Asian Infrastructure Investment Bank 18-K Annual report (foreign governments)

Exhibit 2-A

ASIAN INFRASTRUCTURE INVESTMENT BANK

AUDITOR’S REPORT AND FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2017

1

Independent Auditor’s Report

To the Board of Governors of the Asian Infrastructure Investment Bank:

Opinion

What we have audited

The financial statements of Asian Infrastructure Investment Bank (the “Bank”) set out on pages 1 to 48, which comprise:

• the statement of comprehensive income for the year ended December 31, 2017;

• the statement of financial position as at December 31, 2017;

• the statement of changes in equity for the year ended December 31, 2017;

• the statement of cash flows for the year ended December 31, 2017; and

• the notes to the financial statements, which include a summary of significant accounting policies.

Our opinion

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Bank as at December 31, 2017, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (“IFRSs”) issued by the International Accounting Standards Board.

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing (“ISAs”). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We are independent of the Bank in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (“IESBA Code”), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code.

Responsibilities of Management and Those Charged with Governance for the Financial Statements

Management is responsible for the preparation of the financial statements that give a true and fair view in accordance with IFRSs, and for such internal control as management determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

2

In preparing the financial statements, management is responsible for assessing the Bank’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intend to liquidate the Bank or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Bank’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

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

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Bank to cease to continue as a going concern.

3

• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

/s/ PricewaterhouseCoopers

PricewaterhouseCoopers

Certified Public Accountants

Hong Kong, March 8, 2019

4

CONTENTS

FINANCIAL STATEMENTS

Statement of Comprehensive Income	6
Statement of Financial Position	7
Statement of Changes in Equity	8
Statement of Cash Flows	9
Notes to the Financial Statements	10-46
A. General Information	10
B. Accounting Policies	10-19
C. Disclosure Notes	19-30
D. Financial Risk Management	30-43
E. Fair Value Disclosures	44-46

5

ASIAN INFRASTRUCTURE INVESTMENT BANK

Statement of Comprehensive Income

For the year ended December 31, 2017

In thousands of US Dollars	Note		For the year ended December 31, 2017			For the period from January 16, 2016 to December 31, 2016
Interest income		C1		124,193			23,455
Interest expense		C1		—			—
Net interest income				124,193			23,455
Net fee and commission expense		C2		(866	)		(70	)
Net gain on investments at fair value through profit or loss		C5		53,783			14,873
Impairment provision		C6		(9,088	)		(277	)
General and administrative expenses		C3		(56,098	)		(30,658	)
Net foreign exchange loss				(58	)		(26	)
Operating profit for the year/period				111,866			7,297
Accretion of paid-in capital receivables		C7		140,442			160,063
Net profit for the year/period				252,308			167,360
Other comprehensive income				—			—
Total comprehensive income				252,308			167,360
Attributable to:
Equity holders of the Bank				252,308			167,360

The accompanying notes are an integral part of these financial statements.

6

ASIAN INFRASTRUCTURE INVESTMENT BANK

Statement of Financial Position

As at December 31, 2017

In thousands of US Dollars	Note		December 31, 2017			December 31, 2016
Assets
Cash and cash equivalents		C4		1,104,866			1,281,992
Term deposits		C4		5,885,854			2,292,141
Investments at fair value through profit or loss		C5		3,255,140			3,179,873
Funds deposited for co-financing arrangements				1,592			23,623
Loan investments, at amortized cost		C6		773,238			9,553
Paid-in capital receivables		C7		7,948,901			11,007,227
Intangible assets				1,032			—
Other assets		C8		1,983			958
Total assets				18,972,606			17,795,367
Liabilities
Other liabilities		C9		13,587			5,538
Total liabilities				13,587			5,538
Members’ equity
Paid-in capital		C10		19,000,300			18,065,400
Reserve for accretion of paid-in capital receivables				(160,444	)		(282,868	)
Retained earnings				119,163			7,297
Total members’ equity				18,959,019			17,789,829
Total liabilities and members’ equity				18,972,606			17,795,367

The accompanying notes are an integral part of these financial statements.

/s/ Jin Liqun	/s/ Thierry de Longuemar
Mr. Jin Liqun President	Mr. Thierry de Longuemar Vice President and Chief Financial Officer
	/s/ Jae Hoon Yoo
	Mr. Jae Hoon Yoo Controller

7

ASIAN INFRASTRUCTURE INVESTMENT BANK

Statement of Changes in Equity

For the year ended December 31, 2017

In thousands of US Dollars	Note		Subscribed capital		Less: callable capital			Paid-in capital		Reserve for accretion of paid-in capital receivables			Retained earnings			Total members’ equity
January 16, 2016				—		—			—		—			—			—
Capital subscription and contribution				90,327,000		(72,261,600	)		18,065,400		—			—			18,065,400
Net profit for the period				—		—			—		—			167,360			167,360
Paid-in capital receivables – accretion effect				—		—			—		(442,931	)		—			(442,931	)
Transfer of accretion		C7		—		—			—		160,063			(160,063	)		—
December 31, 2016		C10		90,327,000		(72,261,600	)		18,065,400		(282,868	)		7,297			17,789,829
January 1, 2017				90,327,000		(72,261,600	)		18,065,400		(282,868	)		7,297			17,789,829
Capital subscription and contribution				4,674,100		(3,739,200	)		934,900		—			—			934,900
Net profit for the year				—		—			—		—			252,308			252,308
Paid-in capital receivables – accretion effect				—		—			—		(18,018	)		—			(18,018	)
Transfer of accretion		C7		—		—			—		140,442			(140,442	)		—
December 31, 2017		C10		95,001,100		(76,000,800	)		19,000,300		(160,444	)		119,163			18,959,019

The accompanying notes are an integral part of these financial statements.

8

ASIAN INFRASTRUCTURE INVESTMENT BANK

Statement of Cash Flows

For the year ended December 31, 2017

In thousands of US Dollars	Note	For the year ended December 31, 2017			For the period from January 16, 2016 to December 31, 2016
Cash flows from operating activities
Net profit for the year/period			252,308			167,360
Adjustments for:
Interest income from term deposits			(104,710	)		(17,141	)
Accrued interest on funds deposited for co-financing arrangements			(167	)		—
Accretion of paid-in capital receivables	C7		(140,442	)		(160,063	)
Net gain on investments at fair value through profit or loss	C5		(53,783	)		(14,873	)
Impairment provision	C6		9,088			277
Depreciation and amortization			193			—
Increase in loan investments	C6		(768,681	)		(9,830	)
Decrease/(Increase) in funds deposited for co-financing arrangements			22,198			(23,623	)
Increase in other assets			(1,651	)		(958	)
Increase in other liabilities			3,957			5,538
Net cash used in operating activities			(781,690	)		(53,313	)
Cash flows from investing activities
Investment purchases	C5		(21,484	)		(3,165,000	)
Increase in term deposits, net of interest received			(3,489,003	)		(2,275,000	)
Intangible assets			(222	)		—
Property improvements			(232	)		—
Computer hardware			(145	)		—
Net cash used in investing activities			(3,511,086	)		(5,440,000	)
Cash flows from financing activities
Capital contributions received	C7		4,115,650			6,775,305
Net cash from financing activities			4,115,650			6,775,305
Net (decrease)/increase in cash and cash equivalents			(177,126	)		1,281,992
Cash and cash equivalents at beginning of year/period			1,281,992			—
Cash and cash equivalents at end of year/period	C4		1,104,866			1,281,992

The accompanying notes are an integral part of these financial statements.

9

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

A GENERAL INFORMATION

Asian Infrastructure Investment Bank (the “Bank” or the “AIIB”) is a multilateral development bank. In June 2015, representatives from 57 countries signed the Articles of Agreement (the “AOA”). The AOA entered into force on December 25, 2015. The Bank commenced operations on January 16, 2016. The principal office of the Bank is located in Beijing, the People’s Republic of China (the “PRC”).

For the year ended December 31, 2017, the Bank has approved 27 new membership applications. As at December 31, 2017, the Bank’s total approved membership is 84, of which 61 have completed the membership process and have become members of the Bank in accordance with the AOA.

The purpose of the Bank is to: (i) foster sustainable economic development, create wealth and improve infrastructure connectivity in Asia by investing in infrastructure and other productive sectors; and (ii) promote regional cooperation and partnership in addressing development challenges by working in close collaboration with other multilateral and bilateral development institutions.

The legal status, privileges, and immunities for the operation and functioning of the Bank in the PRC are agreed in the AOA and further defined in the Headquarters Agreement between the government of the People’s Republic of China (the “Government”) and the Bank on January 16, 2016.

These financial statements were signed by the President, the Vice President and Chief Financial Officer, and the Controller on April 10, 2018.

B ACCOUNTING POLICIES

B1 Basis of preparation

These financial statements for the Bank have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). According to By-Laws of the AIIB, the financial year of the Bank begins on January 1 and ends on December 31 of each year. For the year in which the Bank commenced operations, the financial year begins on the date the Bank commences operations and ends on December 31 of that year.

The Bank has adopted all of the IFRS standards and interpretations effective for annual periods beginning on January 1, 2017. In addition, the Bank has adopted IFRS 9 Financial Instruments (full version issued in July 2014 and mandatorily effective on January 1, 2018), IFRS 15 Revenue from Contracts with Customers (mandatorily effective on January 1, 2018), and IFRS 16 Leases (mandatorily effective on January 1, 2019) from the commencement of operations.

