As a general rule, the effect of interfund activity has been eliminated in the government-wide

financial statements. Exceptions to this rule are: 1) activities between funds reported as governmental activities and funds reported as business-type activities and 2) activities between funds that are reported in different functional categories in either the governmental or business-type activities column. Elimination of these activities would distort the direct costs and program revenues for the functions concerned.

T. Risk Financing

The FSM National Government is exposed to various risks of loss related to torts; theft of,

damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. It is the policy of the primary government not to purchase commercial insurance for the risks of loss to which it is exposed. Instead, the FSM National Government management believes it is more economical to manage its risks internally. In the event of claim settlements and judgments, the FSM National Government reports all of its risk management activities in its General Fund. Claims expenditures and liabilities are reported when it is probable that a loss has occurred and the amount of that loss can be reasonably estimated. These losses include an estimate of claims that have been incurred but not reported. No losses have occurred as a result of these risks in any of the past three fiscal years.



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U. New Accounting Standards

During fiscal year 2015, the FSM National Government implemented the following pronouncements:

GASB Statement No. 68, Accounting and Financial Reporting for Pensions, which

revises and establishes new financial reporting requirements for most governments that provide their employees with pension benefits. The implementation of this statement did not have a material effect on the accompanying financial statements.

GASB Statement No. 69, Government Combinations and Disposals of Government

Operations, which improves accounting and financial reporting for state and local governments' combinations and disposals of government operations. Government combinations include mergers, acquisitions, and transfers of operations. A disposal of government operations can occur through a transfer to another government or a sale.The implementation of this statement did not have a material effect on the accompanying financial statements.

GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the

Measurement Date - an amendment of GASB Statement No. 68, which addresses an issue regarding application of the transition provisions of Statement No. 68, Accounting and Financial Reporting for Pensions. The issue relates to amounts associated with contributions, if any, made by a state or local government employer or nonemployer contributing entity to a defined benefit pension plan after the measurement date of the

The implementation of this statement did not have a material effect on the accompanying financial statements.

In February 2015, GASB issued Statement No. 72, Fair Value Measurement and Application, which addresses accounting and financial reporting issues related to fair value measurements and requires entities to expand their fair value disclosures by determining major categories of debt and equity securities within the fair value hierarchy on the basis of the nature and risk of the investment. The provisions in Statement 72 are effective for fiscal years beginning after June 15, 2015. Management believes that the implementation of this statement only requires additional disclosures to be made about fair value measurements, the level of fair value hierarchy, and valuation techniques and will not have a material effect on the financial statements of the FSM National Government.

In June 2015, GASB issued Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not Within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68, which aligns the reporting requirements for pensions and pension plans not covered in GASB Statements 67 and 68 with the reporting requirements in Statement 68. The provisions in Statement No. 73 are effective for fiscal years beginning after June 15, 2015, with the exception of the provisions that address employers and governmental nonemployer contributing entities for pensions that are not within the scope of Statement 68, which are effective for fiscal years beginning after June 15, 2016. Management does not believe that the implementation of this statement will have a material effect on the financial statements of the FSM National Government.



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U. New Accounting Standards, Continued

In June 2015, GASB issued Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, which replaces Statements No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, as amended, and No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans, and addresses financial reporting requirements for governments whose employees are provided with postemployment benefits other than pensions (other postemployment benefits or OPEB). The provisions in Statement No. 74 are effective for fiscal years beginning after June 15, 2016. Management does not believe that the implementation of this statement will have a material effect on the financial statements of the FSM National Government. In June 2015, GASB issued Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, which replaces the requirements of Statements No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, as amended, and No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans, and provides guidance on reporting by governments that provide OPEB to their employees and for governments that finance OPEB for employees of other governments. The provisions in Statement No. 75 are effective for fiscal years beginning after June 15, 2017. Management does not believe that the implementation of this statement will have a material effect on the financial statements of the FSM National Government. In June 2015, GASB issued Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, which eliminates two of the four categories of authoritative GAAP that exist under the existing hierarchy prescribed by Statement 55. The two categories that will remain under the new standard are (1) GASB Statements and (2) GASB technical bulletins and implementation guides in addition to AICPA guidance that the GASB clears. The provisions in Statement No. 76 are effective for fiscal years beginning after June 15, 2015. Management does not believe that the implementation of this statement will have a material effect on the financial statements of the FSM National Government. In August 2015, GASB issued Statement No. 77, Tax Abatement Disclosures, which requires governments that enter into tax abatement agreements to disclose certain information about the agreements. The provisions in Statement No. 77 are effective for fiscal years beginning after December 15, 2015. Management does not believe that the implementation of this statement will have a material effect on the financial statements of the FSM National Government.

V. Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, deferred outflows of resources, liabilities, and deferred inflows of resources and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures/expenses during the reporting period. Actual results could differ from those estimates.



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W. Total Columns

Discussion and Analysis includes certain prior year summarized comparative information in total. Such information does not include sufficient detail to constitute a full comparative presentation. Accordingly, such information should be read in conjunction with the FSM

4 from which summarized information was derived.

(2) Deposits and Investments

The FSM National Government pools cash resources of its various funds in order to facilitate the management of cash. Unless otherwise required by law, interest income received on pooled cash accrues to the General Fund. Cash and cash equivalents applicable to a particular fund are readily identifiable. The FSM National Government has invested the majority of its excess funds in a pooled investment fund which is managed under the control of the Federated Development Authority (FDA), an entity comprised of the FSM National Government and its four component States. Investment income originating from the pool accrues to the various funds.

The deposit and investment policies of the FSM National Government are governed by legislation

enacted by the Congress. The Secretary of Finance is responsible for ensuring that deposits of the General Fund are maintained in commercial checking or savings accounts of any financial institution whose assets are at least $1 billion and whose deposits are subject to Federal Deposit Insurance Corporation (FDIC) insurance. Furthermore, the Secretary of Finance is responsible for the investment of any monies of the FSM National Government that are deemed not necessary for immediate use. FDA has selected investment managers who are given authority to buy and sell securities. These investment managers may invest in stocks, bonds and cash equivalents, for which minimum standards of quality of such investments at the time of purchase shall be as follows:

i. Cash equivalents - the investment manager may engage in all normally accepted short-term

investment practices including, but not limited to U.S. Treasury and government agency securities, bankers acceptances, certificates of deposit, commercial paper and repurchase agreements using any of the foregoing as collateral. The following restrictions apply: (1) Commercial paper must be rated A-1/P-1 or higher by Standard & Poor Corporation and Moody's Investor Services; and (2) Certificates of deposit must be from FDIC insured banks or FSLIC insured savings and loan associations, both of which must have assets in excess of $2 billion. Deposits in smaller institutions are acceptable, but must not exceed the amount of the insurance, unless collateralized by U.S. Treasury obligations at 102%.

ii. Stocks - A "B" rating by a national rating service. Non-rated stocks, such as banks or

insurance companies, must be equal in quality or higher.

iii. Bonds - Confined to issues rated "A" or higher by a national rating service, except in the case of U.S. Treasury or government agency obligations which are not rated.



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(2) Deposits and Investments, Continued The equity portfolio shall be diversified among issues and industry classifications. No more than 25% of the equity portfolio may be invested in any single classification, as described by the Standard and Poor 500 Index, unless prior approval is received from the Secretary of Finance. No investment may be made in a single corporate entity which exceeds 5% of the total assets of the fund at the time of purchase without prior approval of the Secretary of Finance.

A. Deposits

Custodial credit risk is the risk that in the event of a bank failure, the FSM National posits may not be returned to it. Such deposits are not covered by depository

insurance and are either uncollateralized or collateralized with securities held by the pledging financial institution or held by the pledging financial institution but not in the depositor-

custodial credit risk. As of September 30, 2015cash equivalents and time certificates of deposit was $61,810,727 and the corresponding bank balances were $62,319,685. Of the bank balances, $49,898,144 is maintained in financial institutions subject to FDIC insurance while $5,463,795 represents short-term investments held and administered by FSM Naagreements and bond indentures. Based on negotiated trust and custody contracts, all of

ncial institutions at September 30, 2015 while the remaining amount of $6,957,746 is maintained in financial institutions not subject to FDIC insurance. As of September 30, 2015, bank deposits in the amount of $1,000,000 were FDIC insured. The FSM National Government does not require collateralization of its cash deposits; therefore, deposit levels in excess of FDIC insurance coverage are uncollateralized. Accordingly, these deposits are exposed to custodial credit risk. As of September 30, 2015, the caequivalents and time certificates of deposit was $3,432,245 and the corresponding bank balances were $3,481,277. Of the bank balances, $1,680,184 is maintained in financial institutions subject to FDIC insurance. The remaining amount of $1,801,093 represents short-

various trust agreements. Based on negotiated trust and custody contracts, all of these investmeinstitutions at September 30, 2015. As of September 30, 2015, bank deposits in the amount of $500,000 were FDIC insured. The fiduciary funds do not require collateralization of their cash deposits; therefore, deposit levels in excess of FDIC insurance coverage are uncollateralized. Accordingly, these deposits are exposed to custodial credit risk.

As of September 30, 2015, the carrying amount of the discretely presentetotal cash and cash equivalents and time certificates of deposit was $34,696,822 and the corresponding bank balances were $35,430,200, which are maintained in financial institutions subject to FDIC insurance. As of September 30, 2015, bank deposits in the amount of $3,285,797 were FDIC insured. The component units do not require collateralization of their cash deposits; therefore, deposit levels in excess of FDIC insurance coverage are uncollateralized. Accordingly, these deposits are exposed to custodial credit risk.



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(2) Deposits and Investments, Continued A. Deposits, Continued

The FSM National Government maintains equity membership shares in the International Monetary Fund of $1,149,850 and the Asian Development Bank of $6,927,442 (SDR 4,260,000), which are recorded as deposits and other assets.

B. Investments

Primary Government As of September 30, 2015, investments at fair value are as follows:

Fixed income securities: Domestic fixed income $ 27,876,331 Other investments: Equities 58,895,211 Money market funds 17,577 Cash management accounts 4,316,791

63,229,579 $ 91,105,910

Additionally, the primary government owns 50,000 shares of the outstanding common stock of a commercial enterprise located in the Commonwealth of the Northern Marianas. The investment of $1,500,000 is accounted for at cost since the investment constitutes less than a 20% ownership share. Furthermore, the primary government owns 257,658 shares of the outstanding common stock of the Bank of the Federated States of Micronesia, which engages in commercial banking services in the FSM. The investment of $3,382,063 is accounted for at cost since management is of the opinion that the FSM National Government does not exert significant influence over the investee.

As of September 30, 2015

Maturity (in years) Investment Type Rating Type Less than 1 1-5 6-10 Over Total U.S. Treasury Notes and Bonds AAA $ 5,028 $ 204,822 $ 89,890 $ 38,464 $ 338,204 U.S. Government Agencies Obligations: Federal Home Loan Mortgage Corporation AAA - 65,566 38,519 18,304 122,389 Government National Mortgage Association AAA - - - 856 856 Federal National Mortgage Association AAA 66,028 162,006 - 27,592 255,626 Tennessee Valley Authority AAA - - 11,959 10,118 22,077 Housing Urban Development No rating - - 94,172 - 94,172 AID-TUNISIA No rating - 33,700 - - 33,700 Municipal Obligations A2 22,014 - - - 22,014 Municipal Obligations Aa1 - 17,938 17,881 11,247 47,066 Municipal Obligations Aa2 - - 8,610 - 8,610



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38

(2) Deposits and Investments, Continued

B. Investments, Continued

Primary Government, Continued Maturity (in years) Investment Type Rating Type Less than 1 1-5 6-10 Over 10 Total Corporate Bonds A1 90,410 10,736 - - 101,146 Corporate Bonds A1 13,972 12,086 - - 26,058 Corporate Bonds A2 24,607 55,847 9,868 - 90,322 Corporate Bonds A3 38,060 23,174 - - 61,234 Corporate Bonds Aa1 11,010 25,470 12,121 - 48,601 Corporate Bonds Aa2 - - - 28,330 28,330 Corporate Bonds Aa3 - 5,429 24,939 - 30,368 Corporate Bonds AAA 22,002 6,601 9,593 - 38,196 Corporate Bonds Baa2 - - 5,693 - 5,693 Corporate Bonds No rating - 8,879 4,502 9,467 22,848

$ 293,131 $ 632,254 $ 327,747 $ 144,378 $ 1,397,510

Investment Type (no aging schedule) Fair Value Credit Ratings U.S. Treasury Notes and Bonds $ 4,501,400 AAA U.S. Government Agencies Obligations 1,138,589 Aa3 Mortgage Backed 8,446,744 Aa2 Asset-Backed 1,323,942 A1 Corporate Bonds 6,910,972 Baa1 Corporate Bonds 1,721,124 A3 Corporate Bonds 2,436,050 Aa3

$ 26,478,821

$ 27,876,331 Credit risk for investments is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. With the exception of investments in U.S. government securities, which are explicitly or implicitly guaranteed by the United States government, all other

policy.

Custodial credit risk for investments is the risk that in the event of the failure of the counterparty to the transaction, the FSM National Government will not be able to recover the value of investment or collateral securities that are in the possession of an outside party. The FSM

negotiated trust and custody contracts, all of these investments were held in the FSM National

September 30, 2015.

