EUROPEAN COMMISSION

Brussels, 26.6.2019

COM(2019) 316 final

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE COURT OF AUDITORS

CONSOLIDATED ANNUAL ACCOUNTS OF THE EUROPEAN UNION FOR THE FINANCIAL YEAR 2018

Consolidated annual accounts of the
European Union

Financial year 2018

CONTENTS

FOREWORD    

EUROPEAN UNION POLITICAL AND FINANCIAL FRAMEWORK, GOVERNANCE AND ACCOUNTABILITY    

NOTE ACCOMPANYING THE CONSOLIDATED ACCOUNTS    

HIGHLIGHTS OF THE FINANCIAL YEAR 2018    

CONSOLIDATED FINANCIAL STATEMENTS AND EXPLANATORY NOTES    

BALANCE SHEET    

STATEMENT OF FINANCIAL PERFORMANCE    

CASHFLOW STATEMENT    

STATEMENT OF CHANGES IN NET ASSETS    

NOTES TO THE FINANCIAL STATEMENTS    

FINANCIAL STATEMENT DISCUSSION AND ANALYSIS    

BUDGETARY IMPLEMENTATION REPORTS AND EXPLANATORY NOTES    

GLOSSARY    

LIST OF ABBREVIATIONS    

FOREWORD

2018 was the fifth year under the current multiannual financial framework; all the financial programmes are fully operational. The implementation of the EU budget totalled EUR 173.1 billion in commitment appropriations, and EUR 156.7 billion in payment appropriations. Throughout the year, the EU budget continued to provide our response to the challenges deriving from a complex geopolitical environment while simultaneously guaranteeing strategic investment and sustainable growth in Europe.

Nearly half of the funds were aimed at stimulating growth, employment and competitiveness. Funding was provided for reaserach and innovation under Horizon 2020, for small and medium sized enterprises under the COSME programme or for education under Erasmus+. The European Fund for Strategic Investments, Connecting Europe Facility and the European Structural and Investment Funds all had also a major role to play. I invite you to discover the stories behind many EU investments on the ‘InvestEU’ portal (https://europa.eu/investeu).

The EU budget offered also strong support in other priority areas such as the EU's comprehensive approach to migration, the security union and the EU's external action. It allowed the Union to play a strong role beyond our borders during a period of turbulence in Europe’s neighbourhood and contributed to achieving cross-cutting policy objectives related to the climate change and the biodiversity. In 2018 the amount allocated to climate mainstreaming amounted to more than EUR 32 billion, 20 % of the total budget.

Finally, the continued support was provided to promoting sustainable growth and the preservation of Europe's natural resources though the Common Agricultural and Fisheries Policies and activities in the fields of climate and environment under the LIFE programme.

The consolidated annual accounts of the European Union are produced in accordance with International Public Sector Accounting Standards. In order to uphold these standards, the Commission is consistently improving its rules and procedures, organisational structure and agility. Reporting consistently and effectively increases the accountability of the EU spending, not only for the purpose of legal compliance. It helps to engage with citizens and with other stakeholders, and to maintain their confidence and trust in the European Union.

Günther H. Oettinger

Commissioner for Budget and Human Resources
 

EUROPEAN UNION POLITICAL AND FINANCIAL FRAMEWORK, GOVERNANCE AND ACCOUNTABILITY

The European Union (EU) is a Union within which the Member States confer competences to attain objectives they have in common. The Union is founded on the values of respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities. These values are common to the Member States in a society in which pluralism, non-discrimination, tolerance, justice, solidarity and equality between women and men prevail.

1.POLITICAL AND FINANCIAL FRAMEWORK

The EU pursues the objectives established in the Treaty with a number of tools, one of which is the EU budget. Others are, for example, proposing legislation or pursuing policy strategies.

The policies supported by the EU budget are implemented in accordance with the Multiannual Financial Framework (MFF) and corresponding sectorial legislation defining spending programmes.

The main sources of funding of the EU are own resources revenues which are complemented by other revenues. There are three types of own resources: traditional own resources (such as custom duties and sugar levies), the own resource based on value added tax (VAT) and the own resource based on gross national income (GNI). Other revenues arising from the activities of the EU (e.g. competition fines) normally represent less than 10 % of total revenue. The overall amount of own resources needed to finance the budget is determined by total expenditure less other revenue. In the current MFF the total amount of own resources cannot exceed 1.20 % of the sum of gross national income (GNI) of the Member States.

The EU's operational expenditure covers the various headings of the Multiannual Financial Framework and takes different forms, depending on how the money is paid out and managed. The EU budget is implemented in three management modes:

Shared management: under this method of budget implementation, tasks are delegated to Member States. About 75 % of the expenditure falls under this management mode covering such areas as agricultural spending and structural actions.

Direct management: this is where the budget is implemented directly by the Commission services.

Indirect management: this refers to cases where the Commission confers tasks of implementation of the budget to third parties, such as the EU regulatory agencies or international organisations.

2.GOVERNANCE AND ACCOUNTABILITY

2.1.INSTITUTIONAL STRUCTURE

The organisational governance of the EU consists of institutions, agencies and other EU bodies, which are listed in note 9 of the notes to the consolidated financial statements. The European Investment Bank (EIB), the European Investment Fund (EIF) and the European Central Bank (ECB) are not included in the scope of the Financial Regulation. The main institutions, in the sense of being responsible for drafting policies and taking decisions, are the European Parliament, the European Council, the Council and the Commission.

The European Commission is a unique organisation. Under the Treaty, the Commission is responsible for planning, preparing and proposing legislation; for managing EU policies, including the monitoring of implementation of EU legislation and ensuring its enforcement and allocating EU funding; and for representing the EU internationally.

As foreseen in the Treaty 6 , the Commission implements the budget in cooperation with the Member States. Together, they ensure that the appropriations are used in accordance with the principles of sound financial management. Regulations lay down the control and audit obligations of the Member States in the implementation of the budget and the resulting responsibilities. They also lay down the responsibilities and detailed rules for each institution concerning its part in effecting its own expenditure.

The Commission performs these roles under the leadership of the College of Commissioners, which sets priorities and takes overall political responsibility for the decisions of the Commission. The President, whose role was strengthened by the Nice and Lisbon Treaties, decides on the internal organisation of the Commission, ensuring that it acts consistently, efficiently and as a collegiate body.

The Commission's internal functioning is based on a number of key principles underpinning good governance: clear roles and responsibilities, a strong commitment to performance management and compliance with the legal framework, clear accountability mechanisms, a high quality and inclusive regulatory framework, openness and transparency, and high standards of ethical behaviour.

2.2.THE COMMISSION'S GOVERNANCE STRUCTURE

The European Commission has a unique governance system, with a clear distinction between political and administrative oversight structures and well-defined lines of responsibility and financial accountability 7 . The system is based on the Treaties and the structure has evolved to adapt to a changing environment and to remain in line with best practice as set out in relevant international standards 8 .

In 2018, the Commission adopted a ‘governance package’ 9 , which significantly streamlined and strengthened its corporate governance arrangements and leveraged recent audit work by the European Court of Auditors 10 and the Internal Audit Service.

·The College of Commissioners assumes collegial political responsibility for the work of the Commission. Operational implementation of the budget is delegated to Directors-General and Heads of Service who lead the administrative structure of the Commission 11 .

·The College delegates financial management tasks to the Directors-General or Heads of Service who thereby become Authorising Officers by Delegation (AOD). These tasks can further be delegated to Directors, Heads of Unit and others, who thereby become Authorising Officers by Sub-Delegation. The responsibility of the Authorising Officers covers the entire management process, from determining what needs to be done to achieve the policy objectives set by the institution to managing the activities from both an operational and budgetary standpoint.

·The Audit Progress Committee follows-up implementation of audits, in particular of the Internal Audit Service but also on the basis of European Court of Auditors audits.

·Under the authority of the President, the Corporate Management Board, chaired by the Secretary-General, brings together on a regular basis the Directors-General responsible for budget, human resources and security, and the Director-General of the Legal Service. The Member(s) responsible for budget and administration in the Cabinet of the President, as well as the Head(s) of Cabinet of the Member(s) of the Commission in charge of budget, human resources and administration, are observers. The board provides coordination, oversight, advice and strategic orientations on corporate management issues, in areas including the management of financial and human resources, risk management, performance management, IT governance, cyber- and physical security, business continuity, and information management. In this way, the Corporate Management Board contributes to ensuring that the necessary structures, processes and administrative policies are in place in the Commission to deliver on the political priorities of the College and the tasks entrusted to it by the Treaties in an efficient and effective manner.

2.3.THE COMMISSION’S FINANCIAL MANAGEMENT

In the Commission, the roles and responsibilities in financial management are clearly defined (e.g. in the Financial Regulation) and applied. This is a decentralised approach with clear responsibilities with the aim of creating an administrative culture that encourages civil servants to take responsibility for activities over which they have control and to give them control over the activities for which they are responsible.

The Commission may also delegate the implementation of specific programmes to executive agencies. Expenditure decisions can also be managed via, or together with, another institution or body. A large proportion of the budget is managed under a system of shared management with the Member States, notably in the areas of structural funds and agriculture.

Budget implementation tasks are also entrusted to:

·national agencies;

·the European Investment Bank Group;

·third countries;

·international organisations (e.g. the World Bank or the United Nations);

·other entities.

As authorising officers by delegation, the Directors-General are responsible for the sound financial management of resources. In implementing the EU budget, authorising officers by delegation must comply with the provisions of the Financial Regulation and establish an appropriate internal control framework. Among other things, the internal control objectives focus on:

·effectiveness, efficiency and economy of operations;

·financial control and anti-fraud;

·integrity and ethics;

·the management of human resources;

·reliable reporting;

·communication;

·the safeguarding of assets and information.

Each authorising officer by delegation may rely on one or two senior or middle managers in charge of risk management and internal control to oversee and monitor the implementation of internal control systems. The Commission’s central services provide guidance and advice and promote best practices.

Within the context of the Commission's Strategic Planning and Programming cycle, each authorising officer is required to prepare an annual activity report (“AAR”) on the activities and policy achievements and results of the year. In the AAR he/she declares that resources have been used based on the principles of sound financial management and that he/she has set in place control procedures which provide the necessary guarantee concerning the legality and regularity of the underlying transactions. At Commission level the Annual Management and Performance Report for the EU budget is the main instrument through which the College of Commissioners takes political responsibility for the management of the budget.

The Accounting Officer of the Commission is centrally responsible for the treasury management, recovery procedures, laying down accounting rules based on International Public Sector Accounting Standards and methods, validating accounting systems and the preparation of the Commission's and consolidated annual accounts of the EU. Furthermore, the Accounting Officer is required to sign the annual accounts declaring that they present fairly, in all material aspects, the financial position, the results of the operations and the cash flows of the Union. The annual accounts are adopted by the College of Commissioners. The Accounting Officer is an independent function and bears a major responsibility as regards financial reporting in the Commission. The Internal Auditor of the Commission is likewise a centralised and independent function and provides independent advice, opinions and recommendations on the quality and functioning of internal control systems inside the Commission, EU agencies and other autonomous bodies.