The financial statements have been prepared under the historical cost convention, except for those financial instruments measured at fair value.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in its process of applying the Bank’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where judgments or estimates are significant to the financial statements are disclosed in Note B4. The financial statements have been prepared on a going concern basis.

10

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

B ACCOUNTING POLICIES

B2 New accounting pronouncements

The new accounting pronouncements, amendments and interpretations issued in 2017 do not have any significant impact on the operating results, financial position and comprehensive income of the Bank, based on the assessment of the Bank.

B3 Summary of significant accounting policies

B3.1 Functional currency and foreign currency transactions

The functional currency of the Bank and the presentation currency of the Bank are United States Dollar (“USD” or “US Dollar”).

Foreign currency transactions are initially translated into USD using exchange rates prevailing at the dates of the related transactions. At the end of the reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are recognized in profit or loss during the period in which they arise.

B3.2 Cash and cash equivalents

Cash and cash equivalents are items which are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Deposits with a maturity of three months or less are classified as cash and cash equivalents.

B3.3 Financial instruments

B3.3.1 Financial assets

The Bank’s financial assets are classified into three categories:

(a) Amortized cost,

(b) Fair value through other comprehensive income (FVOCI), or

(c) Fair value through profit or loss (FVPL).

The basis of classification depends on the relevant business model and the contractual cash flow characteristics of the underlying financial asset.

(a) Classification of financial assets at amortized cost

The Bank classifies its financial assets at amortized cost only if both of the following criteria are met:

(i) The financial asset is held within a business model having the objective of collecting the contractual cash flows; and

11

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

B ACCOUNTING POLICIES

B3 Summary of significant accounting policies (Continued)

B3.3 Financial instruments (Continued)

B3.3.1 Financial assets (Continued)

(a) Classification of financial assets at amortized cost (Continued)

(ii) The contractual terms give rise, on specified dates, to cash flows that are solely payments of principal or interest on the principal outstanding.

The Bank applies the effective interest method to the amortized cost of a financial asset.

(b) Classification of financial assets at FVOCI

Financial assets at FVOCI comprise:

(i) Financial assets having contractual cash flows which reflect solely payments of principal and interest on outstanding principal, and for which the objective of the related business model is achieved both by collecting contractual cash flows and selling financial assets, and

(ii) Investments in equity instruments which are neither held for trading nor contingent consideration, and for which the Bank has made an irrevocable election at initial recognition to recognize changes in fair value through other comprehensive income (OCI) rather than profit or loss.

For (i) above, interest is calculated using the effective interest method and recognized in profit or loss. Except for gains or losses from impairment and foreign exchange, the financial asset is measured at FVOCI. When the financial asset is derecognized, the cumulative gain or loss previously recognized in OCI is reclassified to profit or loss.

For (ii) above, the accumulated fair value changes in OCI will not be reclassified to profit or loss in the future. Dividends on such investments are recognized in profit or loss, unless the dividend clearly represents a recovery of part of the cost of the investment.

(c) Classification of financial assets at FVPL

The Bank classifies the following financial assets at FVPL:

(i) Financial assets that do not qualify for measurement at either amortized cost or FVOCI;

(ii) Financial assets that are designated at initial recognition at FVPL irrevocably, when such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise;

(iii) Investments in equity instruments that are held for trading; and

(iv) Investments in equity instruments for which the entity has not elected to recognize fair value gains or losses through OCI.

12

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

B ACCOUNTING POLICIES

B3 Summary of significant accounting policies (Continued)

B3.3 Financial instruments (Continued)

B3.3.2 Financial liabilities

The Bank’s financial liabilities are classified as either financial liabilities through FVPL or other financial liabilities, carried at amortized cost.

(a) Classification of financial liabilities at FVPL

Financial liabilities at FVPL have two subcategories, financial liabilities held for trading and those designated as FVPL on initial recognition. There were no financial liabilities classified as FVPL during the reporting period or as at December 31, 2017 and 2016.

(b) Other financial liabilities

Other financial liabilities are measured at amortized cost, using the effective interest method. The related interest expenses are recognized in profit or loss.

B3.3.3 Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

A puttable financial instrument includes a contractual obligation for the issuer to repurchase or redeem that instrument for cash or another financial asset on exercise of the put. The puttable instrument that includes such an obligation is classified as an equity instrument when meeting all the generally required features being most subordinate class of shares with identical features and all have the same rights on liquidation.

B3.3.4 Impairment of financial instruments

Financial assets of the Bank that are measured at amortized cost (Note B3.3.1(a)), FVOCI (Note B3.3.1 (b) (i)) and certain unrecognized financial instruments such as loan commitments are subject to credit loss estimated through an expected credit loss (“ECL”) model, assessed on a forward-looking basis.

At each reporting date, the Bank assesses whether the credit risk of a financial instrument has increased significantly since initial recognition. When making this assessment, the Bank considers the change in the risk of a default occurring over the expected life of the financial instrument. To make this assessment, the Bank compares the risk of a default occurring as at the reporting date with the risk of a default occurring as at the date of initial recognition, based on reasonable and supportable information that is available without undue cost or effort and is indicative of significant increases in credit risk since initial recognition.

13

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

B ACCOUNTING POLICIES

B3 Summary of significant accounting policies (Continued)

B3.3 Financial instruments (Continued)

B3.3.4 Impairment of financial instruments (Continued)

At each reporting date, the Bank measures the loss allowance for a financial instrument at either:

(i) An amount equal to the lifetime ECL if the credit risk related to that financial instrument has increased significantly since initial recognition; or

(ii) An amount equal to a 12-month ECL if the credit risk related to that financial instrument has not increased significantly since initial recognition.

The Bank measures ECL related to a financial instrument in a way that reflects:

(i) An unbiased and probability-weighted amount determined by evaluating a range of possible outcomes;

(ii) The time value of money; and

(iii) Reasonable and supportable information that is available without undue cost or effort at the reporting date regarding relevant past events, current circumstances, and forecasts of future economic conditions.

The Bank identified financial assets as having credit impairment when one or more events that could have a detrimental impact on the estimated future cash flows of that financial asset have occurred.

The Bank recognizes the loss allowance of loan commitments as a provision. However, if a financial instrument includes both a loan (i.e. financial asset) and an undrawn commitment (i.e. loan commitment) component and the Bank cannot separately identify the ECL on the loan commitment component from those on the financial asset component, the ECL on the loan commitment is recognized together with the loss allowance for the financial asset. To the extent that the combined ECL exceed the gross carrying amount of the financial asset, the ECL is recognized as a provision.

B3.3.5 Determination of fair value

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e. an exit price) regardless of whether that price is directly observable or estimated using another valuation technique.

For financial instruments traded in active markets, the determination of fair values of financial assets and financial liabilities is based on quoted market prices.

A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, pricing service, or regulatory agency; and those prices represent actual and regularly occurring market transactions on an arm’s length basis. If the above criteria are not met, the market is regarded as being inactive.

14

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

B ACCOUNTING POLICIES

B3 Summary of significant accounting policies (Continued)

B3.3 Financial instruments (Continued)

B3.3.5 Determination of fair value (Continued)

For financial instruments not traded in active markets, fair value is determined using appropriate valuation techniques. Valuation techniques include the use of recent transaction prices, discounted cash flow analysis, option pricing models and others commonly used by market participants. These valuation techniques include the use of observable and/or unobservable inputs.

B3.3.6 Recognition and derecognition

The Bank recognizes a financial asset or a financial liability in its statement of financial position when, and only when, the Bank becomes a party to the contractual provisions of the instrument.

At initial recognition, the Bank measures a financial asset or financial liability at its fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issuance of the financial asset or financial liability.

Before evaluating whether, and to what extent, derecognition is appropriate, the Bank determines whether the derecognition analysis should be applied to a part of a financial asset or a financial asset in its entirety. The Bank derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Bank neither transfers nor retains substantially all the risks and rewards of ownership and has not retained control of the transferred asset, the Bank derecognizes the financial asset and recognizes separately as assets or liabilities any rights and obligations created or retained in the transfer.

Upon derecognition of a financial asset in its entirety, the difference between the carrying amount of the asset and the sum of the consideration received and receivable and, where applicable, the cumulative gain or loss that had been recognized in other comprehensive income is reclassified to profit or loss, except for those investments in equity instruments designated as FVOCI.

Financial liabilities are derecognized when the related obligation is discharged, cancelled or expires. The difference between the carrying amount of the financial liability derecognized and the sum of the consideration paid and payable is recognized in the profit or loss.

B3.4 Property improvements

Property improvements are stated at cost less accumulated depreciation. Depreciation is calculated on a straight line basis to write down the cost of each asset to its residual value over its estimated useful economic life. Property improvements are depreciated over a useful economic life of no more than 3 years.

15

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

B ACCOUNTING POLICIES

B3 Summary of significant accounting policies (Continued)

B3.5 Intangible assets

Intangible assets are stated at cost less accumulated amortization. Amortization is calculated on a straight line basis to write down the cost of each asset to its residual value over its estimated useful economic life. Intangible assets comprise computer software which is amortized over a useful economic life of no more than 3 years.