Concentration of credit risk for investments is the risk of loss attributed to the magnitude of an

and amount of investments in any one issuer that represents five percent (5%) or more of total investments for the State. As of September 30, 2015, the FSM National Government did not hold an investment in any one issuer that represented more than 5% of the FSM National



September 30, 2015

39

(2) Deposits and Investments, Continued B. Investments, Continued

Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of debt instruments. The FSM National Government does not have a formal investment policy that limits investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates. Fiduciary Funds FSM Social Security Administration (FSMSSA): The deposit and investment policies are governed by the FSMSSA enabling legislation. The FSMSSA Board is required to engage one or more fund custodians to assume responsibility for the physical possession of their investments. Legally authorized investments are as follows: i. Government obligations - Obligations issued or guaranteed as to principal and interest by

the FSM National Government and/or State governments of the FSM or by the Government of the United States, provided that the principal and interest on each obligation are payable in the currency of the United States.

ii. Corporate obligations and mortgage-backed securities - Obligations of any public or private

entity or corporation created or existing under the laws of the FSM or of the United States or any state, territory or commonwealth thereof, or obligations of any other government or economic community which are payable in United States dollars, or pass through and other mortgage-backed securities provided that the obligation is issued by an agency of the United States Government, the FSM National Government, or is rated in one of the three highest categories by two nationally recognized rating agencies. No investment under this heading shall exceed ten percent of the market value of the FSMSSA Retirement Fund or ten percent of the outstanding value of the issue at the time of purchase.

iii. Preferred and common stocks - Shares of preferred or common stocks of any corporation

created or existing under the laws of the FSM or under the laws of the United States or any state, territory or commonwealth thereof provided that the purchase of such shares shall be considered reasonable and prudent by the respective investment advisors at the time of purchase, that not more than five percent of the market value of the FSMSSA Retirement Fund shall be invested in the stock of any one corporation, and that not more than tenpercent of the market value of the FSMSSA Retirement Fund shall be invested in any one industry group.



September 30, 2015

40


Fiduciary Funds, Continued FSM Social Security Administration (FSMSSA), Continued: iv. Insurance company obligations - Contracts and agreements supplemental thereto providing

for participation in one or more accounts of a life insurance company authorized to do business in the FSM or in any state, territory or commonwealth of the United States provided that the total market value of these investments at no time shall exceed ten percent of all investments of the FSMSSA Retirement Fund.

As of December 31, 2015, investments at fair value are as follows:

Fixed income securities: Domestic fixed income $ 14,694,669 Other investments: Domestic equities 28,310,526

$ 43,005,195 As of December 31, 2015Service credit ratings, had the following maturities:

Investment Maturities (In Years) Less Greater Fair

Than 1 1 to 5 6 to 10 Than 10 Value U.S. Treasury obligations $ - $ 2,834,877 $ 4,816,196 $ 337,069 $ 7,988,162

Mortgage and asset-backed securities - 567,776 200,754 2,178,945 2,947,475

Corporate notes and bonds 181,237 1,474,130 1,135,622 968,043 3,759,032

$ 181,237 $ 4,876,783 $ 6,152,572 $ 3,484,077 $ 14,694,669

custcustodial financial institutions at December 31, 2015.

As of December 31, 2015, FSMSSA did not hold an investment in any one issuer that

tal investments.

Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of debt instruments. FSMSSA does not have a formal investment policy that limits investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates.



September 30, 2015

41


Discretely Presented Component Units

lly

follow those of the primary government.

FSM Telecommunications Corporation (FSMTC): As of September 30, 2015, investments at fair value are as follows:

Fixed income securities: U.S. Treasury obligations $ 192,436 U.S. Government agencies 61,499 Corporate notes 140,429 394,364 Other investments: Domestic and international equities 1,095,079 Money market funds 59,166 $ 1,548,609

As of September 30, 2015 securities in s Investors Service credit ratings, had the following maturities:

Investment Maturities (In Years) Credit Less Greater Fair Rating Than 1 1 to 5 6 to 10 Than 10 Value U.S. Treasury obligations Aaa/P-1 $ 38,237 $ 114,643 $ 39,556 $ - $ 192,436 U.S. Government agencies Aaa/P-1 12,194 49,305 - - 61,499 Corporate notes AA3/P-1 - - 15,408 - 15,408 Corporate notes A1/P-1 15,313 30,129 - - 45,442 Corporate notes A2/P-1 - 38,086 26,300 - 64,386 Corporate notes A3-/P-1 - 10,168 - - 10,168 Corporate notes BAA2/P-1 - 5,025 - - 5,025 $ 65,744 $ 247,356 $ 81,264 $ - $ 394,364



September 30, 2015

42

(2) Deposits and Investments, Continued

B. Investments, Continued Discretely Presented Component Units, Continued College of Micronesia - FSM (COM-FSM): As of September 30, 2015, the COM-

Fixed income securities: Domestic fixed income $ 725,448 International fixed income 260,218 985,666 Other investments: Common equities 2,871,022 Exchange traded funds 136,139 Money market funds 130,003

3,137,164

$ 4,122,830 As of September 30, 2015, COM-Investors Service credit ratings, had the following maturities:

Investment Maturities (in years) Investment Type Fair Value Less than 1 1-5 5-10 more than 10

Corporate bond $ 185,260 $ 6,055 $ 11,141 $ 67,602 $ 100,462International bond 260,218 - - - 260,218Government bond 540,188 - 422,059 69,502 48,627 $ 985,666 $ 6,055 $ 433,200 $ 137,104 $ 409,307

Domestic International Total

AAA/AAA $ 540,188 $ - $ 540,188 AA1/AA+ 7,259 - 7,259 A1/AA+ 7,262 - 7,262 A1/A 7,289 - 7,289 A1/AA- 7,682 - 7,682 A3/A 7,191 - 7,191 A3/A- 19,236 - 19,236 A3/BBB+ 14,299 - 14,299 BA1/BBB+ 5,743 - 5,743 BAA1/A- 2,114 - 2,114 BAA1/BBB+ 14,260 - 14,260 BAA1/BBB 7,927 - 7,927 BAA1-/BBB+ 11,292 - 11,292 BAA2/BBB+ 13,258 - 13,258 BAA2/BBB 14,293 - 14,293 BAA2/BBB- 7,099 - 7,099 BAA3/BBB+ 7,090 - 7,090 BAA3/BBB 6,057 - 6,057 BAA3/BBB- 25,909 - 25,909 Not Rated - 260,218 260,218

Total credit risk debt securities $ 725,448 $ 260,218 $ 985,666



September 30, 2015

43


Discretely Presented Component Units, Continued FSM Development Bank (FSMDB): As of December 31, 2015, investments at fair value are as follows:

Fixed income securities: Domestic fixed income $ 5,008,967 Other investments: Domestic equities 8,298,900 Shares in a mutual fund (Templeton Global BD FD ADV TGBAX) 983,966 $ 14,291,833

As of December 31, 2015Service credit ratings, had the following maturities:

Amount Maturity U.S. Government Securities: U.S. Treasury Note $ 511,494 11/15/2021 Aaa U.S. Treasury Note 681,224 02/15/2022 Aaa U.S. Treasury Note 693,459 05/15/2022 Aaa U.S. Treasury Bond 1,071,281 08/15/2023 Aaa U.S. Government Agency Securities: Federal Home Loan Bank (FHLB) note 339,820 06/23/2017 Aaa Federal National Mortgage Association (FNMA) note 90,687 09/26/2017 Aaa FNMA note 275,605 04/27/2018 Aaa Federal Farm Credit Bank note 179,348 05/17/2018 Aaa FNMA note 125,663 08/17/2018 AA+ S&P Federal Home Loan Mortgage Association (FHLMC) mortgage-backed securities 84,106 10/01/2023 not rated FNMA mortgage-backed securities 189,344 09/01/2027 not rated FHLMC mortgage-backed securities 212,931 06/01/2036 not rated Corporate Bonds: Morgan Stanley (CUSIP 61747WAF6) 56,137 01/25/2021 A3 General Electric Capital Corp (CUSIP 36962G5J9) 49,823 10/17/2021 A1 Wells Fargo & Company (CUSIP 94974BFJ4) 55,130 02/13/2023 A3 Wyeth (CUSIP 983024AF7) 42,812 02/01/2024 A1 IBM Corp (CUSIP 459200HU8) 51,471 02/12/2024 Aa3 Apple Inc. (CUSIP 037833AS9) 51,797 05/06/2024 Aa1 Florida Power & Light Company (CUSIP 341081FK8) 45,947 06/01/2024 Aa2 Goldman Sachs Group, Inc. (CUSIP 38141EC23) 35,716 07/08/2024 A3 Aflac, Inc. (CUSIP 001055AM4) 50,886 11/15/2024 A3 Citigroup Inc. (CUSIP 172967JT9) 60,601 06/10/2025 Baa3 MetLife Inc. (CUSIP 59156RBB3) 53,685 11/21/2036 A3 $ 5,008,967



September 30, 2015

44


Discretely Presented Component Units, Continued FSM Development Bank (FSMDB), Continued: FSMDB owns 225,000 shares of the outstanding common stock of the Bank of the Federated States of Micronesia. The investment of $1,912,188 is accounted for at cost since the investment constitutes a 16.1% ownership share. National Fisheries Corporation (NFC): NFC owns 50,493 shares of the outstanding common stock of the Micronesia Longline Fishing Company, Inc., an unconsolidated entity, representing a 97% ownership share. Additionally, NFC owns 50% of the shares of the outstanding common stock of the following unconsolidated entities: Yap Fishing Corporation, Yap Fresh Tuna, Inc., Chuuk Fresh Tuna, Inc., and Kosrae Sea Venture, Inc. These investments have been written down to a nil value. In addition, NFC holds 25% of the outstanding shares of Taiyo Micronesia Corporation, totaling $765,113, which is accounted for under the equity method. FSM Petroleum Corporation (FSMPC): As of December 31, 2015, investments at fair value are as follows:

Fixed income securities:

Domestic fixed income $ 469,912 International fixed income 188,139 658,051

Other investments: Common equities 773,072 Exchange traded funds 396,627 Money market funds 43,473 1,213,172

$ 1,871,223

As of December 31, 2015, fixed income securities had the following maturities:

1 to 5 5 to 10 More than Investment Type Fair value years years 10 years

International bonds $ 188,139 $ - $ - $ 188,139 Corporate bonds 268,244 98,366 141,196 28,682 U.S. Government Agency Bonds 201,668 78,659 80,467 42,542

$ 658,051 $ 177,025 $ 221,663 $ 259,363



September 30, 2015

45


Discretely Presented Component Units, Continued

(the Plan): As of September 30, 2015, investments at fair value are as follows:

Fixed income securities: Domestic fixed income $ 1,462,565 Other investments: Money market funds 20,517

$ 1,483,082 As of September 30, 2015Service credit ratings, had the following maturities:

Less Than 1 to 5 5 to 10 Fair Credit Rating 1 Year Years Years Value

U.S. Treasury obligations AAA $ 134,156 $ 452,490 $ 74,983 $ 661,629 U.S. Government agencies obligations AAA 154,372 311,526 - 465,898 Corporate bonds Aaa 22,039 16,132 - 38,171 Corporate bonds Aa 10,163 58,760 - 68,923 Corporate bonds A 32,432 149,816 - 182,248 Corporate bonds Baa 15,301 30,395 - 45,696

$ 368,463 $ 1,019,119 $ 74,983 $ 1,462,565

(3) Receivables

Primary Government Receivables as of September 30, 2015governmental funds, and nonmajor governmental and fiduciary funds in the aggregate, including applicable allowances for uncollectible accounts, are as follows:

Nonmajor Grants Compact and Fiduciary General Assistance Trust Funds TotalsReceivables: General $ 3,062,718 $ - $ - $ - $ 3,062,718 Taxes 4,149,042 - - - 4,149,042 Government agencies - 5,505,773 - - 5,505,773 Contributions - - - 2,943,789 2,943,789 Loans 46,632,660 - - 1,606,953 48,239,613 Advances 1,454,072 88,782 - - 1,542,854 Accrued interest 27,184 - - - 27,184 Other - - - 1,010,278 1,010,278 55,325,676 5,594,555 - 5,561,020 66,481,251 Less: allowance for uncollectable accounts (6,342,103) (1,590,989) - (1,606,953) (9,540,045) Net receivables $ 48,983,573 $ 4,003,566 $ - $ 3,954,067 $ 56,941,206



September 30, 2015

46

(3) Receivables, Continued

Primary Government, Continued During the year ended September 30, 2015, certain loans receivable balances resulting from subsidiary loans of loan agreements between the FSM National Government and the Asian Development Bank (ADB) were reduced as a result of foreign exchange gains recognized by these respective subsidiary borrowers. The non-cash reduction in loans receivable of $2,338,637 is presented as a special item in the accompanying financial statements and is offset against the governmental activities gain on SDR foreign exchange.