2.4.PERFORMANCE FRAMEWORK

Implementing robust performance frameworks is essential for ensuring a strong focus on results, EU added value and sound management of EU programmes. The performance framework of the EU budget is highly specified, scoring higher than any Organisation for Economic Co-operation and Development (OECD) country in the standard index of performance budgeting frameworks. The EU budget performance framework reports on several types and levels of strategic goals, objectives and targets, including the Europe 2020 strategy and other political priorities. It must also take account of the complementarity and mainstreaming of policies and programmes and the key role of the Member States in implementing the EU Budget.

·Objectives, indicators and targets are strongly featured in the programmes' legal basis and every year the Commission reports on them through the Programme Statements that accompany the draft budget. They provide all of the key information that is necessary for careful programme scrutiny and performance measurement: this includes 7-year financial commitments; programme performance baselines (starting points for policy action); end-goals (to be achieved at the end of the multi-annual programming period); and intermediate milestones.

·To ensure resources are allocated to priorities and that every action brings high performance and added value, the Commission promotes a performance culture across the Commission services. Moreover, over the past years it has developed an approach that promotes a better balance between compliance and performance.

·The Annual Management and Performance Report for the EU budget provides a comprehensive overview on the performance, management and protection of the EU budget. It explains how the EU budget supports the European Union’s political priorities, the results achieved with the EU budget, and the role the Commission plays in ensuring and promoting the highest standards of budgetary and financial management.

·The European Court of Auditors takes a systematic and thorough approach to assessing the qualitative aspects of budgeting, including the performance dimension, as a normal part of its annual reporting and through special reports.

All of these elements place the budget authority in a strong position to take performance into account as a significant factor in deciding on the next annual budget.

2.5.FINANCIAL REPORTING

The main element of EU financial reporting is the Integrated Financial and Accountability Reporting of the EU, which comprises the consolidated annual accounts of the EU, the Annual Management and Performance Report for the budget, which includes the evaluation report according to art. 247(1) (e) FR, the annual internal audit report, a long-term forecast of future inflows and outflows covering the next five years and the report on the follow-up to the discharge. The Integrated Financial and Accountability Reporting provides the public with a comprehensive view of the financial and operational situation of the EU each year.

The consolidated annual accounts of the EU provide financial information on the activities of the institutions, agencies and other bodies of the EU from both an accrual accounting and budgetary perspective. These accounts do not encompass the annual accounts of Member States.

The consolidated annual accounts of the EU consist of two separate but linked parts:

a)    the consolidated financial statements; and

b)    the reports on implementation of the budget, which provide an aggregated record of budget implementation.

In addition, the consolidated annual accounts of the EU are accompanied by a Financial Statement Discussion and Analysis (FSDA), which summarises significant changes and trends in the financial statements and explains significant risks and uncertainties the EU has faced and needs to address in future.

Reporting and Accountability in the Commission:

2.6.EXTERNAL AUDIT AND DISCHARGE PROCEDURE

External audit

The European Court of Auditors (ECA) is the external auditor of the EU institutions (and bodies). The ECA's mission is to contribute to improving EU financial management, promote accountability and transparency, and act as the independent guardian of the financial interests of the citizens of the EU. Its role as the EU’s independent external auditor is to check that EU funds are correctly accounted for, are collected and spent in accordance with the relevant rules and regulations and have achieved value for money.

As part of its activities, the ECA draws up for the use of the European Parliament and the Council:

(1)    an annual report on the activities financed from the general budget, detailing its observations on the EU annual accounts and underlying transactions;

(2)    an opinion, based on its audits and included in the annual report in the form of a statement of assurance, on (i) the reliability of the accounts and (ii) the legality and regularity of the underlying transactions involving both revenue collected and payments to final beneficiaries; and

(3)    special reports covering specific areas as well as specific annual reports (on e.g. the European Development Fund, on EU Agencies).

Discharge

The final step of the budget lifecycle is the discharge procedure for a given financial year. It represents the political dimension of the external control of budget implementation and is the decision by which the "Discharge Authority" (i.e. the European Parliament, acting on a Council recommendation) "releases" the Commission (and other EU bodies) from its responsibility for the management of a given budget. This decision is based on an examination of the EU consolidated annual accounts and a set of Commission reports (the Annual Management and Performance Report for the EU budget, the report on the follow-up to the previous year's discharge and the annual report to the discharge authority on internal audits carried out) as well as on the European Court of Auditors' Annual Report, audit opinion (the "Statement of Assurance") and Special Reports. It also takes account of the Commission written replies to questions and other information requests as well as hearings of the Budget Commissioner, Commissioners and Directors General responsible for the main spending areas and the Secretary General before the European Parliament's Budgetary Control Committee (CONT).

The outcome of the discharge procedure may be threefold: granting, postponement or refusal of the discharge. The final discharge reports also include specific requests addressed to the Commission by both the European Parliament and the Council. These requests are subject to a follow up report in which the Commission outlines the concrete actions it has already taken or intends to take.

NOTE ACCOMPANYING THE CONSOLIDATED ACCOUNTS

The consolidated annual accounts of the European Union for the year 2018 have been prepared on the basis of the information presented by the institutions and bodies under Article 246(2) of the Financial Regulation applicable to the general budget of the European Union. I hereby declare that they were prepared in accordance with Title XIII of this Financial Regulation and with the accounting principles, rules and methods set out in the notes to the financial statements.

I have obtained from the accounting officers of these institutions and bodies, who certified its reliability, all the information necessary for the production of the accounts that show the European Union's assets and liabilities and the budgetary implementation.

I hereby certify that based on this information, and on such checks as I deemed necessary to sign off the accounts of the European Commission, I have a reasonable assurance that the accounts present fairly, in all material aspects, the financial position, the results of the operations and the cashflows of the European Union.

[signed]

Rosa ALDEA BUSQUETS

Accounting Officer of the Commission

21 June 2019

HIGHLIGHTS OF THE FINANCIAL YEAR 2018

Implementation of the 2018 Union budget

The 2018 adopted budget focused on two main policy priorities for Europe among the ten priorities set by President Juncker at the beginning of this Commission’s mandate. One was a European response to the new challenges deriving from the complex geopolitical environment, from migration management to the protection of the EU's external borders and the security of its citizens. The other was strategic investment and sustainable growth, to support economic cohesion, and create jobs, in particular for young people. In addition to these two clear priorities, in 2018, the EU budget and other instruments continued to support farmers and rural development, and deepened and strengthened the strategic interconnectors and networks between EU countries with the implementation of the digital single market and the energy union. The Commission continued to support the external projection of the EU as a key economic and political partner as well as a leading international provider of investment and humanitarian assistance.

The implementation of the EU budget in 2018 totalled EUR 173.1 billion in commitment appropriations, and EUR 156.7 billion in payment appropriations.

Nearly half of the funds – EUR 87.4 billion in commitment appropriations were aimed at stimulating smart and inclusive growth, jobs, competitiveness and cohesion. This included funding for research and innovation under Horizon 2020, education under Erasmus+, small and medium sized enterprises under the COSME programme, the Connecting Europe Facility (CEF), the guarantee fund for the European Fund for Strategic Investments (EFSI) which is the tool behind the Investment Plan for Europe, and fostering convergence among Member States and among regions through the European Structural and Investment Funds (ESIF). Moreover, the EU budget support to European farmers amounted to EUR 44.4 billion in payments made.

The budget was also used to reinforce the external borders of the Union and address the migration and refugee crisis by funding actions including emergency assistance, relocation, border control, resettlement, return and integration of refugees and asylum-seekers. Finally, the budget continued to fund programmes to support the protection of justice and fundamental rights as well as social cohesion so that our European societies remain inclusive, free and fair.

The United Kingdom's withdrawal from the European Union

Background

On 23 June 2016 a majority of the citizens of the United Kingdom who voted in the referendum on membership of the European Union voted to leave the EU. On 29 March 2017, the United Kingdom formally notified the European Council of its intention to leave the EU and the European Atomic Energy Community (Euratom). In doing so, it triggered Article 50 of the Treaty on European Union, which sets out the procedure for a Member State to withdraw from the Union.

The negotiation process

On 19 March 2018 the Commission published a draft of the Withdrawal Agreement that outlined the progress made in the negotiations. In the financial settlement part of the draft Withdrawal Agreement, the EU and the UK translated the progress achieved in the first phase of negotiations into a legal text.

A Joint Report was published on 14 November 2018 reporting agreement at negotiators’ level on the full text of the draft Withdrawal Agreement, and on an outline of the Political Declaration on the framework for the future relationship between the United Kingdom and the European Union. On the same day, this updated and agreed draft Withdrawal Agreement was published, in which the UK agreed to pay all its obligations under the current Multiannual Financial Framework (MFF) and previous financial perspectives as if it were still a Member State, including its share of the Union's liabilities and contingent liabilities. The UK government approved the draft Withdrawal Agreement on the 14 November and the European Council endorsed it on 25 November 2018. On 11 January 2019, the Council (Article 50) approved the decision on the conclusion of the Withdrawal Agreement and sent it to the European Parliament for its consent. On the request of the United Kingdom, in accordance with the procedure set in the Article 50 of the TFEU, on 21 March 2019 the European Council agreed to extend the UK’s departure date to 22 May 2019, provided the Withdrawal Agreement was approved by the House of Commons by 29 March 2019 at the latest and to the 12 April 2019 if it was not the case (European Council Decision (EU) 2019/476 of 22 March 2019, OJ L80 22.3.2019, p. 1). Subsequent to this, the House of Commons did not approve the Withdrawal Agreement by 29 March 2019 and so, again on the request of the United Kingdom, on 10 April 2019 the European Council agreed to an extension to the UK’s departure until 31 October 2019 (European Council Decision (EU) 2019/584 of 11 April 2019, OJ L101 11.4.2019, p. 1). The withdrawal should take place on the first day of the month following the completion of the ratification procedures or on 1 November 2019, whichever is the earliest. The United Kingdom will remain a Member State until the new withdrawal date, with full rights and obligations in accordance with Article 50 TEU, and the United Kingdom has a right to revoke its notification at any time.

Financial settlement and the 2018 EU annual accounts

With regard to the financial settlement, it was stated in the draft Withdrawal Agreement published on 14 November 2018, that the UK would pay all its obligations under the current MFF and previous financial perspectives as if it were still a Member State. More specifically, the draft Withdrawal Agreement states that the United Kingdom shall in particular be liable to the Union for its share of:

•    The budgetary commitments of the Union budget and of the budgets of the Union decentralised agencies outstanding on 31 December 2020 – see Article 140 of the draft Withdrawal Agreement;

•    The financing of the Union's liabilities incurred until 31 December 2020, with certain exceptions – see Article 142;

•    The contingent financial liabilities of the Union arising from financial operations decided/approved before the withdrawal date – see Articles 143 & 144; and

•    The payments required to discharge the contingent liabilities of the Union that become due related to legal cases concerning financial interests of the Union (provided that the facts forming the subject matter of those cases occurred no later than 31 December 2020) – see Article 147.

At the time of the signature of these accounts, and in the absence of ratification by the United Kingdom, the actual departure date and manner of departure (with or without agreement) is not yet known. Based on this current situation, there is no financial impact to be reported in the 2018 consolidated EU annual accounts.

EUROPEAN UNION

FINANCIAL YEAR 2018

CONSOLIDATED FINANCIAL STATEMENTS AND EXPLANATORY NOTES

It should be noted that due to the rounding of figures into millions of euros, some financial data in the tables below may appear not to add-up.