B3.6 Revenue

B3.6.1 Interest income

Interest income is calculated using the effective interest method. In this regard, the effective interest rate is applied to the gross carrying amount of a financial asset except for:

(i) Purchased or originated credit-impaired financial assets, for which the credit adjusted effective interest rate is applied to the amortized cost of the financial assets from initial recognition; and

(ii) Credit-impaired financial assets that have been recognized subsequent to initial recognition, for which the original effective interest rate is applied to the net carrying value in subsequent reporting periods.

With respect to (ii) above, in subsequent reporting periods, interest income is calculated by applying the effective interest rate to the gross carrying amount if the credit risk of the financial asset improves so that it is no longer credit impaired.

B3.6.2 Front-end and commitment fees

Front-end fees received by the Bank relating to the origination or acquisition of a financial asset are an integral part of generating an involvement with the resulting financial instrument and, accordingly, are an integral part of the effective interest rate of that financial instrument.

Commitment fees received by the Bank to originate a loan when the loan commitment is not measured at FVPL are treated as follows:

(i) If it is probable that the Bank will enter into a specific lending arrangement, it is an integral part of the effective interest rate of a financial instrument. If the commitment expires without the Bank making the loan, the fee is recognized as revenue at expiration of the commitment.

(ii) If it is likely that a specific lending arrangement will not be entered into, it is not an integral part of the effective interest rate of the financial instrument, the fee is accounted for as revenue over the commitment period.

B3.6.3 Administration fees

Administration fees are recognized as revenue throughout the period that the services are rendered.

16

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

B ACCOUNTING POLICIES

B3 Summary of significant accounting policies (Continued)

B3.6 Revenue (Continued)

B3.7 Employee benefits

Employee benefits represent considerations given, and are expenditures incurred by the Bank, in exchange for services rendered by employees or for termination of employment contracts. These benefits include short-term employee benefits and contributions to defined contribution plans.

Short-term employee benefits

During the reporting period in which an employee has rendered services, the Bank recognizes the short-term employee benefits payable for those services as a liability with a corresponding increase in the related expense. Short-term employee benefits include base salary and location premiums, pre-retirement medical insurance, life insurance, accidental death and disability provision, death grant, leave, travel accident coverage, long-term disability, multipurpose loans to staff as well as flexible allowance and resettlement allowance which are special allowances for staff recruited globally.

Defined contribution plans

A defined contribution plan is a retirement plan under which the Bank pays fixed contributions into a separate entity. When an employee has rendered service to the Bank during a period, the Bank recognizes a contribution payable to a defined contribution plan in exchange for that service, along with the related expense. Defined contribution plans include defined contribution retirement plans and post-retirement medical benefit plans.

B3.8 Leases

A lease contract is one which conveys the right to control the use of an asset for a specified period of time. The lease liability is measured as the present value of the payments that are not paid at the date of recognition discounted at the leases’ implicit interest rate. The right of use asset is measured at cost, consisting of the lease liability plus any payments made before the commencement of lease and less any lease incentives.

B3.9 Dividends

Dividend distributions to the Bank’s members are recognized as a liability in the period in which the dividends are approved by the Board of Governors.

B3.10 Current and noncurrent presentation

The Bank presents its assets and liabilities in the order of liquidity as this provides more relevant information.

B3.11 Taxation

In accordance with Article 51 of the AOA, within the scope of its official activities, the Bank, its assets, property, income, and its operations and transactions, shall be exempt from all taxation and from all custom duties in its member countries. Article 51 also exempts the Bank from any obligation for the payment, withholding, or collection of any tax or duty.

17

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

B ACCOUNTING POLICIES

B4 Critical accounting estimates and judgments in applying accounting policies

The Bank makes estimates and assumptions that affect the amounts recognized in the financial statements, and the carrying amounts of assets and liabilities within the next financial year. Estimates and judgments are continually evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgments, apart from those involving estimations, in the process of applying the accounting policies. Judgments that have the most significant effect on the amounts recognized in the financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include:

B4.1 Impairment losses on financial instruments

The measurement of the ECL allowance for financial assets measured at amortized cost requires extensive financial modelling and significant assumptions about future economic conditions and credit behavior (e.g. the likelihood of customers defaulting and the resulting losses).

A number of significant judgments are also required in measuring ECL, which include:

• Determining criteria for significant increase in credit risk and definition of default;

• Choosing appropriate models and assumptions for the measurement of ECL;

• Establishing the number and probability of forward-looking scenarios for each type of product; and

• Assigning exposures through an internal credit grading process.

Details of the inputs, assumptions, and estimation techniques used in measuring ECL are further disclosed in Note D3, which also presents sensitivities of the ECL.

B4.2 Measurement of fair value

Paid-in capital receivables are initially measured at fair value. The Bank is required to use valuation techniques to determine the fair value. The Bank made judgments about the expected timing of future cash flows and the appropriate discount rate to apply. If the interest rate were changed +/-1 basis point (“bps”), the carrying amount of the capital receivables as at December 31, 2017 would have decreased/increased by approximately USD1.09 million (2016: USD3 million).

18

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

B ACCOUNTING POLICIES

B4 Critical accounting estimates and judgments in applying accounting policies (Continued)

B4.3 Structured entity consolidation

The Bank manages AIIB’s Project Preparation Special Fund (the “Special Fund”), and has made a judgment on whether or not, for accounting purposes, it is the principal or an agent, to assess whether the Bank controls the Special Fund and should consolidate it. The Bank identified the Special Fund’s assets as a “silo” when conducting its consolidation assessment. When performing this assessment, the Bank considered several factors including, among other things, the scope of its decision-making authority over the structured entity, the rights held by other parties, the remuneration to which it is entitled in accordance with the related agreements for the administration services and the Bank’s exposure to variability of returns from other interests that it holds in the structured entity. The Bank is not exposed to any significant variability in its returns and as such was deemed to not control the Special Fund. The Bank performs re-assessment periodically.

Detailed information about the unconsolidated structured entity is set out in Note C13.

C DISCLOSURE NOTES

C1 Interest income and expense

	For the year ended December 31, 2017		For the period from January 16, 2016 to December 31, 2016
Interest income
Loan investments (1)		11,795		6
Cash and deposits		112,398		23,449
Total interest income		124,193		23,455
Interest expense		—		—
Total interest expense		—		—
Net interest income		124,193		23,455

(1) Interest income for loan investments includes amortization of front-end fees, commitment fees and other incremental and directly related costs in relation to loan origination that are an integral part of the effective interest rate of those loans.

C2 Net fee and commission expense

	For the year ended December 31, 2017			For the period from January 16, 2016 to December 31, 2016
Special Fund administration fee (Note C13)		70			100
Loan service fee		49			—
Total fee and commission income		119			100
Co-financing service fee		(985	)		(170	)
Total fee and commission expense		(985	)		(170	)
Net fee and commission expense		(866	)		(70	)

19

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

C DISCLOSURE NOTES

C3 General and administrative expenses

	For the year ended December 31, 2017		For the period from January 16, 2016 to December 31, 2016
Staff costs (1)		25,226		12,226
Professional service expenses		12,607		6,729
IT services		5,691		3,170
Facilities and administration expenses		5,028		4,553
Travelling expenses		4,186		2,102
Auditor’s remuneration		1,000		455
Others		2,360		1,423
Total general and administrative expenses		56,098		30,658

(1) Staff costs

	For the year ended December 31, 2017		For the period from January 16, 2016 to December 31, 2016
Short-term employee benefits		22,092		10,826
Defined contribution plans		3,120		1,391
Others		14		9
Total		25,226		12,226

Refer to Note C14 for details of key management remuneration.

C4 Cash and deposits with banks

	December 31, 2017			December 31, 2016
Cash		—			—
Deposits with banks
- Demand deposits		457,124			4,488
- Term deposits		6,533,596			3,569,645
Total cash and deposits with banks		6,990,720			3,574,133
Less: term deposits with maturity more than 3 months (1)		(5,885,854	)		(2,292,141	)
Total cash and cash equivalents		1,104,866			1,281,992

(1) Term deposits with maturity more than 3 months have maturities up to 24 months.

20

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

C DISCLOSURE NOTES

C5 Investments at fair value through profit or loss

	For the year ended December 31, 2017		For the period from January 16, 2016 to December 31, 2016
As at beginning of year/period		3,179,873		—
Additions		21,484		3,165,000
Fair value gain, net		53,783		14,873
Total investments at fair value through profit or loss		3,255,140		3,179,873

Analysis of investments at fair value through profit or loss:

	December 31, 2017		December 31, 2016
Trust Fund (a)		3,236,448		3,179,873
LP Fund (b)		18,692		—
Total investments at fair value through profit or loss		3,255,140		3,179,873

The Bank has the following investments in certain unconsolidated structured entities:

(a) The Bank places funds with an external counterparty in a trust fund account (the “Trust Fund”), which, in accordance with the related Administrative Agreement between the Bank and the counterparty, reinvests the funds in a larger collective pool of investments (the “Pool”) in accordance with the investment mandate for the entire Pool. Notional allocations within the Pool are made, subject to the Investment Framework agreement between the Bank and the counterparty, to create a model portfolio exposure, as the basis for determining the fair value of the Trust Fund. The Bank classifies this investment as a single unit of account measured at fair value through profit or loss. Fees charged for the administration of the Trust Fund are comprised of a flat fee based upon average assets under management and full-cost recovery of the counterparty’s staff costs, related benefits and allocated overhead related to administering the Pool.