Loans receivable of the primary government are as follows: General Fund:

Notes receivable from the National Fisheries Corporation (NFC), payable in various annual installments of $1,962 to $86,639, non-interest bearing, and due on various dates ranging from July 2007 through April 2014. These notes have been fully provided for in the allowance for uncollectable accounts. $ 3,225,000 Loan receivable from Micronesia Longline Fishing Company, a majority-owned subsidiary of NFC, in the amount of SDR 3,514,000, interest at 6.64% per annum, repayments commencing January 15, 1998, with a maturity date of July 15, 2007. The loan is a subsidiary loan of a loan agreement (Loan Number 1257 FSM (SF)) between the FSM National Government and the ADB. This loan has been fully provided for in the allowance for uncollectible accounts. 3,956,653 Loans receivable from the State of Chuuk (CSG), the Pohnpei Utilities Corporation (PUC), and the Yap State Public Service Corporation (YSPSC). These loans are subsidiary loans of a loan agreement (Loan Number 1459 FSM (SF)) between the FSM National Government and the ADB. The FSM National Government entered into Financing Agreements with the States of Chuuk, Pohnpei and Yap whereby a portion of the loan proceeds under this ADB loan were relent under the same terms and conditions imposed by the ADB. The States (with the exception of CSG) in turn relent the loan proceeds to PUC and YSPSC, respectively, as follows: General Governmental Fund Activities State of Chuuk $ 3,259,280 $ 569,738 Pohnpei Utilities Corporation 2,000,695 348,769 Yap State Public Service Corporation 2,140,321 373,707 $ 7,400,296 $ 1,292,214 8,692,510



September 30, 2015

47

(3) Receivables, Continued Primary Government, Continued General Fund, Continued: Loans receivable from the States to assist in the implementation of an Early Retirement Scheme (ERS) in which employees holding certain nonessential positions as identified by the States were retired early with a payout of the equivalent of two-years wages. These loans are subsidiary loans of a loan agreement (Loan Number 1520 FSM (SF)) between the FSM National Government and the ADB. The FSM National Government entered into Financing Agreements with the States whereby a portion of the loan proceeds under this ADB loan were relent under the same terms and conditions imposed by the ADB. The amounts outstanding from the States are as follows: General Governmental Fund Activities State of Chuuk $ 4,484,498 $ 779,682 State of Yap 2,944,610 514,978 State of Kosrae 1,681,923 294,184 State of Pohnpei 3,555,254 617,848 $ 12,666,285 $ 2,206,692 14,872,977 Loans receivable from the States to assist in the implementation of the Basic Social Services Program. These loans are subsidiary loans of a loan agreement (Loan Number 1816 FSM (SF)) between the FSM National Government and the ADB. The FSM National Government entered into Financing Agreements with the States whereby a portion of the loan proceeds under this ADB loan were relent under the same terms and conditions imposed by the ADB. The amounts outstanding from the States are as follows: General Governmental Fund Activities State of Chuuk $ 328,470 $ 66,725 State of Yap 151,331 22,357 State of Kosrae 117,429 15,993

$ 597,230 $ 105,075 702,305 Loans receivable from the States to assist in the implementation of the Private Sector Development Program. These loans are subsidiary loans of loan agreements (Loan Number 1873 FSM (SF) and Loan Number 1874 FSM (SF)) between the FSM National Government and the ADB. The FSM National Government entered into Financing Agreements with the States whereby a portion of the loan proceeds under these ADB loans were relent under the same terms and conditions imposed by the ADB. The amounts outstanding from the States are as follows:



September 30, 2015

48

(3) Receivables, Continued Primary Government, Continued General Fund, Continued

General Governmental Fund Activities State of Chuuk $ 1,288,880 $ 146,352 State of Yap 871,388 126,710 State of Kosrae 1,011,683 164,325 State of Pohnpei 980,888 178,504 $ 4,152,839 $ 615,891 4,768,730 Loans receivable from the States and the to enhance public health and the environment through assistance to improve water supply infrastructure in Kosrae and Yap, and wastewater infrastructure in Pohnpei; and to support economic growth and poverty reduction in Chuuk through improvements to the electrical power sector. These loans are subsidiary loans of loan agreements Loan Number 2099 FSM (SF) and Loan Number 2100 FSM (SF)) between the FSM National Government and the ADB. The FSM National Government entered into Financing Agreements with the States whereby a portion of the loan proceeds under these ADB loans were relent under the same terms and conditions imposed by the ADB. The amounts outstanding from the States and the S ent units are as follows: General Fund State of Pohnpei/PUC $ 6,997,376 State of Chuuk/CPUC 4,138,781 State of Yap/GTWA 2,479,594 State of Kosrae/KUA 1,018,606 $ 14,634,357 14,634,357 $ 50,852,532 Other Governmental Funds: Loans receivable from students under a student financial assistance loan program, interest at 4% per annum, with repayment commencing ten years and nine months after completion of study. These loans have been fully provided for in the allowance for uncollectible accounts. $ 1,606,953



September 30, 2015

49

(3) Receivables, Continued Primary Government, Continued General Fund, Continued

Discretely Presented Component Units Receivables as of September 30, 2015, for the discretely presented component units, including applicable allowances for uncollectible accounts, are as follows:

FSM

FSM Tele- FSM National College of Coconut FSM Vital Caroline

Communications Development Fisheries Micronesia- Development Petroleum Energy Islands MiCare

Corporation Bank Corporation FSM Authority Corporation Inc. Air, Inc. Plan, Inc. Total

Receivables:

General $ 1,804,531 $ 8,146 $ 50,000 $9,460,689 $ - $1,917,485 $662,118 $ - $ 558,429 $14,461,398

Loans - 25,832,979 - - - - - - - 25,832,979

Interest 170,968 122,571 - - - - - - - 293,539

Other 359,319 197,448 1,907 171,897 - 462 - - - 731,033

2,334,818 26,161,144 51,907 9,632,586 - 1,917,947 662,118 - 558,429 41,318,949

Less: allowance for

uncollectible

accounts (1,006,883) (3,952,258) - (2,930,833) - - - - (310,395) (8,200,369)

$ 1,327,935 $ 22,208,886 $ 51,907 $6,701,753 $ - $1,917,947 $662,118 $ - $248,034 $33,118,580

(4) Interfund Receivables and Payables

Primary Government Receivables and payables between funds reflected as due to/from other funds in the combined balance sheet at September 30, 2015, are summarized as follows: Receivable Fund Payable Fund Amount General Grants Assistance $ 125,508 Grants Assistance General 12,793,564 Nonmajor governmental funds General 4,520,505 $ 17,439,577



September 30, 2015

50

(5) Capital Assets Capital asset activities for the year ended September 30, 2015, are as follows: Primary Government

Balance October 1, 2014

Additions and

Reclassifications

Retirements and Reclassifications

Balance September30, 2015

Depreciable assets: Buildings and improvements $ 55,545,429 $ 7,718,877 $ 3,230,862 $ 66,495,168 Boats 22,569,231 811,743 (1,198,567) 22,182,407 Infrastructure 107,540,266 3,732,798 14,155,004 125,428,068 Motor vehicles 6,570,990 719,946 (4,206,881) 3,084,055 Computer equipment 5,103,886 185,811 (3,348,009) 1,941,688 Aircraft 709,207 - - 709,207 Furniture, equipment and machinery 9,868,082 451,827 (2,956,293) 7,363,616

207,907,091 13,621,002 5,676,116 227,204,209

Less: accumulated depreciation Buildings and improvements (7,868,727) (1,153,021) (185,396) (9,207,144) Boats (16,244,982) (1,058,937) 1,808,057 (15,495,862) Infrastructure (16,718,892) (6,109,629) (2,058,983) (24,887,504) Motor vehicles (5,550,803) (327,472) 3,901,979 (1,976,296) Computer equipment (4,479,363) (197,923) 3,198,616 (1,478,670) Aircraft (548,570) (35,460) 26,325 (557,705) Furniture, equipment, and machinery (8,498,264) (630,142) 2,983,697 (6,144,709)

(59,909,601) (9,512,584) 9,674,295 (59,747,890)

147,997,490 4,108,418 15,350,411 167,456,319 Land 10,000 - - 10,000 Construction in progress 54,858,631 - (9,325,977) 45,532,654

54,868,631 - (9,325,977) 45,542,654 Net Assets $ 202,866,121 $ 4,108,418 $ 6,024,434 $ 212,998,973



September 30, 2015

51

(5) Capital Assets, Continued Primary Government, Continued

governmental activities as follows: Office of the President $ 34,487 Foreign affairs 29,929 Health and social affairs 309,915 Education 135,309 Resources and development 15,282 Office of National Archives, Cultural and Historic 5,851 Transportation, communication and infrastructure 7,716,629 Finance and administration 44,720 Justice 388,578

Office of the Public Defender 22,480 SBOC Office 32,986 Judiciary 55,440 Legislature 91,712 Office of the National Public Auditor 11,642 Environment and emergency management 15,169 National government programs 547,409 Agencies, boards and commissions 55,046 $ 9,512,584


Balance Balance October 1, 2014 Additions Deletions September 30, 2015

Depreciable assets: Building and Leasehold Improvements $ 35,126,834 $ 113,037 $ - $ 35,239,871 Plant and Equipment 67,209,837 6,607,878 - 73,817,715 Machinery and Equipment 20,892,998 443,006 (17,957) 21,318,047 Others 19,765,986 796,498 (7,707) 20,554,777

142,995,655 7,960,419 (25,664) 150,930,410 Accumulated Depreciation (81,609,739) (6,947,064) 15,199 (88,541,604)

61,385,916 1,013,355 (10,465) 62,388,806 Nondepreciable assets: Construction in Progress 9,170,306 3,468,995 (8,167,236) 4,472,065 Land 1,455,685 - - 1,455,685

10,625,991 3,468,995 (8,167,236) 5,927,750

$ 72,011,907

$ 4,482,350 $ (8,177,701) $ 68,316,556



September 30, 2015

52

(6) Indefeasible Right of Use (IRU) On January 12, 2009, the FSM Telecommunications Corporation (FSMTC) entered into an IRU Capital Lease agreement with a third party for the exclusive use of 8 wave lengths of fiber capacity of the two fibers of the Kwajalein Cable System (KCS) which runs between Guam and Kwajalein

certain payments of $3,656,301. The initial term of the agreement is for a period of 10 years commencing on the date FSMTC is initially granted access, and which term is automatically renewable for a further 10 year period and an additional 5 year period thereafter. Prior to the tenth and twentieth anniversary dates, FSMTC has the option to terminate this agreement; however, such is subject to prior approval of the Rural Utilities Services (RUS) of the U.S. Department of

September 30, 2015, accumulated amortization expense of $804,386 has been recorded.

(7) Long-Term Obligations Primary Government

Asian Development Bank (ADB) Loan Number 1257 FSM (SF) - Fisheries Development Project Loan (SDR 3,792,000), non-interest bearing with a service charge of 1% per annum on the amount of the loan withdrawn from the Loan Account. The loan is payable semi-annually commencing January 15, 2004 in an amount of SDR 46,100 increasing to SDR 92,400 on January 15, 2014, with a maturity date of July 15, 2033. $ 3,956,653

ADB Loan Number 1459 FSM (SF) - Water Supply and Sanitation Project Loan (SDR 7,233,000), non-interest bearing with a service charge of 1% per annum on the amount of the loan withdrawn from the Loan Account. The loan is payable semi-annually commencing February 1, 2007 in an amount of SDR 69,200, increasing to SDR 138,500 on February 1, 2017, with a maturity date of August 1, 2036. 7,400,296

ADB Loan Number 1520 FSM (SF) - Public Sector Reform Program Loan (SDR 12,979,000), non-interest bearing with a service charge of 1% per annum on the amount of the loan withdrawn from the Loan Account. The loan is payable semi-annually commencing February 1, 2008 in an amount of SDR 129,800, increasing to SDR 259,600 on February 1, 2018, with a maturity date of August 1, 2037. 14,748,908

ADB Loan Number 1816 FSM (SF) - Basic Social Services Project Loan (SDR 6,199,000), non-interest bearing with a service charge of 1% per annum on the amount of the loan withdrawn from the Loan Account. The loan is payable semi-annually commencing February 1, 2009 in an amount of SDR 129,145, at which time the service charge increases to 1.5% per annum, with a maturity date of August 1, 2032. 2,568,033



September 30, 2015

53

(7) Long-Term Obligations, Continued Primary Government, Continued

ADB Loan Number 1873 FSM (SF) - Private Sector Development Program Loan

(SDR 3,912,000), non-interest bearing with a service charge of 1% per annum on the amount of the loan withdrawn from the Loan Account. The loan is payable semi-annually commencing May 15, 2010 in an amount of SDR 122,250, at which time the service charge increases to 1.5% per annum, with a maturity date of November 15, 2025. 2,215,888

ADB Loan Number 1874 FSM (SF) - Private Sector Development Project Loan

(SDR 6,273,000), non-interest bearing with a service charge of 1% per annum on the amount of the loan withdrawn from the Loan Account. The loan is payable semi-annually commencing May 15, 2010 in an amount of SDR 130,687, at which time the service charge increases to 1.5% per annum, with a maturity date of November 15, 2033. 4,859,154

ADB Loan Number 2099 FSM (SF) - Omnibus Infrastructure Development

Project (SDR 9,686,000), interest bearing at the rate of 1% per annum on the amount of the loan withdrawn from the Loan Account during the grace period. The loan is payable semi-annually commencing January 15, 2013 in an amount of SDR 201,791, at which time the interest rate increases to 1.5% per annum, with a maturity date of July 15, 2036. 10,693,306

ADB Loan Number 2100 FSM (SF) - Omnibus Infrastructure Development

Project (SDR 9,686,000), interest bearing equivalent to the sum of LIBOR and .60% per annum on the amount of the loan withdrawn from the Loan account with a loan term of 25 years including a grace period of 5 years. The loan is payable semi-annually commencing January 15, 2010, in an amount of .83% of the outstanding loan balance and incrementing at certain years between .04% - .16% up to the maturity date of July 15, 2029. 4,214,220

$ 50,656,458 The abovementioned ADB loans payable are uncollateralized and are backed by the full faith and credit of the FSM National Government. Annual debt service requirements to maturity for principal and interest and service charges are as follows: Year ending Interest Service September 30, Principal Charge Total 2016 $ 2,088,840 $ 603,312 $ 2,692,152 2017 2,284,315 577,951 2,862,266 2018 2,652,053 542,465 3,194,518 2019 2,670,013 517,368 3,187,381 2020 2,690,885 485,106 3,175,991 2021-2025 13,838,375 1,935,324 15,773,699 2026-2030 13,241,631 1,121,002 14,362,633 2031-2034 9,400,634 381,779 9,782,413 2035-2037 1,789,712 25,346 1,815,058 $ 50,656,458 $ 6,189,653 $ 56,846,111