CONTENTS

BALANCE SHEET    

STATEMENT OF FINANCIAL PERFORMANCE    

CASHFLOW STATEMENT    

STATEMENT OF CHANGES IN NET ASSETS    

NOTES TO THE FINANCIAL STATEMENTS    

1.    SIGNIFICANT ACCOUNTING POLICIES    

2.    NOTES TO THE BALANCE SHEET    

3.    NOTES TO THE STATEMENT OF FINANCIAL PERFORMANCE    

4.    CONTINGENT LIABILITIES AND ASSETS    

5.    BUDGETARY AND LEGAL COMMITMENTS    

6.    FINANCIAL RISK MANAGEMENT    

7.    RELATED PARTY DISCLOSURES    

8.    EVENTS AFTER THE BALANCE SHEET DATE    

9.    SCOPE OF CONSOLIDATION    

BALANCE SHEET

*    The European Parliament adopted a budget on 12 December 2018 which provides for the payment of the Union's short-term liabilities from own resources to be collected by, or called up from, the Member States in 2019. Additionally, under Article 83 of the Staff Regulations (Council Regulation 259/68 of 29 February 1968 as amended), the Member States shall jointly guarantee the liability for pensions.

STATEMENT OF FINANCIAL PERFORMANCE

CASHFLOW STATEMENT

STATEMENT OF CHANGES IN NET ASSETS

NOTES TO THE FINANCIAL STATEMENTS

1.SIGNIFICANT ACCOUNTING POLICIES

2.LEGAL BASIS AND ACCOUNTING RULES

The accounts of the EU are kept in accordance with Regulation (EU, Euratom) No 1046/2018 of the European Parliament and of the Council of 18 July 2018 on the financial rules applicable to the general budget of the Union, amending Regulations (EU) No 1296/2013, (EU) No 1301/2013, (EU) No 1303/2013, (EU) No 1304/2013, (EU) No 1309/2013, (EU) No 1316/2013, (EU) No 223/2014, (EU) No 283/2014, and Decision No 541/2014/EU and repealing Regulation (EU, Euratom) No 966/2012 (OJ L 193, 30 July 2018, p. 1) hereinafter referred to as the 'Financial Regulation' (FR).

In accordance with article 80 of the Financial Regulation, the EU prepares its financial statements on the basis of accrual-based accounting rules that are based on International Public Sector Accounting Standards (IPSAS). These accounting rules, adopted by the Accounting Officer of the Commission, have to be applied by all the institutions and EU bodies falling within the scope of consolidation in order to establish a uniform set of rules for accounting, valuation and presentation of the accounts with a view to harmonising the process for drawing up the financial statements and consolidation.

Application of new and amended European Union accounting rules (EAR)

Revised EAR which is effective for annual periods beginning on or after 1 January 2018

The following accounting rules, adopted by the Accounting Officer of the Commission, became mandatorily effective in the current year:

·Revision of EAR 12 "Employee Benefits": The revised EAR 12 was adopted by the Accounting Officer in 2017 which is based on the new IPSAS 39 “Employee Benefits” published in July 2016. For the first application of the revised EAR 12 there were no significant impacts on the EU consolidated financial statements, aside from the recognition of any gain or loss resulting from changes in the actuarial assumptions, which under the revised EAR is recognised directly in net assets, in contrast with the previous requirement to recognise in surplus or deficit.

New EAR adopted but not yet effective at 31 December 2018

The EU has not applied the following new EAR, which have been adopted by the Accounting Officer of the Commission, but which is not yet effective:

·New EAR 20 "Public Sector Combinations" (effective for annual periods beginning on or after 1 January 2019): The EAR 20, which is based on the IPSAS 40 "Public Sector Combinations", establishes the classification of a public sector combination into two different types depending on whether the transaction takes place under common control or not: (i) amalgamation, in which the transaction is based on the carrying amounts of the entity combined with the EU; and (ii) acquisition, in which the transaction is based on the acquisition date fair values of the entity acquired by the EU. Both have distinct requirements and levels of disclosure, in order to provide a better understanding of its effects to users of the financial statements of the EU.

The impact on the EU financial statements in the year of initial application will depend on whether in that period the EU would enter into a public sector combination transaction.

3.ACCOUNTING PRINCIPLES

The objective of financial statements is to provide information about the financial position, performance and cashflows of an entity that is useful to a wide range of users. For the EU as a public sector entity, the objectives are more specifically to provide information useful for decision-making, and to demonstrate the accountability of the entity for the resources entrusted to it. It is with these goals in mind that the present document has been drawn up.

The overall considerations (or accounting principles) to be followed when preparing the financial statements are laid down in EU accounting rule 1 "Financial Statements" and are the same as those described in IPSAS 1: fair presentation, accrual basis, going concern, consistency of presentation, materiality, aggregation, offsetting and comparative information. The qualitative characteristics of financial reporting are relevance, faithful representation (reliability), understandability, timeliness, comparability and verifiability.

4.CONSOLIDATION

Scope of consolidation

The consolidated financial statements of the EU comprise all significant controlled entities (i.e. the EU institutions (including the Commission) and the EU agencies), associates and joint ventures. The complete list of consolidated entities can be found in note 9 of the EU financial statements. It now comprises 52 controlled entities and 1 associate. Entities that fall under the consolidation scope, but which are immaterial to the EU consolidated financial statements as a whole, need not be consolidated or accounted for using equity method where to do so would result in excessive time or cost to the EU. Those entities are referred to as 'Minor entities' and are separately listed in note 9. In 2018, 7 entities have been classified as minor entities.

Controlled entities

The decision to include an entity in the scope of consolidation is based on the control concept. Controlled entities are all entities for which the EU is exposed, or has right, to variable benefits from its involvement and has the ability to affect the nature and amount of those benefits through its power over the other entity. This power must be presently exercisable and must relate to the relevant activities of the entity. Controlled entities are fully consolidated. The consolidation begins at the first date on which control exists, and ends when such control no longer exists.

The most common indicators of control within the EU are: creation of the entity through founding treaties or secondary legislation, financing of the entity from the EU budget, the existence of voting rights in the governing bodies, audit by the European Court of Auditors and discharge by the European Parliament. An individual assessment for each entity is made in order to decide whether one or all of the criteria listed above are sufficient to result in control.

Under this approach, the EU's institutions (except the European Central Bank) and agencies (excluding the agencies of the former 2nd pillar) are considered as under the exclusive control of the EU and are therefore included in the consolidation scope. Furthermore, the European Coal and Steel Community (ECSC) in Liquidation is also considered as a controlled entity.

All material "inter-entity transactions and balances" between EU controlled entities are eliminated, while unrealised gains and losses on such transactions are not material and so have not been eliminated.

Joint Arrangements

A joint arrangement is an agreement over which the EU and one or more parties have joint control. Joint control is contractually agreed sharing of control over an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of parties sharing control. Joint agreements can be either joint operations or joint ventures. In case a joint arrangement is structured through a separate vehicle and parties to the joint arrangement have rights to the net assets of the arrangement, this joint arrangement classifies as a joint venture. Participations in joint ventures are accounted for using the equity method (see note 1.5.4). In case the parties have rights to the assets, and obligations for the liabilities, related to the arrangement, this joint arrangement is classified as a joint operation. In relation to its interest in joint operations, the EU recognises in its financial statements: its assets and liabilities, revenue and expense, as well as its share of assets, liabilities, revenue and expense held or incurred jointly.

Associates

Associates are entities over which the EU has, directly or indirectly, significant influence but not control. It is presumed that significant influence exists if the EU holds directly or indirectly 20 % or more of the voting rights. Participations in associates are accounted for using the equity method (see note 1.5.4).

Non-consolidated entities the funds of which are managed by the Commission

The funds of the Joint Sickness Insurance Scheme for staff of the EU, the European Development Fund and the Participants Guarantee Fund are managed by the Commission on their behalf. However, since these entities are not controlled by the EU, they are not consolidated in its financial statements.

5.BASIS OF PREPARATION

Financial statements are presented annually. The accounting year begins on 1 January and ends on 31 December.

6.Currency and basis for conversion

Functional and reporting currency

The financial statements are presented in millions of euros, unless stated otherwise, the euro being the EU's functional and reporting currency.

Transactions and balances

Foreign currency transactions are translated into euros using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the re-translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of financial performance. Translation differences on non-monetary financial instruments classified as available for sale financial assets are included in the fair value reserve.

Different conversion methods apply to property, plant and equipment and intangible assets, which retain their value in euros at the rate that applied at the date when they were purchased.

Year-end balances of monetary assets and liabilities denominated in foreign currencies are converted into euros on the basis of the European Central Bank (ECB) exchange rates applying on 31 December:

Euro exchange rates

7.Use of estimates

In accordance with IPSAS and generally accepted accounting principles, the financial statements necessarily include amounts based on estimates and assumptions by management based on the most reliable information available. Significant estimates include, but are not limited to: amounts for employee benefit liabilities, provisions, financial risk on inventories and accounts receivable, accrued revenue and charges, contingent assets and liabilities, degree of impairment of intangible assets and property, plant and equipment and amounts disclosed in the notes concerning financial instruments. Actual results could differ from those estimates. Changes in estimates are reflected in the period in which they become known.

8.BALANCE SHEET

9.Intangible assets

Acquired computer software licences are stated at historical cost less accumulated amortisation and impairment losses. The assets are amortised on a straight-line basis over their estimated useful lives (3‑11 years). The estimated useful lives of intangible assets depend on their specific economic lifetime or legal lifetime determined by an agreement. Internally developed intangible assets are capitalised when the relevant criteria of the EU accounting rules are met and the expenses relate solely to the development phase of the asset. The costs capitalisable include all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management. Costs associated with research activities, non-capitalisable development costs and maintenance costs are recognised as expenses as incurred.    

10.Property, plant and equipment

All property, plant and equipment are stated at historical cost less accumulated depreciation and impairment losses. Cost includes expenditure that is directly attributable to the acquisition, construction or transfer of the asset.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits or service potential associated with the item will flow to the EU and its cost can be measured reliably. Repairs and maintenance costs are charged to the statement of financial performance during the financial period in which they are incurred.

Land and works of art are not depreciated as they are deemed to have an indefinite useful life. Assets under construction are not depreciated, as these assets are not yet available for use. Depreciation on other assets is calculated using the straight-line method to allocate their cost less their residual values over their estimated useful lives, as follows:

Gains or losses on disposals are determined by comparing proceeds less selling expenses with the carrying amount of the disposed asset and are included in the statement of financial performance.

Leases

Leases of tangible assets, where the EU has substantially all the risks and rewards of ownership, are classified as finance leases. Finance leases are capitalised at the lease’s commencement at the lower of the fair value of the leased asset and the present value of the minimum lease payments. The interest element of the finance lease payment is charged to expenditure over the period of the lease at a constant periodic rate in relation to the balance outstanding. The rental obligations, net of finance charges, are included in financial liabilities (non-current and current). The interest element of the finance cost is charged to the statement of financial performance over the lease period so as to produce a constant periodic interest rate on the remaining balance of the liability for each period. The assets held under finance leases are depreciated over the shorter of the asset's useful life and the lease term.