The counterparty does not guarantee any investment return or the principal amount deposited. The Trust Fund reports its notional allocation in the Pool as one class of financial assets.

(b) The Bank also invests in a Limited Partnership Fund (“LP Fund”). The LP Fund is an Emerging Asia growth-focused private equity fund with a returns-driven strategy, selectively investing growth capital across multiple sectors. The LP Fund is managed by the General Partner who makes all investment decisions on behalf of the Limited Partners. The Bank, along with other investors, has entered into the Fund as a Limited Partner with a capital commitment which will be drawn down over the life of the LP Fund, based on drawdown notices sent by the General Partner. The management fee is payable on a quarterly basis.

21

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

C DISCLOSURE NOTES

C6 Loan investments, loan commitments and related ECL allowance

Loan investments	December 31, 2017			December 31, 2016
Gross carrying amount		778,511			9,830
ECL allowance		(5,273	)		(277	)
Net carrying amount		773,238			9,553

The following table sets out overall information about the credit quality of loan investments and loan commitments issued for effective contracts as at December 31, 2017. The gross amounts of loans include the transaction costs and fees that are capitalized through the effective interest method.

	December 31, 2017			December 31, 2016
Loan investments, gross carrying amount		778,511			9,830
Loan commitments		1,947,528			334,305
		2,726,039			344,135
Total ECL allowance (a)		(9,365	)		(277	)
		2,716,674			343,858

(a) As at December 31, 2017, ECL related to loan commitments were USD4.09 million, presented as a provision in Note C9.

C7 Paid-in capital receivables

According to the AOA, payments for paid-in capital (refer to Note C10) are due in five installments, with the exception of members designated as less developed countries, who may pay in ten installments. Paid-in capital receivables represent amounts due from members in respect of paid-in capital. These amounts are initially recognized at fair value and subsequently measured at amortized costs. The fair value discount is accreted through income using the effective interest method. For the year ended December 31, 2017, a total discount of USD18 million (2016: USD443 million) was debited into reserve. An amount of USD140 million (2016: USD160 million) has been accreted through income in the current year.

Members	Paid-in capital receivables at amortized cost as at
	December 31, 2017		December 31, 2016
Afghanistan		13,268		—
Australia		289,241		430,896
Austria		39,260		58,488
Azerbaijan		30,151		39,999
Bangladesh		86,925		98,609
Brunei Darussalam		4,114		6,129

22

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

C DISCLOSURE NOTES

C7 Paid-in capital receivables (Continued)

Members	Paid-in capital receivables at amortized cost as at
	December 31, 2017		December 31, 2016
Cambodia		8,249		9,359
China		2,335,329		3,479,854
Denmark		29,075		44,043
Egypt		51,036		102,081
Ethiopia		7,127		—
Fiji		1,898		—
Finland		36,781		48,753
France		265,470		395,954
Georgia		4,235		6,310
Germany		351,383		523,473
Hong Kong, SAR		118,497		—
Hungary		15,491		—
Iceland		1,375		2,052
India		657,150		979,699
Indonesia		264,210		394,036
Iran		123,411		—
Ireland		20,144		—
Israel		59,015		58,368
Italy		202,212		301,572
Jordan		9,320		13,892
Kazakhstan		86,548		114,798
Korea		292,963		436,442
Kyrgyz Republic		3,580		4,153
Lao PDR		5,664		6,424
Luxembourg		5,442		8,106
Malaysia		12,913		—
Maldives		911		1,031
Malta		1,060		1,580
Mongolia		3,215		4,791
Myanmar		34,429		38,995
Nepal		10,639		12,063
Netherlands		80,832		120,420
New Zealand		36,165		53,876
Norway		65,134		86,287
Oman		30,688		30,320
Pakistan		122,341		162,072
Philippines		76,681		192,537
Poland		65,447		97,622
Portugal		7,674		—
Qatar		47,473		71,024

23

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

C DISCLOSURE NOTES

C7 Paid-in capital receivables (Continued)

Members	Paid-in capital receivables at amortized cost as at
	December 31, 2017		December 31, 2016
Russia		512,461		763,574
Saudi Arabia		200,573		299,384
Singapore		19,591		29,186
Spain		136,659		—
Sri Lanka		31,863		42,232
Sweden		74,623		98,908
Switzerland		83,706		110,959
Tajikistan		4,702		5,251
Thailand		112,058		167,149
Timor-Leste		2,440		—
Turkey		205,374		306,373
United Arab Emirates		93,284		139,159
United Kingdom		361,402		478,770
Uzbekistan		17,256		25,714
Vietnam		78,743		104,460
Total paid-in capital receivables		7,948,901		11,007,227

As at December 31, 2017, the contractual undiscounted paid-in capital receivables overdue amounting to USD346.04 million (December 31, 2016: USD433.80 million) (Note C10), because of an administrative delay but are not considered as impaired. Of this amount, USD342.44 million was collected by the date of signing of the 2017 financial statements (2016: USD433.18 million) (Note C15).

As at December 31, 2017, USD4,021 million (December 31, 2016: USD3,856 million) of the above balance is due within 12 months from the reporting date.

	For the year ended December 31, 2017			For the period from January 16, 2016 to December 31, 2016
As at beginning of year/period		11,007,227			—
Paid-in capital receivables originated		916,882			17,622,469
Contributions received		(4,115,650	)		(6,775,305	)
Accretion to profit or loss		140,442			160,063
Carrying amount		7,948,901			11,007,227

24

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

C DISCLOSURE NOTES

C8 Other assets

	December 31, 2017		December 31, 2016
Tax refund receivable		750		305
Property improvements		271		168
Computer hardware		238		—
Prepaid co-financing service fee		63		175
Others		661		310
Total other assets		1,983		958

C9 Other liabilities

	December 31, 2017		December 31, 2016
Accrued expenses		8,080		5,102
Provision – ECL allowance (Note C6)		4,092		—
Staff costs payable		1,205		436
Deferred administration fee (Note C14)		210		—
Total other liabilities		13,587		5,538

C10 Share capital

	December 31, 2017			December 31, 2016
Authorized capital		100,000,000			100,000,000
– Allocated
– Subscribed		95,001,100			90,327,000
– Unsubscribed		3,277,600			7,824,400
– Unallocated		1,721,300			1,848,600
Total authorized capital		100,000,000			100,000,000
Subscribed capital		95,001,100			90,327,000
Less: callable capital		(76,000,800	)		(72,261,600	)
Paid-in capital		19,000,300			18,065,400
Paid-in capital comprises:
– amounts received		10,890,955			6,775,305
– amounts due but not yet received		346,040			433,795
– amounts not yet due		7,763,305			10,856,300
Total paid-in capital		19,000,300			18,065,400

25

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

C DISCLOSURE NOTES

C10 Share capital (Continued)

In accordance with Articles 4 and 5 of the AOA, the initial authorized capital stock of the Bank is USD100 billion, divided into 1,000,000 shares, which shall be available for subscription only by members.

The original authorized capital stock is divided into paid-in shares and callable shares, with paid-in shares having an aggregate par value of USD20 billion and callable shares having an aggregate par value of USD80 billion.

Payment of the amount subscribed to the callable capital stock of the Bank shall be subject to call only as and when required by the Bank to meet its liabilities. Calls on unpaid subscriptions shall be uniform in percentage on all callable shares.

In accordance with Article 37 of the AOA, any member may withdraw from the Bank at any time by delivering a notice in writing to the Bank at its principal office. A withdrawing member remains liable for all direct and contingent obligations to the Bank to which it was subject at the date of delivery of the withdrawal notice. At the time a country ceases to be a member, the Bank shall arrange for the repurchase of such country’s shares by the Bank as a part of the settlement of accounts with such country.

Members	Total shares		Subscribed capital		Callable capital		Paid-in capital		Paid-in capital received		Paid-in capital not yet received
Afghanistan		866		86,600		69,300		17,300		3,460		13,840
Australia		36,912		3,691,200		2,953,000		738,200		442,920		295,280
Austria		5,008		500,800		400,600		100,200		60,120		40,080
Azerbaijan		2,541		254,100		203,300		50,800		20,320		30,480
Bangladesh		6,605		660,500		528,400		132,100		39,630		92,470
Brunei Darussalam		524		52,400		41,900		10,500		6,300		4,200
Cambodia		623		62,300		49,800		12,500		3,750		8,750
China		297,804		29,780,400		23,824,300		5,956,100		3,573,660		2,382,440
Denmark		3,695		369,500		295,600		73,900		44,340		29,560
Egypt		6,505		650,500		520,400		130,100		78,060		52,040
Ethiopia		458		45,800		36,600		9,200		1,840		7,360
Fiji		125		12,500		10,000		2,500		500		2,000
Finland		3,103		310,300		248,200		62,100		24,840		37,260
France		33,756		3,375,600		2,700,500		675,100		405,060		270,040
Georgia		539		53,900		43,100		10,800		6,480		4,320
Germany		44,842		4,484,200		3,587,400		896,800		538,080		358,720
Hong Kong, SAR		7,651		765,100		612,100		153,000		30,600		122,400
Hungary		1,000		100,000		80,000		20,000		4,000		16,000
Iceland		176		17,600		14,100		3,500		2,100		1,400
India		83,673		8,367,300		6,693,800		1,673,500		1,004,100		669,400
Indonesia		33,607		3,360,700		2,688,600		672,100		403,260		268,840
Iran		15,808		1,580,800		1,264,600		316,200		189,725		126,475