September 30, 2015

54

(7) Long-Term Obligations, Continued Primary Government, Continued Other long-term liabilities will be liquidated in the future from governmental funds. During the year ended September 30, 2015, the following changes occurred in liabilities reported as part of the

long-term liabilities in the statement of net position:

Balance Balance October 1, September 30, Due Within 2014 Additions Reductions 2015 One Year Loans payable: ADB Loan 1257 FSM (SF) $ 4,834,613 $ - $ (877,959) $ 3,956,653 $ 219,429 ADB Loan 1459 FSM (SF) 8,782,726 - (1,382,429) 7,400,296 180,145 ADB Loan 1520 FSM (SF) 17,494,504 - (2,745,597) 14,748,908 350,750 ADB Loan 1816 FSM (SF) 3,130,667 - (562,634) 2,568,033 150,851 ADB Loan 1873 FSM (SF) 2,797,543 - (581,655) 2,215,888 210,775 ADB Loan 1874 FSM (SF) 5,837,362 - (978,210) 4,859,154 262,330 ADB Loan 2099 FSM (SF 10,253,026 1,544,135 (1,103,855) 10,693,306 566,514 ADB Loan 2100 FSM (SF) 3,862,330 498,545 (146,654) 4,214,220 148,046 56,992,771 2,042,680 (8,378,993) 50,656,458 2,088,840 Other: Compensated absences payable 1,117,888 347,180 (391,613) 1,073,455 340,525 $58,110,659 $2,389,860 $ (8,770,606) $51,729,913 $2,429,365

When the ADB extends credit to a particular country, the loan is booked in Special Drawing Rights (SDRs) but the actual loan is delivered in the currency of the borrower, at the current exchange rate between the currency and the SDR. The value of the SDR is subject to periodic review by the International Monetary Fund, which may result in the recognition of a foreign exchange gain or loss. During the year ended September 30, 2015, the FSM National Government recognized a foreign exchange gain of $6,298,877 associated with valuation of the SDR, which is presented as a special item in the accompanying financial statements, and which results in a reduction in ADB loans payable. Discretely Presented Component Units

As of September 30, 2015, the discretely presented component units had the following long-term debt outstanding: FSM Telecommunications Corporation (FSMTC): Loans payable to RUS, with a 35 year term, interest at 5% per annum, collateralized by the Corporation's specific ground leases and essentially all other assets. Pursuant to loan agreements dated August 1, 1990 and March 12, 2009, the Corporation is required to make monthly payments of both principal and interest to RUS. The loans were originally in the amounts of $32,000,000 and $12,136,000 and the proceeds were used for capital related purposes. $ 25,708,951



September 30, 2015

55

(7) Long-Term Obligations, Continued Discretely Presented Component Units, Continued

FSM Development Bank (FSMDB): Loan payable to European Investment Bank under an August 2010 master finance contract of EUR 4 million, drawn on August 20, 2014, bearing fixed interest, and payable through semi-annual principal and interest installment. 1,283,346 National Fisheries Corporation (NFC): Notes payable to the FSM National Government, due in various annual installments of $1,962 to $86,639, non-interest bearing, with final maturities due on various dates ranging from July 2007 through April 2014. These notes are all delinquent as payments should have commenced in 1994 and 1995. However, no repayments have been made. Therefore, these notes are classified as current. 3,225,000 $ 30,217,297 Annual the debt service requirements to maturity for principal and interest are as follows:

Year ending September 30, Principal Interest Total 2016 $ 5,105,754 $ 1,302,551 $ 6,408,305 2017 1,977,743 1,205,562 3,183,305 2018 2,076,968 1,106,337 3,183,305 2019 2,182,081 1,001,224 3,183,305 2020 2,291,826 891,479 3,183,305 2021-2025 13,045,831 2,613,191 15,659,022 2026-2027 3,537,094 117,814 3,654,908 $ 30,217,297 $ 8,238,158 $ 38,455,455

FSM Telecommunications Corporation (FSMTC): FSMTC entered into a $4 million contract with Acclinks Communications, Inc. for a Third Generation (3G) Mobile Network Partnership Agreement signed on September 12, 2013. As of September 30, 2015, FSMTC recognized $2,580,248 as a contract liability that will be paid through revenue sharing as agreed per payment terms. Future minimum payments payable under this contract are as follows:

Year ending September 30; Total

2016 $ 885,782 2017 564,822 2018 564,822 2019 564,822 $ 2,580,248



September 30, 2015

56

(7) Long-Term Obligations, Continued Discretely Presented Component Units, Continued Changes in long-term liabilities of the discretely presented component units for the year ended September 30, 2015, are as follows:

Balance Balance October 1, September 30, Due Within 2014 Additions Reductions 2015 One Year Loans payable: FSMTC $ 27,380,302 $ - $ (1,671,351) $ 25,708,951 $ 1,752,305 FSMDB 1,821,480 - (538,134) 1,283,346 128,449 NFC 3,350,000 - (125,000) 3,225,000 3,225,000 32,551,782 - (2,334,485) 30,217,297 5,105,754 Contracts payable: FSMTC 2,800,000 - (219,752) 2,580,248 885,782 $ 35,351,782 $ - $ (2,554,237) $ 32,797,545 $ 5,991,536

(8) Short-Term Obligations


FSM Petroleum Corporation (FSMPC):

As of December 31, 2015, FSMPC has a bank line of credit facility (LOC) of $10,000,000 currently expiring on July 30, 2017. This LOC is utilized by FSMPC to fund fuel inventory purchases. The LOC and the related long-term obligation are secured and collateralized by an executed Pledge and Security Agreement for the assignment of the Reserve Bank Account and Revenue, an executed Notice of Security Interest and Chattel Mortgage and are guaranteed by the FSM National Government. Borrowings against the LOC bear interest rate plus 0.75%, with minimum rate of 7% per annum and decreased to 5.75% per annum on January 31, 2013, with interest payable monthly and principal due within 180 days. No borrowings are outstanding against the LOC at December 31, 2015.

(9) Operating Transfers In/Out

Primary Government

Operating transfers in/out for each major governmental fund and nonmajor governmental funds in the aggregate, for the year ended September 30, 2015, are as follows:

Source Recipient Transfers Out Transfers In General Fund General Fund Grants Assistance Fund $ 200,000 $ - Grants Assistance Funds General Fund Grants Assistance Fund - 200,000 $ 200,000 $ 200,000



September 30, 2015

57

(9) Operating Transfers In/Out, Continued

Primary Government, Continued

Transfers are used to 1) move revenues from the fund that enabling legislation or budget requires to collect them to the fund that enabling legislation or budget requires to expend them, 2) use unrestricted revenues collected in the General Fund to finance various programs accounted for in other funds in accordance with budgetary authorizations, and 3) record reductions in interfund loans for amounts that are not expected to be repaid.

(10) Contingencies and Commitments

Sick Leave

It is the policy of the FSM National Government to record expenditures for sick leave when leave is actually taken. Sick leave is compensated time for absence during working hours arising from employee illness or injury. FSM Petroleum Corporation (FSMPC) Loan Guarantee

obligations under the loan and waives the sovereign immunity of the FSM National Government with regard to any legal action arising from the guaranty.

FSMPC Due to States and Primary Government FSMPC has received a grant from Japan to fund fuel acquisition. At an undetermined time, FSMPC will distribute the grant to the States; however, the amount and time at which the amount would be distributable is currently undeterminable and therefore the FSM National Government and the States have not recorded a corresponding receivable. Insurance Coverage The FSM National Government does not maintain insurance coverage for a significant amount of fixed assets. In the event of a catastrophe, the FSM National Government may be self-insured to a material extent. Federal Grants The FSM National Government participates in a number of federally assisted grant programs. These programs are subject to financial and compliance audits to ascertain if Federal laws and guidelines have been followed. Cumulative questioned costs exist and have been set forth in the

as of September 30, 2015. The ultimate disposition of these questioned costs can be determined only by final action of the respective grantor agencies. Therefore, no provision for any liability that may result upon resolution of this matter has been made in the accompanying financial statements. In addition, a material amount of questioned costs may exist from the four States, which receive federal funds in a subrecipient capacity. If these questioned costs are sustained, such will be funded by State resources.



September 30, 2015

58

(10) Contingencies and Commitments, Continued Federal Grants, Continued Pursuant to Title I, Section 105 of United States Public Law 99-290, the FSM National Government is no longer liable for debts to U.S. federal agencies arising prior to the date of the implementation of the Compact of Free Association. This matter has not yet been officially resolved with the U.S. Government. Accordingly, the States have made no adjustment to the above questioned costs for amounts which were incurred prior to the implementation of the Compact of Free Association. The FSM National Government is pursuing long outstanding receivables from federal grant agencies. Uncollectible accounts, if any, that result from this exercise will be accounted for prospectively. Leases The FSM National Government has entered into house lease agreements varying from one to five years. The aggregate amount of future lease payments has not been accumulated as renewal is subject to annual appropriation. Litigation The FSM National Government is party to various legal proceedings, many of which are normal recurrences in governmental operations. The Attorney General of the FSM National Government is of the opinion that the probable outcome of suits existing at September 30, 2015, is not predictable. No provision for any liability has been made in the accompanying financial statements because management believes that no unfavorable outcome is likely to occur. Encumbrances The FSM National Government utilizes encumbrance accounting to identify fund obligations. Encumbrances represent commitments related to unperformed contracts for goods. At September 30, 2015, the FSM National Government has significant encumbrances summarized as follows:

General

Grants

Assistance

Other Governmental

Funds

Total Encumbrances $2,712,936 $6,361,823 $503,515 $9,578,274 Asian Development Bank (ADB) Loans On November 5, 2004, the FSM National Government entered into two loan agreements (Loan Number 2099 FSM (SF) and Loan Number 2100 FSM (SF)) with the Asian Development Bank in the combined amount of $19,000,000 for the Omnibus Infrastructure Development Project. The proceeds are to be used to enhance public health and the environment through assistance to improve water supply infrastructure in Kosrae and Yap, and wastewater infrastructure in Pohnpei; and to support economic growth and poverty reduction in Chuuk through improvements to the electrical power sector, which will include on lending a portion of the loan proceeds to the States under separate Financing Agreements. As of September 30, 2015, the FSM National Government had drawn down $14,907,526 against these loans. A substantial portion of the ADB loans are subject to currency exchange adjustments that can ultimately impact the carrying values of the debt.



September 30, 2015

59

(11) Special Item During the year ended September 30, 2015, management determined that certain receivables in the amount of $6,966,019 were no longer considered collectible and were written off. This write-off of receivable balances is presented as a special item in the accompanying financial statements.

(12) Fund Balance

Classifications of fund balances comprise a hierarchy based primarily on the extent to which a government is bound to observe constraints imposed upon the use of the resources reported in governmental funds. The following table enumerates the fund balance classifications: Non-spendable: Loans receivable from States $ 39,451,007 $ - $ - $ - $ 39,451,007 United Micronesia Dev. Association 1,500,000 - - - 1,500,000 Bank of FSM 3,382,063 - - 3,382,063 ADB contribution 6,927,442 - - - 6,927,442 IMF contribution 1,149,850 - - - 1,149,850 General government 1,454,072 - - - 1,454,072 Permanent fund - - 14,621,055 - 14,621,055 Restricted For: ADB Imprest Funds 83,716 - - - 83,716 Infrastructure - 350,901 - - 350,901 Disaster Assistance - 2,086,339 - - 2,086,339 Sector Development - 13,153 - - 13,153 Committed: ADB 2,116,230 - - - 2,116,230 CFSM Public projects 19,208,818 - - - 19,208,818 Office of the President 42,610 - - - 42,610 Department of TC&I 7,260,709 - - 108,519 7,369,228 Department of Finance & Adm. 211,201 - - - 211,201 Department of Justice 867,261 - - 1,753,578 2,620,839 Department of R & D 671,027 - - 28,603 699,630 Department of Education 2,100,000 - - 122,010 2,222,010 Department of Health 235,366 - - 30,582 265,948 Office of SBOC 155,393 - - - 155,393 Office of EEM 12,806 - - - 12,806 National Historic & Preservation 157,515 - - - 157,515 Legislative 48,300 - - - 48,300 Judiciary 139,314 - - - 139,314 Office of Public Auditor 109,961 - - - 109,961 Office of Public Defender 100,000 - - - 100,000 Future operations-FSM Trust fund 58,761,675 - - - 58,761,675 Other functions and programs 2,070,873 - - 2,492,428 4,563,301 Assigned: Presidents (Executive branch) 965,055 - - - 965,055 Legislative branch 349,746 - - - 349,746 Judiciary branch 39,500 - - - 39,500 National program 184,026 - - - 184,026 Other functions and programs 2,070,193 - - - 2,070,193 Unassigned 19,857,370 (24,675) - - 19,832,695

$ 171,683,099 $ 2,425,718 $ 14,621,055 $ 4,535,720 $ 193,265,592

60


___________________________________________________________

REQUIRED SUPPLEMENTARY INFORMATION-

___________________________________________________________



Schedule of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual - General FundGeneral Fund


Variance withActual Final Budget -

Amounts PositiveOriginal Final (note 1) (Negative)

Revenues: Taxes 13,636,705$ 13,636,705$ 16,806,209$ 3,169,504$ Fishing rights 36,000,000 58,500,000 65,164,718 6,664,718 Postal revenues 600,000 600,000 181,316 (418,684) Investment earnings 1,500,000 1,500,000 153,172 (1,346,828) Fees and charges 500,000 500,000 151,965 (348,035) Micare reimbursable - - 243,451 243,451 Other 8,650,000 6,650,000 903,417 (5,746,583)

Total revenues 60,886,705 81,386,705 83,604,248 2,217,543

Expenditures: Executive Branch - Core Operational 17,202,953 18,710,079 16,682,909 2,027,170 Executive Branch - Non-Core Operational 19,561,621 12,040,699 7,409,497 4,631,202 Judicial Branch-Core Operational 1,311,436 1,311,436 1,112,000 199,436 Judicial Branch-Non-core Operational 180,000 180,000 140,000 40,000 Legislative Branch-Core Operational 3,849,605 5,433,005 5,148,537 284,468 Legislative Branch-Non-Core Operational 755,000 492,990 335,853 157,137 Office of the National Public Auditor-Core Operational 748,398 748,398 647,218 101,180 Office of the National Public Auditor-Non-Core Operational 329,250 432,000 403,250 28,750 Other National Programs 1,020,203 1,080,203 917,696 162,507 Boards and Commissions 1,830,178 1,857,975 1,804,546 53,429 Payments to Component Units 4,262,669 4,262,669 2,848,051 1,414,618 National projects - continuing projects 14,101,631 14,101,631 4,869,367 9,232,264

Total expenditures 65,152,944 60,651,085 42,318,924 18,332,161

Excess (deficiency) of revenues over (under) expenditures (4,266,239) 20,735,620 41,285,324 20,549,704

Other financing uses: Operating transfers out - - (200,000) (200,000)

Special item: Write-off of receivable balances - - (6,966,019) (6,966,019)

Net change in fund balance (4,266,239) 20,735,620 34,119,305 13,383,685

Encumbrances for supplies and equipment ordered but not received are reported in the year the order is placed for budgetary purposes but in the year the supplies are received for financial reporting purposes - - (11,833,597) (11,833,597)

(4,266,239) 20,735,620 22,285,708 1,550,088Fund balance at the beginning of the year 149,397,391 149,397,391 149,397,391 -

Fund balance at the end of the year 145,131,152$ 170,133,011$ 171,683,099$ 1,550,088$

See accompanying notes to required supplementary information - budgetary reporting.