Leases where the lessor retains a significant portion of the risks and rewards inherent to ownership are classified as operating leases. Operating lease payments are recognised as an expense in the statement of financial performance on a straight-line basis over the lease term.

11.Impairment of non-financial assets

Assets that have an indefinite useful life are not subject to amortisation/depreciation and are tested annually for impairment. Assets that are subject to amortisation/depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable (service) amount. The recoverable (service) amount is the higher of an asset’s fair value less costs to sell and its value in use.

Intangible assets and property, plant and equipment residual values and useful lives are reviewed, and adjusted if appropriate, at least once per year. An asset’s carrying amount is written down immediately to its recoverable (service) amount if the asset’s carrying amount is greater than its estimated recoverable (service) amount. If the reasons for impairments recognised in previous years no longer apply, the impairment losses are reversed accordingly.

12.Investments accounted for using the equity method

Participations in associates and joint ventures

Investments accounted for using the equity method are initially recognised at cost, being the carrying amount subsequently increased or decreased to recognise the EU’s share of the surplus or deficit of the investee after the date of acquisition. The EU's share of the investee’s surplus or deficit is recognised in the statement of financial performance, and its share of investee’s movements in equity is recognised in the reserves within net assets. The initial cost together with all movements (further contributions, share of economic results and reserve movements, impairments and dividends) give the book value of the investment in the financial statements at the balance sheet date. Distributions received from the investment reduce the carrying amount of the asset.

If the EU's share of deficits of an investment accounted for using the equity method equals or exceeds its interest in the investment, the EU discontinues recognising its share of further losses ("unrecognised losses"). After the EU's interest is reduced to zero, additional losses are provided for and a liability is recognised only to the extent that the EU has incurred legal or constructive obligation or made payments on behalf of the entity.

If there are indications of impairment, a write-down to the lower recoverable amount is necessary. The recoverable amount is determined as described under note 1.5.3. If the reason for impairment ceases to apply at a later date, the impairment loss is reversed to the carrying amount that would have been determined had no impairment loss been recognised.

In cases where the EU holds 20 % or more of an investment capital fund, it does not seek to exert significant influence. Such funds are therefore treated as financial instruments and categorised as available for sale financial assets.

Associates and joint ventures classified as minor entities are not accounted for under the equity method. EU contributions to those entities are accounted for as an expense of the period.

13.Financial assets

Classification

The EU classifies their financial assets in the following categories: financial assets at fair value through surplus or deficit; loans and receivables; held-to-maturity investments; and available for sale financial assets. The classification of financial instruments is determined at initial recognition and re-evaluated at each balance sheet date.

(I)Financial assets at fair value through surplus or deficit

A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by the entity. Derivatives are also categorised in this category. Assets in this category are classified as current assets if they are expected to be realised within 12 months of the balance sheet date.

(II)Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the EU provides money, goods or services directly to a debtor with no intention of trading the receivable, or in case the EU is subrogated to the rights of the original lender following a payment made by the EU under a guarantee contract. Payments due within 12 months of the balance sheet date are classified as current assets. Payments due after 12 months from the balance sheet date are classified as non-current assets. Loans and receivables include term deposits with the original maturity above three months.

(III)Held-to-maturity investments

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the EU has the positive intention and ability to hold to maturity. During this financial year, the EU did not hold any investments in this category.

(IV)Available for sale financial assets

Available for sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are classified as either current or non-current assets, depending on the period of time the EU expects to hold them. Investments in entities that are neither consolidated nor accounted for using the equity method and other equity-type investments (e.g. Risk Capital Operations) are also classified as available for sale financial assets.

Initial recognition and measurement

Purchases and sales of financial assets at fair value through surplus or deficit, held-to-maturity and available for sale are recognised on trade-date – the date on which the EU commits to purchase or sell the asset. Cash equivalents and loans are recognised when cash is deposited in a financial institution or advanced to borrowers. Financial instruments are initially recognised at fair value. For all financial assets not carried at fair value through surplus or deficit transactions costs are added to the fair value at initial recognition. Financial assets carried at fair value through surplus or deficit are initially recognised at fair value and transaction costs are expensed in the statement of financial performance.

The fair value of a financial asset on initial recognition is normally the transaction price (i.e. the fair value of the consideration received), unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets (e.g. in case of some derivative contracts). However, when a long-term loan that carries no interest or an interest below market conditions is granted, its fair value can be estimated as the present value of all future cash receipts discounted using the prevailing market rate of interest for a similar instrument with a similar credit rating.

Loans granted are measured at their nominal amount, which is considered to be the fair value of the loan. The reasoning for this is as follows:

·The “market environment” for EU lending is very specific and different from the capital market used to issue commercial or government bonds. As lenders in these markets have the opportunity to choose alternative investments, the opportunity possibility is factored into market prices. However, this opportunity for alternative investments does not exist for the EU, which is not allowed to invest money on the capital markets; it only borrows funds for the purpose of lending at the same rate. This means that there is no alternative lending or investment option available to the EU for the sums borrowed. Thus, there is no opportunity cost and therefore no basis of comparison with market rates. In fact, the EU lending operation itself represents the market. Essentially, since the opportunity cost "option" is not applicable, the market price does not fairly reflect the substance of the EU lending transactions. Therefore, it is not appropriate to determine the fair value of EU lending with reference to commercial or government bonds.

·Furthermore, as there is no active market or similar transactions to compare with, the interest rate to be used by the EU for fair valuing its lending operations under the EFSM, BOP and other such loans, should be the interest rate charged.

·In addition, for these loans, there are compensating effects between loans and borrowings due to their back-to-back character. Thus, the effective interest for the loan equals the effective interest rate for the related borrowings. The transaction costs incurred by the EU and then recharged to the beneficiary of the loan are directly recognised in the statement of financial performance.

Financial instruments are derecognised when the rights to receive cashflows from the investments have expired or the EU has transferred substantially all risks and rewards of ownership to another party.

Subsequent measurement

a)Financial assets at fair value through surplus or deficit are subsequently carried at fair value. Gains and losses arising from changes in the fair value of the ‘financial instruments at fair value through surplus or deficit’ category are included in the statement of financial performance in the period in which they arise.

b)Loans and receivables are carried at amortised cost using the effective interest method. In the case of loans granted on borrowed funds, the same effective interest rate is applied to both the loans and borrowings since these loans have the characteristics of 'back-to-back operations' and the differences between the loan and the borrowing conditions and amounts are not material. The transaction costs incurred by the EU and then recharged to the beneficiary of the loan are directly recognised in the statement of financial performance.

c)Held to maturity assets are carried at amortised cost using the effective interest method. The EU currently holds no held to maturity investments.

d)Available for sale financial assets are subsequently carried at fair value. Gains and losses arising from changes in the fair value of available for sale financial assets are recognised in the fair value reserve, except for translation differences on monetary assets, which are recognised in the statement of financial performance. When assets classified as available for sale financial assets are derecognised or impaired, the cumulative fair value adjustments previously recognised in the fair value reserve are recognised in the statement of financial performance. Interest on available for sale financial assets calculated using the effective interest method is recognised in the statement of financial performance. Dividends on available for sale equity instruments are recognised when the EU's right to receive payment is established.

The fair values of quoted investments in active markets are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities and over-the–counter derivatives), the EU establishes a fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cashflow analysis, option pricing models and other valuation techniques commonly used by market participants.

Investments in Venture Capital Funds, classified as available for sale financial assets, which do not have a quoted market price in an active market are valued at the attributable net asset value, which is considered as an equivalent of their fair value.

In cases where the fair value of investments in equity instruments that do not have a quoted market price in an active market cannot be reliably measured, these investments are valued at cost less impairment losses.

Impairment of financial assets

A financial asset is impaired and a loss is recognised if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset and that loss event (or events) has an impact on the estimated future cashflows of the financial asset that can be reliably estimated. The EU assesses at each reporting date whether there is objective evidence that a financial asset is impaired.

(a)Assets carried at amortised cost

If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cashflows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the statement of financial performance. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. The calculation of the present value of the estimated future cashflows of a collateralised financial asset reflects the cashflows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through the statement of financial performance.

(b)Assets carried at fair value

In the case of equity investments classified as available for sale financial assets, a significant or permanent (prolonged) decline in the fair value of the security below its cost is considered in determining whether the securities are impaired. If any such evidence exists for available for sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the statement of financial performance – is removed from reserves and recognised in the statement of financial performance. Impairment losses recognised in the statement of financial performance on equity instruments are not reversed through the statement of financial performance. If, in a subsequent period, the fair value of a debt instrument classified as available for sale financial asset increases and the increase can be objectively related to an event occurring after the impairment loss was recognised, the impairment loss is reversed through the statement of financial performance.

14.Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first-in, first-out (FIFO) method. The cost of finished goods and work in progress comprises raw materials, direct labour, other directly attributable costs and related production overheads (based on normal operating capacity). Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses. When inventories are held for distribution at no charge or for a nominal charge, they are measured at the lower of cost and current replacement cost. Current replacement cost is the cost the EU would incur to acquire the asset on the reporting date.

15.Pre-financing amounts

Pre-financing is a payment intended to provide the beneficiary with a cash advance, i.e. a float. It may be split into a number of payments over a period defined in the particular contract, decision, agreement or basic legal act. The float or advance is either used for the purpose for which it was provided during the period defined in the agreement or it is repaid. If the beneficiary does not incur eligible expenditure, they have the obligation to return the pre-financing advance to the EU. The amount of the pre-financing may be reduced (wholly or partially) by the acceptance of eligible costs (which are recognised as expenses).

Pre-financing is, on subsequent balance sheet dates, measured at the amount initially recognised on the balance sheet less eligible expenses (including estimated amounts where necessary) incurred during the period.

Interest on pre-financing is recognised as it is earned in accordance with the provisions of the relevant agreement. An estimate of the accrued interest revenue, based on the most reliable information, is made at the year-end and included on the balance sheet.

Other advances to Member States which originate from reimbursement by the EU of amounts paid as advances by the Member States to their beneficiaries (including "financial instruments under shared management") are recognised as assets and presented under the pre-financing heading. Other advances to Member States are subsequently measured at the amount initially recognised on the balance sheet less a best estimate of the eligible expenses incurred by final beneficiaries, calculated on the basis of reasonable and supportable assumptions.

The EU contributions to the trust funds of the European Development Fund or other unconsolidated entities are also classified as pre-financing since their purpose is to give a float to the trust fund to allow it to finance specific actions defined under the trust fund's objectives. The EU contributions to trust funds are measured at the initial amount of the EU contribution less eligible expenses, including estimated amounts where necessary, incurred by the trust fund during the reporting period and allocated to the EU contribution in accordance with the underlying agreement.

16.Exchange receivables and non-exchange recoverables

As the EU accounting rules require a separate presentation of exchange and non-exchange transactions, for the purpose of drawing up the accounts, receivables are defined as stemming from exchange transactions and recoverables are defined as stemming from non-exchange transactions, i.e. when the EU receives value from another entity without directly giving approximately equal value in exchange (for example recoverables from Member States related to own resources).

Receivables from exchange transactions meet the definition of financial instruments and are thus classified as loans and receivables and measured accordingly (see note 1.5.5). The financial instruments notes disclosures concerning receivables from exchange transactions include accrued revenue and deferred charges from exchange transactions, as they are not material. A general write-down based on past experience is made for outstanding recovery orders not already subject to a specific write-down.