26

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

C DISCLOSURE NOTES

C10 Share capital (Continued)

Members	Total shares		Subscribed capital		Callable capital		Paid-in capital		Paid-in capital received		Paid-in capital not yet received
Ireland		1,313		131,300		105,000		26,300		5,260		21,040
Israel		7,499		749,900		599,900		150,000		90,000		60,000
Italy		25,718		2,571,800		2,057,400		514,400		308,640		205,760
Jordan		1,192		119,200		95,400		23,800		14,280		9,520
Kazakhstan		7,293		729,300		583,400		145,900		58,360		87,540
Korea		37,387		3,738,700		2,991,000		747,700		448,620		299,080
Kyrgyz Republic		268		26,800		21,400		5,400		1,620		3,780
Lao PDR		430		43,000		34,400		8,600		2,580		6,020
Luxembourg		697		69,700		55,800		13,900		8,340		5,560
Malaysia		1,095		109,500		87,600		21,900		8,760		13,140
Maldives		72		7,200		5,800		1,400		420		980
Malta		136		13,600		10,900		2,700		1,620		1,080
Mongolia		411		41,100		32,900		8,200		4,920		3,280
Myanmar		2,645		264,500		211,600		52,900		15,870		37,030
Nepal		809		80,900		64,700		16,200		4,860		11,340
Netherlands		10,313		1,031,300		825,000		206,300		123,780		82,520
New Zealand		4,615		461,500		369,200		92,300		55,380		36,920
Norway		5,506		550,600		440,500		110,100		44,040		66,060
Oman		2,592		259,200		207,400		51,800		20,720		31,080
Pakistan		10,341		1,034,100		827,300		206,800		82,720		124,080
Philippines		9,791		979,100		783,300		195,800		117,480		78,320
Poland		8,318		831,800		665,400		166,400		99,840		66,560
Portugal		650		65,000		52,000		13,000		5,200		7,800
Qatar		6,044		604,400		483,500		120,900		72,540		48,360
Russia		65,362		6,536,200		5,229,000		1,307,200		784,320		522,880
Saudi Arabia		25,446		2,544,600		2,035,700		508,900		305,340		203,560
Singapore		2,500		250,000		200,000		50,000		30,000		20,000
Spain		17,615		1,761,500		1,409,200		352,300		211,380		140,920
Sri Lanka		2,690		269,000		215,200		53,800		21,520		32,280
Sweden		6,300		630,000		504,000		126,000		50,400		75,600
Switzerland		7,064		706,400		565,100		141,300		56,520		84,780
Tajikistan		309		30,900		24,700		6,200		1,240		4,960
Thailand		14,275		1,427,500		1,142,000		285,500		171,300		114,200
Timor-Leste		160		16,000		12,800		3,200		640		2,560
Turkey		26,099		2,609,900		2,087,900		522,000		313,200		208,800
United Arab Emirates		11,857		1,185,700		948,600		237,100		142,260		94,840
United Kingdom		30,547		3,054,700		2,443,800		610,900		244,360		366,540
Uzbekistan		2,198		219,800		175,800		44,000		26,400		17,600
Vietnam		6,633		663,300		530,600		132,700		53,080		79,620
Total		950,011		95,001,100		76,000,800		19,000,300		10,890,955		8,109,345

27

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

C DISCLOSURE NOTES

C11 Reserves

Based on Article 18.1 of the AOA, the Board of Governors shall determine at least annually what part of the net income of the Bank shall be allocated, after making provision for reserves, to retained earnings or other purposes and what part, if any, shall be distributed to the members.

C12 Distribution

Distributable retained earnings as at December 31, 2017 were USD119.16 million (December 31, 2016: USD7.30 million). As at December 31, 2017, USD140.44 million (December 31, 2016: USD160.06 million) of retained earnings has been transferred to reserve for accretion of the paid-in capital receivables.

No dividends were declared during the reporting period.

C13 Unconsolidated structured entity

The Special Fund established and administered by the Bank based on Article 17.1 of the AOA is an unconsolidated structured entity for accounting purposes. The objective of the Special Fund is to support and facilitate the preparation of projects for the benefit of one or more members of the Bank that, at the time when the decision to extend the grant is made by the Bank, are classified as recipients of financing from the International Development Association, including Blend countries; however, the projects that benefit other members may also be eligible for such assistance in exceptional circumstances, such as innovative and complex projects and regional or cross-border projects with significant regional impacts. Consistent with Article 10 of the Bank’s AOA, the resources of the Special Fund shall at all times and in all respects be held, used, committed, invested or otherwise disposed of entirely separately from the Bank’s ordinary resources.

The resources of the Special Fund consist of: (a) amounts accepted from any member of the Bank, any of its political or administrative sub-divisions, or any entity under the control of the member or such sub-divisions or any other country, entity or person approved by the President may become a contributor to the Special Fund; (b) income derived from investment of the resources of the Special Fund; and (c) funds reimbursed to the Special Fund, if any.

The full cost of administering the Special Fund is charged to that Special Fund. The Bank charges an administration fee equal to 1% of any contribution, and the Special Fund bears all expenses appertaining directly to operations financed from the resources of the Special Fund.

As at December 31, 2017, the Special Fund had aggregate contributions received amounting to USD38 million (December 31, 2016: USD10 million). The Bank, acting as administrator of the Special Fund, receives administration fees. For the year ended December 31, 2017, fees recognized as income amounted to USD0.07 million (for the period from January 16, 2016 to December 31, 2016: USD0.10 million) (Note C2).

The Bank is not obliged to provide financial support to the Special Fund.

28

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

C DISCLOSURE NOTES

C14 Related party transactions

Parties are generally considered to be related if the parties are under common control, or one party has the ability to control the other party or can exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely to the legal form.

Outstanding balances with related parties were as follows:

	December 31, 2017				December 31, 2016
	Key management personnel		Other related parties		Key management personnel		Other related parties
Assets – loans granted		100		—		23		—
Other liabilities (Note C9)		—		210		—		—

The income and expense items affected by transactions with related parties were as follows:

	For the year ended December 31, 2017				For the period from January 16, 2016 to December 31, 2016
	Key management personnel		Other related parties		Key management personnel		Other related parties
Income		—		70		—		100
Expense		—		—		—		—

Income from other related parties relates to the Special Fund administration fee (Note C13).

Key management personnel

Key management personnel are those persons who have the authority and responsibility to plan, direct, and control the activities of the Bank. Key management personnel of the Bank is defined as the members of the Bank’s Executive Committee, that is, in accordance with the Terms of Reference of the Executive Committee, the President, Vice Presidents, the General Counsel and the Chief Risk Officer.

During the year ended December 31, 2017, other than loans granted to key management personnel as disclosed above, the Bank had no other material transactions with key management personnel.

The compensation of key management personnel during the year comprises short-term employee benefits of USD3.31 million (2016: USD2.12 million) and defined contribution plans of USD0.54 million (2016: USD0.30 million).

Use of office building

In accordance with Article 5 of the Headquarters Agreement, the Government provides a permanent office building and the temporary office accommodation to the Bank, free of charge.

29

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

C DISCLOSURE NOTES

C15 Events after the end of the reporting period

Subsequent to December 31, 2017, USD342.44 million of paid-in capital receivables that were overdue has been received by the Bank from members.

D FINANCIAL RISK MANAGEMENT

D1 Overview

The Bank adopts a proactive and comprehensive approach to risk management that is instrumental to the Bank’s financial viability and success in achieving its mandate. The ability to identify, mitigate, and manage risk begins with the Bank’s policies established with a strong risk culture. In addition to establishing appropriate risk parameters, a thorough and robust project review and monitoring process, the risk management function provides independent oversight of credit, market, liquidity, operational, and associated reputational risk in the Bank’s activities. It is also designed to integrate asset and liability risk to minimize the volatility of equity value and to maintain sufficient liquidity.

D2 Financial risk management framework

The Bank has established its risk appetite, risk management objectives and strategies in its Risk Limits Policy, and its Risk Management Framework (the “RMF”). Within this RMF, the Risk Management Department is responsible for monitoring financial risks with the oversight of the Risk Committee.

The Risk Committee is responsible for establishing the overall risk appetite of the Bank and reviewing and approving the risk management objectives and strategies. The Risk Committee monitors the integrated risk processes, on a cross-sector and cross-category basis for the Bank. The Board approves key risk policies as recommended by the President and the Executive Committee.

The Risk Management Department has overall responsibility for managing all aspects of risks, including implementing risk management strategies, initiatives and credit policies, and approving internal policies, measures and procedures related to risk management.

(i) Investment operations portfolio

The Investment Committee of Senior Management reviews that a proposed project prepared by Investment Operation staff is in line with the Bank’s policies and procedures. In order to make its recommendations, the committee is supported by relevant departments with assessments specific to their area, including risk management, legal, finance, strategy, environmental and social aspects, and procurement. The Board of Directors makes final approval of investment projects.

Accountabilities at different stages of the credit risk/project approval and monitoring process are delineated and regularly updated by the Bank’s management.

(ii) Treasury portfolio

The treasury portfolio includes deposits with banks and the investments in the Trust Fund.