61

Budgeted Amounts

62


Notes to Required Supplementary Information - Budgetary Reporting

September 30, 2015 (1) Budgetary Information

The Congress of the Federated States of Micronesia (CFSM) enacts the budget through passage of specific departmental appropriations. Before signing the Appropriations Act, the President may veto or reduce any specific appropriation, subject to Congressional override. Under the Compact of Free Association, which went into effect November 3, 1986, approval of all CFSM Laws is vested with the President of the Federated States of Micronesia. During fiscal year 2015, supplemental appropriations were also made for both operating and capital purposes, to reflect the evolving priorities of the FSM National Government. Budgetary control is maintained at the departmental level. Budget revisions during the year, reflecting program changes, may be effected by CFSM approval. Formal budget integration is employed as a management control device during the year for all funds. The Congress of the FSM has the authority to reprogram budgeted estimates in accordance with the Constitution. All annual appropriations lapse at fiscal year end unless otherwise specified by law. Supplemental appropriations may occur throughout the year. Unexpended encumbrances at each fiscal year end are carried forward until they are expended or canceled without further legislative action. Accounting principles used in developing data on a budgetary basis differ from those used in preparing the basic financial statements in conformity with GAAP. Amounts included on the Schedule of Revenues, Expenditures, and Changes in Fund Balance - Budget and Actual - General Fund (which is presented on a non-GAAP budgetary basis) are reconciled to unreserved fund balance of the Governmental Fund Balance Sheet within the other changes in unreserved fund balance section of that schedule. Encumbrance accounting is employed in governmental funds. For budgetary purposes, the encumbrances (i.e., purchase orders, contracts) are considered expenditures when incurred. For GAAP reporting purposes, encumbrances outstanding at year end are reported as reservations of fund balances and do not constitute expenditures or liabilities because the commitments will be reappropriated and honored during the subsequent fiscal year.

63


Notes to Required Supplementary Information - Budgetary Reporting, Continued

September 30, 2015 (2) Reconciliation - GAAP and Budgetary Bases of Accounting

The Budget Act for fiscal year 2015, Public Law No. 18-89, was approved for the Executive branch and the Legislative branch. Budgets for Special Revenue Funds are generally not submitted. Accordingly, a budget to actual presentation for Special Revenue Funds is not required or presented. Project length financial plans are adopted for capital projects funds. The accompanying Schedule of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual - General Fund presents solely the financial activities of the General Fund administered by the Department of Finance and Administration, and does not include other financial activities administered by that Department and the impact of implementation of Governmental Accounting Standards Board Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions.

Accounting principles used in developing data on a budgetary basis differ from those used in preparing the financial statements in conformity with GAAP. The net change in fund balance on a budgetary basis reconciled to the net change in fund balance for the General Fund is as follows:

Net change in fund balance - Budgetary basis $ 34,119,305 Add: Encumbrances and commitments (45,457,323) Net change in fund balances (11,338,018) Add: Net change in fund balance - GAAP for GASB 54 Funds: ADB Loan Fund (Fund 91) (1,991,756) IDF Fund (185,241) ERP Fund (428,751) FSM Trust Fund 36,229,474 Net change in fund balance - GAAP $ 22,285,708

64


_______________________________________________

OTHER SUPPLEMENTARY INFORMATION _______________________________________________



Combined Schedule of Expenditures by Account -Governmental Fund Types


SpecialRevenue Permanent

Other Grants Compact Governmental

General Assistance Trust Funds Total

Expenditures:Personnel 13,481,059$ 2,955,831$ -$ 305,326$ 16,742,216$ Travel and transportation 4,226,340 2,486,604 - 7,321 6,720,265Books and library materials 6,491 199,497 - - 205,988Communications 602,932 5,886 - 1,040 609,858Customs and taxes 28,221 19,709 - - 47,930Dues, membership and subscription 371,648 207,696 - - 579,344Food stuffs 674,526 38,569 - 79,040 792,135Freight 31,825 80,799 - 1,778 114,402Expendable equipment 252,574 360,019 - 2,092 614,685Office supplies and materials 1,358,348 166,709 - 33,357 1,558,414POL 1,277,633 55,367 - 1,317,150 2,650,150Advertising, printing and reproduction 181,678 279,016 - (82) 460,612Rental services 164,571 13,193 - 391 178,155Repair and maintenance 90,071 260,951 - 1,100 352,122Utilities 967,177 4,210 - 3,000 974,387Miscellaneous goods and services 23,651 - - - 23,651Medical supplies 5,949 280,357 - - 286,306Medical claims and referrals 150 - - - 150Contributions, subsidies and grants 3,288,910 - - - 3,288,910General contractual services 4,207,586 3,237,886 - 2,231,747 9,677,219Professional services 579,588 606,681 - - 1,186,269Employee housing and household storage 981,394 71,125 - - 1,052,519Recruit and repatriation 160,885 - - - 160,885Compensation-nonpayroll 217,360 28,510 - - 245,870Educational allowance 132,483 - - - 132,483Training and registration fees 148,191 10,319 - - 158,510Scholarships 2,059,274 - - 47,920 2,107,194Official and meeting allowances 53,480 64,710 - - 118,190Representation 2,560,908 - - - 2,560,908Insurance and fees 424,535 1,852 - 426,387Leased housing, offices, buildings and land 1,193,617 231,420 - - 1,425,037Bank charges 58,342 620 - 200 59,162Architecture and design 278,302 8,843,309 - - 9,121,611Equipment 1,695,763 52,044 - 4,410 1,752,217Furnitures and fixtures 15,031 - - - 15,031Vehicle and vessels 342,627 40,698 - - 383,325Court settlement 283,475 - - - 283,475Principal and interest payments 2,518,311 - - - 2,518,311Legislative projects 7,566,528 - - - 7,566,528Other 311,768 - - - 311,768

Total expenditures 52,823,202$ 20,603,587$ -$ 4,035,790$ 77,462,579$

See Accompanying Independent Auditors' Report.

65


GENERAL FUND (FUND 1)Schedule of Revenues, Expenditures by Function and Department,

and Changes in Fund BalanceYear Ended September 30, 2015

(with comparatives for the year ended September 30, 2014)

2015 2014

Revenue:Taxes:

Import $ 3,519,835 $ 3,361,137Fuel 212,600 127,328 Corporate tax 4,138,339 27,630,004Income tax, individuals, net of tax refunds 4,195,769 4,070,210Gross receipts tax, businesses 4,170,042 4,380,072Tobacco revenue share 569,624 307,985

16,806,209 39,876,736

Fishing rights 65,164,718 47,517,815

Fees and charges:Postal collections 181,316 405,547 Business license and various fees 151,965 70,192

333,281 475,739

Investment earnings:Net change in the fair value of investments (56,974) 1,452,059Dividend and interest income 210,146 428,657

153,172 1,880,716-

MiCare reimbursible 243,451 243,881 Other 903,417 772,970

Total revenues 83,604,248 90,767,857

Expenditures:Executive Branch:

Core operational:President's Office 1,110,264 958,989 Department of External Affairs and LNO's 4,217,720 4,250,643Department of Health and Social Affairs 685,672 748,729 Department of Education 2,514,070 505,955 Office of Resources and development 814,654 930,033 National archives, cultural and historic prevention 121,983 155,604 Office of SBOC 832,966 1,096,145Office of Environment and emergency management 613,347 336,510 Department of Transportation, Communication and Infrastructure 3,339,074 3,889,660Department of Finance and Administration 2,707,690 2,013,138Department of Justice 3,136,449 3,446,610Office of the Public Defender 722,436 803,667

Sub-total 20,816,325 19,135,683


66



and Changes in Fund Balance, ContinuedYear Ended September 30, 2015


2015 2014Expenditures, continued:

Executive Branch:Non-core operational:

President's Office 2,105,437 916,432 Department of External Affairs and LNO's 247,933 194,000 Department of Health and Social Affairs 584,642 544,892 Department of Education 2,752,521 1,922,862Office of Resources and development 506,069 421,157 National archives, cultural and historic prevention 6,110 3,792Office of SBOC 47,632 141,806 Office of Environment and emergency management 886,002 238,554 Department of Transportation, Communication and Infrastructure 1,608,159 2,728,673Department of Finance and Administration 304,198 665,427 Department of Justice 133,356 557,317

Sub-total 9,182,059 8,334,912

Total Executive Branch 29,998,384 27,470,595

Judicial Branch-core operational 1,112,000 1,296,745Judicial Branch-non-core operational 303,718 192,061

Total Judicial Branch 1,415,718 1,488,806

Legislative Branch:Office of the Speaker and members 2,711,864 2,247,423Congress staff 1,565,040 1,540,899Delegation offices 1,221,375 644,182

Total Legislative Branch 5,498,279 4,432,504

Office of the National Public Auditor-Core operational 647,219 621,280 Office of the National Public Auditor-Non-Core operational 403,250 329,744

Total Office of the Public Auditor 1,050,469 951,024

Other National Government Programs - 200

Agencies, Boards and Commissions 3,118,632 2,400,688

Payments to Component Units:College of Micronesia-FSM 101,344 731,105 FSM Social Security Administration 1,000,000 1,000,000FSM Coconut Development Authority (152) 211,642 Micare Plan, Inc. - 100,000 Caroline Air, Inc. - 35,407Payment to Component Units-Non operational - 14,500

1,101,192 2,092,654

Legislative public projects 7,593,574 7,972,694

Total expenditures 49,776,248 46,809,165

Excess of revenues over expenditures 33,828,000 43,958,692


67



and Changes in Fund Balance, ContinuedYear Ended September 30, 2015


2015 2014Other financing sources (uses):

Operating transfers in:Postal Services Revolving Fund - 73,382Fisheries Observer Revolving Fund - 793,321 Passport Revolving Fund - 453,757

- 1,320,460

Operating transfers out:FSM Trust Fund (38,000,000) (7,000,000)Asian Development Bank Loan Fund - (200,000)Disaster Emergency Fund (200,000) (200,000)Infrastructure Fund - (85,000)

(38,200,000) (7,485,000)

Total other financing sources (uses), net (38,200,000) (6,164,540)

Special item:Write-off of receivable balances (6,966,019) -

Net change in fund balance (11,338,019) 37,794,152

Fund balance at the beginning of the year 81,696,089 43,901,937

Fund balance at the end of the year $ 70,358,070 $ 81,696,089

Reconciliation:Fund balance, General Fund $ 70,358,070 Add:

ADB Loan Fund 40,950,020 IDF with FSMDB 1,600,283 Early Retirement Fund 13,051 FSM Trust Fund 58,761,675

Fund balance, GAAP $ 171,683,099


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74


GENERAL FUNDStatement of Revenues, Expenditures and Changes in Fund Balance -

Budget and Actual, Budgetary BasisYear Ended September 30, 2015

Variance withFinal Budget -

Actual PositiveOriginal Final Amounts (Negative)

Revenues: Local taxes $ 13,636,705 $ 13,636,705 $ 16,806,209 $ 3,169,504 Fishing right fees 36,000,000 58,500,000 65,164,718 6,664,718 Postal revenues 600,000 600,000 181,316 (418,684) Investment earnings 1,500,000 1,500,000 153,172 (1,346,828) Fees and charges 500,000 500,000 151,965 (348,035) MiCare reimbursable - - 243,451 243,451 Other 8,650,000 6,650,000 903,417 (5,746,583)

Total revenues 60,886,705 81,386,705 83,604,248 2,217,543

Expenditures-budgetary basis by department: Executive Branch-Core Operational: Office of the President 471,590 720,490 790,903 (70,413) President's Office - Personnel 107,709 107,709 97,953 9,756 Public Information 104,862 104,862 95,431 9,431

Total Office of the President 684,161 933,061 984,287 (51,226)