Recoverables from non-exchange transactions are carried at original amount (adjusted for interest and penalties) less write-down for impairment. A write-down for impairment of recoverables from
non-exchange transactions is established when there is objective evidence that the EU will not be able to collect all amounts due according to the original terms of recoverables from non-exchange transactions. The amount of the write-down is the difference between the asset’s carrying amount and the recoverable amount. The amount of the write-down is recognised in the statement of financial performance. A general write-down, based on past experience, is also made for outstanding recovery orders not already subject to a specific write-down. See note 1.5.14 concerning the treatment of accrued revenue at year-end. Amounts displayed and disclosed as recoverables from non-exchanges transactions are not financial instruments, as they do not arise from a contract that would give rise to a financial liability or equity instrument. However, in the notes to the financial statements recoverables from non-exchange transactions are disclosed together with receivables from exchange transactions where appropriate.

17.Cash and cash equivalents

Cash and cash equivalents are financial instruments and include cash at hand, deposits held at call or at short notice with banks and other short-term highly liquid investments with original maturities of three months or less.

18.Employee benefits

The accounting policy for employee benefits has been updated in line with the requirements of the revised accounting rule EAR 12 Employee Benefits, effective for periods beginning on or after 1 January 2018, which is based on the new IPSAS 39 (Employee Benefits) published in July 2016. The main change, arising from the revision of accounting rule 12, is the presentation of actuarial gains and losses as a movement in net assets instead of in the statement of financial performance.

Accounting for defined benefit plans is complex because actuarial assumptions and judgement are required to measure the obligation. In applying the revised accounting rule, the EU has reassessed the judgements used, in particular, as regards to the estimate of the ultimate cost of the benefit attributed to the employees. As a result of this exercise, the appropriateness of the use of the estimated active service period of the employee as the basis for attributing benefits to periods of service was confirmed. The benefits which the EU’s employees are entitled to are given under a single plan – although split in two schemes – and they must be treated similarly so as to give a fair presentation of the situation and reflect the economic reality.

The EU provides a set of benefits (emoluments and social security) to employees. For accounting purposes these have to be classified into short term and post-employment benefits.

Short-term employee benefits

Short-term employee benefits are those benefits due to be settled before twelve months after the end of the reporting period in which employees rendered the service, such as salaries, annual and paid sick leaves, and other short-term allowances. Short-term employee benefits are recognised as an expense when the related service is provided. A liability is recognised for the amount expected to be paid if the EU has a present legal or constructive obligation to pay as a result of past service provided by the employee and the obligation can be estimated reliably.

Post-employment benefits

The EU grants a set of post-employment benefits to employees, which include retirement, invalidity and survival pensions, as well as medical coverage (see note 2.9).

The EU provides its staff with a post-employment benefit plan that includes:

I.Pension Scheme of European Officials (PSEO): The benefits granted under this notionally funded 12 scheme relate to seniority, invalidity and survival, as well as, family allowances, death before retirement to those employees that work or worked in the EU Institutions, Agencies and other EU bodies or are survivors of deceased officials or pensioners. Staff contribute one third of the expected cost of these benefits from their salaries.

II.Joint Sickness Insurance Scheme (JSIS): Under this scheme, the EU provides health coverage for staff of the European Commission, Institutions, Agencies and other EU bodies through the reimbursement of medical expenses. The benefits granted to the "inactives" of this scheme (i.e. pensioners, orphans, etc.) are classified as post-employment benefits.

The EU also provides post-employment benefits to members of the EU institutions via separate pension schemes. These are shown under the heading other retirement benefit schemes. Under these schemes the EU provides pension benefits to members of the Commission, Court of Justice and General Court, Court of Auditors, Council, European Parliament, Ombudsman, Data Protection Supervisor, Civil Service Tribunal. The EU provides health coverage to the members of the EU Institutions via the JSIS.

The above post-employment benefits qualify as defined benefit obligations of the EU and are calculated at each reporting date by estimating the amount of future benefit that employees have earned in the current and prior periods, discounting that amount and deducting the fair value of any plan assets. The calculation of defined benefit obligation is performed annually using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of government bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability.

The post-employment benefits provided to EU staff are incorporated in a single plan comprising both a pension scheme (PSEO) and a sickness insurance scheme (JSIS), with the right to coverage under the JSIS scheme being dependent on having acquired the right to coverage under the PSEO scheme. Under the terms of this single plan, as set out in the Staff Regulation, certain entitlements, such as the right to a deferred and reduced pension under the PSEO scheme, are acquired after 10 years of service. However, the entitlements acquired under the single plan by the employee’s subsequent service are materially higher than those initial entitlements as reflected by subsequent annually accrued pension rights.

Therefore, in order to depict the economic substance of the underlying transaction required by the faithful representation qualitative characteristic of financial reporting as outlined in both EAR 1 and the IPSAS Conceptual Framework, the service cost incurred is accrued on a straight-line basis over staff’s estimated active service period, i.e. the period from the date when service by the employee first leads to benefits under the plan (whether or not the benefits are conditional on further service) until the date when further service by the employee will lead to no material amount of further benefits under the plan, other than from further salary increases. This approach is applied consistently to the benefits provided for under the single plan.

Remeasurements of the net defined benefit liability comprise actuarial gains and losses and the return on plan assets, and are recognised immediately in net assets.

The EU recognises the net interest expense (income) and other expenses related to the defined benefit plans in the statement of financial performance within the caption ‘staff and pension costs’.

When benefits provided are changed or curtailed, the resulting change in benefits that relates to past service or the gain or loss on curtailment is recognised immediately in the statement of financial performance. Gains and losses on settlement are recognised when the settlement occurs. Past service cost is recognised immediately in the statement of financial performance, unless the changes are conditional on the employees remaining in service for a specified period of time.

19.Provisions

Provisions are recognised when the EU has a present legal or constructive obligation towards third parties as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are not recognised for future operating losses. The amount of the provision is the best estimate of the expenses expected to be required to settle the present obligation at the reporting date. Where the provision involves a large number of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities (“expected value” method).

Provisions for onerous contracts are measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract.

20.Financial liabilities

Financial liabilities are classified as financial liabilities at fair value through surplus or deficit, financial liabilities carried at amortised cost or as financial guarantee liabilities.

Borrowings are composed of borrowings from credit institutions and debts evidenced by certificates. They are recognised initially at fair value, being their issue proceeds (fair value of consideration received) net of transaction costs incurred, then subsequently carried at amortised cost using the effective interest method; any difference between proceeds, net of transaction costs, and the redemption value is recognised in the statement of financial performance over the period of the borrowings using the effective interest method. In the case of loans granted on borrowed funds, the effective interest method may not be applied to loans and borrowings, based on materiality considerations. The transaction costs incurred by the EU and then recharged to the beneficiary of the loan are directly recognised in the statement of financial performance.

Financial liabilities categorised at fair value through surplus or deficit include derivatives where fair value is negative. They follow the same accounting treatment as financial assets at fair value through surplus or deficit, see note 1.5.5.

Financial guarantee liabilities are initially recognised at fair value, being the premium received. Subsequently, financial guarantee liabilities are measured at the higher of the best estimate of the expenses expected to be required to settle the financial guarantee liability and the amount initially recognised less, when appropriate, cumulative amortisation. The EU recognises a financial guarantee liability when it receives consideration for granting of the guarantee, that is at market terms, or when the fair value of the guarantee can be measured reliably. In case no active market for a directly equivalent guarantee contract exists, the EU discloses the guarantee given as a contingent liability (see note 1.7.2) or - when it is more likely than not that an outflow of resources will be required to settle the obligation – the EU recognises a provision (see note 1.5.11).

Financial liabilities are classified as non-current liabilities, except for maturities less than 12 months after the balance sheet date.

EU trust funds that are considered as part of the Commission's operational activities are accounted for in the Commission accounts and further consolidated in the EU annual accounts. Therefore, contributions from other donors to the EU trust funds fulfil the criteria of revenues from non-exchange transactions under conditions and they are presented as financial liabilities until the conditions attached to the contributions transferred are met, i.e. eligible costs are incurred by the trust fund. The trust fund is required to finance specific projects and return remaining funds at the time of winding-up. At the balance sheet date the outstanding contribution liabilities are measured at contributions received less the expenses incurred by the trust fund, including estimated amounts when necessary. For reporting purposes the net expenses are allocated to the contributions of other donors in proportion to net contributions paid as at 31 December. This allocation of contributions is only indicative. When the trust fund is wound up the actual split of remaining resources will be decided by the trust fund board.

21.Payables

A significant amount of the payables of the EU are unpaid cost claims from beneficiaries of grants or other EU funding (non-exchange transactions). They are recorded as payables for the requested amount when the cost claim is received. Upon verification and acceptance of the eligible costs, the payables are valued at the accepted and eligible amount.

Payables arising from the purchase of goods and services are recognised at invoice reception for the original amount and corresponding expenses are entered in the accounts when the supplies or services are delivered and accepted by the EU.

22.Accrued and deferred revenue and charges

Transactions and events are recognised in the financial statements in the period to which they relate. At year-end, if an invoice is not yet issued but the service has been rendered, the supplies have been delivered by the EU or a contractual agreement exists (e.g. by reference to a treaty), an accrued revenue will be recognised in the financial statements. In addition, at year-end, if an invoice is issued but the services have not yet been rendered or the goods supplied have not yet been delivered, the revenue will be deferred and recognised in the subsequent accounting period.

Expenses are also accounted for in the period to which they relate. At the end of the accounting period, accrued expenses are recognised based on an estimated amount of the transfer obligation of the period. The calculation of accrued expenses is done in accordance with detailed operational and practical guidelines issued by the Commission which aim at ensuring that the financial statements provide a faithful representation of the economic and other phenomena they purport to represent. By analogy, if payment has been made in advance for services or goods that have not yet been received, the expense will be deferred and recognised in the subsequent accounting period.

23.STATEMENT OF FINANCIAL PERFORMANCE

24.Revenue

REVENUE FROM NON-EXCHANGE TRANSACTIONS

The vast majority of the EU's revenue relates to non-exchange transactions:

GNI based resources and VAT resources

Revenue is recognised for the period for which the Commission sends out a call for funds to the Member States claiming their contribution. They are measured at their “called amount”. As VAT and GNI resources are based on estimates of the data for the budgetary year concerned, they may be revised as changes occur until the final data are issued by the Member States. The effect of a change in estimate is included when determining the net surplus or deficit for the period in which the change occurred.

Traditional own resources

Recoverables from non-exchange transactions and related revenues are recognised when the relevant monthly "A" statements (including duties collected and amounts due that are guaranteed and not contested) are received from the Member States. At the reporting date, revenue collected by the Member States for the period but not yet paid to the Commission is estimated and recognised as accrued revenue. The quarterly "B" statements (including duties neither collected nor guaranteed, as well as guaranteed amounts that have been contested by the debtor) received from the Member States are recognised as revenue less the collection costs to which they are entitled. In addition, a value reduction is recognised for the amount of the estimated recovery gap.