30

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

D FINANCIAL RISK MANAGEMENT

D2 Financial risk management framework (Continued)

According to the Bank’s General Investment Authority, the Bank can make investments in the assets specified in a list of eligible assets, including deposits and certain money market funds that invest in high credit quality securities.

With respect to the Trust Fund described in Note C5, the Trust Fund’s assets consist of its notionally allocated share of cash and investments in the Pool. The Pool is actively managed and invested in accordance with the investment strategy established for all such kind of Trust Funds administered by the counterparty. The objective of the investment strategy is foremost to maintain adequate liquidity to meet foreseeable cash flow needs and preserve capital and then, to maximize investment returns. The Pool is exposed to credit, market and liquidity risks.

D3 Credit risk

Credit risk management

The Bank takes on exposure to credit risk, which is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Exposure to credit risk arises as a result of the Bank’s lending and other transactions with counterparties giving rise to financial assets and loan commitments.

The Bank is primarily exposed to credit risk in both its loan granting of bank activities and deposit placing of the treasury activities. The counterparties could default on their contractual obligations or the value of the Bank’s investments could become impaired.

(i) Credit risk in the investment operations portfolio

• Sovereign-backed loans

Sovereign-backed loans are the obligation of a member as borrower or guarantor. The Bank’s credit decisions are based on assessments of the borrower’s or guarantor’s capacity to service the loan. These assessments are undertaken in accordance with the relevant operational policies. Specifically, the Bank performs its own sovereign credit analysis and assigns its own internal sovereign credit rating. When making these assessments, the Bank gives particular consideration to the International Monetary Fund/World Bank debt sustainability analyses and will utilize, where appropriate, country and macroeconomic reporting by multilateral development banks (“MDBs”), commercial banks, and “think tanks”. The appraisal of sovereign-backed loans takes into account, as appropriate, a full assessment of the project’s benefits and risks. The Bank’s internal rating has 12 notches, with rating 1-4 for investment grade.

As at December 31, 2017, the rating of sovereign-backed loans ranged from 3 to 10 and the related range of annualized PD was 0.14%-8.67%.

As an international financial institution, the Bank does not participate in country debt rescheduling or debt reduction exercises of sovereign-backed loans or guarantees.

31

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

D FINANCIAL RISK MANAGEMENT

D3 Credit risk (Continued)

Credit risk management (Continued)

When a borrower fails to make payment on any principal, interest, or other charge due to the Bank, the Bank may suspend disbursements immediately on all loans to that borrower. The conditions for suspension of sovereign loans are presented in more detail in the Bank’s operational policies. Under its operational policies, the Bank would cease making new sovereign-backed loans to the borrower once any loans are overdue by more than 30 days and suspend all disbursements to or guaranteed by the member concerned once any loans are overdue by more than 60 days.

• Nonsovereign-backed financings

The Bank provides private enterprises and state-owned or state-controlled enterprises with loans and investments that do not have a full member guarantee. However, the Bank retains the right, when it deems it advisable, to require a full or partial sovereign guarantee.

The Bank assigns an internal credit rating taking into account specific project, sector, macro and country credit risks. For nonsovereign projects, risk ratings are normally capped by the sovereign credit rating, except where the Bank has recourse to a guarantor from outside the country which may have a better rating than the local sovereign credit rating.

As at December 31, 2017, the rating of nonsovereign-backed loans was 9 and the related annualized PD was 4.58%.

• LP Fund investment

As at December 31, 2017, the investment operations portfolio includes LP Fund investment described in Note C5. The LP Fund investment is measured at fair value through profit or loss. The fair value related information is described in Note E.

(ii) Credit risk in the treasury portfolio

Treasury activities and risk appetite are monitored by the Audit and Risk Committee and Board of Directors. The Bank has a limits policy which determines the maximum exposure to eligible counterparties and instruments. Eligible counterparties must have a single A credit rating or higher. All individual counterparty and investment credit lines are monitored and reviewed by Risk Management Department periodically.

As at December 31, 2017, the treasury portfolio includes term deposits with banks and investment in the Trust Fund described in Note C5. The Trust Fund is measured at fair value through profit or loss, and the fair value related information is described in Note E. As the Trust Fund is not subject to significant credit risk, the credit risk of the treasury portfolio is mainly from the term deposits. Given the high credit quality, no significant loss provisions were made for the investments in the treasury portfolio for the year ended December 31, 2017 and 2016.

32

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

D FINANCIAL RISK MANAGEMENT

D3 Credit risk (Continued)

Credit quality analysis

Except for loan investments, other financial assets at amortized cost are paid-in capital receivables and deposits with banks, for which the credit risk is not material.

The following table set out the loans and loan commitments for sovereign-backed loans and nonsovereign-backed loans, with their respective ECL allowance balances.

	December 31, 2017					December 31, 2016
	Loans and loan commitments		ECL			Loans and loan commitments		ECL
Sovereign-backed loans		2,558,761		(5,050	)		344,135		(277	)
Nonsovereign-backed loans		167,278		(4,315	)		—		—
Total		2,726,039		(9,365	)		344,135		(277	)

(i) Concentration of credit risk

As at December 31, 2017, the geographical distribution of the Bank’s loan investments (gross carrying amount of loans and exposure of loan commitments) is as follows:

	December 31, 2017						December 31, 2016
Region	Stage 1		Stage 2		Total		Stage 1
Sovereign-backed loans
Asia		2,194,438		364,323		2,558,761		344,135
NonAsia		—		—		—		—
Subtotal		2,194,438		364,323		2,558,761		344,135
Nonsovereign-backed loans
Asia		20,198		—		20,198		—
NonAsia		147,080		—		147,080		—
Subtotal		167,278		—		167,278		—
Total		2,361,716		364,323		2,726,039		344,135

33

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

D FINANCIAL RISK MANAGEMENT

D3 Credit risk (Continued)

Credit quality analysis (Continued)

The following table sets out the credit quality of loan investments (gross carrying amount of loans and exposure of loan commitments) segmented by the Bank’s internal credit rating system and their respective staging.

	December 31, 2017						December 31, 2016
Internal credit rating	Stage 1		Stage 2		Total		Stage 1
Sovereign-backed loans
Investment grade		828,834		99,977		928,811		216,059
Noninvestment grade (a)		1,365,604		264,346		1,629,950		128,076
Subtotal		2,194,438		364,323		2,558,761		344,135
Nonsovereign-backed loans
Investment grade		—		—		—		—
Noninvestment grade (a)		167,278		—		167,278		—
Subtotal		167,278		—		167,278		—
Total		2,361,716		364,323		2,726,039		344,135

(a) For the noninvestment grade sovereign-backed loan exposures as at December 31, 2017, the balances of USD1,203 million are within internal rating ranging from 5 to 7, and the balances of USD427 million are within internal rating ranging from 8 to 12 (2016: all the balances of non-investment grade are within internal rating ranging from 8 to 12).

For the nonsovereign-backed loan exposures as at December 31, 2017, all the balances of noninvestment grade are within internal rating ranging from 8 to 12 (2016: nil).

(ii) Credit enhancement

As at December 31, 2017, the Bank’s maximum exposure to credit risk from financial instruments other than undrawn loan commitments before taking into account any collateral held or other credit enhancements is their carrying amount presented on the statement of financial position. The maximum exposure to credit risk from the undrawn loan commitments as at December 31, 2017 is USD1,948 million (December 31, 2016: USD334 million).

Credit enhancement for loan investments (gross carrying amount of loans and exposure of loan commitments) are as below:

	December 31, 2017		December 31, 2016
Guaranteed by sovereign members		864,303		—
Guaranteed by nonsovereign entities		20,199		—
Unguaranteed (a)		1,841,537		344,135
Total		2,726,039		344,135

34

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

D FINANCIAL RISK MANAGEMENT

D3 Credit risk (Continued)

Credit quality analysis (Continued)

(a) The unguaranteed loan investments represent sovereign loans and loan commitments granted to member countries.

There was no other credit enhancement held as at December 31, 2017 and December 31, 2016.

(iii) Reconciliation of loan gross carrying amount and ECL

An analysis of the changes in the gross carrying amount of loans and exposure of loan commitments, with the related changes in ECL allowances is as follows:

Sovereign-backed loans
	Stage 1			Stage 2		Total
Gross carrying amount of loans and exposure of loan commitments as at January 1, 2017		344,135			—		344,135
New loans and commitments originated		2,214,626			—		2,214,626
Transfer to Stage 2		(364,323	)		364,323		—
As at December 31, 2017		2,194,438			364,323		2,558,761
	Stage 1			Stage 2		Total
ECL allowance as at January 1, 2017		277			—		277
Additions		4,730			—		4,730
Change in risk parameters*		43			—		43
Transfer to Stage 2		(3,572	)		3,572		—
As at December 31, 2017		1,478			3,572		5,050

* The increase in the loss allowance is due to an increase in the probability of default (PD) used to calculate the 12-month expected credit loss for the performing loans.

35

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

D FINANCIAL RISK MANAGEMENT

D3 Credit risk (Continued)

Credit quality analysis (Continued)

Nonsovereign-backed loans
	Stage 1		Stage 2		Total
Gross carrying amount of loans and exposure of loan commitments as at January 1, 2017		—		—		—
New loans and commitments originated		167,278		—		167,278
Transfer to Stage 2		—		—		—
As at December 31, 2017		167,278		—		167,278
	Stage 1		Stage 2		Total
ECL allowance as at January 1, 2017		—		—		—
Additions		4,315		—		4,315
Change in risk parameters		—		—		—
Transfer to Stage 2		—		—		—
As at December 31, 2017		4,315		—		4,315
Total gross carrying amount of loans and exposure of loan commitments as at December 31, 2017		2,361,716		364,323		2,726,039
Total ECL allowance as at December 31, 2017		5,793		3,572		9,365

(iv) Past due information

As at December 31, 2017, a front-end and supervision fee receivable amount of USD2.28 million was past due but not yet more than 30 days. All the amounts were collected by the date of signing of the 2017 financial statements (2016: nil).

ECL measurement

The Bank adopts an ECL ‘three-stage’ model for applicable financial instruments. A ‘three-stage’ model for impairment is based on changes in credit quality since initial recognition:

• A financial instrument that has not experienced significant increase in credit risk (“SICR”) in its credit quality as compared to its rating at origination is classified in ‘Stage 1’, and has its credit risk continuously monitored by the Bank;

• If it has experienced SICR since initial recognition, the financial instrument is moved to ‘Stage 2’, but is not yet deemed to be credit impaired;

• If the financial instrument is deemed to be credit impaired, the financial instrument is then moved to ‘Stage 3’.

The Bank’s main credit risk exposure related to ECL measurement is from loan investments and loan commitments.

36

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

D FINANCIAL RISK MANAGEMENT

D3 Credit risk (Continued)

ECL measurement (Continued)

The following reflects the Bank’s ECL measurement focusing on loan investments and loan commitments. Given the nature of the Bank’s business (large infrastructure loans), all the instruments are assessed on an individual basis.

The key judgments and assumptions adopted by the Bank are discussed below:

(i) Significant increase in credit risk

The Bank considers a financial instrument to have experienced SICR when one or more of the following quantitative, qualitative or backstop criteria have been met:

• Quantitative criteria

Deterioration in credit rating is used as the quantitative criteria of SICR:

• For investment grade loans, rating downgrade by 2 notches determined by comparing the current rating (incorporating forward looking information) with rating at origination;

• For noninvestment grade loans, rating downgrade by 1 notch determined by comparing the current rating (incorporating forward looking information) with rating at origination.

All loans included in the Bank’s investment portfolio are rated using internal rating methodology. The methodology used to rate these individual loans depends on the type of loan. For sovereign loans, an internal credit rating methodology is used. The methodology uses the same factors considered by the major international credit rating agencies (“ICRA”s) such as Standard & Poor’s (“S&P”), Moody’s and Fitch. In case the sovereign borrower is not rated by any of the three ICRAs, the Bank uses Economist Intelligence Unit rating assessment as the basis for further analysis. For nonsovereign loans, the loan may be rated using the risk rating methodology that is in-line with the Bank’s policy for nonsovereign-backed financing depending on the type of their financing structure. More specifically, project finance transactions will be rated using a credit scoring tool for project finance. Similarly, corporate financing transactions will be rated based on a credit scoring tool for corporate finance: these initial ratings are used to estimate the Stage 1—12-month ECL at each reporting date to determine the SICR since origination.

• Qualitative criteria

In addition to the quantitative criteria, the following qualitative elements will also contribute to a determination that the loan should migrate to Stage 2:

• Adverse changes in business, financial or economic conditions;

• Expected breach of contract that may lead to covenant waivers or amendments;

• Transfer to watch list/monitoring; and

• Changes in payment behavior.

37

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

D FINANCIAL RISK MANAGEMENT

D3 Credit risk (Continued)

ECL measurement (Continued)

(i) Significant increase in credit risk (Continued)

• Backstop

• 30 days past due.

• Overlay

Temporary adjustments (“overlay adjustments”) to the allowance are adjustments which may be used to account for circumstances when it becomes evident that existing or expected risk factors have not been considered in the credit risk rating and modelling process. Management should evaluate the appropriateness of overlay adjustments made to the output of quantitative models, and assess such overlays for indication of bias. Any overlay adjustment shall be properly discussed with the Risk Committee.

A new ECL calculation software has been used for the year ended December 31, 2017. It is used to replace the previous excel based template used for calculating ECL. The new tool applies the same three-stage ECL methodology in compliance with IFRS 9 requirements, with enhancements in a more sophisticated approach to incorporate the PIT PD term structure and forward-looking assessment.

(ii) Definition of credit-impaired assets

Credit-impaired assets, which migrate to Stage 3, are those with respect to which one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is credit-impaired include observable data about the following events:

• significant financial difficulty of the issuer or the borrower;

• a breach of contract, such as a default or past due event;

• the lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise consider;

• it is becoming probable that the borrower will enter bankruptcy or other financial reorganization.

In addition, the credit-impaired assets also include the purchased or originated financial assets at a deep discount that reflects the incurred credit losses.

It may not be possible to identify a single discrete event. Instead, the combined effect of several events may have caused financial assets to become credit-impaired. For sovereign-backed loans, the same criteria of past due for “default assets” (see D3 (vi)) is also being applied for assessing credit impaired financial assets.

38

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

D FINANCIAL RISK MANAGEMENT

D3 Credit risk (Continued)

ECL measurement (Continued)

(iii) Measurement of the 12-month and lifetime ECL

Estimation of 12-month ECL is calculated by using the following formula:

12-month ECL

1. PIT PD is the Point-in-time Probability of Default, and is converted from Through-The-Cycle (TTC) PD by first mapping to Moody’s unconditional PIT PDs, then conditioning on three future scenarios (baseline, good, bad).

2. Loss Given Default (LGD) is currently set as 30% for sovereign loans and on a case-by-case basis or 70% in case of insufficient information available to estimate LGD for nonsovereign-backed loans, based upon management’s estimate established on the analysis of market data statistics and related judgment.

3. Exposure at Default (EAD) is calculated as loan balance at the period end plus projected net disbursement in the next year.

The above calculation is performed for three different scenarios. The weights of the 3 scenarios are 50%, 25%, and 25% respectively for the Baseline, Good and Bad scenarios. The estimation is based on the best representative management judgment without undue cost or effort that, going forward the current path of macroeconomic projections with equal chance of being significantly worse (Bad scenario) or better (Good scenario), considering the macroeconomic projections of those countries and relevant industries that the Bank has credit exposures.

• Estimation of lifetime ECL

Estimation of the lifetime ECL is calculated using the following formula as the summation of net present value of the ECL for each year:

Lifetime ECL     

Where ECL_t is the ECL for each year and n is the year for which ECL is calculated.

ECL_t  is calculated  as:  where w_s is the weight of each scenario – 50% for Baseline, 25% for both Good and Bad scenarios.

1) Conditional PIT PD

The process to convert TTC PD to conditional PIT PD term structure is the same as 12-month ECL calculation for the first 3 years and is assumed to revert back to the long-run PD for the remaining years.

2) LGD is the same as 12-month ECL calculation.

3) EAD for any given year is based on loan balance at the period end + net projected disbursement in the next 1 year, as by the disbursement schedule for each year.

39

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

D FINANCIAL RISK MANAGEMENT

D3 Credit risk (Continued)

ECL measurement (Continued)

(iii) Measurement of the 12-month and lifetime ECL (Continued)

4) Lifetime is equal to contractual lifetime.

5) Discount rate is equal to calculated effective interest rate.

In the same way as the 12-month ECL calculation, the above calculation is done for each of the three scenarios and then probability weighted, and the weighting of the 3 scenarios are the same as 12-month ECL calculation.

(iv) Forward-looking information incorporated in ECL

Forward-looking information has been incorporated taking into account the following steps:

• Macro Scenario development

• 3 Macro Scenarios – Baseline, Good, Bad. Each scenario is forecasted for 3 years.

• For each member, the corresponding long-term average and standard deviation of each macro factor would be computed. Good and bad scenarios would be established based on a view of movement in macro factors in terms of ‘number of standard deviations from average’.

• Choice of macro scenarios and probability weighting of each scenario is approved by the Risk Committee.

• Establishment of TTC PD

• TTC PD is calculated based on each borrower’s internal AIIB rating.

• Calculation of Forward-looking PIT PD

First, each borrower’s TTC PD will be mapped to the unconditional PIT PD derived by the software for each credit rating. Second, to convert the unconditional PIT PD into forward-looking PIT PD, the software utilizes forecasts of macroeconomic variables associated with the country and industry where the borrower operates.

(v) Sensitivity analysis

The output of the Bank’s ECL model is most sensitive to the credit quality of the obligors especially of those with the lowest credit quality and/or the largest amount of exposure. The Bank identified two obligors meeting these criteria. Should their ratings have been downgraded by one more notch and consequentially moved to Stage 2 when SICR criteria is met, the amount of ECL would have been USD31.14 million, or increased by USD21.78 million.

The weights of the scenarios used is another source of sensitivity. Should the Bank have changed the weights to 30%, 40% and 30% respectively for good, baseline and bad scenarios, the amount of ECL would have been USD9.51 million, or increased by USD0.15 million.

40

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

D FINANCIAL RISK MANAGEMENT

D3 Credit risk (Continued)

ECL measurement (Continued)

(vi) Definition of default

For the ECL measurement, “default” occurs when an obligor meets one or more of the following conditions:

• Failure to make a payment (“payment default”) –180 days past due for sovereign- backed infrastructure loans and 90 days past due for nonsovereign-backed infrastructure loans. 180 days past due for sovereign-backed infrastructure loans is based on the consideration for slower administrative, processing and collection periods that are not driven by credit deterioration.

• Breach of specific covenants that trigger a default clause.

• Default under a guarantee or collateral or other support agreements.

• Failure to pay a final judgment or court order.

• Bankruptcy, liquidation or the appointment of a receiver or any similar official.

(vii) Write-off policy

The Bank reduces the gross carrying amount of a financial asset when the Bank has no reasonable expectations of recovering the contractual cash flows on a financial asset in its entirety or a portion thereof.

D4 Market risk

The Bank is exposed to currency and interest rate risk in its investment, lending and other activities. Currency risk is the potential for loss that arises when assets or liabilities are denominated in a non-US dollar currency and the price of that currency versus US dollars fluctuates. Interest rate risk arises when the value of assets or liabilities changes with the fluctuation of interest rates.

In its asset and liability management process, the Bank pursues five goals: (a) reducing risks that might arise from the mismatch of assets and liabilities in terms of currency, interest rate sensitivity, or maturity; (b) monitoring the evolving risks to the Bank’s income over time and establishing a framework that reduces the potential volatility of the Bank’s income over the medium term; (c) assigning clear responsibility for all market risks to which the Bank is exposed; (d) minimizing volatility of available equity; and (e) maintaining sufficient liquidity to meet all of the Bank’s obligations with an extremely high level of confidence and continue its lending program, even in times of market stress.

41

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

D FINANCIAL RISK MANAGEMENT

D4 Market risk (Continued)

Currency risk

The Bank currently offers loans only in US Dollars. This will continue to be the case until the Bank is prepared to hedge nondollar lending through swaps or other hedging mechanisms. As at December 31, 2017, the currency risk is not material for the Bank. A currency table for the main monetary items is set out below:

As at December 31, 2017	USD		Other currencies		Total
			USD equivalent
Financial assets
Cash and cash equivalents		1,104,756		110		1,104,866
Term deposits		5,885,854		—		5,885,854
Investments at fair value through profit or loss		3,255,140		—		3,255,140
Funds deposited for co-financing arrangements		1,592		—		1,592
Loan investments, at amortized cost		773,238		—		773,238
Paid-in capital receivables		7,948,901		—		7,948,901
		18,969,481		110		18,969,591
As at December 31, 2016	USD		Other currencies		Total
			USD equivalent
Financial assets
Cash and cash equivalents		1,281,832		160		1,281,992
Term deposits		2,292,141		—		2,292,141
Investments at fair value through profit or loss		3,179,873		—		3,179,873
Funds deposited for co-financing arrangements		23,623		—		23,623
Loan investments, at amortized cost		9,553		—		9,553
Paid-in capital receivables		11,007,227		—		11,007,227
		17,794,249		160		17,794,409

Interest rate risk

The Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest margins may increase as a result of such changes, but may reduce or create losses in the event that unexpected movements arise. Currently, all loans of the Bank are subject to floating rate.

Sensitivity analysis

As the Bank has no material financial liabilities as at December 31, 2017, the following table illustrates the potential impact for the current year, of a parallel upward or downward shift of 50 basis points in relevant interest rate curves on the Bank’s interest income from the floating rate loan investments and certain managed rate overnight deposits which are measured at amortized cost, based on the carrying value at the end of the reporting period. This analysis assumes that interest rates of all maturities move by the same amount, and does not reflect the potential impact of unparalleled yield curve movements.

42

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

D FINANCIAL RISK MANAGEMENT

D4 Market risk (Continued)

Sensitivity analysis (Continued)

The sensitivity analysis on net interest income is based on reasonably possible changes in interest rates over the next 12 months from the reporting date with the assumption that the structure of financial assets held at the period end remains unchanged.

	Interest income
	For the year ended December 31, 2017			For the period from January 16, 2016 to December 31, 2016
+50 basis points		26			3
-50 basis points		(26	)		(3	)

D5 Liquidity risk

Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. As at December 31, 2017, the Bank does not have any significant financial liabilities.

D6 Operational risk

Consistent with guidance issued by the Basel Committee on Banking Supervision, operational risk is defined as risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Effective management and mitigation of operational risk relies on a system of internal controls aimed at identifying various risks, and establishing acceptable risk parameters and monitoring procedures.

The Bank adopts the Basic Indicator Approach (as recommended by Basel II) for capital allocation for operational risks, which is set at 15% of the average gross income over the past 3 years, ignoring those years where income was not positive. For initial years, the Bank allocates capital for operational risk at 1% of its paid-in capital, reserves and retained earnings.

D7 Capital management

The Bank collectively manages the paid-in capital plus reserves and retained earnings as capital. To ensure that the Bank has the highest possible credit on a stand-alone basis at all times, two limits are relevant to be always observed. The first, as required by Article 12.1 of the Bank’s AOA, the Bank’s total unimpaired subscribed capital, reserves, and retained earnings have to be always greater than the total exposure from its investment operations (i.e. loans, equity investments, guarantees and other types of financing). This limit may be increased up to 250% of the Bank’s unimpaired subscribed capital, reserves, and retained earnings with the approval of the Board of Governors. The second, using an economic capital framework, the Bank’s available capital must be greater than the required economic capital given the composition of its investment assets by credit risk rating plus a certain amount of buffer.

43

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

E FAIR VALUE DISCLOSURES

The majority of the Bank’s assets and liabilities in the statement of financial position are financial assets and financial liabilities. Fair value measurement of nonfinancial assets and nonfinancial liabilities do not have a material impact on the Bank’s financial position and operations, taken as a whole.

The Bank does not have any financial assets or financial liabilities subject to nonrecurring fair value measurements for the year ended December 31, 2017.

The fair value of the Bank’s financial assets and financial liabilities are determined as follows:

• If traded in active markets, fair values of financial assets and financial liabilities with standard terms and conditions are determined with reference to quoted market bid prices and ask prices, respectively.

• If not traded in active markets, fair values of financial assets and financial liabilities are determined in accordance with generally accepted pricing models or discounted cash flow analysis using prices from observable current market transactions for similar instruments or using unobservable inputs relevant to the Bank’s assessment.

Fair value hierarchy

The Bank classifies financial assets and financial liabilities into the following 3 levels based on the extent to which inputs to valuation techniques used to measure fair value of the financial assets and financial liabilities are observable:

Level 1: Fair value measurements are those derived from quoted prices (unadjusted) in an active market for identical assets or liabilities;

Level 2: Fair value measurements are those derived from inputs other than quoted included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices); and

Level 3: Fair value measurements are based on models, and unobservable inputs are significant to the entire measurement.

44

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

E FAIR VALUE DISCLOSURES

Financial assets and financial liabilities not measured at fair value on the statement of financial position

The table below summarizes the carrying amounts and fair values of those financial assets and financial liabilities not measured in the Statement of Financial Position at their fair value:

	December 31, 2017				December 31, 2016
	Carrying amount		Fair value		Carrying amount		Fair value
Financial assets
Cash and cash equivalents		1,104,866		1,104,866		1,281,992		1,281,992
Term deposits		5,885,854		5,884,195		2,292,141		2,291,991
Funds deposited for co-financing arrangements		1,592		1,592		23,623		23,623
Loan investments, at amortized cost		773,238		779,443		9,553		9,553
Paid-in capital receivables		7,948,901		7,947,268		11,007,227		10,522,553
Financial liabilities
Other liabilities		13,587		13,587		5,538		5,538

As at December 31, 2017, the Bank’s balances of those financial assets and liabilities not measured at fair value but with short-term maturity approximate their fair values.

Fair value of loan investments and paid-in capital receivables measured at amortized cost were calculated using Level 3 inputs by discounting the cash flows at a current interest rate applicable to each loan and paid-in capital receivable.

Financial assets and financial liabilities measured at fair value on the statement of financial position

The table below summarizes the fair values of the financial assets and financial liabilities measured in the statement of financial position at their fair value:

As at December 31, 2017
	Level 1		Level 2		Level 3		Total
Investments at fair value through profit or loss
•    Trust Fund		—		3,236,448		—		3,236,448
•    LP Fund		—		—		18,692		18,692
Total		—		3,236,448		18,692		3,255,140
As at December 31, 2016
	Level 1		Level 2		Level 3		Total
Investments at fair value through profit or loss
•    Trust Fund		—		3,179,873		—		3,179,873

Investments at fair value through profit or loss are amounts invested in the Trust Fund and the LP Fund (Note C5).

45

ASIAN INFRASTRUCTURE INVESTMENT BANK

Notes to the Financial Statements

For the year ended December 31, 2017

(All amounts in thousands of US Dollars unless otherwise stated)

E FAIR VALUE DISCLOSURES

Financial assets and financial liabilities measured at fair value on the statement of financial position (Continued)

The Trust Fund’s notionally allocated share in the Pool is not traded in any market. The fair value of the Trust Fund is derived from that of the notionally allocated assets. Discounted cash flow valuation technique is used for the valuation of the underlying assets of the LP Fund. The unobservable inputs include weighted average cost of capital, liquidity discount and projected cash flows. The fair value of the investment in the LP fund is based on an adjusted net assets method.

There has been no transfer among Level 1, Level 2 and Level 3 during the year.

46