Department of External Affairs Administration 273,605 278,605 294,285 (15,680) Division of APA and Multilateral Affairs 104,656 104,656 96,515 8,141 Division of American and European Affairs 85,104 85,104 47,917 37,187 FSM Consulate - China 690,382 690,382 652,291 38,091 FSM Consulate - Guam 311,580 311,580 262,292 49,288 FSM Consulate - Honolulu 358,285 358,285 346,793 11,492 FSM Embassy - Tokyo 985,497 985,497 944,080 41,417 FSM Embassy - Washington D.C. 552,571 572,571 556,248 16,323 FSM Embassy - Fiji 256,547 256,547 235,351 21,196 FSM Permanent Mission - New York 774,665 774,665 707,803 66,862

Total Department of External Affairs 4,392,892 4,417,892 4,143,575 274,317

Department of Health and Social Affairs: Administration 166,117 166,117 143,542 22,575 Health System Support 219,128 219,128 219,041 87 Environmental Health 274,692 274,692 252,774 21,918 Gender Development Unit 34,320 34,320 29,117 5,203 Sports and Youth Unit 70,456 70,456 41,198 29,258

Total Department of Health and Social Affairs 764,713 764,713 685,672 79,041

Department of Education: Administration 156,042 163,740 133,384 30,356 Basic Education & Accreditation 161,112 161,112 158,672 2,440 Career Technical Education 100,583 100,583 87,163 13,420

Total Department of Education 417,737 425,435 379,219 46,216

Department of Resources and Development: Administration 113,899 113,899 90,592 23,307 Division of Sectoral Development 498,637 498,637 467,896 30,741 Division of Trade and Investment 146,416 146,416 140,494 5,922 Division of Energy 58,964 58,964 38,994 19,970

Total Department of Resources and Development 817,916 817,916 737,976 79,940

Office of National Archives, Cultural and Historic Preservation 135,979 135,979 121,983 13,996

Office of Statistics, Budget, Overseas Development Assistance and Compact Management: Office of the Director 103,579 103,579 69,531 34,048 Division of Statistics 349,449 349,449 311,836 37,613 Division of Overseas Development 63,838 87,838 77,145 10,693 Division of Budget and Economic Management 256,063 256,063 167,618 88,445 Division of Compact Management 289,904 289,904 195,354 94,550

Total Statistics, Budget, Overseas Development Assistance and Compact Management 1,062,833 1,086,833 821,484 265,349

Office of Environment and Emergency Management: Office of the Director 87,802 87,802 83,597 4,205 Division of Sustainable Development 105,024 105,024 104,296 728 Division of Emergency Management 87,419 87,419 78,595 8,824

Total Office of Environment and Emergency Management 280,245 280,245 266,488 13,757


Budgeted Amounts

75


Statement of Revenues, Expenditures and Changes in Fund Balance -Budget and Actual, Budgetary Basis, Continued




Expenditures-budgetary basis by department, continued: Department of Transportation, Communication and Infrastructure: Administration 155,801 155,801 161,708 (5,907) Division of Marine Transportation 1,380,207 1,836,881 1,695,959 140,922 Division of Infrastructure 477,313 487,313 450,519 36,794 Civil Aviation 148,455 148,455 95,918 52,537 Communication 206,870 206,870 160,332 - Project Management Unit 327,139 935,793 547,122 388,671

Total Department of Transportation, Communication and Infrastructure 2,695,785 3,771,113 3,111,558 613,017

Department of Finance and Administration: Administration 151,705 157,705 150,287 7,418 Division of National Treasury 685,999 685,999 657,992 28,007 Division of Customs and Tax Administration 841,220 946,420 853,063 93,357 Investment and International Finance 139,520 139,520 114,689 24,831 Total Department of Finance and Administration 1,818,444 1,929,644 1,776,031 153,613

Department of Justice: Administration 221,027 236,027 215,977 20,050 Registry of Corporation 79,505 79,505 80,132 (627) Division of Law 229,430 229,430 131,668 97,762 Division of Litigation 205,376 205,376 216,763 (11,387) Division of Immigration and Labor 683,970 683,970 678,070 5,900 FSM National Police 1,654,158 1,654,158 1,609,591 44,567 FSM National Police - Fuel 200,000 200,000 - 200,000

Total Department of Justice 3,273,466 3,288,466 2,932,201 356,265

Office of the Public Defender 858,782 858,782 722,435 136,347

Total Executive Branch-Core Operational 17,202,953 18,710,079 16,682,909 2,027,170

Executive Branch-Non-Core Operational: President's Office 10,130,650 332,950 291,944 41,006 Department of External Affairs and LNO's 267,000 317,933 317,933 - Department of Health and Social Affairs 542,000 542,000 193,303 348,697 Department of Education 2,950,000 3,232,339 2,739,954 492,385 Office of Resources and development 681,498 1,175,987 367,791 808,196 National archives, cultural and historic prevention 7,014 7,014 6,110 904 Office of Statistics, Budget, Overseas Development Assistance and Compact Management 50,250 50,250 - 50,250 Office of Environment and Emergency Management 269,268 329,268 336,377 (7,109) Department of Transportation, Communication and Infrastructure 3,984,917 4,419,917 2,382,805 2,037,112 Department of Finance and Administration 69,024 812,184 639,924 172,260 Department of Justice 610,000 820,857 133,356 687,501

Total Executive Branch-Non-Core Operational 19,561,621 12,040,699 7,409,497 4,631,202

Total Executive Branch 36,764,574 30,750,778 24,092,406 6,658,372

Judicial Branch-Core Operational 1,311,436 1,311,436 1,112,000 199,436 Judicial Branch-Non-core Operational 180,000 180,000 140,000 40,000 Total Judiciary Branch 1,491,436 1,491,436 1,252,000 239,436

Legislative Branch: Office of the Speaker and members 1,869,771 2,965,171 2,711,863 253,308 Members and staff 1,279,834 1,557,834 1,551,157 6,677 Delegation offices 700,000 910,000 885,517 24,483 Total Legislative Branch - Core 3,849,605 5,433,005 5,148,537 284,468 Legislative Branch- Non- core Operational 755,000 492,990 335,853 157,137

Total Legislative Branch 4,604,605 5,925,995 5,484,390 284,468

Office of the National Public Auditor Public Auditor (Core) 748,398 748,398 647,218 101,180 Single Audit (Non-core) 329,250 432,000 403,250 28,750

Total Office of the National Public Auditor 1,077,648 1,180,398 1,050,468 129,930

Other National Government Programs: General Election 395,247 455,247 338,254 116,993 National Election Director 349,956 349,956 329,442 20,514 Micronesia Legal Services Corporation 250,000 250,000 250,000 - Other National Programs 25,000 25,000 - 25,000

Total Other National Government Programs 1,020,203 1,080,203 917,696 162,507


Budgeted Amounts

76


Statement of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual, Budgetary Basis, Continued




Expenditures-budgetary basis by department, continued: Board and Commissions: National Oceanic Resource Management Authority 422,106 449,903 443,202 6,701 FSM Insurance 261,151 261,151 221,693 39,458 FSM Banking Board 192,094 192,094 186,192 5,902 FSM Fisheries and Maritime 94,489 94,489 94,489 - Board of Regents-COM 105,000 105,000 101,344 3,656 Postal Services 755,338 755,338 757,626 (2,288)

Total Boards and Commissions 1,830,178 1,857,975 1,804,546 53,429

Payments to component units: FSM MiCare 80,000 80,000 80,000 - FSM Social Security Administration 1,000,000 1,000,000 1,000,000 - MLFC Loan Subsidy 288,466 288,466 288,466 - COM-FSM 2,894,203 2,894,203 1,479,585 1,414,618

Total payments to component units 4,262,669 4,262,669 2,848,051 1,414,618

Other National government programs-continuing approp 14,101,631 14,101,631 4,869,367 9,232,264

Total expenditures 65,152,944 60,651,085 42,318,924 8,703,324

Excess of revenues over expenditures (4,266,239) 20,735,620 41,285,324 10,920,867

Other financing uses: Operating Transfers out: Disaster Assistance Emergency Fund/Trust Fund - - (200,000) 200,000

Total Operating Transfers out - - (200,000) 200,000

Total other financing sources (uses), net - - (200,000) 200,000

Special item: Write-off of receivable balances - - (6,966,019) 6,966,019

Net change in fund balance (4,266,239) 20,735,620 34,119,305 4,154,848

Continuing appropriations - - (11,833,597) (11,833,597)Encumbrances - - - -

(4,266,239) 20,735,620 22,285,708 1,550,088

Fund balance at beginning of year 149,397,391 149,397,391 149,397,391 -

Fund balance at end of year $ 145,131,152 $ 170,133,011 $ 171,683,099 $ 1,550,088


Budgeted Amounts

77


WORLD BANK PROJECTSYear Ended September 30, 2015

Expended TransferredGrant Names Grant Amount ENC/Committed to DA Balance

PRIF:

Grant Amount $ 500,000 $ - $ - $ Expended - 200,000 - Reimbursed - - -

Balance 300,000

Energy Sector Development Project:

Grant Amount $ 14,400,000 - 1,000,000 Component 1 9,270,000 - - Component 2 3,400,000 - - Component 3 1,500,000 93,400 - Contingencies 230,000 - -

Balance 13,306,600

FSM-PALAU Connectivity Project:

Grant Amount $ 47,500,000 - 1,000,000 Component 1 44,500,000 - - Component 2 2,250,000 - - Component 3 750,000 32,598 -

Balance 46,467,402

Pacific Islands Regional Oceanscape Project:

Grant Amount $ 5,500,000 500,000 Component 1 4,740,000 Component 2 300,000 Component 3 460,000 4,288

Balance 4,995,712

Total for Grants $ 67,900,000 $ 65,069,714

Balance


78

79

INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL

STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Honorable Peter M. Christian President Federated States of Micronesia: We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standardsissued by the Comptroller General of the United States, the financial statements of the governmental activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the Federated States of Micronesia (FSM) National Government, as of and for the year ended September 30, 2015, and the related notes to the financial statements, which collectively comprise the FSM National Governmentreport thereon dated June 30, 2016. For purposes of this report, our consideration of internal control over financial reporting and our tests of compliance with certain provisions of laws, regulations, contracts and grants, and other matters did not include the FSM Social Security Administration or the discretely presented component units, which were all audited by us. We have issued separate reports on our consideration of internal control over financial reporting and our tests of compliance with certain provisions of laws, regulations, contracts, and grant agreements, and other matters for these entities. The findings, if any, included in those reports are not included herein. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the FSM National

control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the FSMNational Government control. Accordingly, we do not express an opinion on the effectiveness of the FSM National Government A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material

timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

Deloitte & Touche LLP 361 South Marine Corps Drive Tamuning, GU 96913-3911 USA Tel: (671)646-3884 Fax: (671)649-4932 www.deloitte.com

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Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. We did identify certain deficiencies in internal control, described in the accompanying Schedule of Findings and Questioned Costs as items 2015-004, 2015-005 and 2015-007, that we consider to be material weaknesses. Compliance and Other Matters As part of obtaining reasonable assurance about whether the FSM National Governmentstatements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. FSM National Government s to Findings FSM National Governmentaccompanying Schedule of Findings and Questioned Costs. FSM National Governmentwere not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on them. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the result of that testing, and not to provide an opinion on the effectiveness of the

accordance with Government Auditing Standards compliance. Accordingly, this communication is not suitable for any other purpose. June 30, 2016

81

INDEPENDENT AUDITORS' REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM; REPORT ON INTERNAL CONTROL OVER COMPLIANCE; AND REPORT ON

SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS REQUIRED BY OMB CIRCULAR A-133 Honorable Peter M. Christian President Federated States of Micronesia: Report on Compliance for Each Major Federal Program We have audited the FSM National Government compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of the FSM National GovernmentSeptember 30, 2015. The FSM National Government eral programs are identified in the

As discussed in Note 2B to the Schedule of Expenditures of Federal Awards, the FSM National

ial statements include the operations of certain entities whose federal awards are not included in the Schedule of Expenditures of Federal Awards for the year ended September 30, 2015. Our audit, described below, did not include the operations of the entities identified in Note 2B as these entities conducted separate audits in accordance with OMB Circular A-133, if required.

Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its federal programs.

Our responsibility is to express an opinion on compliance for each of the FSM National Governmentmajor federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the FSM National Government ose requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of the FSM National Government

Deloitte & Touche LLP 361 South Marine Corps Drive Tamuning, GU 96913-3911 USA Tel: (671)646-3884 Fax: (671)649-4932 www.deloitte.com

82

Basis for Qualified Opinion on CFDA 93.074 HPP and PHEP Aligned Cooperative Agreements As described in the accompanying Schedule of Findings and Questioned Costs, FSM National Government did not comply with requirements regarding CFDA 93.074 Public Health and Emergency Preparedness as described in item 2015-005 for Allowable Costs/Cost Principles. Compliance with such requirements is necessary, in our opinion, for the FSM National Government to comply with the requirements applicable to that program. Qualified Opinion on CFDA 93.074 HPP and PHEP Aligned Cooperative Agreements In our opinion, except for the noncompliance described in the Basis for Qualified Opinion paragraph, the FSM National Government complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on CFDA 93.074 HPP and PHEP Aligned Cooperative Agreements for the year ended September 30, 2015. Unmodified Opinion on Each of the Other Major Federal Programs In our opinion, the FSM National Government complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its

accompanying Schedule of Findings and Questioned Costs for the year ended September 30, 2015. Other Matters The results of our auditing procedures disclosed other instances of noncompliance, which are required to be reported in accordance with OMB Circular A-133 and which are described in the accompanying Schedule of Findings and Questioned Costs as items 2015-001 through 2015-004 and 2015-006. Our opinion on each major federal program is not modified with respect to these matters. FSM National Governmentdescribed in the accompanying Schedule of Findings and Questioned Costs. FSM National Governmentcompliance and, accordingly, we express no opinion on the responses.