Fines

Revenue from fines is recognised when the EU's decision imposing a fine has been taken and it is officially notified to the addressee. If there are doubts about the undertaking's solvency, a value reduction on the entitlement is recognised. After the decision to impose a fine, the debtors have two months from the date of notification:

a)either to accept the decision, in which case they must pay the fine within the time limit laid down and the amount is definitively collected by the EU;

b)or not to accept the decision, in which case they lodge an appeal under EU law.

However, even if appealed, the fine must be paid within the time limit of three months laid down as the appeal does not have suspensory effect (Article 278 of the EU Treaty) or, under certain circumstances and subject to the agreement of the Commission's Accounting Officer, the debtor may present a bank guarantee for the amount instead.

If the undertaking appeals against the decision, and has already provisionally paid the fine, the amount is disclosed as a contingent liability. However, since an appeal against an EU decision by the addressee does not have suspensory effect, the cash received is used to clear the recoverable. If a guarantee is received instead of payment, the fine remains as a recoverable. If it appears probable that the General Court may not rule in favour of the EU, a provision is recognised to cover this risk. If a guarantee had been given instead, then the recoverable outstanding is written-down as required. The accumulated interest received by the Commission on the bank accounts where received payments are deposited is recognised as revenue, and any contingent liability is increased accordingly.

Since 2010, all provisionally cashed fines are managed by the Commission in a specifically created fund (BUFI) and invested in financial instruments.

REVENUE FROM EXCHANGE TRANSACTIONS

Revenue from the sale of goods and services is recognised when the significant risk and rewards of ownership of the goods are transferred to the purchaser. Revenue associated with a transaction involving the provision of services is recognised by reference to the stage of completion of the transaction at the reporting date.

Interest revenue and expense

Interest revenue and expense are recognised in the statement of financial performance using the effective interest method. This is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest revenue or interest expense over the relevant period. When calculating the effective interest rate, the EU estimates cashflows considering all contractual terms of the financial instrument (for example prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest revenue is recognised using the rate of interest to discount the future cashflows for the purpose of measuring the impairment loss.

Revenue from dividends

Revenue from dividends and similar distributions is recognised when the right to receive payment is established.

25.Expenses

Expenses from non-exchange transactions account for the majority of the EU's expenses. They relate to transfers to beneficiaries and can be of three types: entitlements, transfers under agreement and discretionary grants, contributions and donations.

Transfers are recognised as expenses in the period during which the events giving rise to the transfer occurred, as long as the nature of the transfer is allowed by regulation (Financial Regulation, Staff Regulations, or other regulation) or an agreement has been signed authorising the transfer; any eligibility criteria have been met by the beneficiary; and a reasonable estimate of the amount can be made.

When a request for payment or cost claim is received and meets the recognition criteria, it is recognised as an expense for the eligible amount. At year-end, incurred eligible expenses due to the beneficiaries but not yet reported are estimated and recorded as accrued expenses.

Expenses from exchange transactions arising from the purchase of goods and services are recognised when the supplies are delivered and accepted by the EU. They are valued at original invoice amount. Furthermore, at the balance sheet date expenses related to the service delivered during the period for which an invoice has not yet been received or accepted are estimated and recognised in the statement of financial performance.

26.CONTINGENT ASSETS AND LIABILITIES

27.Contingent assets

A contingent asset is a possible asset that arises from past events and of which the existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the EU. A contingent asset is disclosed when an inflow of economic benefits or service potential is probable.

28.Contingent liabilities

A contingent liability is a possible obligation that arises from past events and of which the existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the EU; or a present obligation that arises from past events but is not recognised because: it is not probable that an outflow of resources embodying economic benefits or service potential will be required to settle the obligation or in the rare circumstances where the amount of the obligation cannot be measured with sufficient reliability.

29.CASHFLOW STATEMENT

Cashflow information is used to provide a basis for assessing the ability of the EU to generate cash and cash equivalents, and its needs to utilise those cashflows.

The cashflow statement is prepared using the indirect method. This means that the economic result for the financial year is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of revenue or expense associated with investing cashflows.

Cashflows arising from transactions in a foreign currency are recorded in the EU’s reporting currency (Euro), by applying to the foreign currency amount the exchange rate between the euro and the foreign currency at the date of the cashflow.

The cashflow statement reports cashflows during the period classified by operating and investing activities (the EU does not have financing activities).

Operating activities are the activities of the EU that are not investing activities. These are the majority of the activities performed. Loans granted to beneficiaries (and the related borrowings, when applicable) are not considered as investing (or financing) activities as they are part of the general objectives and thus daily operations of the EU.

Investing activities are the acquisition and disposal of intangible assets and property, plant and equipment and of other investments which are not included in cash equivalents. Investing activities do not include loans granted to beneficiaries. The objective is to show the real investments made by the EU.

30.NOTES TO THE BALANCE SHEET

ASSETS

31.INTANGIBLE ASSETS

The above amounts relate primarily to computer software.

32.PROPERTY, PLANT AND EQUIPMENT

The Space assets category covers operational fixed assets related to the two EU space programmes: the Global Navigation Satellite Systems (GNSS), i.e. Galileo and EGNOS, and the Copernicus European Earth observation programme, while assets of the space systems which are not yet operational are included under the Assets under construction heading.

For Galileo, four new satellites have been added to the operational constellation in 2018 bringing it up to 22 satellites. The Galileo operational fixed assets, covering both satellites and ground installations, amounted to EUR 2 410 million at 31 December 2018, net of depreciation (2017: EUR 2 276 million). The remaining assets under construction totalling EUR 1 324 million (2017: EUR 1 026 million) include the four satellites launched in July 2018 for which the in-orbit testing had not yet been completed at the balance sheet date. The development of the Galileo system will continue until the system reaches its full operational capacity. When completed, the Galileo constellation will comprise 24 operational satellites and 6 spares.

Regarding Copernicus, two new satellites (Sentinel 5P & 3B) became operational in 2018, in addition to the five other Copernicus operational satellites, increasing the total value of Copernicus operational fixed assets to EUR 1 455 million (2017: EUR 1 140 million), net of accumulated depreciation. Another EUR 1 207 million related to Copernicus satellites is recognised as assets under construction (2017: EUR 1 443 million).

Fixed assets related to the European Geostationary Navigation Overlay System (EGNOS) ground infrastructure of EUR 52 million (2017: EUR 67 million) are also included under the Space assets heading. In addition, EGNOS assets under construction amount to EUR 130 million (2017: EUR 52 million).

The assets related to the EU space programmes are being built with the assistance of the European Space Agency (ESA).

Property, plant and equipment

33.INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD

The participation of the EU, represented by the Commission, in the European Investment Fund (EIF) is treated as an associate using the equity method of accounting. The EIF is the EU's financial institution specialising in providing risk capital and guarantees to Small and Medium-sized Entities (SMEs). The EIF is located in Luxembourg and operates as a private-public partnership, whose members are the European Investment Bank (EIB), the EU and a group of financial institutions. At 31 December 2018, the EU held 29.7 % of ownership interests in the EIF (2017: 29.7 %) and 29.7 % of the voting rights (2017: 29.7 %). In accordance with its statutes, the EIF is required to allocate to a statutory reserve at least 20 % of its annual net result until the aggregate reserve amounts to 10 % of subscribed capital. This reserve is not available for distribution.

The following carrying amounts are attributable to the EU based on its percentage of participation:

Reconciliation of the above summarised financial information to the carrying amount of the interest held in the EIF is as follows:

The EU, represented by the Commission, has paid in 20 % of its subscribed shares in the EIF capital at 31 December 2018, the amount uncalled being as follows:

34.FINANCIAL ASSETS

35.Available for sale financial assets

Out of the total of EUR 15 443 million, the EU holds available for sale financial assets in the form of debt securities (e.g. bonds) of EUR 13 993 million (2017: EUR 12 048 million), equity instruments of EUR 1 365 million (2017: EUR 1 333 million) and investments in the EIB Unitary Fund (money market fund) of EUR 85 million (2017: EUR 251 million). The debt securities and units in the EIB Unitary Fund are mainly used to temporarily invest the amounts allocated to the EU guarantee and risk-sharing instruments until they are used to satisfy the guarantee calls.

BUFI investments

Provisionally cashed fines related to competition cases are allocated to a dedicated fund (BUFI Fund - 'Budget Fines' Fund) and invested by the Commission in debt instruments categorised as available for sale financial assets.

ECSC in Liquidation

Regarding the European Coal and Steel Community (ECSC) in liquidation, all available for sale financial assets are debt securities denominated in EUR and quoted in an active market.

European Bank for Reconstruction and Development

The EU holds a financial investment in the capital of the European Bank for Reconstruction and Development (EBRD), in which at 31 December 2018 the number of shares held were 90 044 (2017: 90 044 shares), representing 3 % of the total subscribed share capital. The EU subscribed for a total amount of EUR 900 million of share capital, out of which EUR 713 million is currently uncalled. According to the Agreement establishing EBRD, the shareholders have some contractual restrictions such as the fact that the shares are not transferable and their redemption is capped at the maximum of the original purchase cost.

The EU measures the investment in EBRD at fair value. The original purchase cost is considered to be the best estimate of the fair value, in particular due to contractual restrictions referred to above. Although EBRD's shares are not quoted on any stock exchange market, there are recent transactions in the investee's equity (issuance of capital at par value), indicating that the cost is the best estimate of the fair value in this situation.

GUARANTEE FUNDS FOR BUDGETARY GUARANTEES

EFSI Guarantee Fund

Pursuant to the EFSI Regulation (Regulation (EU) 2015/2017), the EFSI Guarantee Fund has been established to provide a liquidity cushion against potential losses incurred by the EIB in relation to its financing and investment operations eligible for the EFSI EU guarantee under the EFSI Agreement - see note 4.1.1. The EFSI Guarantee Fund is financed by contributions from the EU budget. It is also endowed by returns on guarantee fund resources invested, revenues received by the EU as remuneration for the guarantee under the EFSI Agreement, and amounts recovered by the EIB from defaulting debtors in respect of previous guarantee calls. The fund is managed by the Commission, which is authorised to invest the assets of the EFSI Guarantee Fund on the financial markets in accordance with the principle of sound financial management following appropriate prudential rules. The EFSI Guarantee Fund started its operations in April 2016. In accordance with the EFSI Regulation, as amended in 2017 (Regulation (EU 2017/2396)), it will be progressively provisioned and shall gradually reach EUR 9.1 billion, i.e. 35 % of the total EU EFSI guarantee obligations.

Guarantee Fund for external actions

The Guarantee Fund for external actions covers loans guaranteed by the EU budget, in particular EIB lending operations outside the EU financed from the EIB's own resources and loans under macro-financial assistance (MFA) and Euratom loans outside the EU – see note 4.1.1. It is a long-term instrument (non-current part: EUR 2 275 million) managed by the EIB and intended to cover any defaulting loans guaranteed by the EU. The Fund is endowed by payments from the EU budget, the proceeds from interest on investments made from the Fund's assets, and sums recovered from defaulting debtors for whom the Fund has had to activate its guarantee. The Fund should be maintained at a target amount corresponding to 9 % of the guaranteed loans outstanding at year-end. The difference between the target amount and the value of the Fund's assets at year-end shall be covered from the EU budget in year N+2, while any surplus is paid back to the EU budget.

