UMOJA UNIT TRUST SCHEME

(UMOJA FUND)

Audited Umoja fund Report and Accounts-2007

3.                   SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently by the Scheme and are consistent with those used in the previous year, except for the changes resulting from the amendments of the accounting policies on the offer documents described in note (j) of the Significant accounting policies section.

(a)                 Foreign currency transactions

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement. Non monetary assets and liabilities denominated in foreign currencies are recorded at the exchange rate ruling at the date of transaction.

(b)                 Financial instruments

i                   Classification

In December 2006, the Scheme amended the offer document section 16.1; Accounting policies to be compliant with IFRS. The changes to the scheme’s accounting policies as a result of amendments of the offer document and their effect on the financial statements are described in note (j) of significant accounting policies section.

Financial instruments are designated at fair value through profit or loss upon initial recognition. These include financial assets that are not held for trading purposes and which may be sold. These are investments in Government securities and equity instruments.

Financial assets that are classified as loans and receivables include interest receivable from Treasury Bonds, Treasury Bills, Corporate Bond and bank balances.

Financial liabilities that are not at fair value through profit or loss include accounts payable.

ii                 Recognition

The Fund recognises financial assets and financial liabilities on the date it becomes a party to the contractual provisions of the instrument.

A regular way purchase of financial assets is recognised using trade date accounting. From this date any gains and losses arising from changes in fair value of the financial assets or financial liabilities are recorded.

Financial liabilities are not recognised unless one of the parties has performed or the contract is a derivative contract not exempted from the scope of IAS 39.

iii               Measurement

Financial instruments are measured initially at fair value (transaction price) plus, in 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 issue of the financial asset or financial liability. Transaction costs on financial assets and financial liabilities at fair value through profit or loss are expensed immediately, while on other financial instruments they are amortised.             

Subsequent to initial recognition, all instruments classified at fair value through profit or losses are measured at fair value with changes in their fair value recognised in the income statement.     

Financial liabilities, other than those at fair value through profit or loss, are measured at amortised cost using the effective interest rate.

iv                 Fair value measurement principles

The fair value of financial instruments is based on their quoted market prices at the balance sheet date without any deduction for estimated future selling costs. Financial assets are priced at current bid prices, while financial liabilities are priced at current asking prices.              

If a quoted market price is not available on a recognised stock exchange or from a broker or dealer for non-exchange-traded financial instruments, the fair value of the instrument is estimated using valuation techniques, including use of recent arm’s length market transactions, reference to the current fair value of another instrument that is substantially the same, discounted cash flow techniques, or any other valuation technique that provides a reliable estimate of prices obtained in actual market transactions.   

v                   Offsetting

Financial assets and liabilities are set off and the net amount presented in the balance sheet when    and only when the Scheme has a legal right to set off the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

       Income and expenses are presented on a net basis only when permitted by the accounting standards or gains and losses arising from a group of similar transactions such as in the Scheme’s trading activity

vi                 Impairment

Financial assets that are stated at cost or amortised cost are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. If any such indication exists, an impairment loss is recognised in the income statement as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate.       

If in a subsequent period the amount of an impairment loss recognised on a financial asset carried at amortised cost decreases and the decrease can be linked objectively to an event occurring after the write-down, the write-down is reversed through the income statement.

vii               De-recognition    

        The Fund derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire or it transfers the financial asset and the transfer qualifies for derecognition in accordance with IAS 39. The Fund uses the weighted average method to determine realised gains and losses on de-recognition.

         A financial liability is derecognised when the obligation specified in the contract is discharged,                     cancelled or expired.             

viii             Specific instruments         

Cash and cash equivalents              

Cash comprises current deposits with banks. Cash equivalents are short-term highly liquid investments that are readily convertible to known amounts of cash with maturity within three months from the date of acquisition, are subject to an insignificant risk of changes in value, and are held for the purpose of meeting short-term cash commitments.

(c)                 Interest income

Interest income is recognised in the income statement as it accrues, using the original effective interest rate of the instrument calculated at the acquisition or origination date. Interest income includes the amortisation of any discount or premium, transaction costs or other differences between the initial carrying amount of an interest-bearing instrument and its amount at maturity calculated on an effective interest basis..

Interest income presented in the income statements includes interest on financial assets at amortised cost on an effective interest rate basis.

Fair value changes on financial assets and liabilities carried at fair value through profit or loss, are presented in net income on other financial instruments carried at fair value in the income statement. Interest income is recognised on a gross basis, including withholding tax, if any.