Report on Internal Control Over Compliance Management of the FSM National Government is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the FSM National Governmentinternal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the FSM National Governmentinternal control over compliance. Our consideration of internal control over compliance was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. However, as discussed below, we identified certain deficiencies in internal control over compliance that we consider to be material weaknesses and significant deficiencies.

83

A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. We consider the deficiencies in internal control over compliance described in the accompanying Schedule of Findings and Questioned Costs as item 2015-005 to be material weaknesses. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. We consider the deficiencies in internal control over compliance described in the accompanying Schedule of Findings and Questioned Costs as items 2015-001 through 2015-004 and 2015-006 to be significant deficiencies. FSM National Governmentaudit are described in the accompanying Schedule of Findings and Questioned Costs. FSM National Governmentcompliance and, accordingly, we express no opinion on the responses. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of OMB Circular A-133. Accordingly, this report is not suitable for any other purpose. Report on Schedule of Expenditures of Federal Awards Required by OMB A-133 We have audited the financial statements of the governmental activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the FSM National Government as of and for the year ended September 30, 2015, and the related notes to the financial statements, which collectively comprise the FSM National Governmentstatements. We issued our report thereon dated June 30, 2016, which contained unmodified opinions on those financial statements. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the basic financial statements. The accompanying Schedule of Expenditures of Federal Awards is presented for purposes of additional analysis as required by OMB Circular A-133 and is not a required part of the basic financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the Schedule of Expenditures of Federal Awards is fairly stated in all material respects in relation to the basic financial statements as a whole. June 30, 2016

FEDERATED STATES OF MICRONESIA

Summary Schedule of Expenditures of Federal Awards, by GrantorYear Ended September 30, 2015

AmountsPassed-Through

toExpenditures Subrecipients

U.S. Department of Agriculture $ - $ 126,008 U.S. Department of Commerce 1,658,936 - U.S. Department of the Interior 7,644,558 28,502,849U.S. Department of Transportation 4,617,148 - Institute of Museum and Library Services 12,988 - U.S. Department of Education 614,207 3,101,172 U.S. Department of Health and Human Services 4,723,166 3,249,987 U.S. Department of Homeland Security 11,761 - GRAND TOTAL $ 19,282,764 $ 34,980,016

Note: All grant awards are received from the respective grantor agencies in a direct capacity.

Reconciliation to the basic financial statements:Expenditures of the Grants Assistance Fund $ 20,603,587 Less:

Expenditures of the Non U.S. Grants Fund (1,320,823)

Total expenditures per financial statements $ 19,282,764

NATIONAL GOVERNMENT

Agency/Program

See accompanying notes to Schedule of Expenditures of Federal Awards.

84



Federal toCFDA Number Expenditures Subrecipients

U.S. DEPARTMENT OF AGRICULTURE

Resident Instruction Grants for Insular Area Activities 10.308 $ - $ -Rural Self-Help Housing Technical Assistance 10.420 - -Outreach and Assistance for Socially Disadvantaged Farmers and Ranchers 10.443 - -Cooperative Extension Service 10.500 - -Forestry Research 10.652 - -Cooperative Forestry Assistance 10.664 - 60,021Urban and Community Forestry Program 10.675 - 22,833Forest Legacy Program 10.676 - 115 Forest Stewardship Program 10.678 - 16,665Community Facilities Loans and Grants 10.766 - 26,374Water Quality 10.Unknown - -USDA-OASDFR 10.Unknown - -

U.S. DEPARTMENT OF AGRICULTURE TOTAL $ - $ 126,008

U.S. DEPARTMENT OF COMMERCE Anadromous Fish Conservation Act Program 11.405 $ - $ -Financial Assistance for National Centers for Coastal Ocean Science 11.426 - -Special Oceanic and Atmospheric Projects 11.460 1,658,936 -

U.S. DEPARTMENT OF COMMERCE $ 1,658,936 $ -

U.S. DEPARTMENT OF THE INTERIOREconomic, Social and Political Development of the Territories 15.875

Compact Sector Funds:Infrastructure and Infrastructure maintenance $ 6,089,765 $ 360,799Education 84,979 11,055,106Health - 10,033,061Capacity Building 307,267 690,511Environment - 628,206Private Sector 695,019 631,389Compact Supplemental Education 31,947 4,455,257Disaster Emergency Fund 198,804 -Compact ERA 99,402 403,936 Subtotal Compact Sector Funds 7,507,183 28,258,265

Technical Assistance:Single Audit - -Technical Assistance OIA/DOI Other 137,375 22,682

137,375 22,682Total CFDA #15.875 7,644,558 28,280,947

Historic Preservation Fund Grants-In-Aid 15.904 - 221,902U.S. DEPARTMENT OF THE INTERIOR TOTAL $ 7,644,558 $ 28,502,849

U.S. DEPARTMENT OF TRANSPORTATIONAirport Improvement Program 20.106 $ 4,617,148 $ -

U.S. DEPARTMENT OF TRANSPORTATION TOTAL $ 4,617,148 $ -

NATIONAL GOVERNMENT

Schedule of Expenditures of Federal AwardsYear Ended September 30, 2015

Agency/Program


85



INSTITUTE OF MUSEUM AND LIBRARY SERVICESGrants to States 45.310 $ 12,988 $ -

INSTITUTE OF MUSEUM AND LIBRARY SERVICES $ 12,988 $ -

U.S. DEPARTMENT OF EDUCATIONSpecial Education - Grants to States 84.027A $ 614,207 $ 3,101,172Special Education - Grants to States 84.027 - -Public Library Services (LSCA - Title I) 84.034 - -Career and Technical Education -- Basic Grants to States 84.048B - -Federal Pell Grant Program 84.063 - -Byrd Honors Scholarship 84.185A - -Bilingual Education-Professional Development 84.195 - -Territories and Freely Associated States Education Grant Program 84.256A - -Goals 2000-State and Local Education Systemic Improvement Grants 84.276A - -School To Work Opportunities 84.278 - -Bilingual Education-Program Development and Implementation Grants 84.288 - -Bilingual Education-Comprehensive School Grants 84.290 - -Gaining Early Awareness and Readiness for Undergraduate Programs 84.334 - -Teacher Quality Partnership Grants 84.336A - -Vocational Education-Occupational and Employment Information State Grants 84.346A - -Pacific Vocational Education Improvement Program 84.994 - -

U.S. DEPARTMENT OF EDUCATION TOTAL $ 614,207 $ 3,101,172

Agency/Program

Schedule of Expenditures of Federal Awards, Continued

NATIONAL GOVERNMENT




86



U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES Public Health and Social Services Emergency Fund 93.003 $ - $ -Public Health Emergency Preparedness 93.069 - -Hospital Preparedness Program 93.074 257,340 -Public Health Emergency Preparedness Supplemental for Ebola 93.074 7,583 -Pulbic Health Emergency Preparedness Supplement 93.074 15,531 -Public Health Emergency Preparedness 93.074 445,801 -Emergency System for Advance Registration of Volunteer Health Professionals 93.089 - -Affordable Care Act (ACA) Personal Responsibility Education Program 93.092 155,762 148,203Area Health Education Centers Point of Service Maintenance and Enhancement Awards 93.107 - -Maternal and Child Health Federal Consolidated Programs - SSDI Program 93.110 42,175 24,722Maternal and Child Health Federal Consolidated Programs 93.110 - -Project Grants and Cooperative Agreements for Tuberculosis Control Programs 93.116 387,649 343,251Small Business Innovation Research (NIAAA, NIDA, NIMH) 93.126 - -Emergency Medical Services for Children 93.127 48,232 -Technical and Non-Financial Assistance to Health Centers 93.129 - -Injury Prevention and Control Research and State and Community Based Programs 93.136 - -Health Activities Recommendation Panel Health Activities - Tobacco Use Prevention Programs 93.203 - -Family Planning-Services 93.217 93,630 237,175Health Center Program 93.224 - 4,833Affordable Care Act (ACA) Abstinence Education Program 93.235 10,135 28,020Oral Health Care 93.236 257,065 21,484Substance Abuse and Mental Health Services - Projects of Regional and National Significance 93.243 645,625 778,617Universal Newborn Hearing Screening 93.251 157,731 75,790Immunization Cooperative Agreements 93.268 659,800 351,449CDC and Prevention-Investigations and Technical Assistance 93.283 212,621 347,679Strengthening PH Infrastructure for Improved Health Outcomes 93.292 111,969 -Laboratory Efficiency Initiative 93.292 16,839 -Tracking Surveillance 93.314 71,635 13,562Epidemiology and Laboratory Capacity for Infectious Disease Capacity Building in FSM 93.323 22,716 -Behavioral Risk Factor 93.336 70,357 -Epidemiology and Laboratory Capacity for Infectious Disease Capacity Building in FSM 93.521 33,783 -ACA Coordinated Chronic Disease Prevention and Health Promotion Program 93.544 - -ARRA Grants to Health Center Programs 93.703 - -ARRA - Immunization 93.712 - -ARRA - Prevention and Wellness-State, Territories and Pacific Islands 93.723 - -Preventive Health and Health Services Block Grant 93.758 26,976 55,469ELC Supplement for Eboloa 93.815 708 -National Bioterrorism Hospital Preparedness Program 93.889 - -HIV Care Formula Grants 93.917 65,412 6,523Cooperative Agreements to Support Comprehensive School - -

Health Programs to Prevent the Spread of HIV and Other - -Important Health Problems 93.938 - -

HIV Prevention Activities-Health Department Based 93.940 - -Epidemiologic Research Studies of AIDS and HIV Infection in - -

Selected Population Groups 93.943 - -HIV/AIDS Surveillance 93.944 - -Tobacco Prevention 93.945 295,695 129,231Occupational Health and Safety Surveillance 93.957 - -Block Grants for Community Mental Health Services 93.958 121,615 19,550Block Grants for Prevention and Treatment of Substance Abuse 93.959 235,121 361,387Preventive Health Services - Sexually Transmitted Diseases Control Grants 93.977 - -Cooperative Agreements for State-Based Diabetes Control Progams - -

and Evaluation of Surveillance Systems 93.988 - -Preventive Health and Health Services Block Grant 93.991 13,011 13,772Maternal and Child Health Services Block Grant to the States 93.994 240,649 289,271CCPI Cancer Program 93.Unknown - -Center for Excellence 93.Unknown - -

U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES TOTAL $ 4,723,166 $ 3,249,988



Agency/Program



87



U.S. DEPARTMENT OF HOMELAND SECURITYPublic Assistance Grants - Tyhpoon Fern HMGP/Subgrantee 83.544 $ - $ -Disaster Grants - Public Assistance (Presidentially Declared Disasters) (B) 97.036 - -Individual and Family Grants - FEMA 1427/IFG Admin. Cost 83.543 - -Crisis Counseling 97.032 - -Hazard Mitigation Grant 97.039 - -Emergency Management Performance Grants 97.042 11,761 -

U.S. DEPARTMENT OF HOMELAND SECURITY TOTAL $ 11,761 $ -

GRAND TOTAL $ 19,282,764 $ 34,980,017


Agency/Program




88

FSM NATIONAL GOVERNMENT FEDERATED STATES OF MICRONESIA

Notes to Schedule of Expenditures of Federal Awards


89

1. Scope Federated States of Micronesia (FSM) National Government is a governmental entity governed by its own Constitution. All significant operations of FSM National Government are included in the scope of the OMB Circular A-133 audit (the "Single Audit"). The U.S. Department of the Interior has been designated as FSM cognizant agency for the Single Audit.

Programs Subject to Single Audit

The Schedule of Expenditures of Federal Awards presents federal programs related to the following agencies:

U.S. Department of Agriculture U.S. Department of Commerce U.S. Department of Education U.S. Department of Health and Human Services U.S. Department of Homeland Security Institute of Museum and Library Services U.S. Department of the Interior U.S. Department of Transportation

2. Summary of Significant Accounting Policies

A. Basis of Accounting For purposes of this report, certain accounting procedures were followed which help illustrate the expenditures of the individual programs. All expenses and capital outlays are reported as expenditures on the accrual basis of accounting.

B. Reporting Entity

For purposes of complying with The Single Audit Act of 1984, as amended in 1996, the FSMNational Government September 30, 2015basic financial statements; and all of the discretely presented component units are excluded. Accordingly, the accompanying Schedule of Expenditures of Federal Awards presents the federal award programs administered by the FSM National Government, as defined above, for the year ended September 30, 2015. The FSM requirements of OMB Circular A-133, and information concerning component units is, as follows:

College of Micronesia-FSM The College of Micronesia-FSM (COM-FSM), a discretely presented component unit, is the recipient of various pass-through funds from FSM National Government and direct grants from the U.S. Department of Agriculture, U.S. Department of the Interior, U.S. Department of Education, and the U.S. Department of Health and Human Services. COM-FSM is to separately satisfy its 2015 reporting responsibilities under the Single Audit Act. Total federal awards for COM-FSM is $2,415,145.


Notes to Schedule of Expenditures of Federal Awards


90

2. Summary of Significant Accounting Policies, Continued

C. Subgrantees

Certain program funds are passed through the FSM National Government to subgrantee organizations. The Schedule of Expenditures of Federal Awards does not contain separate schedules disclosing how the subgrantee outside of the FSM National Government's control utilizes these funds.

D. Indirect Cost Allocation

The FSM National Government did not receive any indirect cost allocation and did not charge indirect costs against federal programs.

E. CFDA #15.875

CFDA #15.875 represents the Office of Insular Affairs (OIA), U. S. Department of the Interior. Funding from this source is subject to varying rules and regulations since OIA administers the Compact of Free Association, which is a treaty, and is not a federal program. The Compact is comprised of various funded programs, each with separate compliance requirements. To maximize audit coverage of OIA funding, the OIG has recommended that programs administered under CFDA #15.875 be grouped by like compliance requirements and such groupings be separately evaluated as major programs.


Schedule of Findings and Questioned Costs


91

Section I - Financial Statements

1. T Unmodified

Internal control over financial reporting:

2. Material weakness(es) identified? Yes

3. Significant deficiency(ies) identified? None reported

4. Noncompliance material to financial statements noted? No

Federal Awards

Internal control over major federal programs: 5. Material weakness(es) identified? Yes 6. Significant deficiency(ies) identified? Yes 7. Type of au federal programs: CFDA Program 93.074 Qualified All other major programs Unmodified 8. Any audit findings disclosed that are required to be reported in

accordance with section 510(a) of OMB Circular A-133? Yes 9. Identification of major federal programs: CFDA Numbers Name of Federal Program or Cluster 11.460 Special Oceanic and Atmospheric Projects 15.875 Economic, Social, and Political Development of the Territories Compact of Free Association Compact Sector Grants 20.106 Airport Improvement Program 84.027 Special Education Grants to States

93.074 Hospital Preparedness Program (HPP) and Public Health Emergency Preparedness (PHEP) Aligned Cooperative Agreements

93.243 Substance Abuse and Mental Health Services Projects of Regional and National Significance 93.268 Immunization Cooperative Agreements 10. Dollar threshold used to distinguish between Type A and Type B Programs: $578,483 11. Auditee qualified as low-risk auditee? No


Schedule of Findings and Questioned Costs, Continued


92

Section II Financial Statements Findings

Section III - Federal Award Findings and Questioned Costs

Finding # CFDA # Finding Questioned Costs 2015-001 2015-002 2015-003 2015-004 2015-005 2015-006

20.106 20.106 20.106 93.243 93.074 93.074

Matching, Level of Effort, Earmarking Cash Management Reporting Allowable Costs/Cost Principles Allowable Costs/Cost Principles Procurement and Suspension and Debarment

$ ---

7,74713,842 7,347

$ 28,936

Finding # Finding 2015-004 Allowable Cost/Cost Principles 2015-005 Allowable Cost/Cost Principles

2015-007 Deferred Revenues




93

Finding No.: 2015-001 Federal Agency: U.S. Department of Transportation CFDA Program: 20.106 Airport Improvement Program Federal Award No.: 854814022 Area: Matching, Level of Effort, Earmarking Questioned Costs: $0 Criteria: Pursuant to grant terms and conditions, the grantee is required to maintain a level of local matching support for the following grants:

PROGRAM NUMBER YEAR FD REQUIRED LOCAL MATCH 27200 27012 27011 27010 27000

12 13 14 13 09

20 20 20 20 20

5% 10% 10% 10% 5%

Condition: For transactions tested, a determination of matching requirement is not evident. Cause: The cause of the above condition is the lack of established policies and procedures to determine compliance with the matching requirements. Effect: The effect of the above condition is a noncompliance with matching requirements. No questioned costs have been reported as no federal cash in excess of the appropriate match requirement has been drawn as the FSM matches on a cash disbursement basis. However, FSM

, on an accrual basis, has not been met. Recommendation: We recommend the Government establish procedures to determine that matching requirements are complied with as program expenditures are incurred and documented at the end of the fiscal year. Auditee Response and Corrective Action Plan: FSM National Government will evaluate the existing procedures related to matching requirements and ensure compliance. For this finding, matching requirements were provided and paid in fiscal year 2016.




94

Finding No.: 2015-002 Federal Agency: U.S. Department of Transportation CFDA Program: 20.106 Airport Improvement Program Federal Award No.: Various Airport Improvement Projects Requirement: Cash Management Questioned Costs: $0 Interest Liability: $701 Criteria: In accordance with applicable cash management requirements, the time elapsed between the receipt of Federal funds and the clearing of the applicable check should be minimized, and any interest arising from advances in excess of the minimum allowable for retention should be returned to the Federal government. Condition: The Government received cash in excess of immediate needs, and an interest liability of $701 results. For these items, the checks cleared on average in six days after receipt of federal funds. Cause: Either cash was drawn down that was used for other purposes, applicable files were not located, or there is a gap in the systematic recordkeeping of cash management documents (e.g., receipts, drawdown confirmation, drawdown requests, expenditure report, etc.) to allow practicable verification. Effect: The Government appears to be in noncompliance with applicable cash management requirements. As a result of this condition, an assessed interest liability results, and noncompliance with the criteria is reported; however, since the projected interest liability does not exceed $10,000, no questioned costs result. Recommendation: The Government should comply with the criteria. Auditee Response and Corrective Action Plan: Contractors are required to open an account with the local bank to shorten the time between check issuance and check clearing. FSM National Government will ensure compliance with the cash management requirements.




95

Finding No.: 2015-003 Federal Agency: U.S. Department of Transportation CFDA Program: 20.106 Airport Improvement Program Requirement: Reporting Questioned Costs: $0 Criteria: In accordance with the Federal Aviation Administration Grant Agreement: (a) A Federal Financial Report or Standard Form SF 425 or a reasonable facsimile thereof approved by the Government of the United States, shall be prepared annually and submitted within 90 days after the end of each federal fiscal year. The report shall include transaction information such as federal cash receipt, federal share of expenditures and recipient share; (b) A Federal Cash Transactions Report, or Standard Form SF 272 of the Government of the United States or a reasonable facsimile thereof approved by the Government of the United States, shall be submitted quarterly within 30 days of the end of the quarter to which it applies. Actual dates, project identification, and amounts of drawdowns for the quarter should be supplied in the Remarks section of the form. Additionally, submitted reports should reconcile with underlying records. Condition: For the FAA Grants, we noted that the SF-425 Federal Financial Report, which covered the period from October 1, 2014 to September 30, 2015, was not prepared and submitted to FAA for the following grants: Fundware Account number CY Expense CY Drawdown GRANT AWARD NO. 3-20-80-81-27000-09-8510 $ 60,451 $ 63,595 3-64-0003-12

Cause: The cause of the condition appears to be the absence of timely reconciliations between the general ledger and related reports. Effect: Noncompliance with reporting requirements results from this condition. Recommendation: The Government should comply with grant requirements and should retain grant sufficient documentation on file to support compliance with those requirements. Auditee Response and Corrective Action Plan: FSM National Government will ensure compliance with the grant requirements.




96

Finding No.: 2015-004 Federal Agency: U.S. Department Human and Health Services CFDA Program: 93.243 Substance Abuse and Mental Health Services Federal Award No.: 5U79SP015588, 1H79SM061556-01, 1U79SP020693-01 Requirement: Allowable Costs/Cost Principles Questioned Costs: $7,747 Criteria: Expenditures should be necessary and reasonable for program needs and should be in accordance with program requirements. Furthermore, financial and programmatic records should be maintained on file for at least three years. Conditions: For 2 (or 3%) of 59 transactions tested, the purpose of the trip is not included in the approved budget. Additional unapproved or side trips were taken during the business trips, and additional questioned costs could result if excess per diem and other costs were incurred.

Per Transaction detail: Summary of QC: No. date1 ref1 prog yr amt Amount 1 11/07/2014 T150043 21216 13 6,202 $ 6,202 2 04/23/2015 T150850-1 21233 15 1,545 1,545

$ 7,747

Cause: There appears to be lack of controls over compliance with the criteria, which can be attributedto inconsistencies in recordkeeping. Effect: The Government appears to be in noncompliance with the criteria, and questioned costs resultsince the projected questioned cost exceeds the threshold. Recommendation: The Government should comply with grant requirements and should retain grant sufficient documentation on file to support compliance with those requirements. Auditee Response and Corrective Action Plan: FSM National Government will ensure that

complied.




97

Finding No.: 2015-005 Federal Agency: U.S. Department Human and Health Services CFDA Program: 93.074 HPP and PHEP Aligned Cooperative Agreements Federal Award No.: 5U90TP000509-03, 3U90TP000509-03S1, 5U90TP000509-04, 3U90TP000509-3S2 Requirement: Allowable Costs/ Cost Principles Questioned Costs: $13,842 Criteria: Expenditures should be necessary and reasonable for program needs and should be in accordance with program requirements. Furthermore, financial and programmatic records should be maintained on file for at least three years. Condition: 1. For 2 (or 6%) of 35 transactions tested, the purpose of the trip was not in line with program

objectives.

Per Transaction Detail: Summary of QC No. Date REF1 Amount Prog no. YR Amount

1 10/29/2014 TK2471 $2,951 21032 14 $ 2,951 2 04/27/2015 T151032 $3,067 21033 15 3,067

$ 6,018 2. For 1 (or 3%) of 35 transactions tested, there were no approved TA, trip reports, invoices, or

boarding passes provided to substantiate the allowability of the following transactions. We further noted that obligating documents, such as contract, PO and/or approved travel advance are not available for review.


1 04/13/2015 T151039 $3,932 21032 14 $ 3,932 3. For 1 (or 3%) of 35 transactions tested, obligating documents such as contract, PO and/or

approved travel advance is not available for our review.


1 01/07/2015 1015345 $3,892 21034 14 $ 3,892 Cause: There appears to be lack of controls over compliance with the criteria which can be attributedto inconsistencies in recordkeeping. Effect: The Government appears to be in noncompliance with the criteria, and questioned costs result.




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Finding No.: 2015-005, Continued Federal Agency: U.S. Department Human and Health Services CFDA Program: 93.074 HPP and PHEP Aligned Cooperative Agreements Federal Award No.: 5U90TP000509-03, 3U90TP000509-03S1, 5U90TP000509-04 3U90TP000509-3S2 Requirement: Allowable Costs/ Cost Principles Questioned Costs: $13,842 Recommendation: The Government should comply with grant requirements and should retain grant sufficient documentation on file to support compliance with those requirements. Auditee Response and Corrective Action Plan: FSM National Government will ensure that

Government will also ensure compliance with the grant requirements.




99

Finding No.: 2015-006 Federal Agency: U.S. Department Human and Health Services CFDA Program: 93.074 HPP and PHEP Aligned Cooperative Agreements Federal Award No.: 5U90TP000509-03, 3U90TP000509-03S1, 5U90TP000509-04 3U90TP000509-3S2 Requirement: Procurement and Suspension and Debarment Question Cost: $7,347 Criteria: Procurements shall provide full and open competition among vendors, and allowable exceptions should be approved and documented in procurement file. Condition: 1. For 1 (or 3%) of 35 transactions tested, complete bid packages from all interested bidders were not

provided to support competitive procurement requirements.

Per Transaction Detail:

Summary of Questioned Costs (QC)

No. Date REF1 Amount Prog no. YR Fund No. Amount

1 09/09/2015 CL0288 $ 4,301 21032 15 20 $4,301 2. For 1 (or 3%) of 35 transactions tested, the price quotation (4/29/15) was dated after the obligation

date (4/24/15).

Per Transaction Detail: Summary of QC No. Date REF1 Amount Prog no. YR Fund No. Amount:

1 06/16/2015 1026374 $3,046 21032 14 20 $3,046 Cause: There appears to be lack of controls over compliance with the criteria which can be attributedto recordkeeping inconsistencies. Effect: The Government appears to be in noncompliance with the criteria, and questioned costs resultsince the projected questioned cost exceeds the threshold. Recommendation: The Government should comply with grant requirements and should retainadequate documentation to substantiate compliance. Auditee Response and Corrective Action Plan: FSM National Government will ensure that procurement process is strictly adhered and adequate supporting documents are retained. The Government will also ensure compliance with the grant requirements.




100

Finding No. 2015-007 Deferred Revenues Criteria: The Government records as deferred revenues collections of non-federal grant monies that have not been expended. Related expenditures are anticipated to be incurred within the same fiscal year when funds were received. Condition: Deferred revenues recorded in FY14 and prior have not been reversed against related expenditures and have remained in this account for a number of years, and the balance continues to increase. FY14 Balance FY15 Balance (Increase) $3,363,081 $6,013,962 $(2,650,881)

Cause: There appears to be a lack of monitoring of the account to timely recognize related revenues. Effect: Revenues may be understated. Prior Year Status: This condition was cited in the 2013 and 2014 Single Audits as deficiencies;however, as the balance continues to increase, such has been determined to represent a significant deficiency. Recommendation: It appears that additional effort is necessary to monitor deferred revenues and the completeness of documents required from grantors/donors and invoices upon completion of projects.We recommend that the account be monitored for appropriate recognition of related revenues. Auditee Response and Corrective Action Plan: FSM National Government will monitor and verify the accounts to accurately recognize the revenue.


Summary Schedule of Prior Audit Findings and Questioned Costs


101

The following is a summary of unresolved federal questioned costs for FSM National Government: Questioned Costs Questioned Set Forth in Costs Resolved Prior Audit Report in Fiscal Year Questioned Costs at 2014 2015 September 30, 2015 Unresolved Questioned Costs FY11 $ 301,014 $ 33,580 $ 267,434Unresolved Questioned Costs FY12 709,783 - 709,783Unresolved Questioned Costs FY13 2,669,022 - 2,669,022Unresolved Questioned Costs FY14 582,384 - 582,384 $ 4,262,203 $ 33,580 4,228,623 Questioned costs for the year ended September 30, 2015 28,936 Total questioned costs $ 4,257,559 The status of prior year findings is set forth in the accompanying Schedule of Findings and Questioned Costs (pages 91 through 100).

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