EFSD Guarantee Fund

Pursuant to the EFSD Regulation (Regulation (EU) 2017/1601 of the European Parliament and of the Council of 26 September 2017), the EFSD Guarantee Fund has been established to provide a liquidity cushion to be used in the event of a call on the Union guarantee given pursuant to the relevant EFSD guarantee agreements. The EFSD Guarantee Fund is financed by contributions from the EU budget and from contributions from the 11th EDF to the EU budget and voluntary contributions from Member States and other contributors. The fund is also endowed by returns on invested resources, amounts recovered from defaulting debtors, revenues and any other payments received by the EU in accordance with the EFSD guarantee agreements. The fund is managed directly by the Commission, which is authorised to invest the fund’s assets in accordance with the principle of sound financial management following appropriate prudential rules. The first EU budget contributions to the EFSD Guarantee Fund were received in August 2018. Total payments received in 2018 amount to EUR 275.1 million, of which EUR 9 million is invested in available for sale financial assets as at 31 December 2018, while another EUR 325 million (2017: EUR 275 million) have been committed but not yet paid and is included in the amount disclosed as RAL in note 5.1. The EFSD Guarantee Fund will be progressively provisioned and gradually reach EUR 750 million, i.e. 50 % of total future EFSD guarantee obligations covered by the EU budget, and may be further increased by other contributions.

FINANCIAL INSTRUMENTS FINANCED BY THE EU BUDGET

Horizon 2020

Under the EU Regulation establishing Horizon 2020 – the Framework Programme for Research and Innovation (2014-2020), new financial instruments have been established in order to enhance access to finance to entities engaged in research and innovation (R&I). These instruments are: the InnovFin Loan and Guarantee Service for R&I under which the Commission shares the financial risk related to a portfolio of new financing operations entered into by the EIB; the InnovFin SME Guarantee including the SME Initiative Uncapped Guarantee Instrument (SIUGI) – guarantee facilities managed by the EIF providing guarantees and counter-guarantees to the financial intermediaries for the new portfolios of loans (under SIUGI the Commission shares the financial risk related to the guarantee given with Member States, EIF and EIB); and the InnovFin Equity Facility for R&I providing for investments in venture capital funds and managed by the EIF.

Risk-Sharing Finance Facility

The Risk-Sharing Finance Facility (RSFF) is managed by the EIB and the Commission's investment portfolio is used to provision financial risk for loans and guarantees given by the EIB to eligible research projects. In total, an EU budget of up to EUR 1 billion was allocated to the RSFF under the 2007-2013 MFF. Under the 2014-2020 MFF, there are no new budget contributions foreseen for the RSFF. The EU overall risk is limited to the amount it contributes to the Facility.

Connecting Europe Facility

Pursuant to Regulation (EU) No 1316/2013, the Connecting Europe Facility (CEF) debt instrument has been established with the objective to facilitate infrastructure projects’ access to financing in the sectors of transport, telecommunications and energy. It is managed by the EIB under an agreement with the EU. The CEF debt financial instrument is the continuity of the Loan Guarantee Instrument for TEN-T projects (LGTT) and of the pilot phase of the Project Bond Initiative (PBI). The LGTT and the PBI Portfolio were merged into the CEF financial instrument with effect from 1 January 2016. It offers risk-sharing for debt financing in the form of senior and subordinated debt or guarantee as well as support for project bonds.

EU SME Equity Facilities

These are equity instruments financed by the COSME, the CIP and MAP programmes and the Technology Transfer Pilot Project, under the trusteeship of the EIF, supporting the creation and financing of EU SMEs in their early (start-up) and growth stages by investing in suitable specialised venture capital funds.

36.Financial assets at fair value through surplus or deficit

The EU enters into foreign currency forward contracts in order to hedge the foreign currency risk related to USD denominated debt securities held in the EFSI Guarantee Fund. Under the foreign currency forward contracts, the EU shall deliver the contractually agreed notional amount in foreign currency ('pay leg'), as presented in the table above, and will receive the notional amount in EUR ('receive leg') at the maturity date. Such derivative contracts are measured at fair value at the balance sheet date and classified as either financial assets or financial liabilities at fair value through surplus or deficit depending on whether their fair value is positive or negative.

The EFSI guarantee given by the EU to the EIB Group in relation to the portfolios of equity investments is classified as a derivative financial instrument and accounted for as a financial asset or financial liability at fair value through surplus or deficit, see note 4.1.1. At 31 December 2018, the amount of the underlying equity investments disbursed by the EIB and EIF amounted to EUR 674 million and the fair value of the EU guarantee on the EFSI equity portfolios totalled EUR 14 million.

Fair value hierarchy of financial assets measured at fair value

During the period there were no transfers between level 1 and level 2.

Reconciliation of financial assets measured using valuation techniques with inputs not based on observable market data (level 3)

37.Loans

38.Loans for financial assistance

The nominal value of loans for financial assistance at 31 December 2018, including ECSC in Liquidation loans, total EUR 53 206 million (2017: EUR 54 093 million). The change in carrying amount corresponds to the change in accrued interests.

EFSM enables the granting of financial assistance to a Member State in difficulties or seriously threatened by severe difficulties caused by exceptional circumstances beyond its control. The assistance may take the form of a loan or credit line. The ECOFIN Council conclusions of 9 May 2010 restrict the facility to EUR 60 billion but the legal limit restricts the outstanding amount of loans or credit lines to the margin available under the own resources ceiling. Borrowings related to loans disbursed under the EFSM are guaranteed by the EU budget. It is not foreseen that the EFSM will engage in new financing programmes or enter into new loan facility agreements. During the year ended 31 December 2018, both beneficiary countries – Ireland and Portugal – have requested a maturity extension in respect to their loans falling due in 2018 for the amount of EUR 3.9 billion and EUR 0.6 billion, respectively.

The BOP facility, a policy-based financial instrument, provides medium-term financial assistance to Member States of the EU that have not adopted the Euro. It enables the granting of loans to Member States who are experiencing, or are seriously threatened by, difficulties in their balance of payments or capital movements. The maximum outstanding amount of loans granted under the instrument is limited to EUR 50 billion. Borrowings related to these BOP loans are guaranteed by the EU budget.

MFA is a form of financial aid extended by the EU to partner countries experiencing a balance of payment crisis. It takes the form of medium/long term loans or grants or an appropriate combination of both and generally complements financing provided in the context of an IMF-supported adjustment and reform program. These loans are guaranteed by the Guarantee Fund for external actions. During the year ended 31 December 2018, further disbursements of loans under MFA for a total amount of EUR 515 million were provided, being EUR 500 million to Ukraine and EUR 15 million to Georgia – see also note 4.1.2.

The European Atomic Energy Community (Euratom, represented by the Commission) lends money to both Member States and non-Member States, and to entities of both, to finance projects relating to energy installations. Guarantees from third-parties of EUR 254 million (2017: EUR 250 million) have been received to cover Euratom loans - see note 4.1.2.

ECSC in Liquidation loans are not loans for financial assistance but promissory notes in order to keep the cash flows in parallel with the borrowings. However, similar to the loans for financial assistance, they were granted on borrowed funds in accordance with articles 54 and 56 of the ECSC Treaty for project financing.

Loans effective interest rates (expressed as a range of interest rates)

39.Other loans

Nominal value of other loans at 31 December 2018 total EUR 617 million (2017: EUR 561 million).

Loans with special conditions are granted at preferential rates as part of co-operation with non-Member States.

Term deposits include mainly amounts with maturity between 3 and 12 months that do not meet the definition of cash equivalents.

Impairment on other loans

Subrogated loans are defaulted loans which were granted by the EIB and guaranteed by the EU budget, for which all rights have been subrogated to the EU following the payment from the Guarantee Fund for external actions or the EFSI Guarantee Fund. These loans are fully impaired for an amount of EUR 579 million (2017: EUR 432 million). Guarantee calls, which occurred in 2018, were partially covered by financial provisions made in previous years. Under the relevant agreements between the EU and the EIB, recovery proceedings are undertaken by the EIB on behalf of the EU with an aim to recover any sums due.

40.PRE-FINANCING

The level of pre-financing amounts in the various programmes must be sufficient to ensure the necessary funding for the beneficiary to start the project, while also safeguarding the financial interests of the EU and taking into consideration legal, operational and cost-effectiveness constraints. The increase in the total amount of pre-financing mainly relates to the increase in ’’other advances to member states’’ (see note 2.5.2).

41.Pre-financing

Pre-financing represents money paid out, and thus implementation of payment appropriations. As explained in note 1.5.7, these are advances and so not yet expensed. Thus while pre-financing reduces outstanding RAL (see note 5.1) it represents expenses still to be recognised in the statement of financial performance.

For shared management, almost all pre-financing amounts relate to the current programming period. There is an initial pre-financing which will not be cleared before the end of the period and is accounted for as non-current. There is also an annual pre-financing which is cleared on an annual basis and is accounted for as current. EUR 10 billion of new pre-financing has been paid in 2018. The pre-financing amounts related to shared management are stable compared to 2017 except for a decrease in the amounts under ‘’other’’ shared management. This relates to the European Union Solidarity Fund (amounts for support to reconstruction in Italy following the 2016/2017 earthquakes there). These amounts were paid as pre-financing in 2017 and expensed in 2018.

For direct management, the pre-financing amounts relate mainly to Horizon 2020 and the Connecting Europe Facility.

For indirect management, the pre-financing covers mainly internal policies programmes like Erasmus, Galileo and EGNOS, but also instruments related to external relations like ENI (European Neighbourhood Instrument), DCI (Development Cooperation Instrument) and Humanitarian Aid.

Guarantees received in respect of pre-financing

These are guarantees that the Commission requests from beneficiaries that are not Member States in certain cases when paying out advance payments (pre-financing). There are two values to disclose for this type of guarantee, the “nominal” and the “on-going” values. For the nominal value, the generating event is linked to the existence of the guarantee. For the on-going value, the guarantee’s generating event is the pre-financing payment and/or subsequent clearings. At 31 December 2018 the nominal value of guarantees received in respect of pre-financing amounted to EUR 516 million while the on-going value of those guarantees was EUR 420 million (2017: EUR 620 million and EUR 462 million respectively).

Certain pre-financing amounts paid out under the 7th Research Framework Programme for research and technological development (FP7) and under Horizon 2020 are effectively covered by a Participants Guarantee Fund (PGF). The PGF is a mutual benefit instrument set up to cover the risks relating to non-payment of amounts by the beneficiaries during the implementation of the indirect actions of FP7 and Horizon 2020. All participants of indirect actions receiving a grant from the EU contribute 5 % of the total amount received to the PGF's capital.

At 31 December 2018, pre-financing amounts covered by the PGF totalled EUR 2 billion (2017: EUR 1.9 billion). The EU (represented by the Commission) acts as an executive agent of the participants of the PGF, but the fund is owned by the participants.

At year-end, the PGF had total assets of EUR 2.1 billion (2017: EUR 2.0 billion). The assets of the PGF also include financial assets that are managed by the Directorate-General for Economic and Financial Affairs of the Commission. As the PGF is a separate entity the assets of the fund are not consolidated in these EU annual accounts.