(d)                 Dividend income 

Dividend income is recognized when the right to receive income is established. Usually this is the ex-dividend date for quoted equity securities. Dividends are reflected as a component of net investment income.

(e)                 Expenses              

All expenses, including management fees and custodian fees, are recognised in the income statement on an accrual basis.

Included in professional fees are legal, consultants and audit fees paid by the Scheme.

(f)                  Taxation

Under Section 86 of the Income Tax Act, 2004 as amended, the Scheme is exempt from paying taxes on income, profits or capital gains with effect from 1 July 2006.

Dividend and interest income received by the Scheme is subject to withholding tax as final tax on the same basis as for individuals. Investment income is recorded gross of such taxes and the withholding tax is included under tax charge for the year.

(g)                 Deferred tax

Deferred tax is provided in full on all temporary differences. Temporary differences are differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax base. The principal temporary differences are from revaluation of certain financial assets and liabilities on the difference between the fair values of the net assets acquired and their tax base.

The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities using tax rates enacted at the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred tax is charged to the income statement except to the extent that it relates to a transaction that is recognised directly in equity.

The effect on deferred tax of any changes in tax rates is recognized in the income statement, except to the extent that it relates to items previously charged or credited directly to equity.

A deferred tax asset is recognised to the extent that is probable that future taxable profits will be available against which the associated unused tax losses and deductible temporary differences can be utilised. Deferred tax assets are reduced to the extent that is no longer probable that the related tax benefit will be realised.

(h)                 Redeemable units

          All redeemable units issued by the Scheme provide the investors with the right to require redemption for cash at the value proportionate to the investor’s units in the Scheme’s net assets at the redemption date. In accordance with IAS 32 such instruments give rise to financial liability for the present value of the redemption amount. In accordance with the offer document, the Scheme is contractually obliged to redeem units based on the Net Asset Value of the next working day.

(i)                  Changes in accounting policies

          In December 2006, Umoja Unit Trust Scheme amended accounting policies set out in the offer document        section 16.1 to comply with IFRS.  The impact on the financial statements of such changes is that fair         value adjustment on the financial     instruments at fair value through profit or loss forms part of the Net              Asset Value. In the statement of changes in unit holders fund this will be part of distributable reserve. For    the year under review, the net fair value gain on financial instruments that has impacted the Net Asset            Value of the Scheme amounted to Tzs 78 million.

4.                   NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED

          A number of new standards, amendments to standards and interpretations are not yet effective for the year   ended 30 June 2007, and have not been applied in preparing these financial statements:

·         IFRS 7 Financial Instruments: Disclosures

·         IAS 1 Presentations of Financial Statements-Capital Disclosures

·         IAS 19 Employee Benefits

·         IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies.

·         IFRIC 8 Scope of IFRS 2 Share based Payments

·         IFRIC 9 Reassessment of Embedded Derivatives

·         IFRIC 10 Interim Financial Reporting and Impairment

The adoption of these standards will have an impact on the type and amount of disclosures in the financial statements. Fund Managers has not yet determined the potential impact on the profits or financial position of the Scheme.

5.                   GOVERNMENT CONTRIBUTION

The Government of Tanzania contributed the following shares of Tanzania Breweries Limited (TBL) and Tanzania Cigarette Company (TCC) held by Unit Trust of Tanzania to the Scheme that represented the 30% discount on the initial sale of units with a value of Tzs 100 per unit.

After the lock in period of one year that ended 31 July 2006, this amount became part of the unit holders’ capital

6.                   INTEREST INCOME

7.                   GROSS DIVIDEND INCOME

8.                   GAIN ON SALE OF EQUITY INVESTMENTS

Gain on sale of equity investments arises from increased value TBL shares sold during the year:

9.                   NET FAIR VALUE GAIN ON FINANCIAL INSTRUMENTS

Net fair value (loss)/gain on financial instruments arises from fair valuation of Treasury bonds and Treasury bills.

10.                OPERATING EXPENSES

Operating expenses up to 31 July 2006 were incurred and borne by Unit Trust of Tanzania as set out in Umoja Fund Offer document, Section 14 – Charges to the Scheme. However all charges from 1 August 2006, were borne by the Scheme as shown below:

11.                TAXATION

Income tax includes current tax and deferred tax at the rates of 10% and 5% on interest and dividend income respectively. These are withholding final tax.

The Scheme’s taxation affairs to 30 June 2006 and to 30 June 2007 are subject to agreement with Tanzania Revenue Authority.

12.                CASH AND CASH EQUIVALENTS

13.                TREASURY BILLS

Treasury bills are government instruments that have a maturity up to one year. These instruments are subject to an insignificant risk of changes in value due to their short term nature. These are:

14.                BONDS

          Bonds include government and corporate bonds that have varying maturity as shown below:

15.                EQUITY INVESTMENTS

16.                INTEREST RECEIVABLE

17.                FINANCIAL INSTRUMENTS AND ASSOCIATED RISKS

The Scheme maintains positions in variety of financial instruments as dictated by its Offer document. The Fund’s investment portfolio comprises quoted equity investments, treasury bills, treasury bonds, corporate bonds and deposits with banks.

The Scheme’s investing activities expose it to various types of risk that are associated with the financial instruments and markets in which it invests. The most types of financial risk to which the Fund is exposed are market risk, credit risk and liquidity risk.

Asset allocation is determined by the Fund Manager who manages the distribution of the assets to achieve the investment objectives, and the investment limits are set out on the Offer document Section 12 where by the Scheme can invest 30% on the Equity investment and the rest can be invested in Government instruments of various maturity, corporate bonds as well as deposit accounts.

Divergence from target asset allocations and the composition of the portfolio is monitored by the Scheme’s custodian, CRDB Bank Limited.

i                   Market risk

Market risk is the potential for both loss and gain to investor resulting from decreases and increases in the unit price of the Scheme. The main causes of unit price changes are the result of price changes in the underlying instruments caused by movements in securities prices, changes in the credit rating of instrument issuers, changes in the prevailing level of interest rates and currency movement relative to Tanzanian shilling.

The Scheme’s strategy on the management of investment risk is driven by the Scheme’s investment objective to empower Tanzanians through wide ownership of its units and encourage a culture of savings in financial assets.

Return is the desired reward for assuming market risk. Market risk is managed by the Scheme’s Manager with reference to the Scheme’s investment mandate, the objective being to produce the highest possible return for a given level of risk.

Details of Scheme’s investment portfolio at the balance sheet dat are disclosed in the schedule of investments as set out in Appendix 1. All individual investments in debt and equity instruments are disclosed separately.

ii                 Currency risk

The Scheme may invest in financial instruments and enter into transactions denominated in currencies other than its functional currency. Consequently, the Scheme is exposed to risks that the exchange rate of its currency relative to other foreign currencies may change in a manner that has an adverse effect on the value of that portfolio of the Scheme’s assets and liabilities denominated in currencies other than Tanzanian shillings.

At the balance sheet date, the Scheme did not have assets and/or liabilities denominated in foreign currency.

iii               Interest rate risk

The majority of the Scheme’s financial assets are interest bearing. The rest of the financial assets are non-interest bearing. As a result, the Scheme is subject to minimum exposure to fair value interest rate risk due to fluctuations in the prevailing levels of market interest rates. Any excess cash and cash equivalents of the Scheme are invested in short-term deposits and Treasury bills.

The table below summarises weighted average interest rates for the interest bearing financial instruments:

iv                 Price risk

Price risk is the risk that value of the instrument will fluctuate as result of changes in market prices, whether caused by factors specific to an individual instrument, its issuer or all factors affecting all instruments traded in the market.

As majority of the Schemes financial instruments are carried at fair value, fair value changes are recognised in the income statement, and all changes in the market condition will directly affect the net investment income.

Price risk is mitigated by the Scheme’s Manager by constructing a diversified portfolio of instruments traded on various markets.

v                   Credit risk

Credit risk is the risk that a counter party to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the fund.

At 30 June 2007, receivable from term deposits with banks and receivables from corporate bonds are the only financial assets that are exposed to credit risk. The total carrying amount of financial assets exposed to credit risk amounted to Tzs 15 billion. Receivables from the government instruments are considered to be free from risk of default.

Credit risk is mitigated by investing in issuers with known credibility and it is monitored on an ongoing basis by the Manager.

The maximum credit risk exposure at the balance sheet date is equal to the carrying amount of the assets as reported.

vi                 Liquidity risk

The Scheme’s Trust Deed and Offer document provided for the lock-in period of one year ended 31 July 2006. It also provides for daily creation and cancellation of units from 1 August 2006 and the Scheme is therefore exposed to the liquidity risk of meeting unit holders’ redemptions at any time.

Liquidity risk is the risk that the Scheme may not be able to liquidate investments quickly enough at an amount close to its fair value in order to meet its liquidity requirements, or to respond to specific events such as deterioration in the creditworthiness of any particular issuer.

The Scheme’s listed securities are considered to be readily realisable as they are listed on a reputable local stock exchange, Dar es Salaam Stock Exchange (DSE). However, DSE is not an active market therefore the Scheme gradually liquidated its equity investments during the lock-in period to avoid the problem of failing to liquidate all the equity instruments at the end of the lock-in period when daily creation and cancellation of units commenced.

Liquidity risk can also occur if an institutional investor redeems a significant proportion of their fund. This risk is mitigated by Manager requiring notice periods for large redemptions.

18.                INCOME TAX PAYABLE

19.                ACCOUNTS PAYABLE

20.                OTHER ACCOUNTS PAYABLES

21.                UNIT HOLDERS’ FUNDS

i)                 Issued and fully paid redeemable units

ii)               Sale and repurchase of units           

Sales and re-purchase opened from 1 August 2006, after one year lock in period.  The Scheme undertake to repurchase and sale any number of units offered to it on the basis of prices calculated in accordance with the terms and conditions set out on the offer document and Trust Deed of Umoja Unit Trust Scheme.

22.                RELATED PARTIES

Sponsor and Manager

Unit Trust of Tanzania is a sponsor and manager of the Scheme, a Government sponsored institution that was established as a Trust and incorporated in Tanzania on 19th June, 2003 under the Trustees Incorporation Ordinance (CAP.375), to implement the investment strategy as specified in the Offer document and to provide administrative services. As per the Offer document, the Manager shall levy a service charge of not more than 1% of the sale or re-purchase price of a unit subject to a minimum of one hundred shillings (Tshs.100/=) per transaction. Included in the account payable at 30 June 2007 are investment management fees and other charges payable of Tzs 905 million.

Custodian

CRDB Bank provides custodian services for a fee at 0.1% of NAV with a minimum of Tzs 50 million per annum in accordance with the offer document section 14.0

Unit holding of related parties

Parties related to the Scheme held the following number of units as at 30 June 2007.

23.                FAIR VALUE INFORMATION

Many of the Scheme’s financial instruments are carried at fair value at the balance sheet date. Usually the fair value of the financial instruments can be reliably determined within reasonable range of estimates. For certain other financial instruments the carrying amounts approximate fair value due to immediate or short term nature of these financial instruments. The carrying amounts of all the Scheme’s financial assets and financial liabilities at the balance sheet date approximate their fair value.

Estimation of fair value

The methods and assumptions used in estimating the fair values of financial instruments were disclosed in note 3(b) of the Significant accounting policies.

Fair values were determined within a reasonable range of estimates due to the financial market conditions in Tanzania. The fair value of the bonds has been estimated by interpolation of current yield on the Treasury bills for 35 days, 90 days, 182 days and 364 days, and Treasury bonds of the closest auction to the balance sheet date. The Scheme’s equity instruments are valued at the latest quoted market prices at the balance sheet date.

Fair value estimates are made at a specific point in time, based on market conditions and information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgement (e.g. interest rates, volatility, estimated cash flows, etc) and therefore, cannot be determined with precision.

At 30 June 2007, the carrying amounts of equity investments on which fair values were determined directly in full by reference to published price quotations amounted to Tzs 17,637 million. The carrying amounts of debt investments for which fair values were determined using valuation techniques amounted to Tzs 25,875 million.

Interest rates used for determining fair values

At the balance sheet date the interest rates applied to determine the fair value of the investment in Government securities were as follows:

These are the rates as per BOT Auction 255, 709, 259 and 16 of 27^th, 13^th and 6^th June 2007 respectively. The total amount of the change in fair value estimated using a valuation technique that was recognised in the income statement for the year ended 30 June 2007 amounted to a net gain of Tzs 78 million.

24.                VALUE AT RISK

The market risk of the Scheme’s financial asset and liability positions is monitored by the Manager using the NAV analysis and other techniques such as analysis of information from Bank of Tanzania and on other financial institutions.

25.                CONTINGENT LIABILITIES

No legal proceeding happened during the year. The Fund Manager is not aware of any contingent liabilities against the Fund as at the date of this report.

APPENDIX 1 – INVESTMENT PORTFOLIO

APPENDIX 1 (Continued)