42.Other advances to Member States

Advances to Member States for financial instruments under shared management

Under the framework of the European Structural and Investment Funds (ESIF) programmes, it is possible to make advance payments from the EU budget to Member States so as to allow them to contribute to financial instruments (i.e. loans, equity investments or guarantees). These financial instruments are set up and managed under the responsibility of the Member States, not the Commission. Nevertheless, monies that are unused by these instruments at year-end are the property of the EU (as with all pre-financing) and are thus treated as an asset on the EU’s balance sheet.

2014-2020 Period:

Under cohesion policy out of EUR 5 790 million paid, it is estimated that EUR 3 590 million was unused at 31 December 2018. This includes the contribution of the Member States to the SME Initiative, an instrument aimed at stimulating additional lending by the banking sector to SMEs (EUR 1 213 million paid, out of which EUR 391 million is estimated as unused).

For rural development, EUR 83 million remained unused at year-end.

2007-2013 Period:

All amounts related to the cohesion policy are considered to have been either implemented or re-allocated to other measures, therefore no assets remain on the balance sheet at 31 December 2018. It should be noted that the actual implementation by the various instruments will be reviewed as part of the closure process of the programmes.

Aid Schemes

Similar to the above, advances paid by the Member States for various aid schemes (state aid, market measures of EAGF or investment measures of EAFRD) that were not used at year-end are recorded as assets (advances) on the EU's balance sheet. The Commission has estimated the value of these advances based on information provided by the Member States; the resulting amounts are included under the Aid Schemes sub-heading above.

2014-2020 Period:

The unused amounts at year-end were estimated at EUR 1 477 million for cohesion policy and EUR 1 171 million for agriculture and rural development.

2007-2013 Period:

It is estimated that EUR 195 million paid in the context of rural development remains unused at the end of 2018.

43.EXCHANGE RECEIVABLES AND NON-EXCHANGE RECOVERABLES

44.Recoverables from non-exchange transactions

45.Recoverables from Member States

The non-current amounts due from Member States relate mainly to non-executed conformity clearance decisions for the European Agricultural Guarantee Fund (EAGF) as well as for the European Agricultural Fund for Rural Development (EAFRD). The amounts related to these decisions are being recovered in annual instalments.

Own resources recoverables

'A accounts' refers to the monthly statements where the Member States communicate the established Traditional Own Resources (TOR) entitlements to the Commission but not yet recovered. TOR are composed of customs duties and sugar levies, collected by Member States on behalf of the Commission.

For 2018, the ‘A accounts’ figure contains TOR from the infringement case explained below as well as from inspection reports. The increase in the heading ‘A accounts’ is driven by these cases. As late payment interest of EUR 1.3 billion is applicable, those amounts are therefore also reported in these annual accounts (see notes 2.6.2 and 3.7).

Concerning the infringement case, on 8 March 2018, the European Commission sent a letter of formal notice (Infringement No 2018/2008) to the United Kingdom (UK) because it refused to make customs duties available to the EU budget, as required by EU law. In view of a lack of a satisfactory reply from the UK, the Commission sent a Reasoned Opinion on 24 September 2018 and decided on 19 December 2018 to refer the case to the Court of Justice of the EU. The UK replied to the Reasoned Opinion on 11 February 2019. This reply was again considered unsatisfactory and the Commission confirmed on 6 March 2019 its decision to refer the infringement to the Court of Justice of the EU. The application was lodged on 7 March 2019. A 2017 OLAF report had found that importers in the UK evaded a large amount of customs duties by using fictitious and false invoices and incorrect customs value declarations at importation. Based on a methodology developed by OLAF and JRC and on the information available, the Commission estimates that the infringement of EU legislation by the UK resulted, during the period November 2011 to October 2017, in losses to the EU budget amounting to EUR 2.1 billion (net, i.e. after deducting the collection costs to be retained by the UK from the gross amount of EUR 2.7 billion). The UK does not agree on the methodology used by the Commission to estimate the above losses.

In addition, the Commission included in the accounts a management estimate of EUR 0.7 billion (of which the largest part being applicable interest) for established customs duties. The UK does not agree with this amount.

‘Separate accounts’ refers to established entitlements that have not been included in the 'A accounts', because they have not been recovered by Member States and no security has been provided (or if security has been provided but the amounts are contested). These entitlements are subject to impairment based on information provided every year by the Member States.

‘Own resources to be received’ refers to recoverables as a result of the amending budget No 6/2018 adopted on 12 December 2018. The amounts were to be entered by Member States on the first working day of January 2019.

EAGF and Rural Development recoverables

This item primarily covers the amounts owed by Member States at 31 December 2018, as declared and certified by the Member States as at 15 October 2018. An estimation is made for the recoverables arising after this declaration and up to 31 December 2018. The Commission also estimates a write-down for the amounts owed by beneficiaries that are unlikely to be recovered. The fact that such an adjustment is made does not mean that the Commission is waiving future recovery of these amounts. A deduction of 20 % is also included in the adjustment and corresponds to what Member States are allowed to retain to cover administrative costs.

46.Recoverables from competition fines

The provisional payments mainly relate to cash receipts from companies that have nevertheless initiated an appeal or still have the option to appeal against the fine decisions at EU courts. A contingent liability is disclosed for the possibility to pay back these amounts to the companies (see note 4.1.4).

Fined companies who have launched or are planning to launch an appeal have an option to either make provisional payments or to provide bank guarantees to the Commission. For EUR 9 354 million (2017: EUR 4 004 million) of fines not paid at year-end, the Commission has accepted guarantees.

The amounts written down due to impairment reflect the Commission's case-by-case assessment of fines amounts not cashed or not covered with a guarantee, which the Commission expects not to recover.

The increase in the competition fines recoverables is mainly due to two significant fines (totalling EUR 5 339 million) where the companies concerned covered the fine with Commission accepted bank guarantees.

47.Accrued income and deferred charges

Other accrued income includes EUR 1 146 million that the Commission expects to recover from the Member States in the area of cohesion. The recovery will be made as a result of the examination and acceptance of the annual accounts submitted by the Member States on 15 February 2019. This procedure for the acceptance of Member States' annual accounts has been introduced for the first time in the cohesion area for the programming period 2014-2020.

48.Receivables from exchange transactions

The receivables under the heading other contain EUR 1.4 billion of accrued late payment interest on own resources out of which EUR 1.3 billion relate to the cases already mentioned in note 2.6.1.1.

49.INVENTORIES

50.CASH AND CASH EQUIVALENTS

51.Bank accounts for budget implementation

This heading covers the funds which the Commission keeps in its bank accounts in each Member State and EFTA country (treasury or central bank), as well as in commercial bank current accounts, imprest accounts and petty cash. The treasury balance at the end of 2018 is due to the following main elements:

·As regards own resources, the end of year treasury balance includes EUR 0.75 billion paid in advance by some of the Member States in relation to amending budget 6 adopted in 2018.

·An amount of EUR 1.4 billion of fines imposed by the Commission for breach of competition rules, definitively cashed in 2018 and not yet included in any amending budget is also part of the year-end treasury balance.

·The treasury balance also includes assigned revenue and other payment appropriations of EUR 7.4 billion.

52.Cash belonging to financial instruments

Amounts shown under this heading primarily concern cash equivalents managed by fiduciaries on behalf of the Commission for the purpose of implementing particular financial instrument programmes funded by the EU budget and cash and cash equivalents held in the guarantee funds relating to budgetary guarantees (see note 2.4.1). The cash belonging to financial instruments and guarantee funds can only be used in the programmes concerned.

53.Cash relating to fines

This is cash received in connection with fines issued by the Commission for which the case is still open. These amounts are kept in specific deposit accounts that are not used for any other activities. Where an appeal has been lodged or when it is unknown if an appeal will be made by the other party, the underlying amount is shown as contingent liability in note 4.1.4.

Since 2010, all new provisionally cashed fines are managed by the Commission in the BUFI fund and invested in financial instruments categorised as available for sale (see note 2.4.1).

LIABILITIES

54.PENSION AND OTHER EMPLOYEE BENEFITS

Net employee benefit scheme liability

The increase in the total employee benefits liability is primarily due to an increase in the net liability of the Pension Scheme of European Officials. The rights accrued during the year due to service are higher than the benefits paid out during the year. In addition to this, there is an annual interest cost (unwinding of the liability discounting) as well as actuarial losses from experience where a significant amount relates to the improvement mentioned in note 2.9.1.

55.Pension Scheme of European Officials

This defined benefit obligation represents the present value of expected future payments that the EU is required to make so as to settle the pension obligations resulting from employee service in the current and prior periods. The scheme is ongoing, and as such, all payments required to be made from the scheme on an annual basis are included in the EU budget each year.

In accordance with Article 83 of the Staff Regulations, the payment of the benefits provided for in the staff pension scheme constitutes a charge to the EU's budget. The scheme is notionally funded, and the Member States guarantee the payment of these benefits collectively. A compulsory pension contribution is deducted from the basic salaries of active members, currently 10.0 %. These contributions are treated as budget revenue of the year and contribute to the funding of EU expenditure in general, see also note 3.6.

The liabilities of the pension scheme were assessed on the basis of the number of staff and retired staff at 31 December 2018 and on the rules of the Staff Regulations applicable at this date. This valuation was carried out in accordance with the methodology of IPSAS 39 (and therefore also EU accounting rule 12). As was already noted in the 2017 annual accounts, the relevant Commission services have been working to strengthen data collection methods, as well as improving assumptions and calculation methods. One result of this work has been a more precise valuation of the liability in relation to the pensions of surviving persons (i.e. where the member is deceased) using the most up to date actuarial practice. The impact of this improved method on the 2018 liability is a EUR 2.1 billion increase. Had this method been used in 2017, that liability would have been EUR 2.3 billion higher compared to the previous method used.

56.Other retirement benefit schemes

This refers to the liability relating to the pension obligations towards Members and former Members of the Commission, the Court of Justice (and General Court) and the Court of Auditors, the Council, the Ombudsman, the European Data Protection Supervisor, and the European Union Civil Service Tribunal. Also included under this heading is a liability relating to the pensions of Members of the European Parliament.

57.Joint Sickness Insurance Scheme

In addition to the above retirement benefit schemes, a valuation is made for the estimated liability that the EU has regarding the Joint Sickness Insurance Scheme (JSIS) in relation to healthcare costs which must be paid during post-activity periods (net of their contributions). As stated in note 1.5.10, the calculation of this liability takes account of the full active service period, ensuring that both the pension and the sickness insurance schemes of the staff’s post-employment plan are accounted for consistently. Taking into account the obligation to faithfully present the economic substance of the underlying situation as required by both EAR and IPSAS, we have not interpreted IPSAS 39 in a stricter sense when attributing the benefits to the periods of service. If one were to accrue the service cost for the JSIS scheme fully over 10 years for all officials, as opposed to the period of active service of the employee, the impact of such an approach on the defined benefit obligation at year-end would be an increase of EUR 3 billion. However, as already indicated, this stricter approach would not be compatible with the qualitative characteristic of faithful representation, and thus would not be deemed to provide reliable information in accordance with EAR 1 and the IPSAS Conceptual Framework. This estimate is highly sensitive to the evolution of current staff administrative status (in particular the number of fixed-term contract members assumed to become officials in the future).

Movement in present value of employee benefits defined benefit obligation

The present value of the defined benefit obligation is the discounted expected future payments required to settle the obligation resulting from employee service in the current and prior periods.

An analysis of the current year movement in the defined benefit obligation is presented below: