2European Aeronautic Defence and Space Company EADS N.V.

www.eads.com

This document
is also available at thefollowing addresses:
European Aeronautic Defence
and Space Company EADS N.V.
In France
37, boulevard de Montmorency
75781 Paris cedex 16 – France
In Germany
81663 Munich – Germany
In Spain
Avenida de Aragón 404
28022 Madrid – Spain

Cover image
Airbus A340-300

EADS Financial Statements and Corporate Governance 2004

European Aeronautic
Defence and Space
Company EADS N.V.
Le Carré, Beechavenue 130–132
1119 PR Schiphol-Rijk
The Netherlands

Financial Statements
and Corporate Governance
2004

The complete EADS Annual Report Suite2004 consists of:

EADS Annual Review 2004 (1)EADS Financial Statements andCorporate Governance 2004 (2)EADS Business andLegal Description 2004 (3)(available upon request)
The online version of the EADSAnnual Report Suite 2004 is available
at the Investor Relations section ofwww.eads.com

This Reference Document was filed in French with the Autorité des marchés
financiers on 19th April 2005 pursuant to Articles 211–1 to 211–42 of the General
Regulations of the Autorité des marchés financiers. It may be used in support ofa financial transaction only if it is supplemented by a transaction note approvedby the Autorité des marchés financiers.
Warning
The AMF draws the attention of the public to the fact that:
European Aeronautic Defence and Space Company EADS N.V. (“EADS”
or the “Company”) is a Dutch company, which is listed in France, Germany
and Spain. Given this fact, the applicable regulations with respect to public
information and protection of investors, as well as the commitments madeby the Company to securities and market authorities, are described in thisReference Document.
This document contains information which forms an integral partof EADS’ Reference Document filed with the Autorité des marchés
financiers on 19th April 2005. When used as a Reference Document,
it must be read in conjunction with the document entitled Businessand Legal Description 2004 (Reference Document Part 2).

Designed by williams and phoa.
Typeset by Bowne.

EADS Annual Report 2004

Part 1 (Financial Statements and Corporate Governance)

This Reference Document was filed in French with the Autorité des marchés financiers on 19th April 2005 pursuant to Articles
211-1 to 211-42 of the General Regulations of the Autorité des marchés financiers. It may be used in support of a financialtransaction only if it is supplemented by a transaction note approved by the Autorité des marchés financiers.
Warning

The AMF draws the attention of the public to the fact that:
European Aeronautic Defence and Space Company EADS N.V. (‘‘EADS’’ or the ‘‘Company’’) is a Dutch company, which islisted in France, Germany and Spain. Given this fact, the applicable regulations with respect to public information and protectionof investors, as well as the commitments made by the Company to securities and market authorities, are described in thisReference Document.
This document contains information which forms an integral part of EADS’ Reference Document filed with theAutorité des marchés financiers on 19th April 2005. When used as a Reference Document, it must be read in
conjunction with the document entitled Business and Legal Description – 2004 (Reference Document Part 2).

Financial Statements and Corporate Governance – 2004

Reference Document (Part 1)
Financial year 2004
2

Financial Policy

4

Net Assets –Financial Position – Results

5

Chapter 1

100

Corporate Governance

Chapter 2

100

Management and Control

2.1

100

Board of Directors, Chairmen andChief Executive Officers

2.1.1

107

Audit Committee

2.1.2

107

Remuneration and Nomination Committee

2.1.3

107

Executive Committee

2.1.4

110

Internal Control and Risk Management
Systems

2.1.5

Management’s Discussion and Analysisof Financial Condition and Resultsof Operations

1.1

5

Certain Information

1.1.1

5

Overview

1.1.2

6

Critical Accounting Considerations, Policies
and Estimates

1.1.3

9

Measurement of Management’s
Performance

1.1.4

116

Interests of Directors and Principal
Executive Officers

2.2

14

EADS Results of Operations

1.1.5

116

Compensation Granted to Directors andPrincipal Executive Officers

2.2.1

20

Statement of Changes in Consolidated
Shareholders’ Equity

1.1.6

116

Options Granted to the Two
Chief Executive Officers

2.2.2

22

Liquidity and Capital Resources

1.1.7

116

Related Party Transactions

2.2.3

26

Management of Market Risks

1.1.8

117

Loans and Guarantees Granted to Directors 2.2.4

31

Financial Statements

1.2

118

2.3

31

Consolidated Financial Statements(IFRS)

1.2.1

Employee Profit Sharing andIncentive Plans

118

Employee Profit Sharing andIncentive Agreements

2.3.1

80

Financial Statements(Dutch GAAP)

1.2.2

118

Employee Share Offering

2.3.2

120

Options Granted to Employees

2.3.3

93

Statutory Auditors’ Fees

1.3
123

Outlook

94

Risk Factors

1.4

Chapter 3

94

Market Risks

1.4.1

123

2005 Financial Outlook

3.1

95

Business-Related Risks

1.4.2

124

3.2

97

Legal Risks

1.4.3

2005 Calendar of Financial
Communication

98

Industrial and Environmental Risks

1.4.4

125

Reference Document Thematic Index

99

Insurance

1.4.5

EADS Financial Statements and Corporate Governance 2004

1

Financial Policy

A message from the Chief Financial Officer
Dear shareholders, customers and employees,
As you will see from the following pages, over-achieving has
become a hallmark of EADS’ financial culture: Again in 2004,
we can be proud of the sound performance that EADS hasdelivered, and the way in which it has seized its opportunities
and confronted its challenges.
First and foremost, the strong 2004 earnings arise from higher
sales volumes, from better Airbus product mix, from greater
competitiveness due to progressive streamlining, and from thesubsidence of external hazards and of programme risks. Oneoff events and non-cash profits added to our otherwise strong
results. The significant increase of the year-end cash position
attests to the quality of these results.
For the fifth consecutive year, order intake exceeded revenues,
producing an unmatched order book, in spite of the severe
devaluation of the U.S. dollar. It is testimony to EADS’
foresight that, early on, it recognised the currency threat to its
competitiveness and designed targeted cost savings programs
such as Airbus Route 06. These, combined with the benefitsof higher sales volumes, allow us to assess new transactions,capture business and preserve long-term profitability under avery degraded exchange rate assumption. Yet we have no room
for complacency. We will continue the drive to perfect ouroperations and to reduce our dependence on the U.S. currency.
Indeed, one motivation behind our Global Industrial Strategy
is achieving a better match between the currencies of revenues
and costs. More importantly, the Global Industrial Strategy
explores the potential for expansion of EADS operations,partnerships, sourcing and sales in key countries. In support ofit, the EADS Finance community is providing conceptual
financial tools and expertise to guide our globalization and tosteer our commercial line of attack. We are also instilling ourshareholder value priority into the inter-disciplinary task forces
devoted to this initiative.
One example of the Finance community’s role in developing
new EADS activities lies in how the Air Tanker consortiumfor the FSTA won preferred bidder status from the U.K.
MOD. Our finance team can take credit for its key role innegotiating this outcome and for its ability to propose
solutions ‘‘that fly’’.
Extending our international reach adds urgency and relevanceto the reinforcement and integration of EADS processes. In
2004, our effort to equip ourselves with state-of-the-art Risk
Management and Internal Control procedures gathered steam.
Our goals significantly exceed compliance with relevant
legislation and adherence to best practices. They include being‘‘best-in-class’’ with sensible systems that truly enhance thetransparency of the Company and its early warning

2

EADS Financial Statements and Corporate Governance 2004

capabilities. Combined with our new integrated group-wide‘‘financial warehouse’’, this will enable us to advance thequality, reliability and availability of financial information. We
aim for world-class efficiency in Finance – the onus is on us
to constantly re-examine our key processes.
In recent years, against the backdrop of the aviation industry
slump and of the weak macro-economic environment, EADS
has established itself as a model of solidity and of reliability
in its communication and action. In this period of managementtransition, continuity will take the form of a renewed
allegiance to transparency and of a steadfast commitment toshareholder value. This means establishing ambitious goals,
reporting performance conservatively and communicatingtargets prudently. In this way we will further improve ourshareholders’ and stakeholders’ confidence in our ability todeliver dependable growth.

Divestments remain part of our toolbox. And decisions of
sizeable impact will be subject to tight governance rules.
We believe the latest civil aviation downturn is now relegatedto history, and with our best product range ever, ourconfidence has never had stronger foundations. We will makethe EADS name stand for Value and for Growth!
Yours truly,

Hans Peter Ring
Chief Financial Officer

This also means exercising restraint in the deployment of our
cash resources. While the ramping up of Airbus deliveries andof A380 production will absorb cash, we must ensure we cancontrol working capital requirement through reduced cycle
times. We plan to reduce capital expenditure as soon as 2005,
and will remain thrifty if appraising future investments.
Profits flow from improved gearing, not from market share.
Issues of perimeter and industry consolidation always receive
the greatest care. As custodians of our shareholders’ trust, we
will continue to seek transactions founded on realistic
strategies, providing profit growth through actionablesynergies, unbound by transactional risks, and of course ‘‘atthe right price’’.

EADS Financial Statements and Corporate Governance 2004

3

Chapter 1
Net Assets –Financial Position – Results

4

Chapter 1

22

Liquidity and Capital Resources

1.1.7

Management’s Discussion and Analysisof Financial Condition and Resultsof Operations

1.1

22

Cash Flow

1.1.7.1

24

Consolidated Cash and Cash Equivalents

1.1.7.2

24

Consolidated Financial Liabilities

1.1.7.3

5

Certain Information

1.1.1

25

Sales Financing

1.1.7.4

5

Overview

1.1.2

26

Management of Market Risks

1.1.8

6

Critical Accounting Considerations,
Policies and Estimates

1.1.3

26

Sales Financing Risk

1.1.8.1

29

Exchange Rate Risk

1.1.8.2

6

Scope of and Changes in Consolidation
Perimeter

1.1.3.1

30

Interest Rate Risk

1.1.8.3

30

Counterparty Credit Risk

1.1.8.4

6

Fair Value Adjustments

1.1.3.2

30

Risks on Equity Investment Portfolio

1.1.8.5

6

Impairment of Assets

1.1.3.3

7

Research and Development Expenses

1.1.3.4

31

Financial Statements

1.2

7

Accounting for Hedged Foreign Exchange
Transactions in the Financial Statements

1.1.3.5

31

Consolidated Financial Statements(IFRS)

1.2.1

8

Accounting for Foreign Currency
Denominated Operations in the Financial
Statements

1.1.3.6

80

Financial Statements(Dutch GAAP)

1.2.2

8

Accounting for Sales Financing Transactions 1.1.3.7
in the Financial Statements

80

Consolidated Financial Statements(Dutch GAAP)

1.2.2.1

9

Measurement of Management’s
Performance

1.1.4

86

EADS N.V. Financial Statements(Dutch GAAP)

1.2.2.2

9Order Backlog

1.1.4.1

93

Statutory Auditors’ Fees

1.3

11

Use of EBIT*

1.1.4.2

11

EBIT* Performance by Division

1.1.4.3

94

Risk Factors

1.4

14

EADS Results of Operations

1.1.5

94

Market Risks

1.4.1

20

Statement of Changes in Consolidated
Shareholders’ Equity

1.1.6

95

Business-Related Risks

1.4.2

97

Legal Risks

1.4.3

98

Industrial and Environmental Risks

1.4.4

99

Insurance

1.4.5

5

4

EADS Financial Statements and Corporate Governance 2004

1

Chapter 1: Net Assets – Financial Position – Results

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations2
3

1.1.1 Certain Information

In addition to historical information, this document includes
forward-looking statements. The forward-looking statements are
generally identified by the use of forward-looking words, such as‘‘anticipate’’, ‘‘expect’’, ‘‘estimate’’, ‘‘intend’’, ‘‘plan’’, ‘‘predict’’,‘‘project’’, ‘‘will’’, ‘‘believe’’, ‘‘should’’, ‘‘may’’ or other variationsof such terms, or by discussion of strategy. These statements relate
to EADS’ future prospects, developments and business strategies
and are based on analyses or forecasts of future results andestimates of amounts not yet determinable. These forward-looking
statements represent the view of EADS only as of the dates they
are made, and EADS disclaims any obligation to update
forward-looking statements, except as may be otherwise requiredby law. The forward-looking statements in this document involve
known and unknown risks, uncertainties and other factors that
could cause EADS’ actual future results, performance andachievements to differ materially from those forecasted orsuggested herein. These include changes in general economic andbusiness conditions, as well as the factors described in‘‘1.4 Risk Factors’’.
The following discussion is based upon the audited
consolidated financial statements of EADS for 2004, 2003 and2002, prepared in accordance with International Financial
Reporting Standards (‘‘IFRS’’) issued by the International
Accounting Standards Board (together, the ‘‘Financial
Statements’’). As from 1st January 2004, EADS early adopted
IFRS 3 ‘‘Business Combinations’’ and revised International
Accounting Standard (‘‘IAS’’) 36 ‘‘Impairment of Assets’’ andIAS 38 ‘‘Intangible Assets’’, with the effect of no longer
amortising goodwill. In 2003, EADS changed its accounting
policy for the treatment of development costs in order to fullycomply with IAS 38. See ‘‘– 1.1.3 Critical Accounting
Considerations, Policies and Estimates – Research andDevelopment Expenses’’ and ‘‘Notes to IFRS Consolidated
Financial Statements – Note 2: Summary of Significant
Accounting Policies’’ and ‘‘Note 11: Intangible Assets’’.
Exchange Rate Information

The financial information presented in this document isexpressed in Euro, U.S. dollars or Pounds Sterling. The
following table sets out, for the periods indicated, certain
information concerning the exchange rate between the Euroand the U.S. dollar and Pound Sterling, calculated using theofficial European Central Bank fixing rate:

Year ended

Average
1-U.S. $1-£

Period End
1-U.S. $1-£

31st December 2002

0.94510.6505

1.04870.642431st December 2003

1.13040.69191.26300.704831st December 2004

1.24380.67871.36210.7051Ratings
EADS currently is rated A3 with a stable outlook by
Moody’s, A with a stable outlook by Standard and Poor’s andA with a stable outlook by Fitch IBCA.
1.1.2 Overview
With consolidated revenues of 431.8 billion for 2004, EADSis Europe’s premier aerospace and defence company and thesecond largest aerospace and defence company in the world. In
terms of market share, EADS is among the top two
manufacturers of commercial aircraft (surpassing Boeing interms of deliveries and orders in 2003 and 2004), civil
helicopters, commercial space launch vehicles and missiles, anda leading supplier of military aircraft, satellites and defence
electronics. In 2004, it generated approximately 76% of its total
revenues in the civil sector and 24% in the defence sector. As
of 31st December 2004, EADS’ active headcount was 110,662.

EADS organises its businesses into the following fiveoperating divisions:– Airbus: Development, manufacturing, marketing and sale ofcommercial jet aircraft of more than 100 seats and thedevelopment and manufacturing of aircraft for military use;
– Military Transport Aircraft: Development, manufacturing,marketing and sale of military transport and special
mission aircraft;– Aeronautics: Development, manufacturing, marketing andsale of civil and military helicopters, regional turboprop
aircraft and light commercial aircraft; civil and military
aircraft conversion and maintenance services;– Defence & Security Systems: Development,
manufacturing, marketing and sale of missile systems;
military combat aircraft and training aircraft; provision of
defence electronics and defence-related telecommunications
solutions; and logistics, training, testing, engineering andother related services; and– Space: Development, manufacturing, marketing and sale ofsatellites, orbital infrastructures and launchers; and provisionof space services.

EADS Financial Statements and Corporate Governance 20045

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)
In general, these manufacturing businesses are characterised bylong-term product cycles. Another significant characteristic ofmany of these businesses is the extent of their dependence on
governmental budgets.

On 18th September 2003, EADS acquired the remaining 41%
interest in EADS Telecom France S.A.S. from Nortel
Networks as part of an exchange for EADS’ interests in
Nortel Networks Germany GmbH & Co. KG and Nortel
Networks France S.A.S. Following this acquisition, EADS held
100% of EADS Telecom France S.A.S.

In 2003, as part of the restructuring of the former Defence
and Civil Systems Division, the Military Aircraft business unitof the Aeronautics Division was transferred to the newly
organized Defence & Security Systems (‘‘DS’’) Division. 2002
segment information for the two divisions has been adjusted
to reflect this transfer.

On 21st October 2003, EADS, through its subsidiary DADC,
acquired an additional 17.7% of the share capital of DornierGmbH for 462 million, bringing its total stake in DornierGmbH to 94%.

1.1.3 Critical Accounting Considerations, Policies
and Estimates
1.1.3.1 Scope of and Changes in Consolidation PerimeterOn 6th March 2002, EADS sold its interest in the Aircelle
joint venture to Snecma, generating a disposal gain of
463 million.

Disposals and acquisitions of interests in various businesses
can account, in part, for differences in EADS’ results ofoperations for one year as compared to another year.
Airbus: Airbus is fully consolidated by EADS in light of theeffective control EADS has exercised, by agreement with BAE
SYSTEMS, over the assets, liabilities and operations of Airbus
since 1st January 2001.
MBDA: EADS and BAE SYSTEMS each hold a 37.5% stakein MBDA, with Finmeccanica holding the remaining 25%.
Pursuant to the shareholder agreements relating to the MBDA
group, EADS and BAE SYSTEMS together exercise certain
controlling rights over MBDA through MBDA Holdings,
including the right of MBDA Holdings to appoint MBDA’s
CEO, COO-Operations and CFO.
EADS proportionally consolidates 50% of MBDA within the
DS Division, consistent with its ability to jointly control
operations, with Finmeccanica’s holding reflected as a 12.5%
minority interest.
Acquisitions and Disposals: On 4th October 2004, EADS
acquired, from RIG Holdings L.P., 100% of the share capitalof RIG Holdings, Inc., the holding company of Racal
Instruments U.S. and Racal Instruments Group Ltd. (together,‘‘Racal Instruments’’) for a cash amount of U.S.$130 million.
From the acquisition date, and as reflected in the
31st December 2004 consolidated balance sheet, EADS fully
consolidates Racal Instruments. Racal Instrument’s 2004 net
results for the period from 4th October through31st December are included in the EADS 2004 consolidated
statement of income.
On 30th January 2003, EADS acquired BAE SYSTEMS’ 25%
interest in Astrium N.V., control of which transferred to
EADS on the same date. Astrium was fully consolidated by
EADS beginning in fiscal year 2003.

6

EADS Financial Statements and Corporate Governance 2004

See ‘‘Notes to IFRS Consolidated Financial Statements –Note 4: Acquisitions and Disposals’’.
1.1.3.2 Fair Value Adjustments

The merger of the operations of ASM, Dasa and CASA,
leading to the creation of EADS in 2000, was recorded using
the purchase method of accounting with ASM as the acquirer.
Accordingly, the book value of certain assets and liabilities,
mainly property, plant and equipment and inventories, wasadjusted by an aggregate amount of 41.8 billion, net of income
taxes, to allocate a portion of the respective fair market valuesof Dasa and CASA at the time of the merger (the ‘‘fair value
adjustments’’). These aggregate additions in value are
generally being depreciated over four to fifteen years for fixed
assets and amortised over approximately 24 months forinventories. In addition, in 2001 in connection with theformation of Airbus S.A.S., EADS adjusted the book value of
Airbus fixed assets and inventories by an aggregate amount of
40.3 billion, net of income taxes, to reflect their fair market
values. The fair value adjustments lead to a depreciation
expense in the consolidated statements of income classified
within cost of sales. For management reporting purposes,
EADS treats these depreciation charges as non-recurring items
in EBIT pre-goodwill amortisation and exceptionals. See‘‘– 1.1.4 Measurement of Management’s Performance – Useof EBIT*’’.
1.1.3.3 Impairment of Assets

When a triggering event, such as an adverse material market
event or a significant change in forecasts or assumptions,occurs, EADS performs an impairment test on the assets,group of assets, subsidiaries, joint ventures or associates likely
to be affected. Following its early adoption of revised IAS 36,
as from 1st January 2004, EADS tests goodwill for
impairment at the end of each fiscal year, whether or not

1

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)

2
3

there is any indication of a triggering event. Generally, thediscounted cash flow method is used to determine the valueof the assets. The discounted cash flow method is sensitive tothe selected discount rate and estimate of future cash flows by
EADS’ management (‘‘Management’’). Consequently, slightchanges to these elements can materially affect the resulting
asset valuation and therefore the amount of the potential
impairment charge.
The discount rate used by EADS is derived from the Group’s
weighted average cost of capital, adjusted to reflect theriskiness of the business concerned. See ‘‘Notes to IFRS
Consolidated Financial Statements – Note 2: Summary of
Significant Accounting Policies – Impairment of Assets’’.
The impairment of goodwill has an effect on profitability, as itis recorded in the line item ‘‘other expense’’ on EADS’
consolidated statement of income. While no goodwill was
impaired in 2004 or 2003, impairment tests in 2002 on the
net assets of businesses in the Space Division resulted in a
goodwill impairment charge of 4350 million relating to thecommercial space business.
See ‘‘– 1.1.5 EADS Results of Operations – Consolidated
Amortisation of Goodwill and Impairment Losses’’ and ‘‘Notes
to IFRS Consolidated Financial Statements – Note 11:
Intangible Assets’’ and ‘‘Note 29: Investment Property’’.
1.1.3.4 Research and Development Expenses

Since 2003, with the application of IAS 38 (‘‘Intangible
Assets’’), the EADS group (the ‘‘Group’’) has assessed
whether product-related development costs qualify forcapitalisation as internally generated intangible assets. Criteria
for capitalisation recognition are strictly applied. Consequently,
all research and development costs not meeting the IAS 38
criteria are expensed as incurred in the consolidated statementof income.
Current and previous research and development programs havebeen reviewed to determine the extent to which expenses inthe development phase of such programs potentially meet therecognition criteria of IAS 38. As a result of the transition to
IAS 38 in 2003, EADS capitalised 44 million of productrelated development costs incurred in 2003 as internallygenerated intangible assets. For 2004, 4165 million of
product–related development costs were capitalised inaccordance with IAS 38, including 4152 million relating to the
Airbus A380 programme.

EADS Financial Statements and Corporate Governance 2004

EADS considers that, due to the complexity of its products(especially civil aircraft, such as the A380), processes carriedout in the various research and development phases are toointertwined to allow a proper distinction between these phases
and to assign an economic value prior to the very late stagesof particular programs. In addition, the absence in prior yearsof systems able to gather the relevant information prevents
EADS from retroactively allocating costs for previous R&D
programs, as required by IAS. Consequently, the 2002 andprior-year financial statements have not been changed by theapplication of IAS 38.
1.1.3.5 Accounting for Hedged Foreign Exchange Transactions in
the Financial Statements

Approximately two-thirds of EADS’ revenues are denominatedin U.S. dollars, whereas the major portion of its costs isincurred in Euro. As the Group intends to generate profits
only from its operations and not through speculation on
foreign currency exchange rate movements, EADS uses
hedging strategies to manage and minimise the impact of
exchange rate fluctuations on these profits. See ‘‘– 1.1.8
Management of Market Risks – Exchange Rate Risk’’ and‘‘1.4.1 Market Risks – Exposure to Foreign Currencies’’.
Historically, EADS’ currency hedge portfolio consisted of both
micro and macro hedges, the accounting for which differs as
explained below. As a result of the IAS 39 (‘‘Financial
Instruments: Recognition and Measurement’’) cash flow
hedging treatment applied to the majority of EADS’ hedge
portfolio since 2001, the significant variations in financial
income that EADS experienced in earlier periods are
significantly reduced and changes in net income are more inline with variations in operating income than they had been insuch earlier periods.
Micro Hedges. When hedges form a hedging relationshipwith customer orders to which they specifically relate, they
qualify for IAS 39 hedge accounting and are referred to as‘‘micro’’ hedges. Revenues from such customer orders arerecorded in Euro at the hedged rate and the impact of thehedges is recognised in gross margin and operating income at
the time of revenue recognition. At the end of eachaccounting period, the value of each outstanding micro hedge
contract is marked-to-market in the balance sheet on the basisof the then prevailing forward exchange rate. See ‘‘– 1.1.6
Statement of Changes in Consolidated Shareholders’ Equity’’.
For products such as aircraft, EADS typically hedges the first
forecasted highly probable future cash inflows for a given
month based upon final payments at delivery. See ‘‘– 1.1.8
Management of Market Risks – Exchange Rate Risk’’.

71.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Micro hedges associated with transactions that are cancelled or
postponed for more than a relatively short period are deemed
terminated for accounting purposes. The sum of (i) changes in
the fair value of these hedges since 1st January and (ii) a
reversal of the portion of accumulated other comprehensive
income (‘‘AOCI’’) corresponding to these hedges prior to
1st January, are then recorded in revenues and deferred tax
income (loss) in the consolidated statement of income.
Macro Hedges. Hedges that do not relate to a specified
customer order, referred to as ‘‘macro’’ hedges, do not qualify
for IAS 39 hedge accounting treatment. Unlike micro hedges,
macro hedges do not have an impact on gross margin or
operating income, even though they initially were intended tohedge cash flows from deliveries. Upon maturing, they areaccounted for in the line item ‘‘financial result’’. At the end ofeach accounting period, each outstanding macro hedge contract
is marked-to-market on the basis of the then prevailingforward exchange rate. Changes in mark-to-market values(before related deferred taxes) from the previous accounting
period are recorded in the line item ‘‘other financial result’’ inthe consolidated statement of income.
On 1st January 2001, most macro hedges then outstanding
were tied to specified customer orders and thereby qualified
for IAS 39 micro hedge accounting treatment. These hedges
were ascribed an implicit conversion rate corresponding to theforward Euro-U.S. dollar exchange rate frozen at
31st December 2000. As of 1st January 2003, there were nolonger any outstanding sales-related macro hedges not tied to
specified customer orders.
Revenues in currencies other than the Euro that are nothedged through financial instruments are translated into Euroat the spot exchange rate at the date the underlying
transaction occurs.
1.1.3.6 Accounting for Foreign Currency DenominatedOperations in the Financial Statements

Following the signature of an Advance Pricing Agreementwith tax authorities in April 2004, the Airbus GIE (a U.S.
dollar-denominated entity) was merged into Airbus SAS(a Euro-denominated entity) with retroactive effect as of
1st January 2004. Consequently, as from such date, operationsof the former Airbus GIE are treated as ‘‘foreign currency
operations’’ and accounted for in accordance with EADS’
consistently applied accounting principles.
Prior to the merger, Airbus GIE operations, with the exceptionof those hedged with financial instruments, were recorded at
the exchange rate prevailing at the time of aircraft delivery,
with outstanding operations being re-valued in the balance

8

EADS Financial Statements and Corporate Governance 2004

sheet at each period end using the closing exchange rate ofsuch period. From 1st January 2004, all U.S. dollardenominated operations, including outstanding operations of
the former Airbus GIE, are recorded on the basis of exchange
rates prevailing at the date of receipt or payment of
U.S. dollars. See ‘‘Notes to IFRS Consolidated Financial
Statements – Note 5: Segment Reporting’’.
In particular, customer advances (and the corresponding
revenues recorded when sales recognition occurs) are now
translated at the exchange rate prevailing on the date they
were received. U.S. dollar-denominated costs are converted at
the exchange rate prevailing on the date they are incurred. To
the extent that U.S. dollar-denominated customer advances
differ, in terms of timing of receipt or amount, fromcorresponding U.S. dollar-denominated costs, there will be aforeign currency exchange impact on EBIT*. Additionally, themagnitude of any such difference, and the corresponding
impact on EBIT*, will be sensitive to variations in the numberof deliveries. See ‘‘– 1.1.4 Measurement of Management’s
Performance – EBIT* Performance by Division’’ for a
discussion of these effects in 2004 on Airbus’ EBIT*.
1.1.3.7 Accounting for Sales Financing Transactionsin the Financial Statements

In order to support product sales, primarily at Airbus and
ATR, EADS may agree to participate in the financing ofcustomers, on a case-by-case basis, directly or throughguarantees provided to third parties. Certain sales contracts
may include the provision of an asset value guarantee(‘‘AVGs’’), whereby Airbus or ATR guarantee a portion of
the market value of an aircraft during a limited period, startingat a specific date after its delivery (in most cases, 10 years
post-delivery). See ‘‘– 1.1.7 Liquidity and Capital Resources –Sales Financing’’ and ‘‘Notes to IFRS Consolidated Financial
Statements – Note 25: Commitments and Contingencies’’. The
accounting treatment of sales financing transactions varies
based on the nature of the financing transaction and theresulting exposure.
On Balance Sheet. When, pursuant to a financing transaction,
the risks and rewards of ownership of the financed aircraft
reside with the customer, the transaction is characterised aseither a loan or a financial lease. In such instances, revenues
from the sale of the aircraft are recorded upon delivery, while
financial interest is recorded over time as financial income. The
outstanding balance of principal is recorded on the balance
sheet in other long-term financial assets, net of any
accumulated impairments. See ‘‘Notes to IFRS Consolidated
Financial Statements – Note 13: Investments in Associates,
Other Investments and Long-term Financial Assets’’.

1

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)

2
3

By contrast, when the risks and rewards of ownership remain
with Airbus or ATR, the transaction is characterised as an
operating lease. EADS’ general policy is to avoid, wheneverpossible, operating leases for new aircraft to be delivered tocustomers. Therefore, new operating leases primarily arise inconnection with the re-marketing of repurchased orrepossessed aircraft. Rather than recording 100% of therevenues from the ‘‘sale’’ of the aircraft at the time ofdelivery, rental income from such operating leases is recorded
in revenues over the term of the respective leases. The leased
aircraft are recorded at production cost on the balance sheet as
tangible assets, the corresponding depreciation and potential
impairment charges are recorded in cost of sales and theamount of cash received at delivery is recorded as deferredincome. See ‘‘Notes to IFRS Consolidated Financial
Statements – Note 12: Property, Plant and Equipment’’.
If the present value of an AVG exceeds 10% of the sales priceof the aircraft, the sale of the underlying aircraft is accounted
for as an operating lease in the Financial Statements. In thiscase, upon aircraft delivery, the cash payment received fromthe customer is recognised on the consolidated balance sheet asdeferred income and amortised straight-line to the amount,
and up to the last exercise date, of the AVG. The production
cost of the aircraft is recorded in tangible assets, and thedifference between production cost and the AVG amount isdepreciated up to the last exercise date of the AVG.
Depreciation expenses are recorded in cost of sales in the
consolidated statement of income. See ‘‘Notes to IFRS
Consolidated Financial Statements – Note 12: Property, Plant
and Equipment’’ and ‘‘Note 22: Deferred Income’’.
Off Balance Sheet – Contingent Commitments. Certain
sales financing commitments, such as lease in/lease out
structures and AVGs where the present value is below the
10% threshold, are not recorded on the balance sheet.
As a result, transactions relating to such AVGs are accounted
for as sales, with the related exposure deemed to be acontingent commitment. To reduce exposure under AVGs andto minimise the likelihood of their occurrence, Airbus and
ATR extend them with prudent guaranteed asset values andrestrictive exercise conditions, including limited exercise
window periods. AVGs are generally not expected by
Management to be exercised.
Under lease in/lease out structures, which Airbus and ATR
applied in the past to allow customers with weaker credit totake advantage of certain jurisdictions’ leasing-related tax
benefits, the risks and rewards of ownership of the aircraft are
typically borne by a third party, usually referred to as thehead lessor. The head lessor leases the aircraft to Airbus or

EADS Financial Statements and Corporate Governance 2004

ATR, which in turn sub-leases it to the customer. To theextent possible, the terms of the head lease and sub-leasematch payment streams and other financial conditions. Suchcommitments by Airbus or ATR are reported as off-balance
sheet contingent liabilities. See ‘‘Notes to IFRS
Consolidated Financial Statements – Note 25: Commitments
and Contingencies’’.
Provisions and Allowances. Under its provisioning policy forsales financing risk, EADS records provisions to fully cover its
estimated financing and asset value net exposure. Provisions
pertaining to sales financing exposure, whether on-balance
sheet or off-balance sheet, are recorded as impairments of therelated assets or in provisions. Provisions recorded as liabilities
relate primarily to off-balance sheet commitments. See ‘‘Notes
to IFRS Consolidated Financial Statements – Note 19 (d):Other Provisions’’. Provisions are recorded as impairments of
the related assets when they can be directly related to thecorresponding asset. See ‘‘Notes to IFRS Consolidated Financial
Statements – Note 12: Property, Plant and Equipment’’ and‘‘Note 13: Investments in Associates, Other Investments andLong-term Financial Assets’’. While Management views its
estimates of valuations of collateral as conservative, changes inprovisions reflecting revised estimates may have a material
impact on net income in future periods.
1.1.4 Measurement of Management’s Performance
1.1.4.1 Order Backlog

Year-end order backlog represents firm future revenues fromcontracts signed up to that date. EADS uses order backlog as ameasure of commercial performance, and growth of EADS’order backlog is an ongoing goal of Management. Only firm
orders are included in calculating order backlog – forcommercial aircraft, a firm order is defined as one for which
EADS receives a non-refundable down payment on adefinitive contract not containing a ‘‘walk-away’’ provision.
Defence-related orders are included in the backlog uponsignature of the related procurement contract. Commitments
under ‘‘umbrella’’ or ‘‘framework’’ agreements bygovernmental customers are not included in backlog until they
are officially notified to EADS.
For civil market contracts, amounts of order backlog reflectedin the table below are derived from catalogue prices, escalated
to the expected delivery date and, to the extent applicable,
converted into Euro (at the corresponding hedge rate for thehedged portion of expected cash flows, and at the year-end
spot rate for the non-hedged portion of expected cash flows).
The amount of defence-related order backlog is equal to thecontract values of the corresponding programs.

91.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Consolidated Backlog1 for the Year Ended 31st December 2004, 2003 and 2002
Year ended
31st December 2004
Amountin 1 bn
Percentage5

Airbus2
Military Transport Aircraft
Aeronautics3
Defence & Security Systems3Space4
Total Divisional Backlog
Headquarters/Eliminations
Total

136.0
19.9
10.2
17.3
11.3
194.7
(10.4)
184.3

70
10
5
9
6
100

Year ended
31st December 2003
Amountin 1 bn
Percentage5

141.8
20.0
9.8
14.3
7.9
193.8
(14.5)
179.3

73
11
5
7
4
100

Year ended
31st December 2002
Amountin 1 bn
Percentage5

140.9
0.6
10.1
13.5
3.9
169.1
(0.8)
168.3

84
0
6
8
2
100

1 Without options.
2 Based on catalogue prices.
3 In 2003, the Military Aircraft business unit was transferred from the Aeronautics Division to the DS Division, with a corresponding impact on the backlog of each
Division of 03.2 billion. 2002 figures have been restated to be comparable with 2003 and 2004.
4 Astrium consolidated at 100% since 2003; proportionally consolidated at 75% in 2002.
5 Before headquarters/eliminations.

The 45 billion increase in the 31st December 2004 order backlog reflects higher orders as compared to revenues accounted for in
the same year, partially offset by the effect of the weaker dollar spot rate used for conversion of the non-hedged portion of
the backlog.
The amount recorded under ‘‘headquarters/eliminations’’ in 2003 and 2004 primarily reflects the elimination of Airbus’ work
share in the A400M program. The Military Transport Aircraft (‘‘MTA’’) Division’s order backlog includes 100% of the value ofthe A400M order to reflect the Division’s prime-contractor responsibility over the program. The double-counting (corresponding
to the Airbus work share) is therefore eliminated in EADS’ consolidated order backlog. In 2004, a change in the recording of
Airbus work share was made to reflect the fact that the A400M engine order was recorded directly by the MTA Division, andnot by Airbus. This led to a decrease in Airbus’ work share on the A400M program, from approximately 69% in 2003 to
approximately 49% in 2004. Consequently, the value of Airbus’ order backlog (and the headquarters/eliminations line) was
reduced by approximately 44.0 billion.
Airbus’ net order intake was 366 aircraft in 2004 (425.8 billion), including 10 new orders for the A380, bringing the total firm
order backlog for the A380 to 139 aircraft. These increases were offset by net foreign currency adjustments to the backlog ofapproximately 47 billion, reflecting the year-end valuation of the non-hedged portion of Airbus’ order backlog, and by the highdelivery rate (320 deliveries in 2004). At the end of 2004, Airbus’ order backlog included 1,500 aircraft (as compared to1,454 aircraft at the end of 2003).
The Military Transport Aircraft Division’s order intake of 41.2 billion, driven by the order of 5 MRTT from Australia, wasoffset in the MTA Division backlog by the A400M revenues ramp up in 2004.
Backlog at the Aeronautics Division was relatively unchanged, as order intake of 44.3 billion, including mostly Eurocopter net
orders for 332 helicopters, was offset by 2004 revenues.
The DS Division’s backlog increased from 2003, driven by high order-intake of 48.5 billion, well in excess of 2004 revenues.
This was mainly a result of the order intake for Eurofighter Tranche 2, the Romania border surveillance system and the Acropol
contract for secure communication.
The Space Division’s order book continued to increase in 2004, mainly due to a high level of order intake (45.7 billion),including orders for Ariane 5 launchers, ATV programme and M51 ballistic missile production.

10

EADS Financial Statements and Corporate Governance 2004

1

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)

2
3

The table below illustrates the proportion of commercial anddefence backlog at the end of each of the past two years.
Year ended
31st December 2004
Amountin 1 bn2
Percentage

Backlog:1
Commercial Sector
Defence Sector
Total

Year ended
31st December 2003
Amountin 1 bn2
Percentage

Set forth below is a table reconciling EADS’ income fromoperating activities (as reflected in EADS’ IFRS consolidated
statement of income) with EADS’ EBIT*.

in 1m

135
49
184

73
27
100

133
46
179

74
26
100

1 Without options.
2 After headquarters/eliminations.

Reflecting the results of Management’s efforts to increase
revenues from the defence sector to approximately 30% of
total revenues over the long term, order backlog in the
defence sector continued to grow (449 billion at year-end2004), with new defence contracts representing an overall
defence order intake of 411.4 billion. Partially offsetting theeffect of these new orders were increased revenues in the
defence sector (from 47.0 billion in 2003 to 47.7 billion in2004) reflecting the ramp-up of several programs such as
A400M, Paradigm and missiles, as well as NH90 and
Tiger helicopters.
1.1.4.2 Use of EBIT*EADS uses earnings before interest and taxes, pre-goodwill
and exceptionals (‘‘EBIT*’’) as a key indicator of its economic
performance. In line with IFRS 3, applied by EADS as from
1st January 2004, goodwill is no longer amortised, but issubject to regular impairment testing. In 2004, there was no
goodwill impairment. The term ‘‘exceptionals’’ refers to items
such as amortisation expenses of fair value adjustments relating
to the EADS Merger, the Airbus Combination and theformation of MBDA, as well as any goodwill impairment
charges thereon.

Income from operating activities
Income from investments
Goodwill amortisation andimpairment losses1
Exceptional depreciation(fixed assets)
Exceptional depreciation(inventories)
EBIT*

Year ended
31st
December
2004

Year ended
31st
December
2003

Year ended
31st
December
2002

2,143
84

561
186

160
87

0

567

936

212

214

227

5
2,444

15
1,543

16
1,426

1 In accordance with IFRS 3, as from the beginning of 2004, EADS no longer
amortizes goodwill on a regular basis.

1.1.4.3 EBIT* Performance by Division
Set forth below is a breakdown of EADS’ consolidated EBIT*
by division for the past three years. To facilitate comparison of2004 and 2003 to 2002 performance in light of the transfer in2003 of the Military Aircraft business unit from the
Aeronautics Division to the DS Division, 2002 EBIT* figures
for the two divisions have been restated accordingly,
presenting EBIT* as if the transfer had occurred on
1st January 2002.

In 1m

AirbusMilitary Transport Aircraft
Aeronautics
Defence and Security Systems
Space1
Subtotal
HQ/Consolidation2
EADS

Year ended
31st
December
2004

Year ended
31st
December
2003

Year ended
31st
December
2002

1,922
26
206
228
10
2,392
52
2,444

1,353
30
217
171
(400)
1,371
172
1,543

1,361
(80)
180
122
(268)
1,315
111
1,426

1 Astrium consolidated at 100% since 2003; proportionally consolidated at 75%
in 2002.
2 HQ/Consolidation primarily includes results from headquarters, which mainly
includes income from the investment in Dassault Aviation.

EADS Financial Statements and Corporate Governance 200411

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)
2004 compared to 2003. EADS’ consolidated EBIT* increased
to 42.4 billion for 2004 from 41.5 billion for 2003, primarilyreflecting (i) the turnaround at the Space Division fromnegative 4400 million in 2003 to positive 410 million in 2004
and (ii) stronger performance at Airbus resulting mainly fromhigher deliveries.
Airbus’ EBIT* increased to 41.9 billion for 2004 from
41.4 billion for 2003, reflecting both an increase in number ofaircraft delivered (320 in 2004, as compared to 302 in 2003)
and a more favourable product mix. Also affecting EBIT* were
the initial results of the ‘‘Route 06’’ cost savings programme
implemented in 2002 (450 million).
Airbus’ EBIT* also included a 4232 million positive accounting
currency effect resulting from the difference between thehistorical exchange rates used to convert U.S. dollardenominated customer advances received and thecorresponding U.S. dollar-denominated costs for aircraft
delivered in 2004. See ‘‘– 1.1.3 Critical Accounting
Considerations, Policies and Estimates – Accounting for
Foreign Currency Denominated Operations in the Financial
Statements’’. This was partially offset by a negative
4100 million impact of less favourable rates of micro hedges
maturing in 2004 as compared to 2003.
The MTA Division’s EBIT* decreased to 426 million for 2004
from 430 million for 2003, reflecting the effects of higher
early retirement costs and commercial costs associated with the
U.K. AirTanker programme.
EBIT* at the Aeronautics Division decreased to 4206 million
for 2004 from 4217 million for 2003. The decrease reflects
EBIT* degradation in the maintenance, repair and overhaul
business, as well as the continuing downturn of the regional
aircraft market. Partially offsetting these negative factors was
an increase in Eurocopter’s performance.
The DS Division’s EBIT* was 4228 million for 2004, ascompared to 4171 million for 2003. Excluding the effect of
the release of a 4106 million provision relating to a nowconcluded litigation with Thales, the DS Division’s EBIT*
would have decreased, primarily as a result of ongoing
restructuring costs (488 million in 2004 as compared to
450 million in 2003).
The results of several years of intensive restructuring efforts
were reflected in the Space Division’s positive EBIT* of
410 million for 2004, a 4410 million increase from 2003.
The decrease of EBIT* at Headquarters to 452 million for
2004, from 4172 million for 2003, reflects the decrease inincome from EADS’ investment in Dassault Aviation,

12

EADS Financial Statements and Corporate Governance 2004

including a negative 4(33) million catch-up of Dassault
Aviation’s 2003 IFRS results (as compared to a positive
477 million catch-up in 2003).
2003 compared to 2002. EADS’ consolidated EBIT* increased
to 41.5 billion for 2003 from 41.4 billion for 2002. The
increase primarily reflects the ramp-up of defence programs at
the DS Division and the Aeronautics Division and, to a lesser
extent, at the MTA Division. Significant losses at the Space
Division partially offset these increases.
Airbus’ EBIT* remained relatively unchanged at 41.4 billion
for 2003, reflecting the roughly equivalent number ofdeliveries (305 in 2003, of which 302 were recognized inrevenues, as compared to 303 in 2002). The positive effects ofimproved margins resulting from a more favourable productmix mostly offset the negative impact of higher research anddevelopment costs for the A380 program. The EBIT* margin
pre-research and development costs of 16.7% reflects the costbenefits of Airbus’ built-in manufacturing flexibility.
See ‘‘Part 2/1.1.2 Airbus – Production – Adaptability to
Changes in Demand’’ for further discussion of built-in
manufacturing flexibility.
Higher margins on military derivatives aircraft (e.g., the multirole tanker program) and reduced research and development
costs contributed to the MTA Division’s 2003 EBIT* of
430 million. This result represents a 4110 million
improvement from the 2002 negative EBIT* of 480 million,
which included the 454 million write-off of assets relating to
the Do 728 programme.
The effect on cost structures resulting from restructuring
measures at the DS Division, as well as increased deliveries of
missiles and combat aircraft, led to a 40% increase of theDivision’s EBIT* from 4122 million for 2002 to 4171 million
for 2003.
Strong results at Eurocopter, mostly relating to the ramp-up of
the NH90 and Tiger programmes, led to a 2003 EBIT* at the
Aeronautics Division of 4217 million, a 21% increase over2002 EBIT* of 4180 million.
Headquarters also contributed 4172 million to EADS’
consolidated EBIT* for 2003, as compared to 4111 million for
2002, resulting primarily from the 4114 million increase inincome from EADS’ investment in Dassault Aviation. The
increase includes a 477 million catch-up of prior-year incomeof Dassault Aviation, in accordance with IFRS. See ‘‘Notes to
IFRS Consolidated Financial Statements – Note 13:
Investments in Associates, Other Investments and Long-term
Financial Assets’’.

1

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)

2
3

These increases to EADS’ consolidated 2003 EBIT* were partly offset by a 4400 million negative EBIT* at the Space Division,
resulting from (i) expenses and provisions of 4288 million relating to the restructuring programs (as compared to 4105 million in2002), (ii) asset depreciation at Astrium of 425 million (as compared to 456 million in 2002) and (iii) further provisioning for
programme cost overruns.
Hedging Impact on EBIT*. Nearly two-thirds of EADS’ consolidated revenues in 2004 were received in currencies other thanthe Euro. Given the long-term nature of EADS’ business cycles (evidenced by its multi-year backlog), the Company hedges its
net foreign exchange exposure to mitigate the impact of exchange rate fluctuations on its EBIT*. See ‘‘– 1.1.8 Management ofMarket Risks – Exchange Rate Risk’’ and ‘‘1.4.1 Market Risks – Exposure to Foreign Currencies’’.
During 2004, micro hedges covering approximately U.S.$9.9 billion of EADS’ U.S. dollar-denominated revenues matured. In
2004, the compounded conversion rate at which hedged U.S. dollar-denominated revenues were accounted for was 4-U.S.$0.987,
as compared to 4-U.S.$0.971 in 2003. This difference resulted in a 4160 million decrease in EBIT* from 2003 to 2004, of whichapproximately two-thirds was at Airbus.
The impact of the year-to-year change in average hedge rates for net foreign currency exposure from 2002 (4-U.S.$0.967) to2003 (4-U.S.$0.969) had a non-material impact (negative 426 million) on EADS’ consolidated EBIT* for 2003.
It is expected that the hedge book will increase in coming years in line with the forecasted growth in demand for aircraft andthe corresponding impact on future deliveries combined with the active hedging policy of EADS. The conversion rates of the
new hedges will reflect the state of the U.S. dollar versus the Euro at the time such hedges are entered into.
The tables below set forth the notional amount of foreign exchange hedges in place as of 31st December 2004, and the average
U.S. dollar rates applicable to corresponding EBIT*.
(in U.S.$ bn)

Total Hedges (in U.S.$)of which 0-U.S.$
of which £-U.S.$
Forward Rates (in U.S.$)
0-U.S.$£-U.S.$

2005

2006

2007

2008

2009

2010

2011

Total

10.9
9.3
1.6

8.7
7.2
1.5

7.2
6.0
1.2

6.7
5.5
1.2

5.0
3.9
1.1

1.3
0.9
0.4

0.4
0.3
0.1

40.2
33.1
7.1

1.01
1.50

1.00
1.51

1.02
1.49

1.03
1.52

1.09
1.59

1.04
1.61

1.13
1.60

Restructuring. Since its formation in 2000, EADS has implemented, and continues to implement, a number of restructuring
plans to further enhance its competitive position in the challenging markets in which it operates. Total restructuring charges of4129 million were recorded in the 2004 IFRS consolidated statement of income, decreasing from 4362 million for 2003. For
2004, this included new provisions and current year charges primarily related to (i) the defence and communications business at
the DS Division (488 million); (ii) restructuring at Sogerma (413 million); and (iii) the final tranche of an early retirement
initiative at the MTA Division (428 million).
The related, yet to be implemented, restructuring burden is accounted for at year-end both as a provision and as other liabilities.

EADS Financial Statements and Corporate Governance 200413

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)
1.1.5 EADS Results of Operations

The following table sets forth a summary of the IFRS consolidated statements of income of EADS for the years indicated.
IFRS consolidated statements of income for the year ended 31st December 2004, 2003 and 2002

in 1m, except for EPS

Year ended
31st
December
2004

Year ended
31st
December
2003

Year ended
31st
December
2002

Revenues
Cost of sales
Gross margin
Selling and administrative expenses
Research and development expenses
Other income
Other expense1
Goodwill amortisation & related impairment losses1,2
Income from operating activities
Income from investments
Interest income (expense)
Other financial result
Income taxes
Profit (loss) from ordinary activities
Minority interests
Net income (loss)
Earnings per share (basic) (in 1)
Earnings per share (diluted) (in 1)

31,761(25,510)6,251(2,119)(2,126)
314
(177)
0
2,143
84
(275)
(55)
(664)
1,233
(203)
1,030
1.29
1.28

30,133(24,594)
5,539(2,162)(2,189)
196
(256)
(567)
561
186
(203)
148
(474)
218
(66)
152
0.19
0.19

29,901(24,465)5,436(2,251)(2,096)
248
(241)
(936)
160
87
(81)
21
(453)
(266)
(33)
(299)
(0.37)(0.37)

1 For purposes of this discussion, the presentation of the summary consolidated statements of income differs from the actual IFRS consolidated statements of income, inwhich ‘‘goodwill amortisation & related impairment losses’’ is included within the line item ‘‘other expense’’.
2 In accordance with IFRS 3, as from the beginning of 2004, EADS no longer amortizes goodwill on a regular basis.

14

EADS Financial Statements and Corporate Governance 2004

1

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)

2
3

Set out below are year-to-year comparisons of results ofoperations, based upon EADS’ consolidated statements
of income.

AirbusSet forth below is a breakdown of Airbus’ deliveries byaircraft type for the past three years.

Consolidated Revenues

Consolidated revenues for 2004 reached 431.8 billion, as
compared to 430.1 for 2003. Excluding the effects of currency
fluctuations on the non-hedged portion of EADS’ revenues,
the increase would have been nearly 7%.
Revenues at all five Divisions increased as compared to 2003.
Set forth below is a breakdown of EADS’ consolidated
revenues by division for the past three years. To facilitatecomparison of 2004 and 2003 to 2002 revenues in light of thetransfer in 2003 of the Military Aircraft business unit fromthe Aeronautics Division to the DS Division, 2002 revenue
figures for the two Divisions have been adjusted accordingly,
presenting revenues as if the transfer had occurred on
1st January 2002.

in 1m

Year ended
31st
December
2004

Year ended
31st
December
2003

Year ended
31st
December
2002

AirbusMilitary Transport Aircraft
Aeronautics
Defence and Security Systems
Space1
Subtotal
HQ/Consolidation2
EADS

20,224
19,048
1,304
934
3,876
3,803
5,385
5,165
2,592
2,424
33,381 31,374(1,620) (1,241)
31,76130,133

19,512
524
3,834
4,770
2,216
30,856(955)
29,901

1 Astrium consolidated at 100% since 2003; proportionally consolidated at 75%
in 2002.
2 HQ/Consolidation includes, in particular, adjustments and eliminations forintercompany transactions.

EADS Financial Statements and Corporate Governance 2004

number of aircraft

Single Aisle
WidebodyLong-Rangeof which ‘‘Stretched’’
Total

Year ended
31st
December
2004

Year ended
31st
December
2003

Year ended
31st
December
2002

233
12
75
23
320

233
8
64
23
3051

236
9
58
8
303

1 In 2003, revenues were recognized in the IFRS consolidated statement ofincome for only 302 of the 305 planes delivered.

2004 compared to 2003. Airbus’ 2004 consolidated revenues
increased by 6.2%, to 420.2 billion from 419 billion for 2003,
reflecting primarily (i) the increase in aircraft deliveries
recognized in revenues (320 in 2004 as compared to 302 in2003), (ii) the positive impact of a more favourable mix ofaircraft being delivered in 2004 as compared to 2003 and(iii) the revenues ramp up of the A400M program. As in
2003, most of the deliveries in 2004 were for single-aisle
A319/A320/A321 aircraft. Airbus delivered the same amountof this type of aircraft in 2004 as in 2003 (233 aircraft).
Deliveries of long-range aircraft increased from 64 in 2003 to
75 in 2004, including 23 of the higher-priced A340-500/600‘‘stretched’’ versions.
Offsetting these positive factors was an approximate
40.3 billion negative impact resulting from (i) the deteriorationof the U.S. dollar exchange rates used to convert payments
upon deliveries, not only for the portion which was nothedged by financial instruments (average spot rate of
4-U.S.$1.24 in 2004 as compared to 4-U.S.$1.13 in 2003), butalso for the portion which was hedged (degradation of thehedge rate); partly offset by (ii) the favourable historicalexchange rate applied to the portion of revenues representing
customer advances received in prior periods. For a discussionof the impact of exchange rate variations on EADS’ results ofoperations, see ‘‘– 1.1.3 Critical Accounting Considerations,
Policies and Estimates – Accounting for Hedged Foreign
Exchange Transactions in the Financial Statements’’,‘‘– 1.1.3 Critical Accounting Considerations, Policies andEstimates – Accounting for Foreign Currency DenominatedOperations in the Financial Statements’’, ‘‘– 1.1.8 Managementof Market Risks – Exchange Rate Risk’’ and ‘‘1.4.1 Market
Risks – Exposure to Foreign Currencies’’.

15

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)
2003 compared to 2002. Airbus’ 2003 consolidated revenues
decreased by 2.4%, to 419 billion from 419.5 billion for 2002.
This decrease primarily reflects the negative effect of theweakening U.S. dollar. The changing Euro-U.S. dollar exchange
rate (average spot rate of 4-U.S.$1.13 in 2003 compared to
4-U.S.$ 0.95 in 2002) translated into a negative 41.5 billion
impact on the non-hedged portion of Airbus’ 2003
consolidated revenues.
Offsetting the negative impact of the weaker U.S. dollar was
the positive impact of a more favourable mix of aircraft being
delivered in 2003 as compared to 2002. As in 2002, most of
the deliveries in 2003 were for single-aisle A319/A320/A321
aircraft. Airbus delivered 233 units of this type of aircraft in
2003, as compared with 236 in 2002. However, deliveries oflong-range aircraft increased from 58 in 2002 to 64 in 2003,
including 23 of the higher-priced A340-500/600 ‘‘stretched’’
versions (as compared to 8 A340 stretched versions deliveredin 2002).
Military Transport Aircraft

Set forth below is a breakdown of the MTA Division’sdeliveries by aircraft type for the past three years.

number of aircraft

C-212
CN-235
C-295
Total

Year ended
31st
December
2004

Year ended
31st
December
2003

Year ended
31st
December
2002

4
4
6
14

2
7
5
14

0
8
2
10

For 2004, consolidated revenues of the MTA Division
increased by 40%, from 40.9 billion for 2003 to 41.3 billion
for 2004. The increase reflects the Division’s attainment offurther development milestones for the A400M programme(40.4 billion of incremental revenue).
For 2003, consolidated revenues of the MTA Division
increased by 78%, from 40.5 billion for 2002 to 40.9 billion
for 2003. The 40.4 billion increase in revenues relates
primarily to the attainment of the first development
milestones for the A400M program (40.3 billion ofincremental revenue) and growth in the mission
aircraft business.

Aeronautics
Set forth below is a breakdown of the Aeronautics division’sdeliveries by product type for the past three years.

number of aircraft

Eurocopter
Light
MediumHeavy
Tiger
ATR (new aircraft)
EADS Socata

Year ended
31st
December
2004

Year ended
31st
December
2003

Year ended
31st
December
2002

279
157
102
18
2
131
48

297
170
108
19
0
9
49

367
230
110
27
0
19
105

1 In 2004, revenues were recognized in the IFRS consolidated statement ofincome for only 9 of the 13 planes delivered.

For 2004, the Aeronautics Division generated consolidated
revenues of 43.9 billion, relatively unchanged from43.8 billion for 2003. Increased revenues generated by
Eurocopter’s customer support services and the achievement ofpercentage-of-completion milestones for the NH90 and Tiger
helicopters offset the effect of fewer helicopter deliveries in
2004. Eurocopter’s revenue increase was offset by lower
revenues at ATR and a reduction in maintenance, repair andoverhaul (MRO) orders at Sogerma.
For 2003, consolidated revenues of 43.8 billion at the
Aeronautics Division remained unchanged from the Division’s
2002 consolidated revenues. Increased revenues generated by
Eurocopter’s customer support services and the recording oftechnical milestones for the NH90 and Tiger helicopters offset
the effect of fewer helicopter deliveries in 2003. Eurocopter’srevenue increase was offset by the impact of lower deliveriesat ATR and Socata.
Defence & Security Systems

Set forth below is a table showing the number of Eurofighter
deliveries by EADS for the past three years.

number of aircraftYear ended
31st
December
2004

Year ended
31st
December
2003

Year ended
31st
December
20021

Eurofighter

9

7

0

1 The first Eurofighter deliveries were scheduled for 2003.

For 2004, the DS Division generated consolidated revenues of
45.4 billion, as compared to 45.2 billion for 2003. The
increase was primarily due to the continued ramp-up of the
PAAMS/Aster, MICA export, and ASRAAM
missile programs.

16

EADS Financial Statements and Corporate Governance 2004

1

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)2
3

For 2003, the DS Division generated consolidated revenues of
45.2 billion, an increase of 8% over 2002 revenues of
44.8 billion. The increase was primarily due to the ramp-up of
the MICA, ASRAAM and Storm Shadow missile programsand to the first deliveries of Eurofighters to Spainand Germany.
Set forth below is a breakdown of the Space Division’sdeliveries of commercial telecommunications satellites andcommercial launchers for the past three years.
Year ended
31st
December
2004

Year ended
31st
December
2003

Year ended
31st
December
2002

3
3

1
4

2
12

For 2004, the Space Division generated consolidated revenuesof 42.6 billion, as compared to 42.4 billion for 2003. The
increase resulted mainly from a ramp-up of Skynet 4 satellite
program services and the achievement of additional milestoneson the M51 ballistic missile program.
For 2003, the consolidation effect of the acquisition of the
25% of Astrium not previously owned by EADS translated
into a 9% increase in consolidated revenues for the Space
Division, from 42.2 billion for 2002 to 42.4 billion for 2003.
Excluding the consolidation effect, the Division’s revenues
would have decreased to 42.0 billion for 2003, reflecting thetermination of the Ariane 4 program and the continuing
downturn in the commercial telecommunications
satellite market.
Consolidated Cost of Sales

For 2004, consolidated cost of sales increased to 425.5 billion
from 424.6 billion for 2003. Gross margin increased from
18.4% in 2003 to 19.7% in 2004, reflecting the effects ofhigher deliveries at Airbus and last year’s major restructuring
activities at the Space Division.

Consolidated cost of sales remained relatively unchanged at424.6 billion for 2003, as compared to 424.5 billion for 2002.
This primarily reflects the stable delivery levels at Airbus (302
in 2003 versus 303 in 2002). Cost of sales significantly
increased at (i) the Space Division, reflecting the 100%
consolidation of Astrium (40.3 billion) and (ii) the DS
Division, reflecting the ramp-up of Eurofighter and missile
system production (40.3 billion). These cost increases wereoffset by a 40.5 billion decrease in cost of sales at Airbus
primarily due to the effects of the weaker U.S. dollar.

EADS Financial Statements and Corporate Governance 2004

For 2004, consolidated selling and administrative expenses
decreased slightly, from 42.2 billion for 2003 to 42.1 billion
for 2004, reflecting the results of cost awareness programs at
the business units and the ongoing effects from restructuring
of EADS’ general and administrative activities.
For 2003, consolidated selling and administrative expenses
decreased slightly, from 42.3 billion for 2002 to 42.2 billion
for 2003, reflecting the results of realised cost reductions at
headquarters and other ongoing effects from restructuring of
EADS’ general and administrative activities.

Space

Commercial
Telecommunications Satellites
Commercial Launchers

Consolidated Selling and Administrative Expenses

Consolidated Research and Development Expenses

EADS’ consolidated research and development expenses
decreased by 3%, to 42.1 billion for 2004 from 42.2 billion for2003. The application of IAS 38 at EADS in 2004 resulted in
the capitalisation of 4165 million of R&D, of which 4152
million related to Airbus for the A380. See ‘‘– 1.1.3 Critical
Accounting Considerations, Policies and Estimates – Researchand Development Expenses’’ for an explanation of the impactof the accounting change related to the capitalization of certain
development costs in accordance with IAS 38. The
capitalisation of A380-related R&D is reflected in the decreaseof A380-related R&D expense in the IFRS consolidated
statement of income, from its peak of 41,082 million for 2003
to 4983 million for 2004. On the whole, Airbus R&D
expense recorded in the IFRS consolidated statement ofincome decreased by 485 million from 2003 levels. Other
non-Airbus consolidated R&D expenses totalled
4392 million – an increase of approximately 420 million from2003 resulting mainly from the EADS research centre.
From 2001 through 2004, cumulative R&D expenses on the
A380 program amounted to 43.3 billion. Following a reviewof the A380 program, Airbus estimated in December 2004
that the aggregate R&D expenses at completion might exceed
the initial budget by approximately 41.5 billion. Taken alone,
this cost overrun is not expected to materially change thebreakeven point or expected internal rate of return of the
A380 program. As a result of the expected cost overrun, theA380-related R&D expenses in the IFRS consolidated
statement of income are not expected to decrease before 2006.
Approximately 40.1 to 40.2 billion of annual R&D expenses is
expected to be capitalised in accordance with IAS 38 over the
next few years.
For 2003, EADS’ consolidated research and development
expenses increased by 4%, to 42.2 billion from 42.1 billion for2002. This increase primarily relates to ongoing programs at
Airbus (41.8 billion for 2003). Expenses at Airbus relating to17

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)
the A380 programme reached 41.1 billion for 2003, an
increase of 40.3 billion from 2002 levels. Research anddevelopment expenses related to the final phases of the flightcertification of the A340-500/600 programme, as well as
further specific enhancements on existing programs, also
contributed to the overall Airbus R&D expenses for the year.
Other non-Airbus consolidated R&D expenses totalled
4370 million – a reduction of approximately 440 million
from 2002.
Consolidated Other Income and Other Expense

Consolidated other income and other expense represent gains
and losses on disposals of investments in fixed assets, income
from rental properties and certain provisions.
For 2004, the net of other income and other expense waspositive 4137 million as compared to negative 460 million for2003. 4106 million from the release of provisions in the DS
Division relating to the Thales Euromissiles litigation were
included in consolidated other income for 2004.
For 2003, the net of other income and other expense wasnegative 460 million as compared to positive 47 million for2002. 463 million from the disposal of EADS’ 50% share in
Aircelle to Snecma were included in consolidated other incomefor 2002.
Consolidated Amortisation of Goodwill and Impairment Losses

As a result of EADS’ early adoption of IFRS 3/IAS 36 revised(‘‘Business Combinations’’), goodwill is no longer amortized ona regular basis as from 1st January 2004, but subject to annual
impairment testing. No impairment charges were recordedfor 2004.
For 2003, the consolidated amortisation of goodwill decreased
to 40.6 billion from 40.9 billion for 2002. The 40.3 billion
decrease from 2002 reflects the impairments taken in 2002 forassets held within the Space Division (4350 million). No
goodwill was impaired in 2003.
Consolidated Income (Loss) from Investments

Consolidated income (loss) from investments principally
includes results from companies accounted for under theequity method and the results attributable to nonconsolidated investments.
For 2004, EADS recorded 484 million in consolidated
investment income as compared to 4186 million for 2003. The
4102 million decrease primarily reflects a 433 million negative
catch-up in 2004 of 2003 income related to EADS’ investment
in Dassault Aviation, versus a positive 477 million catch-up in2003 of 2002 income related to EADS’ investment in Dassault
Aviation in 2003. See ‘‘Notes to IFRS Consolidated Financial
Statements – Note 9: Financial Result’’.

18

EADS Financial Statements and Corporate Governance 2004

For 2003, EADS recorded 4186 million in consolidated
investment income as compared to 487 million for 2002. The
499 million increase is mainly due to a 477 million catch-upof prior year income related to EADS’ investment in Dassault
Aviation. In 2003, EADS restated Dassault Aviation’s 2002
and 2003 IFRS actual financial performance – in previous
periods, EADS had relied on estimated financial performance
reported under French GAAP. Including the IFRS restatement,
investment income for the 46% stake in Dassault Aviation
amounted to 4225 million as compared with 4111 million for2002. See ‘‘Part 2/1.1.7 Investment – Dassault Aviation’’.
These increases were partially offset by depreciation of various
non-consolidated investments.
Consolidated Interest Income (Expense)
Consolidated interest income (expense) reflects the net ofinterest income and expenses arising from financial assets
or liabilities.
For 2004, EADS reported a consolidated net interest expenseof 4275 million, as compared to 4203 million of consolidated
net interest expense for 2003. In addition to higher interest
charges for 2004 on European government refundable advances
received, interest charges on financing for the Skynet5/
Paradigm programme in 2004 contributed to the increase inconsolidated net interest expense. See ‘‘– 1.1.7 Liquidity andCapital Resources – Consolidated Financial Liabilities’’.
For 2003, EADS reported a consolidated net interest expenseof 4203 million, as compared to 481 million of consolidated
net interest expense for 2002. This change is principally due
to (i) higher interest charges for 2003 on European
government refundable advances received and (ii) the
increasing spread between interest received on positive balances
invested in short-term liquid instruments and interest paid on
longer-term debt. See ‘‘– 1.1.7 Liquidity and Capital
Resources – Consolidated Financial Liabilities’’.
Consolidated Other Financial Result

For 2004, consolidated other financial result decreased tonegative 455 million from positive 4148 million for 2003.
This change primarily results from (i) the lower effect in 2004
from valuation changes of U.S. dollar-denominated financial
liabilities on the Euro- or British pound-denominated balance
sheets of Group companies, which had generated positive
other financial results in prior periods; (ii) a negative effectfrom the mark-to-market valuation of ‘‘embedded
derivatives’’ and (iii) interest accrued on tax audit expenses in
2004. ‘‘Embedded derivatives’’ are currency hedges that, foraccounting purposes, are deemed to be embedded in
U.S. dollar-denominated purchase orders of equipment, where

1

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)

2
3

the U.S. dollar is not conclusively the currency in which theprice of the related equipment is routinely denominated ininternational commerce.
For 2003, consolidated other financial result increased to4148 million from 421 million for 2002. This change
primarily results from a positive mark-to-market valuation ofembedded derivatives.
In 2001, postponed deliveries of commercial aircraft related tothe events of 11th September 2001 resulted in a mismatch
between hedged positions and expected cash flows. A roll-overplan was carried out in 2002 and 2003 to rephase thematurities of the affected hedges with new delivery dates. The
roll-over plan was completed as of 31st December 2003. Had
this roll-over plan not been implemented, the affected hedges
would have been deemed cancelled for accounting purposes.
As the affected hedges had a negative mark-to-market value atthe end of 2001, cancellation would have had a negative
impact on consolidated other financial result. See ‘‘– 1.1.3
Critical Accounting Considerations, Policies and Estimates –Accounting for Hedged Foreign Exchange Transactions in the
Financial Statements’’.
Consolidated Income Taxes

The effective tax rate was 35% in 2004. See ‘‘Notes to IFRS
Consolidated Financial Statements – Note 10: Income Taxes’’.
Consolidated Minority Interest

For 2004, consolidated minority interest was negative
4203 million, as compared to negative 466 million for 2003,
reflecting primarily the interests of BAE SYSTEMS(4184 million) and Finmeccanica (421 million) in the results ofAirbus and MBDA, respectively.
For 2003, consolidated minority interest was negative
466 million, as compared to positive 433 million for 2002,
reflecting primarily the interests of BAE SYSTEMS and
Finmeccanica in the results of Airbus andMBDA, respectively.
Consolidated Net Income

As a result of the factors discussed above, EADS recorded
consolidated net income of 41,030 million for 2004 ascompared to consolidated net income of 4152 million for 2003
and a consolidated net loss of 4299 million for 2002.

EADS Financial Statements and Corporate Governance 2004

The 2004 consolidated net income reflects the effects of
EADS’ early adoption of IFRS 3 and revised IAS 36. The
table below sets forth 2003 and 2002 net income, restated as
if IFRS 3 and revised IAS 36 had been applied for
those periods.

In 1m

Reported Consolidated Net
Income (Loss)
Amortisation of Goodwill1
Minority Portion of Goodwill
Amortisation
Restated Consolidated Net
IncomeYear ended
31st
December
2004

Year ended
31st
December
2003

Year ended
31st
December
2002

1,030
–

152
567

(299)
586

–

(75)

(75)

1,030

644

212

1 Regular amortisation charge, excluding goodwill impairment charges alreadyincluded in the Reported Consolidated Net Income/(Loss).

Earnings per Share (EPS)
Basic earnings per share increased by 41.10 per share, from40.19 per share in 2003 to 41.29 per share in 2004. The
number of outstanding shares at the end of 31st December
2004 was 799,550,294. The denominator used to calculate EPS
was 801,035,035 shares, reflecting the average number ofshares outstanding during the year. In 2002, EADS reported
basic earnings per shares of 4(0.37). See ‘‘Notes to IFRS
Consolidated Financial Statements – Note 18: Shareholders’Equity’’ and ‘‘Note 31: Earnings per Share’’.

As EPS for 2004 reflects the impact of the adoption of IFRS 3
and revised IAS 36, it is not directly comparable with EPS for2003. Had IFRS 3 and IAS 36 revised been applied for 2002
and 2003, EPS would have been as follows:

In 1m

Restated Net Income(in 0m)Average Number of Shares(in millions)
Restated Basic EPS (in 0)

Year ended
31st
December
2004

Year ended
31st
December
2003

Year ended
31st
December
2002

1,030

644

212

801.0351.29

800.9570.80

804.1170.26

19

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)
1.1.6 Statement of Changes in Consolidated
Shareholders’ Equity

IAS 39 Related Impact on AOCI

The following table sets forth a summary of the consolidated
statement of changes in shareholders’ equity for the period
1st January 2004 through 31st December 2004.
in 1mBalance at 31st December 2003
Equity increase through ESOP/SOP
Net income
Cash distribution to shareholders
Purchase of treasury shares
Accumulated other comprehensive income

thereof currency translation adjustments
Balance at 31st December 2004

16,149
43
1,030
(320)
(81)
152
(359)
16,973The increase in consolidated shareholders’ equity in 2004
primarily reflects the year’s higher net results and the effects
of changes in accumulated other comprehensive income(‘‘AOCI’’), partly offset by the cash distribution toshareholders. Set out below is a discussion of AOCI and its
impact on consolidated shareholders’ equity. For a discussionof the other line items impacting consolidated shareholders’equity, see ‘‘Notes to IFRS Consolidated Financial
Statements – Note 18: Shareholders’ Equity’’.
In 2004, AOCI increased by 4152 million. Changes in AOCI
were due to (i) the 40.5 billion positive variation (after
accounting for deferred taxes and minority interest) of theyear-end mark-to-market valuation of that portion of EADS’
hedge portfolio qualifying for hedge accounting under IAS 39,
offset by (ii) the negative currency translation adjustment
variation of 4(0.4) billion generated mainly by the accounting
impact of the merger of Airbus GIE into Airbus SAS.

20

EADS Financial Statements and Corporate Governance 2004

At 31st December 2004, the notional amount of theoutstanding portfolio of hedges qualifying for IAS 39 hedge
accounting treatment (‘‘micro hedges’’) amounted toapproximately U.S.$40 billion hedged against the Euro and thePound Sterling. The year-end mark-to-market valuation of
EADS’ portfolio of micro hedges resulted in a positive
valuation change of 40.9 billion from 31st December 2003,
based on a closing rate of 4-U.S.$1.36.
Positive pre-tax mark-to-market values of micro hedges areincluded in other assets, while negative pre-tax mark-to-market
values of micro hedges are included in provisions for financial
instruments. Year-to-year changes in the mark-to-market valueof micro hedges are recognised as adjustments to AOCI. These
adjustments to AOCI are net of corresponding changes to(i) deferred tax assets (for micro hedges with negative mark-tomarket valuations) and deferred tax liabilities (for micro hedges
with positive mark-to-market valuations) and (ii) minority
interests (where the hedge contract is held by an entity that is
not wholly owned by EADS, e.g. Airbus).

1

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)

2
3

Set out below is a graphic presentation of micro hedge related movements in AOCI over the past three years (in 4m).

8,756
7,847
■ 31st December 2002: U.S.$1.0487■ 31st December 2003: U.S.$1.2630■ 31st December 2004: U.S.$1.3621
4,022

4,500

2,965
416
OCI Net Asset

1,015

1,147

Minority Interests(20% Airbus)-1,051-2,8101,498
Net Equity OCI-3,109Deferred Taxes

As a result of the positive change in the fair market valuation of the micro hedge portfolio in 2004, AOCI-related other assets
increased to 48.8 billion for 2004 from 47.8 billion for 2003. The corresponding 40.3 billion tax effect increased the AOCIrelated deferred tax liability to 43.1 billion at 31st December 2004.
A 40.1 billion adjustment to minority interest was recorded to reflect mainly BAE SYSTEMS’ 20% share of the positive aftertax mark-to-market valuation change in the Airbus hedge portfolio. As a result of this adjustment, AOCI-related minority
interest was 41.1 billion at 31st December 2004, as compared to 41.0 billion at 31st December 2003.
Currency Translation Adjustment Impact on AOCI

The negative 4359 million currency translation adjustment (CTA) related impact on AOCI primarily relates to the consequencesof the merger of Airbus GIE (a U.S. dollar-denominated entity) into Airbus SAS (a Euro-denominated entity). Before the merger,
Airbus GIE operations were recorded at the current exchange rate of the period except for those hedged with financial
instruments. As from 1st January 2004, former Airbus GIE operations are recorded on the basis of historical exchange rates. As
a result, no additional CTA is generated by former Airbus GIE operations. The portion of outstanding CTA as at
31st December 2003, booked in respect of non-monetary balance sheet items relating to transactions realised as from 1st January
2004 (i.e., mainly aircraft deliveries), is gradually released to the consolidated statement of income, in line with such deliveries.

EADS Financial Statements and Corporate Governance 200421

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)
1.1.7 Liquidity and Capital Resources

The Group’s policy is to maintain sufficient cash and cash
equivalents at all times to meet its present and future cash
requirements. This policy objective is met through:– implementation of measures designed to generate cash;– developing and maintaining access to the capital markets;and– containment of exposure to customer financing.
EADS benefits from a strong cash position, with 49.2 billionof consolidated gross cash (including available-for-sale securitiesof 40.5 billion) at 31st December 2004. This cash position isfurther supported by a 42.0 billion syndicated back-up facility.
In 2004, the European Investment Bank granted EADS a longterm loan of $ 0.3 billion to fund a shareholder loan granted
to Airbus. In addition, EADS’ share of the financing for the
ramp-up of the Paradigm program amounted to 40.3 billion.
Overall, financial liabilities (short and long-term) amounted to45.1 billion at 31st December 2004.
EADS calculates its consolidated net cash position as thedifference between (i) cash, cash equivalents and securities and(ii) financial liabilities (as recorded in the consolidated balance
sheet). The net cash position at 31st December 2004 was
44.1 billion. The factors affecting EADS’ cash position, andconsequently its liquidity risk, are discussed below.
1.1.7.1 Cash FlowEADS generally finances its manufacturing activities andproduct development programs, and in particular thedevelopment of new commercial aircraft, through a
combination of flows generated by operating activities,
customers’ advance payments, risk-sharing partnerships with
sub-contractors and European government refundable advances.
In addition, EADS’ military activities benefit fromgovernment-financed research and development contracts. If
necessary, EADS may raise funds in the capital markets.

The following table sets forth the variation of EADS’
consolidated net cash position over the periods indicated.

in 1m

Consolidated net cash position at
1st January
Gross cash flows from operations1
Changes in other operating assets andliabilities

thereof change in European refundable
advances
Cash used for investing activities
thereof industrial capital expenditures
thereof customer financing
thereof others
Free Cash Flows2

thereof Free Cash Flows before
customer financing
Treasury share buy-backCash distribution to shareholders
Repayment/dividend to minorities
Capital increase
Other changes in financial position
thereof financial liabilities non-recourse
to EADS
Consolidated net cash position at
31st December

Year ended
31st
December
2004

Year ended
31st
December
2003

3,105
2,858

2,370
2,690

2,155

2,019

2
(3,399)(3,017)
(188)
(194)
1,614

716
(3,659)(2,672)(1,093)
106
1,050

1,802
(81)
(320)
(64)
43
(239)

2,143
(31)
(240)
(38)
21
(27)

(369)

0

4,058

3,105

1 Represents cash flow from operations, excluding variations in working capital.
2 Does not reflect (i) investments in, or disposals of, available-for-sale securities(disposal of 010 million for 2004; disposal of 0336 million for 2003), which areclassified as cash and not as investments solely for the purposes of this net cash
presentation; (ii) changes in cash from change in consolidation (09 million for
2004; 0(152) million for 2003); or (iii) increase in customer financing when it isnon-recourse to EADS (0(369) million for 2004; 00 million for 2003).

The consolidated net cash position at 31st December 2004 was
44,058 billion, a 31% increase from 31st December 2003. The
increase reflects (i) improved profit on a higher number ofdeliveries at Airbus, (ii) an optimisation of working capitalthrough the receipt of pre-delivery payments in line withgrowth in the order book, (iii) the effects of an ongoing
Company-wide focus on cash management and (iv) thestabilisation of customer financing. These positive factors werepartly offset by (i) on-going capital expenditures at Airbus(particularly in relation to the A380) and the Space Division,and (ii) the higher cash distribution to shareholders in 2004.

22

EADS Financial Statements and Corporate Governance 2004

1

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)

2
3

Gross Cash Flows from Operations

Gross cash flows from operations increased by 4168 million to42.9 billion for 2004, primarily as a result of the higher
earnings (restated for 2003 from goodwill depreciation)
generated during the year (an increase over 2003 of
4523 million, before minority interests), partly offset by cash
disbursements related to restructuring activities at the Space
Division (4(150) million).
In 2003, the maturing of remaining ‘‘old’’ macro hedges,
which had been reclassified as micro hedges in January 2001,
had a negative effect of 40.2 billion on gross cash flows fromoperations. As of 31st December 2003, no further material
impacts on gross cash flow resulting from such hedges are
expected. See ‘‘– 1.1.3 Critical Accounting Considerations,
Policies and Estimates – Accounting for Hedged Foreign
Exchange Transactions in the Financial Statements’’.
Changes in Other Operating Assets and Liabilities(Working Capital)

Working capital is comprised of trade receivables, net
inventory (gross inventory offset by a portion of customer
advances), other assets and prepaid expenses netted against
trade liabilities, other liabilities and deferred income.
Changes in working capital resulted in a positive impact on
the net cash position for 2004 (42.2 billion) and 2003
(42.0 billion). The main net contributors to the positive
working capital variation were (i) further inflow of overall
pre-delivery payments from customers (approximately
41.7 billion in 2004, as compared to 41.3 billion in 2003);(ii) the change in gross inventory (approximately 40.4 billion in2004 and 4(0.6) billion in 2003), primarily reflecting thedecrease of finished goods in 2004; (iii) ‘‘others’’ contributing
40.1 billion in 2004 and 40.6 billion in 2003 (including an
exceptional increase in tax liabilities); and (iv) the change inEuropean government refundable advances (40.0 billion in2004 and 40.7 billion in 2003).
European Government Refundable Advances. As of
31st December 2004, total European government refundable
advances received, recorded on the balance sheet in the line
item ‘‘other liabilities’’, amounted to 45.1 billion, including
accrued interest.
For 2004, new receipts of European government refundable
advances totalled 40.3 billion and reimbursements totalled
40.3 billion. Related accrued interest for 2004 of 40.25 billion
was recorded on the balance sheet in the line item‘‘other liabilities’’.

EADS Financial Statements and Corporate Governance 2004

Set out below is a breakdown of total amounts of European
government refundable advances, by product/project.
in 1 bn

2004

Long Range & Wide Body
A380
Eurocopter
Others
EADS

2.0
2.5
0.2
0.4
5.1

Cash Used for Investing Activities
Management categorises cash used for investing activities into
three components: (i) industrial capital expenditures,(ii) customer financing and (iii) net investments in subsidiaries.

Industrial Capital Expenditures. Industrial capital expenditures(investments in property, plant and equipment and intangible
assets) amounted to 43.0 billion for 2004 as compared to42.7 billion for 2003. A380-related capital expenditure totalled
41.3 billion for 2004, as compared to 41.2 billion for 2003
(including capitalized research and development costs). See‘‘Part 2/1.1.2 Airbus – Products and Services’’. To date, total
A380-related capital expenditures is 43.7 billion, including thecapitalisation of certain prototypes for approximately
40.4 billion.
The remaining portion of capital expenditures related to otherprogrammes at Airbus of 40.8 billion (manufacturing facilities
and common information technologies systems) and additional
programmes in the other divisions of 40.9 billion, including
investments in fixed assets at Paradigm Secure Communication
Ltd. Excluding Airbus and Paradigm-related expenditures,
EADS’ other divisions incur approximately 40.5 billion
annually in capital expenditures related to ongoing businesses.
Investments in aircraft leases are included in customer
financing, and not in industrial capital expenditures, eventhough the underlying assets are eventually recorded inproperty, plant and equipment.
For the period 2005 to 2006, it is estimated that most of
EADS’ capital expenditures will occur in connection with
Airbus activities – in particular, for the development of theA380, the A350 and the A400M programmes. The A380 willcontinue to require substantial capital expenditures, although at
a lesser rate than in 2004. See ‘‘Part 2/1.1.2 Airbus – Products
and Services’’.
Customer Financing. Consolidated cash flows relating tocustomer financing amounted to negative 4188 million for2004. EADS aims to structure financing so as to facilitate thefuture sell-down or reduction of its exposure. During 2004,23

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)
additions and sell-downs to EADS customer financing gross
exposure offset one another. The cash outflow of 4188 million
primarily results from the payments received on outstanding
financial leases over the course of the year being more thanoffset by the utilisation of certain provisions and therepayment of non-recourse debt. See ‘‘– Sales Financing’’.
Others. For 2004, the negative 40.2 billion figure primarilyreflects net investments in subsidiaries, including theacquisition of Racal Instruments.

flow statement, as of 31st December 2003 and in line with
IAS 7 (‘‘Cash Flow Statements’’), EADS changed its
presentation regarding cash and cash equivalents in the
consolidated balance sheet. Short-term securities that arereadily convertible to known amounts of cash and which are
subject to an insignificant risk of change in value, which had
previously been included in the line item ‘‘securities’’ in the
consolidated balance sheet, have been reclassified to the line
item ‘‘cash and cash equivalents’’.

As a result of the factors discussed above, positive free cash
flows amounted to 41.6 billion for 2004, as compared to41.0 billion for 2003. Positive free cash flows before customer
financing were 41.8 billion for 2004 as compared to42.1 billion for 2003.

Total cash and cash equivalents (including available-for-salesecurities) includes the full consolidation of cash at Airbus inan amount of 42.5 billion. However, EADS’ stake therein is
only 80%. Similarly, total cash and cash equivalents includes
40.6 billion from the 50% consolidation of MBDA. However,
EADS’ stake in MBDA is only 37.5%, representing 75% of theconsolidated amount.

Other Changes in Financial Position

1.1.7.3 Consolidated Financial Liabilities

In 2003, other changes in financial position represent mainly
foreign exchange rate valuation changes on cash and debt
instruments. In 2004, the cash outflow of 4(239) million
primarily reflects the impact of non-recourse
customer financing.

The following table sets forth the composition of EADS’
consolidated financial liabilities, including both short-and longterm debt, as of 31st December 2004:

Free Cash Flows

1.1.7.2 Consolidated Cash and Cash Equivalents

The cash and cash equivalents and securities portfolio of theGroup is invested mainly in non-speculative financial
instruments, mostly highly liquid, such as certificates ofdeposits, overnight deposits, commercial paper and othermoney market instruments which, for cash and cash
equivalents, generally have a maturity of less than one year.
Therefore, EADS assesses its exposure towards price risk due
to changes in interest rates and spreads as minimal. See‘‘– 1.1.8 Management of Market Risks – Interest Rate Risk’’.
In 2003, the fully automated cross-border cash pooling system(covering France, Germany, Spain, the Netherlands and theU.K.) became operational. A Group-wide implementation ofthis system to cover entities located in other countries isongoing. The cash pooling system enhances Management’s
ability to assess reliably and instantaneously the cash positionof each subsidiary within the Group and enables Management
to allocate cash optimally within the Group depending upon
shifting short-term needs.
At 31st December 2004, the outstanding balance of cash andcash equivalents was 49.2 billion (including 40.5 billion inavailable-for-sale securities), as compared to 47.8 billion(including 40.5 billion in available-for-sale securities) at
31st December 2003. To conform with the consolidated cash-

24

EADS Financial Statements and Corporate Governance 2004

Not
Exceeding
1 yearin 1m

1Finance Leases
Bonds
Liabilities to financial
institutions2
Liabilities to affiliatedcompanies
Loans
Other
Total

31st December 2004Over
1 year up
More
to
Than
5 years
5 years

Total

52
23

172
137

46
1,511

270
1,671

145

260

1,369

1,774

110
45
345
720

–
239
–
808

–
672
–
3,598

110
956
345
5,1262

1 This figure reflects the 01,089 million effect of the netting of defeased bankdeposits against sales financing liabilities.
2 Financial liabilities include non-recourse debt for 0988 million.

The outstanding balance of financial liabilities was 45.1 billion
at 31st December 2004, compared to 44.8 billion at
31st December 2003. Prior to 2003, the amounts of thedefeased bank deposits were recorded in the line item‘‘financial assets’’ on the consolidated balance sheet.
The net increase of consolidated financial liabilities of
40.4 billion from 2003 resulted mainly from the 40.3 billion
EIB loan and additional 40.3 billion financing relating to the
Paradigm programme.

1

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)

2
3

Total financial liabilities include the full consolidation of
Airbus financial debt for an amount of 42.3 billion. However,
EADS is liable for only 80% of such financial debt incurred
after 1st January 2001, in line with its stake in Airbus. See‘‘– Sales Financing’’.
Overall, Management believes that the maturity profile of theconsolidated financial liabilities is prudent and consistent withthe structure of EADS’ consolidated assets and expectedcash flows.
EMTN Programme. In February 2003, EADS launched a
43 billion Euro Medium Term Note (‘‘EMTN’’) Programme,with a subsequent initial 41.0 billion issue of a seven year
4.625%, later swapped into a variable rate of three-month
LIBOR plus 1.02%, capped at 4%. In September 2003, EADS
issued an additional 40.5 billion of fifteen year 5.5% fixed rate
notes under the EMTN program. The objectives of the two
issuances under the EMTN program are to refinance existing
debt and to lengthen the maturity profile of the Company’s
debt. Management believes that the establishment of suchfinancing schemes will enhance its overall presence andstanding in the capital markets and increase its flexibility inresponding to fluctuating funding requirements.
EADS has a strict policy in place with respect to contractual
provisions relating to accelerated repayment of financial debt.
It systematically rejects acceleration clauses which are based ona credit rating downgrade or on any non-material measurable
event not under the control of EADS.
1.1.7.4 Sales Financing

EADS favours cash sales, and encourages independent
financing by customers, in order to avoid retaining credit orasset risk in relation to delivered products.
However, in order to support product sales, primarily at
Airbus and ATR, EADS may agree to participate in thefinancing of customers, on a case-by-case basis, directly or
through guarantees provided to third parties. Dedicated andexperienced teams at headquarters and at Airbus and ATR,
respectively structure such financing transactions and closely
monitor total EADS finance and asset value exposure and its
evolution in terms of quality, volume and cash requirements
intensity. EADS aims to structure all financing it provides tocustomers in line with market-standard contractual terms so as
to facilitate any subsequent sale or reduction of such exposure.

operating environment of the aircraft and its expected future
value. Market yields and current banking practices also serve
to benchmark the financing terms offered to customers.
More than 36% of the 45.1 billion of total consolidated
financial liabilities as at 31st December 2004, are derived fromthe funding of EADS’ sales financing assets, which are of along-term nature and have predictable payment schedules. The
decrease from 41% of total financial liabilities in 2003 reflects
primarily the increase in overall financial liabilities resulting
from the 40.3 billion EIB loan and an additional 40.3 billion
financing for the Paradigm program. See ‘‘– Consolidated
Financial Liabilities’’. The following table presents a
breakdown of consolidated financial liabilities related tosales financing:in 1mFinance Leases1
Liabilities to financial institutions
Loans
Total Sales Financing Liabilities1

Principal
AmountOutstanding
2004

Principal
AmountOutstanding
2003

270
844
780
1,894

351
757
866
1,974

1 These figures reflect the effect (01,089 million in 2004; 01,131 million in 2003)of the netting of defeased bank deposits against sales financing liabilities.

The amounts of total sales financing liabilities at
31st December 2004 and 2003 reflect the offsetting of sales
financing liabilities by 41.1 billion (for 2004) and 41.1 billion(for 2003) of defeased bank deposits securing such liabilities.
Of the remaining 41.9 billion total sales financing liabilities at
31st December 2004, 41.0 billion is in the form of limited
recourse debt, where EADS’ repayment obligations are limited
to its receipts from transaction counterparties. A significant
portion of financial assets representing non-cancellable
customer commitments have terms closely matching those of
the related financial liabilities. See ‘‘Notes to IFRS
Consolidated Financial Statements – Note 20: Financial
Liabilities’’. See also ‘‘– 1.1.3 Critical Accounting
Considerations, Policies and Estimates – Accounting for Sales
Financing Transactions in the Financial Statements’’.
Sales financing transactions are generally collateralised by theunderlying aircraft. Additionally, Airbus and ATR benefit
from protective covenants and from security packages tailoredaccording to the perceived risk and the legal environment ofeach transaction.

In determining the amount and terms of a financing
transaction, Airbus and ATR take into account the airline’s
credit rating as well as risk factors specific to the intended

EADS Financial Statements and Corporate Governance 200425

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)
1.1.8 Management of Market Risks
1.1.8.1 Sales Financing Risk

EADS classifies the risks arising from its sales financing
activities into two categories: (i) Financing Exposure, where thecustomer’s credit – its ability to perform its obligations undera financing agreement – constitutes the risk; and (ii) Asset
Value Exposure, where the risk relates to decreases in the
future value of the financed aircraft. See also ‘‘1.4.1 Market
Risks – Exposure to Sales Financing Risk’’.
Customer Financing Exposure. Certain EADS and BAE
SYSTEMS group companies retain joint and several liability
for sales financing exposure incurred by Airbus prior to theformation of Airbus S.A.S. EADS’ exposure to liabilities
incurred by Airbus following 1st January 2001, is limited byits status as a shareholder in Airbus S.A.S., of which it owns
80% of the shares. EADS proportionally consolidates only 50%
of ATR and shares the risk with its partner, Alenia.
Airbus Customer Financing Exposure as of 31st December
2004 is spread over approximately 219 aircraft, operated at any
time by approximately 39 airlines; the breakdown by aircraft
type is balanced between A300/310, A320 family andA330/340. In addition, other aircraft related assets, such as
spare parts, may also serve as collateral security. 57% of Airbus
Financing Gross Exposure is distributed over five airlines infour countries, not taking backstop commitments into account.
ATR Customer Financing Gross Exposure as of
31st December 2004 is distributed over 208 aircraft.

Gross Customer Financing Exposure: Customer Financing Gross
Exposure is computed as the sum of (i) the net book value ofaircraft under operating leases; (ii) the outstanding principal
amount of finance leases or loans; and (iii) the net present
value of the maximum commitment amounts underfinancial guarantees.
Gross Financing Exposure from operating leases, financial
leases and loans differs from the value of related assets on
EADS’ balance sheet and related off-balance sheet contingent
commitments for the following reasons: (i) assets are recordedin compliance with IFRS, but may relate to transactions where
there is limited recourse to Airbus or ATR; (ii) the value ofthe assets is impaired or depreciated on the consolidatedbalance sheet; (iii) off-balance sheet gross exposure is calculated
as the net present value of future payments, whereas the
Financial Statements present the total future payments innominal terms; and (iv) exposure related to AVGs recorded as
operating leases in the Financial Statements is categorised
under Asset Value Exposure, not Financing Exposure.
Airbus has reduced Gross Financing Exposure by 25% from its
1998 peak of U.S.$6 billion, to U.S.$4.6 billion (43.3 billion)
as of 31st December 2004, while the Airbus fleet in operation
has increased from 1,838 aircraft to 3,598 over the same
period. Management believes the current level of Gross
Financing Exposure enhances Airbus’ ability to assist its
customers in the context of a tight aircraft financing market.
The chart below illustrates the evolution of Airbus’ Gross
Financing Exposure during 2004 (in millions).

Evolution of Airbus'
Gross Financing Exposure
during 2004

U.S.$4,834
3,822

1,047
Additions

December 2003

26

EADS Financial Statements and Corporate Governance 2004

-1,058

Disposals-263
Amortisation

U.S.$4,560
3,348

December 2004

1

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)2
3

ATR 100% has reduced gross exposure by approximately 50% from a peak of U.S.$1.8 billion in 1997 to U.S.$0.5 billion(40.3 billion) as of 31st December 2004, despite a challenging market for turboprop aircraft.
In response to the continued demand by its customers for financing, EADS expects to undertake additional outlays in connection
with customer financing of commercial aircraft, mostly through finance leases and loans. Nevertheless, it intends to keep theamount as low as possible, and expects the net increase of sales financing gross exposure to be very low in 2005.
Net Exposure. Net exposure is the difference between gross exposure and the estimated value of the collateral security. Collateralvalue is assessed using a dynamic model based on the net present value of expected future rentals from the aircraft in theleasing market and potential cost of default. This valuation model yields results that are typically lower than residual value
estimates by independent sources in order to allow for what Management believes is its conservative assessment of market
conditions, as well as for repossession and transformation costs. See ‘‘– 1.1.3 Critical Accounting Considerations, Policies andEstimates – Accounting for Sales Financing Transactions in the Financial Statements’’.
The table below shows the transition from gross to net financing exposure (which does not include AVGs) as at 31st December
2004 and 2003. It includes 100% of Airbus’ customer financing exposure and 50% of ATR’s exposure, reflecting EADS’ stakein ATR.
in 1 million

Note*

Airbus 100%
12/31/2004

Airbus 100%
12/31/2003

ATR 50%12/31/2004

ATR 50%12/31/2003

TOTAL EADS
12/31/2004

TOTAL EADS
12/31/2003

Operating Lease
Finance leases and loans
OthersOn Balance sheet customer financing
Off Balance sheet customer financing
Non-recourse transactions on balance sheet
Off balance sheet adjustments
Gross customer financing exposure
Collateral Values
Net exposure
Impairment and provisions
On Operating Lease
On Finance Lease & loans
On Inventories
On On balance sheet customer financing
On Off balance sheet committments
Asset impairments and Provisions
Residual exposure

12
13

1,835
2,044
3,879
732
(1,135)(128)
3,348(1,916)
1,432

1,638
2,098
104
3,840
1,113
(742)
(389)
3,822
(2,229)
1,593

146
22
119
287
46

218
25
34
277
126

333
(300)
33

403
(365)
38

1,981
2,066
119
4,166
778
(1,135)(128)
3,681(2,216)
1,465

1,856
2,123
138
4,117
1,239
(742)
(389)
4,225
(2,594)
1,631

(532)
(466)
(1)

(590)
(431)
(27)

(433)
(1,432)–(545)(1,593)
–

(532)
(466)
(1)
(33)
(433)
(1,465)
–

(590)
(431)
(27)
(38)
(545)
(1,631)
–

25

25
25

12
13
14
19
19

(33)

(38)

(33)
–

(38)
–

* The indicated numbers refer to the number of the Notes to IFRS Consolidated Financial Statements.

The gross value of consolidated operating leases shown in the table above (41,981 million in 2004 and 41,856 million in 2003)
is accounted for in ‘‘Property, Plant and Equipment’’ at net book value of operating leases before impairment. Corresponding
asset impairments (4532 million in 2004 and 4590 million in 2003) are charged against this net book value. See ‘‘Notes tothe IFRS Consolidated Financial Statement – Note 12: Property, plant and equipment’’ and ‘‘Note 25: Commitments
and contingencies’’.

EADS Financial Statements and Corporate Governance 200427

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Also shown in the table above is the gross value forconsolidated finance leases and loans (42,066 million in 2004
and 42,123 million in 2003). Consolidated finance leases(41,120 million in 2004 and 41,047 in 2003) are accounted for
as long-term financial assets, recorded at their net book value
before impairment. Loans (4946 million in 2004 and41,078 million in 2003) are also accounted for as long-term
financial assets, recorded at their outstanding gross amount.
Corresponding overall asset impairment (4466 million in 2004
and 4431 million in 2003) is charged against the net bookvalue. See ‘‘ Notes to the IFRS Consolidated Financial
Statement – Note 13: Investments in associates, otherinvestments and long-term financial assets’’.
Off-balance sheet customer financing exposure at Airbus and
50% ATR was 4778 million in 2004 and 41,239 million in
2003. These amounts reflect the total nominal value of future
payments under lease in/lease out structures. The year-to-year
decrease mostly reflects the impact of the weakening
U.S. dollar on the Euro amount of such payments. The
corresponding net present value of future payments(discounted and net of mitigating factors) is included in total
Gross Financing Exposure for an amount of 4650 million in2004 and 4850 million in 2003. A provision of 4433 million
exists in EADS’ balance sheet as of 31st December 2004 tocover the full amount of the corresponding net exposure. See‘‘Notes to the IFRS Consolidated Financial Statements –Note 25: Commitments and contingencies’’.
Asset Value Exposure. A significant portion of EADS’ asset
value exposure arises from outstanding AVGs, primarily at
Airbus. Management considers the financial risks associatedwith such guarantees to be manageable. Three factors
contribute to this assessment: (i) the guarantee only covers a
tranche of the estimated future value of the aircraft, and its
level is considered prudent in comparison to the estimatedfuture value of each aircraft; (ii) the AVG-related exposure isdiversified over a large number of aircraft and customers; and(iii) the exercise periods of outstanding AVGs are distributed
through 2018, resulting in low levels of exposure maturing in
any year. Because exercise dates for AVGs are on average inthe 10th year following aircraft delivery, AVGs issued in2005 will generally not be exercisable prior to 2015, and,
therefore, an increase in near-term exposure is not expected.
Gross Exposure. Gross Asset Value Exposure is defined as thesum of the maximum guaranteed tranche amounts (as opposedto the sum of the maximum guaranteed asset value amounts)

28

EADS Financial Statements and Corporate Governance 2004

under outstanding AVGs. At 31st December 2004, Airbus
Gross Asset Value Exposure (discounted present value of
future guaranteed tranches) was U.S.$3.0 billion (42.2 billion).
The off-balance sheet portion of Airbus Gross Asset Value,
representing AVGs with net present values of less than 10%of the sales price of the corresponding aircraft, was4810 million, excluding 4413 million where the risk is
considered to be remote. In many cases, the risk is limited to a
specific portion of the residual value of the aircraft. The
remaining Airbus Gross Asset Value Exposure is recorded
on-balance sheet.
Net Exposure. The present value of the risk inherent to thegiven asset value guarantees, where a settlement is considered
to be probable, is fully provided for and included in the total
amount of provisions for asset value risks of 4473 million.
This provision covers a potential expected shortfall between
the estimated value of the aircraft of the date upon which theguarantee can be exercised and the value guaranteed on atransaction basis taking counter guarantees into account. See‘‘Notes to the Audited Consolidated Financial Statements –Note 19(d): Other provisions.’’
Backstop Commitments. While commitments to provide
financing related to orders on Airbus’ and ATR’s backlog arealso given, such commitments are not considered to be part ofgross exposure until the financing is in place, which occurs
when the aircraft is delivered. This is due to the fact that(i) past experience suggests it is unlikely that all such proposed
financings actually will be implemented (although it is possiblethat customers not benefiting from such commitments may
nevertheless request financing assistance ahead of aircraft
delivery), (ii) until the aircraft is delivered, Airbus or ATR
retain the asset and do not incur an unusual risk in relation
thereto (other than the corresponding work-in-progress), and(iii) third parties may participate in the financing. In order tomitigate Airbus and ATR exposure to unacceptable credits,such commitments typically contain financial conditions thatguaranteed parties must satisfy in order to benefit therefrom.
See ‘‘Notes to IFRS Consolidated Financial Statements –Note 25: Commitments and Contingencies’’ for further
discussion of EADS’ sales financing policies andaccounting procedures.

1

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)

2
3

1.1.8.2 Exchange Rate Risk

Exchange Rate Exposure. A significant portion of EADS’revenues are denominated in U.S. dollars (approximately
U.S.$22 billion for 2004), with approximately half of suchcurrency exposure ‘‘naturally hedged’’ by U.S. dollardenominated costs. The remainder of costs is incurred
primarily in Euro, and to a lesser extent, in Pounds Sterling.
Consequently, to the extent that EADS does not use financial
instruments to hedge its net current and future exchange rate
exposure from the time of a customer order to the time ofdelivery, its profits will be affected by market changes in theexchange rate of the U.S. dollar against these currencies.
Consistent with EADS’ policy of generating profits principallyfrom its operations, EADS uses hedging strategies to manage
and minimise the impact on its EBIT* from the volatility of
the U.S. dollar. See ‘‘– 1.1.4 Measurement of Management’s
Performance – EBIT* Performance by Division – Hedging
Impact on EBIT*’’. See also ‘‘1.4.1 Market Risks – Exposure to
Foreign Currencies’’.
As EADS uses financial instruments to hedge only its net
foreign currency exposure, the portion of its U.S. dollardenominated revenues not hedged by financial instruments(approximately 30% of total consolidated revenues) is exposed
to changes in exchange rates. Of this non-hedged portion ofrevenues, a certain percentage (relating to customer pre-delivery
payments) are converted into Euro at the spot rate effective at
the time the payment was received by EADS. The remainderof non-hedged U.S. dollar-denominated revenues(corresponding to payments upon delivery) are subject tochanges in the spot rate at the time of delivery. See‘‘– 1.1.3 Critical Accounting Considerations, Policies andEstimates – Accounting for Foreign Currency DenominatedOperations in the Financial Statements’’.
Exposure on aircraft sales – For products such as aircraft,
EADS typically hedges forecasted sales in U.S. dollars related
to firm commitments and forecasted transactions for thefollowing year through 2011. The hedged items are defined as
the first forecasted highly probable future cash inflows for agiven month based upon final payments at delivery. The
amount of the first flows to be hedged is decided by atreasury committee and typically covers up to 100% of theequivalent of the net U.S. dollar exposure. For EADS, aforecasted transaction is regarded highly probable if the futuredelivery is included in the firm order book or is very likely tomaterialise in view of contractual evidences (e.g., a letter ofintent). The coverage ratio is adjusted to take into accountmacroeconomic movements affecting the spot and interest
rates, as applicable.

EADS Financial Statements and Corporate Governance 2004

Exposure on project related business – For project-related
business, EADS generally hedges 100% based on specific flows
arising out of firm and individual contracts. Hedging is
implemented on an individual project basis.
Exposure on treasury operations – In connection with its
treasury operations, EADS headquarters enters into foreignexchange swaps (notional amount of 40.3 billion in 2004) toadjust for short-term fluctuations of non-Euro cash balances atthe business unit level. Year-to-year changes in the fair market
value of these swaps is recorded on the consolidated statementof income in the line item ‘‘other financial result’’. Thesechanges may have a material impact on EADS’ net income.
Hedge Portfolio. EADS manages a long-term hedge portfoliowith a maturity of several years covering its net exposure to
U.S. dollar sales, mainly from the activities of Airbus (and toa lesser extent, of the Aeronautics Division). The net exposure
is defined as the total currency exposure (U.S. dollardenominated revenues), net of the part that is ‘‘naturally
hedged’’ by U.S. dollar-denominated costs. The hedge portfolio
covers the vast majority of the Group’s hedging transactions.
As hedging instruments, EADS primarily uses foreign
currency forwards and option contracts.
The contract or notional amounts of EADS’ foreign exchange
derivative financial instruments shown below do notnecessarily represent amounts exchanged by the parties and,thus, are not necessarily a measure for the exposure of theGroup through its use of derivatives.
The notional amounts of such foreign exchange derivative
financial instruments are as follows, specified by year of
expected maturity:
Remaining period

in 1mYear ended 31st
December 2004
Net forward sales
contracts
Structured U.S. dollar
forward
Foreign exchange swap
contracts

Not
exceeding
1 yearOver
1 year up to
5 yearsMorethan
5 years

Total

7,780

19,8291,277

28,886

180

452

0

632

189

102

0

291

29

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)
1.1.8.3 Interest Rate Risk

EADS uses an asset and liability management approach withthe objective of limiting its interest rate risk. The Company
attempts to match the risk profile of its assets with acorresponding liability structure. The net interest rate exposure
is managed through several types of instruments in order tominimise risks and financial impacts. Therefore, EADS may
use interest rate derivatives for hedging purposes.
Hedging instruments that are specifically related to debt
instruments have at most the same nominal amounts, as wellas the same maturity dates, as the corresponding hedged item.
Regarding the management of its cash balance, EADS invests
mainly in short-term instruments and/or floating rate
instruments in order to further minimise any interest risk in
its cash and securities portfolio.
The contract or notional amounts of EADS’ interest rate
derivative financial instruments shown below do notnecessarily represent amounts exchanged by the parties and,thus, are not necessarily a measure for the exposure of theGroup through its use of derivatives.
The notional amounts of such interest rate derivative financial
instruments are as follows, specified by expected maturity.
Remaining period
Not
exceeding
1 yearin 1m

Year ended 31st
December 2004
Interest rate swaps and
caps

0

Over
1 yearup to
5 years

802

More
than
5 years

2,964

Total

3,766

Since its creation, EADS has been in a positive net cash
position. As interest rate sensitivity analysis is mostly relevant
to large borrowers, EADS considers that the added value ofsuch analysis to an understanding of the Company’s interest
rate exposure is minimal. Such analysis has therefore not been
included herein, and the above table of interest rate derivatives
has not been correlated with the preceding table of financial
debt. As circumstances warrant, EADS will consider including
such an analysis in future Reference Documents.

30

EADS Financial Statements and Corporate Governance 2004

1.1.8.4 Counterparty Credit Risk
EADS is exposed to credit risk to the extent of nonperformance by its financial instrument counterparties.
However, the Group has policies in place to avoid
concentrations of credit risk and to ensure that credit risk
is limited.

Cash transactions and derivative counterparties are limited tohigh credit quality financial institutions. EADS has set up acredit limit system to actively manage and limit its credit risk
exposure. This limit system assigns maximum exposure lines
to counterparties of financial transactions, based at a minimumon their credit ratings as published by Standard & Poor’s,
Moody’s and Fitch IBCA. The respective limits are regularly
monitored and updated.
As counterparty credit risk also arises in the context of sales
financing transactions, EADS’ policy is to provide financing
only to customers and through structures with an appropriate
credit standing. See ‘‘– 1.1.7 Liquidity and Capital Resources –Sales Financing’’.
1.1.8.5 Risks on Equity Investment Portfolio

EADS holds several equity investments for industrial reasons.
None of the equity investments are held for speculative or
trading purposes. Equity investments are either accounted forusing the equity method (associated companies), if EADS has
the ability to exercise significant influence, or at fair value. If
fair value is not readily determinable, the investment ismeasured at cost.
Changes in the value of equity investments mainly depend on
their performance. EADS’ principal investment in associates is
Dassault Aviation. The net asset value of this investment was
41.7 billion at 31st December 2004. EADS considers its risk
to unexpected changes in the value of Dassault Aviation as
well as to all other associated companies as remote.
For equity investments other than associates, which make up
only a fraction of EADS’ total assets, EADS regards the riskof negative changes in fair value or impairments on theseinvestments as non-significant.
Treasury shares held by EADS are not considered to be equity
investments. Additionally, treasury shares are not regarded as
being exposed to risk, as any change in value of treasury
shares is recognised directly in equity only when sold to themarket and never affects net income. Treasury shares areprimarily held to hedge the dilution risk arising from
employee stock ownership plans and the exercise by employeesof stock options.

1

1.2 Financial statements23

1.2.1 Consolidated financial statements (IFRS)
Consolidated Income Statements (IFRS) for the years 2004, 2003, 2002
in millions of 1

Note

2004

2003

2002

Revenues
Cost of sales
Gross margin
Selling expenses
Administrative expenses
Research and development expenses
Other income
Other expenses
thereof goodwill amortization and related impairment losses
Income from operating activities
Income from investments
thereof income from associates
Interest result
Other financial result
Financial result
Income taxes
Profit (loss) from ordinary activities
Minority interests
Net income (loss)
Earnings per share
Basic
DilutedCash distribution per share (2004: proposal)

5, 6
7

31,761(25,510)
6,251
(798)
(1,321)(2,126)
314
(177)
0
2,143
84
88
(275)
(55)
(246)
(664)
1,233
(203)
1,030

30,133(24,594)
5,539
(776)
(1,386)(2,189)
196
(823)
(567)
561
186
224
(203)
148
131
(474)
218
(66)
152

29,901(24,465)
5,436
(829)
(1,422)(2,096)248(1,177)
(936)
160
87
108
(81)
21
27
(453)
(266)
(33)
(299)

1

1

1

1.29
1.28
0.50

0.19
0.19
0.40

(0.37)(0.37)
0.30

7
7
8
7
11
5

9
10

31
31
18

The accompanying notes are an integral part of these Consolidated Financial Statements.

EADS Financial Statements and Corporate Governance 200431

1.2 Financial statements (continued)

Consolidated Balance Sheets (IFRS) at 31st December 2004 and 2003
in millions of 1

Note

2004

2003

AssetsIntangible assets

11

10,008

9,694

Property, plant and equipment

12

12,905

11,448Investments in associates

13

1,738

1,640

Other investments and long-term financial assets
Fixed assets
Inventories, net of advances received
Trade receivables
Other receivables and other assets
Securities
Cash and cash equivalents
Non-fixed assets
Deferred taxes
Prepaid expenses
Total assets

13

2,352
27,003
3,075
4,406
11,105466
8,718
27,7702,543
951
58,267

2,489
25,271
3,279
4,001
10,280468
7,404
25,432
2,724
951
54,378810
10,254
6,086(177)
16,973

813
9,589
5,934
(187)
16,149

2,370
8,573
5,126
5,860
13,24024,226
4,134
1,991
58,267

2,179
8,726
4,767
5,117
11,31821,202
3,664
2,458
54,378

14
15
16
17

10

Liabilities and shareholders’ equity

Capital stockReserves
Accumulated other comprehensive income
Treasury shares
Shareholders’ equity
Minority interests
Provisions
Financial liabilities
Trade liabilities
Other liabilities
Liabilities
Deferred taxes
Deferred income
Total liabilities and shareholders’ equity

The accompanying notes are an integral part of these Consolidated Financial Statements.

32

EADS Financial Statements and Corporate Governance 2004

18
19
20
21
21
10
22

1

1.2 Financial statements (continued)

2
3

Consolidated Statements of Cash Flows (IFRS) for the years 2004, 2003 and 2002
in millions of 1

Net income (loss)
Income applicable to minority interests
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization of fixed assets
Valuation adjustments and CTA release
Deferred tax expenses (income)Results on disposal of fixed assets / businesses and result of associates (equity method)
Change in provisions
Change in other operating assets and liabilities:– Inventories, net– Trade receivables– Trade liabilities– Other assets and liabilities
Cash provided by operating activities
Investments:– Purchases of intangible and fixed assets– Proceeds from disposals of intangible and fixed assets– Acquisitions of subsidiaries (net of cash)– Proceeds from disposals of subsidiaries (net of cash)– Payments for investments in other financial assets– Proceeds from disposals of other financial assets– Increase in equipment of leased assets– Proceeds from disposals of leased assets– Increase in finance lease receivables– Decrease in finance lease receivables– Dividends paid by companies valued at equity
Change in securities
Change in cash from changes in consolidation
Cash used for investing activities
Change in financial liabilities
Cash distribution to EADS N.V. shareholders
Repayments/dividends to minorities
Capital increase
Purchase of treasury shares
OthersCash provided by (used for) financing activities
Effect of foreign exchange rate changes and other valuation adjustments on cash andcash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

EADS Financial Statements and Corporate Governance 2004

Note

23

23

2004

2003

2002

1,030
203

152
66

(299)
33

1,621
(200)
537
(96)
(237)
2,155
282
(403)
756
1,520
5,013

2,375
263
(138)
(274)
246
2,019
160
168
116
1,575
4,709

2,768
177
255
(227)
(845)
804
274
895
(139)
(226)
2,666

(3,017)
36
(100)
0
(482)
492
(656)
74
(261)
110
36
10
9
(3,749)
474
(320)
(64)
43
(81)
0
52

(2,672)
47
(92)
32
(728)
346
(279)
8
(443)
84
38
336
(152)
(3,475)
1,132
(240)
(38)
21
(31)
8
852

(2,213)120(19)84(1,115)
735
(101)
120
(749)
150
30
(264)
5
(3,217)
(774)
(403)
(127)
16
(156)
(3)
(1,447)

(2)
1,314

(83)
2,003

(82)
(2,080)

7,404
8,718

5,401
7,404

7,481
5,401

33

1.2 Financial statements (continued)
The following represents supplemental information with respect to cash flows from operating activities:
in millions of 1

Interest paid
Income taxes paid
Interest received
Dividends received

2004

2003

2002

(367)
(302)
329
57

(311)
(383)
338
55

(407)
(318)
403
49

TreasurysharesTotalequity

–

9,877
16
(299)
(403)
(156)
3,730

The accompanying notes are an integral part of these Consolidated Financial Statements.
For details, see Note 23, ‘‘Consolidated Statement of Cash Flows’’.
Consolidated Statements of Changes in Shareholders’ Equity (IFRS) for the years 2004, 2003 and 2002

in millions of 1

Balance at 31st December 2001
Capital increase
Net loss
Cash distribution to EADS N.V. shareholders
Purchase of treasury shares
Other comprehensive income
thereof changes in fair values of securities
thereof changes in fair values of hedging instruments
thereof currency translation adjustments
Balance at 31st December 2002
Capital increase
Net income
Cash distribution to EADS N.V. shareholders
Purchase of treasury shares
Other comprehensive income
thereof changes in fair values of securities
thereof changes in fair values of hedging instruments
thereof currency translation adjustments
Balance at 31st December 2003
Capital increase
Net income
Cash distribution to EADS N.V. shareholders
Purchase of treasury shares
Cancellation of treasury shares
Other comprehensive income
thereof changes in fair values of securities
thereof changes in fair values of hedging instruments
thereof currency translation adjustments
Balance at 31st December 2004

Note

Capital
stock

Share
premium

Other
reserves

Accumulated
othercomprehensive
income

809
2

9,524
14

822

(1,278)

(299)
(403)
(156)

811
2

9,538
19

(156)

152
(240)
(31)

18

813
2

9,317
41

272

3,482
154
2,524
804
5,934

(187)

1,030
(320)
18
18

(5)

(81)
91

(86)

26
810

8,952

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

34

120

3,730
(10)
2,713
1,027
2,452

EADS Financial Statements and Corporate Governance 2004

1,302

152
33
478
(359)
6,086

(177)

12,765
21
152
(240)
(31)
3,482

16,149
43
1,030
(320)
(81)
0
152

16,973

1

1.2 Financial statements (continued)

2

Notes to the consolidated financial statements (IFRS)Basis of presentation

3
1. The Company

The accompanying Consolidated Financial Statements present
the operations of European Aeronautic Defence and Space
Company EADS N.V. and its subsidiaries (‘‘EADS’’ or the‘‘Group’’), a Dutch public limited liability company (Naamloze
Vennootschap) legally seated in Amsterdam (Le Carré,
Beechavenue 130-132, 1119 PR, Schiphol-Rijk, The
Netherlands). EADS’ core business is the manufacturing ofcommercial aircraft, civil helicopters, commercial space launchvehicles, missiles, military aircraft, satellites, defence systems
and defence electronics and rendering of services related tothese activities. The Consolidated Financial Statements wereauthorised for issue by EADS’ Board of Directors on
8th March 2005 and are prepared and reported in Euro (‘‘4’’).
2. Summary of Significant Accounting Policies

The principal accounting policies applied in the preparation ofthese Consolidated Financial Statements are set out below.
These policies have been consistently applied to all years
presented, unless otherwise stated.
Basis of Preparation – EADS’ Consolidated Financial
Statements are prepared in accordance with International
Financial Reporting Standards (‘‘IFRS’’), adopted by theInternational Accounting Standards Board (‘‘IASB’’). They
comprise (i) IFRS, (ii) International Accounting Standards(‘‘IAS’’) and (iii) Interpretations originated by the International
Financial Reporting Interpretations Committee (IFRIC) or
former Standing Interpretations Committee (‘‘SIC’’).
At the end of March 2004, the IASB completed Phase I of its
ongoing Business Combinations Project and adopted new
IFRS 3 ‘‘Business Combinations’’, superseding IAS 22‘‘Business Combinations’’, as well as revised Standards IAS 36‘‘Impairment of Assets’’ and IAS 38 ‘‘Intangible Assets’’.
EADS decided to early adopt IFRS 3, revised IAS 36 andIAS 38 and to apply these standards as of 1st January 2004
mainly due to the abolishment of goodwill amortisation.
Consequently, EADS changed its accounting policies regarding
the accounting for impairment testing, intangible assets andbusiness combinations with an agreement date after
31st December 2003. This has been done prospectively inaccordance with transitional provisions required by IFRS 3,
IAS 36 and IAS 38. Until 31st December 2003, goodwill wasamortized on a straight line basis over a period ranging fromfive to 20 years and assessed for an indication of impairment
at each balance sheet date.

EADS Financial Statements and Corporate Governance 2004

Starting with 1st January 2004, any goodwill acquired in abusiness combination irrespective of whether recognised before
or after 31st December 2003 has no longer been amortized
but tested annually for impairment as well as whenever there
are indications of impairment. Same rule applies to any
goodwill arising from an interest in a jointly controlled entityand for investments accounted for by applying the equity
method. The Group has reassessed the useful lives ofintangible assets in accordance with the provisions of IAS 38.
No adjustment resulted from this reassessment.
Besides the revisions of thirteen IAS in conjunction with the
Improvements Project (published in December 2003) the IASB
released in 2004 four more standards, five interpretations aswell as amendments/revisions to IAS 19, IAS 32 and IAS 39
and SIC 12, as listed below:
Improvements Project:
IAS 1 Presentation of Financial Statements
IAS 2 Inventories
IAS 8 Accounting Policies, Changes in Accounting Estimatesand Errors
IAS 10 Events after Balance Sheet Date
IAS 16 Property, Plant and Equipment
IAS 17 Leases
IAS 21 The Effects of Changes in Foreign Exchange Rates
IAS 24 Related Party Disclosure
IAS 27 Consolidated and Separate Financial Statements
IAS 28 Investments in Associates
IAS 31 Interests in Joint Ventures
IAS 33 Earnings per ShareIAS 40 Investment Property
New Standards:
IFRS 2 Share-based Payment
IFRS 4 Insurance Contracts
IFRS 5 Non-current Assets held for sale andDiscontinued Operations
IFRS 6 Exploration for and Evaluation of Mineral Resources
New Interpretations:
IFRIC 1 Changes in Existing Decommissioning, Restorationand Similar Liabilities
IFRIC 2 Members’ Shares in Co-operative Entities andSimilar Instruments
IFRIC 3 Emission Rights

35

1.2 Financial statements (continued)
Notes to the consolidated financial statements (IFRS)Basis of presentation
IFRIC 4 Determining whether an Arrangement contains
a LeaseIFRIC 5 Rights to Interests arising from Decommissioning,
Restoration and Environmental Rehabilitation Funds
Amendments / Revisions:

IAS 19 Employee Benefits
Amendment (December 2004): Actuarial Gains and Losses,
Group Plans and Disclosure
IAS 32 Financial Instruments: Disclosure and Presentation
Revision (December 2003)
Amendment (March 2004)
IAS 39 Financial Instruments: Recognition and Measurement:
Revision (December 2003)
Amendment (March 2004): Fair Value Hedge Accounting forPortfolio Hedge of Interest Rate Risk
Amendment (December 2004): Transition and Initial
Recognition of Financial Assets and Financial Liabilities
SIC 12 Consolidation – Special Purpose Entities
Amendment (November 2004): Scope of SIC 12
While IFRS 6, IFRIC 3 to IFRIC 5 and December 2004
amendments to IAS 19 and IAS 39 have a later effective date,
all other Standards and Interpretations listed above become
mandatory to the Group’s Financial Statements for theaccounting period beginning on 1st January 2005. Except for
IFRS 3, IAS 36 and IAS 38, EADS has abandoned the option
to early adopt any of the new, revised or amended standards
or interpretations before they become effective.
Changes in Accounting Policy – In 2003, EADS changed
its accounting policy regarding capitalisation of product related
development costs, as applied under the benchmark rules
detailed in IAS 8, ‘‘Net Profit or Loss for the Period,
Fundamental Errors and Changes in Accounting Policies’’. As
of 31st December 2003, product related development costs
that had, as a policy, previously been expensed in the period
incurred, have been retrospectively assessed for capitalisation
unless the amount of any resulting adjustment that relates toprior periods has not been reasonably determinable. Due to thecomplexity of its products (especially civil aircraft like A 380),
EADS considers processes carried out in the various researchand development phases are of such interaction that a proper
distinction between research and development phases cannot
be made up to only a very late stage of the program. In
addition, for past programs, retroactive proper allocation of
costs as required by IAS 38 has not been possible because
there was no system in place to gather the necessary

36

EADS Financial Statements and Corporate Governance 2004

information. The policy for capitalising product related
development as internally generated intangible assets is
described below. The effects of the application of IAS 38,‘‘Intangible Assets’’, are disclosed in Note 11.
Consolidation – The Consolidated Financial Statements
include the subsidiaries under the control of EADS.
Investments in which EADS has significant influence(‘‘Investments in associates’’) are accounted for using theequity method. For investments in joint ventures, EADS uses
the proportionate method of consolidation. The effects ofintercompany transactions are eliminated.
Business Combinations with an agreement date on or before
31st December 2003 have been accounted for by using thepurchase accounting method in accordance with IAS 22.
Since 1st January 2004, business combinations are accounted
for under the purchase accounting method as required by
IFRS 3; all identifiable assets acquired, liabilities andcontingent liabilities incurred or assumed are recorded at fairvalue at the date control is transferred to EADS (acquisitiondate), irrespective of the extent of any minority interest. The
cost of a business combination is measured at the fair value of
assets given, equity instruments issued and liabilities incurredor assumed at the date of exchange, plus costs directly
attributable to the acquisition. Any excess of the cost of thebusiness combination over the Group’s interest in the net fairvalue of the identifiable assets, liabilities and contingent
liabilities recognised is capitalized as goodwill and tested for
impairment at the end of each financial year and whenever
there is an indication for impairment. If the cost of an
acquisition is less than the fair value of the net assets of thesubsidiary acquired, the identification and measurement of theidentifiable assets, liabilities and contingent liabilities isreassessed as well as the measurement of the cost of the
combination. Any remaining difference is immediately
recognised in the Consolidated Income Statement.
Special purpose entities (‘‘SPEs’’) are consolidated, when therelationship between the Group and a SPE indicates that theSPE is in substance controlled by the Group. SPEs are entities
which are created to accomplish a narrow andwell-defined objective.
Foreign Currency Translation – The assets and liabilities offoreign entities, where the reporting currency is other thanEuro, are translated using period-end exchange rates, while thestatements of income are translated using average exchange
rates during the period, approximating the foreign exchange
rate at the dates of the transactions. All resulting translation

1

1.2 Financial statements (continued)

2

Notes to the consolidated financial statements (IFRS)Basis of presentation3
differences are included as a separate component ofshareholders’ equity (‘‘Accumulated other comprehensive
income’’ or ‘‘AOCI’’).
Transactions in foreign currencies are translated into Euro at
the foreign exchange rate in effect at the date of thetransaction. Monetary assets and liabilities denominated inforeign currencies at the balance sheet date are translated into
Euro at the exchange rate in effect at that date. Foreignexchange gains and losses arising from translation arerecognized in the Consolidated Income Statement. Nonmonetary assets and liabilities denominated in foreign
currencies, which are stated at historical cost, are translated
into Euro at the foreign exchange rate in effect at the date of
the transaction.
Goodwill and fair value adjustments arising on the acquisitionof a foreign entity are treated as assets and liabilities of theacquiring company and are recorded at the exchange rate at thedate of the transaction.
Revenue Recognition – Revenue from the sale of goods isrecognized upon the transfer of risks and rewards ofownership to the buyer and when the amount of revenue canbe measured reliably. Revenue from services rendered isrecognized in proportion to the stage of completion of thetransaction at the balance sheet date. For construction
contracts, when the outcome can be estimated reliably, revenue
is recognized by reference to the stage (percentage) ofcompletion (‘‘PoC’’) of the contract activity. The stage ofcompletion of a contract may be determined by a variety ofways. Depending on the nature of the contract, revenue isrecognized as contractually agreed-upon milestones are reached,as units are delivered or as the work progresses. Changes in
profit rates are reflected in current earnings as identified.
Contracts are reviewed regularly and in case of probable losses,
provisions are recorded.
Incentives applicable to performance on contracts are
considered in estimated profit rates and are recorded whenanticipated contract performance is probable and can bereliably measured.
Sales of aircraft that include asset value guarantee
commitments are accounted for as operating leases when thesecommitments are considered substantial compared to the fairvalue of the related aircraft. Revenues then comprise lease
income from such operating leases.
Product-Related Expenses – Expenses for advertising andsales promotion and other sales-related expenses are charged to
expense as incurred. Provisions for estimated warranty costs
are recorded at the time the related sale is recorded.

EADS Financial Statements and Corporate Governance 2004

Research and Development Expenses – Research anddevelopment activities can be (i) contracted or (ii) self-initiated.
i) Costs for contracted research and development activities,
carried out in the scope of externally financed research anddevelopment contracts, are expensed when the related revenues
are recorded.
ii) Costs for self-initiated research and development activities
are assessed whether they qualify for recognition as internallygenerated intangible assets. Apart from complying with thegeneral requirements for and initial measurement of an
intangible asset, qualification criteria are met only whentechnical as well as commercial feasibility can be demonstrated
and cost can be measured reliably. It must also be probablethat the intangible asset will generate future economic benefits
and that it is clearly identifiable and allocable to a
specific product.
Further to meeting these criteria, only such costs that relatesolely to the development phase of a self-initiated project arecapitalized. Any costs that are classified as part of the researchphase of a self-initiated project are expensed as incurred. If theresearch phase cannot be clearly distinguished from thedevelopment phase, the respective project related costs aretreated as if they were incurred in the research phase only.
Capitalized development costs are generally amortized over theestimated number of units produced if no other procedurereflects the consumption pattern more appropriately and arereviewed for impairment annually when the asset is not yet in
use and further on whenever events or changes incircumstances indicate that the carrying amount may not
be recoverable.
Income Taxes – Tax expense (tax income) is the aggregate
amount included in the determination of net profit or loss forthe period in respect of (i) Current tax and (ii) Deferred tax.
i) Current tax is the amount of income taxes payable orrecoverable in a period. Current income taxes are calculated
applying respective tax rates on the periodic taxable profit or
tax loss that is determined in accordance with rules establishedby the competent taxation authorities. Current tax liabilities
are recognised for current tax to the extent unpaid for current
and prior periods. A current tax asset is recognised in case thetax amount paid exceeds the amount due to current and priorperiods. The benefit of a tax loss that can be carried back torecover current tax of a previous period is recognised as an
asset provided that the related benefit is probable and can bemeasured reliably.

371.2 Financial statements (continued)
Notes to the consolidated financial statements (IFRS)Basis of presentationii) Deferred tax assets and liabilities reflect lower or higher
future tax consequences that result for certain assets andliabilities from temporary valuation differences between thefinancial statement carrying amounts and their respective tax
bases as well as from net operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates to apply to taxable income in the years inwhich those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in the period
the new rates are enacted or substantially enacted. As deferred
tax assets anticipate potential future tax benefits, they arerecorded in the Consolidated Financial Statements of EADS
only when it is probable that the tax benefits will be realized.
The carrying amount of deferred tax assets is reviewed at eachfinancial year end.
Intangible Assets – Intangible assets comprise (i) internallygenerated intangible assets, i.e. internally developed softwareand other internally generated intangible assets (see above:
Research and development expenses), (ii) acquired intangible
assets, and (iii) goodwill (see above: Consolidation).
Acquired intangible assets are valued at acquisition cost and are
generally amortized over their respective useful lives (3 to10 years) on a straight line basis. Intangible assets having an
indefinite useful life are not amortized but tested for
impairment at the end of each financial year as well as
whenever there is an indication that the carrying amountexceeds the recoverable amount of the respective asset.
Property, Plant and Equipment – Property, plant andequipment is valued at acquisition or manufacturing costs lessany accumulated depreciation and any accumulated impairment
losses. Depreciation expense is recognized generally using thestraight-line method. The costs of internally produced
equipment and facilities include direct material and labourcosts and applicable manufacturing overheads, including
depreciation charges. Borrowing costs are not capitalized. The
following useful lives are assumed: buildings 6 to 50 years;
site improvements 6 to 20 years; technical equipment andmachinery 3 to 20 years; and other equipment, factory andoffice equipment 2 to 10 years. The useful lives anddepreciation methods applied to property, plant and equipment
are reviewed periodically and in case they change significantly
depreciation charges for current and future periods are adjusted
accordingly. If the carrying amount of any asset exceeds its
recoverable amount an impairment loss is recognised
immediately in profit or loss. At each reporting date it isassessed whether there is any indication that an item ofproperty, plant and equipment may be impaired.

38

EADS Financial Statements and Corporate Governance 2004

Property, plant and equipment includes capitalized
development costs for tangible developments of specialized
tooling for production such as jigs and tools, design,
construction and testing of prototypes and models. In caserecognition criteria are met, these costs are capitalized andgenerally depreciated using the straight-line method over
5 years or, if more appropriate, using the number of
production or similar units expected to be obtained from thetools (sum-of-the-units method). Especially for aircraft
production programs such as the Airbus A380 with anestimated number of aircraft to be produced using such tools,
the sum-of-the-units method effectively allocates thediminution of value of specialized tools to the units produced.
Investment Property – The group accounts for investment
property using the cost model. Investment property is recordedon balance sheet at book value, that is, at cost less any
accumulated depreciation and any accumulated impairment
losses. The fair value of investment property is reviewed
annually by using cash-flow models or by determinations ofopen market prices.
Impairment of Assets – The Group assesses at eachreporting date whether there is an indication that an asset may
be impaired. In addition, intangible assets with an indefinite
useful life, intangible assets not yet available for use andgoodwill are tested for impairment at the end of each financial
year irrespective of whether there is any indication of
impairment. If the carrying amount exceeds the recoverable
amount, the respective asset or the assets in the cashgenerating unit are written down to their recoverable amounts.
The recoverable amount of an asset or a cash-generating unit is
the higher of its fair value less costs to sell and its value in
use. The value in use is the present value of the future cash
flows expected to be derived from an asset or cash-generating
unit. The discount rates used are consistent with estimatedfuture cash flows to avoid any double-counting or disregard ofcertain effects such as inflation or taxes. The discount rates
used for determining the value of an asset are pre-tax rates
that reflect current market assessment of (i) the time value ofmoney and (ii) the risk specific to the asset for which the
future cash flow estimates have not been adjusted. These rates
are estimated from the rate implicit in current market
transactions for similar assets or from the weighted average
cost of capital of a comparable listed entity. These rates inquestion shall reflect the return that investors would require
for an investment in the asset under review.

1

1.2 Financial statements (continued)

2

Notes to the consolidated financial statements (IFRS)Basis of presentation

3
Impairment losses recognised for goodwill are not reversed.
Those for investments in equity instruments classified asavailable-for-sale financial assets (see below: Investments) arereversed through AOCI. For any other asset an impairment
loss recognised in prior periods is reversed through profit orloss up to its recoverable amount provided that there has beena change in estimates used to determine the asset’s recoverable
amount since the last impairment loss has been recognised.
The respective asset’s carrying amount is increased to its
recoverable amount taken into account any amortisation or
depreciation that would have been chargeable on the asset’s
carrying amount since the last impairment loss.
Leasing – The Group is a lessor and a lessee of assets,
primarily in connection with commercial aircraft sales
financing. Lease transactions where substantially all risks andrewards incident to ownership are transferred from the lessor
to the lessee are accounted for as finance leases. All otherleases are accounted for as operating leases.
Assets held for leasing out under operating leases are included
in property, plant and equipment at cost less depreciation (seeNote 12, ‘‘Property, plant and equipment’’). Rental income
from operating leases (e.g. aircraft) is recorded as revenue over
the term of the lease. Assets leased out under finance leases
cease to be recognized in the balance sheet after the inceptionof the lease. Instead, a finance lease payments receivable
representing the discounted future lease payments to bereceived from the lessee plus any discounted unguaranteed
residual value is recorded as long-term financial assets (seeNote 13, ‘‘Other investments and long-term financial assets’’).
Unearned finance income is recorded over time in ‘‘Financial
result’’. Revenues and the related cost of sales are recognised
at the inception of the finance lease.
Assets obtained under finance leases are included in property,
plant and equipment at cost less depreciation (see Note 12,‘‘Property, plant and equipment’’), unless such assets havebeen further leased out to customers. In such a case, therespective asset is either qualified as an operating lease or as afinance lease with EADS being the lessor (headlease-subleasetransaction) and is recorded accordingly. For the relating
liability from finance leases see Note 20, ‘‘Financial liabilities’’.
When EADS is the lessee under an operating lease contract,
rental payments are recorded when they fall due (see Note 25,‘‘Commitments and contingencies’’ for future operating leasecommitments). Such leases often form part of commercial
aircraft customer financing transactions with the related
sublease being an operating lease (headleasesublease-transaction).

EADS Financial Statements and Corporate Governance 2004

EADS considers headlease-sublease-transactions which are set
up for the predominant purpose of tax advantages and which
are secured by bank deposits (defeased deposits) that
correspond with the contractual head lease liability to belinked and accounts for such arrangements as one transactionin accordance with SIC 27 ‘‘Evaluating the Substance ofTransactions Involving the Legal Form of a Lease’’. To reflect
the substance of the transaction, the Group consequently
offset (head) finance lease obligations with the matchingamount of defeased deposits.
Investments – The Group’s investments comprise investments
in associates (see above: Consolidation), other investments andlong-term financial assets as well as current investments likesecurities and cash equivalents (see below: Cash andcash equivalents).
Within EADS all participations in unconsolidated entities areclassified as non-current available-for-sale financial assets. They
are included in the line other investments and long-term
financial assets in the Consolidated Balance Sheet.
All of the Group’s securities are debt securities and classified
as available-for-sale financial assets.
Financial assets classified as available-for-sale are accounted forat fair value. Management determines the appropriateclassification at the time of purchase and reassesses suchdetermination at each balance sheet date. Unrealised gains andlosses on available-for-sale financial assets are recognised
directly within AOCI, a separate component of shareholders’equity, net of applicable deferred income taxes. As soon as
such financial assets are sold or otherwise disposed of, or are
determined to be impaired, the cumulative gain or loss
previously recognised in equity is recorded as part of‘‘Financial Result’’ in the Consolidated Income Statement forthe period.
The fair value of quoted investments is based on current
market prices. If the market for a financial asset is not active(and for unlisted securities), the Group establishes fair value
by using generally accepted valuation techniques on the basisof market information available at the reporting date.
Available-for-sale equity investments that do not have aquoted market price in an active market and whose fair value
cannot be reliably estimated by alternative valuation methods,
such as discounted cash flow model, are measured at cost, lessany accumulated impairment losses. All purchases and sales of
securities are recognized on settlement date according tomarket conventions.

39

1.2 Financial statements (continued)
Notes to the consolidated financial statements (IFRS)Basis of presentation
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 Group provides money,
goods or services directly to a debtor with no intention of
trading the receivable. Loans and receivables are classified as
trade and other receivables.

Derivative Financial Instruments – Within EADS derivative
financial instruments are (a) used for hedging purposes in
micro-hedging strategies to offset the Group’s exposure to
identifiable transactions and are (b) a component of hybrid
financial instruments that include both the derivative and hostcontract (‘‘Embedded Derivatives’’).

The Group assesses at each balance sheet date whether there is
any objective evidence that a financial asset or a group offinancial assets may be impaired. Equity investments classified
as available-for-sale are considered for impairment in case of asignificant or prolonged decline of their fair value below theircost. Any impairment loss recognised in the Consolidated
Income Statement on equity instruments is not reversed
through the Consolidated Income Statement (see above:
Impairment of assets).

In accordance with IAS 39 ‘‘Financial Instruments: Recognition
and Measurement’’, derivative financial instruments are
initially recognized in the Consolidated Balance Sheet at costand are subsequently measured at fair value. While derivative
financial instruments with positive fair values are recorded in‘‘Other receivables and other assets’’, such derivative financial
instruments with negative fair values are recorded as‘‘Provisions for financial instruments’’.

Inventories – Inventories are measured at the lower ofacquisition or manufacturing cost and net realizable value.
Manufacturing costs comprise all costs that are directly
attributable to the manufacturing process, such as directmaterial and labour, and production related overheads (basedon normal operating capacity), including depreciation charges.
Borrowing costs are not capitalized. Inventory is presented in
the Consolidated Balance Sheet net of advance payments
received for construction, delivery and service contracts.
Trade Receivables – Trade receivables include claims arisingfrom revenue recognition that are not yet settled by the
debtor as well as receivables relating to PoC revenue
recognition. Trade receivables are initially recognized at fairvalue and, provided they are not expected to be realised
within one year are subsequently measured at amortized costusing the effective interest method. If it is probable that theGroup is not able to collect all amounts due according to theoriginal terms of receivables, an impairment has occurred. The
amount of the impairment loss is equal to the difference
between the asset’s carrying amount and the present value of
estimated future cash flows, discounted at the original
effective interest rate, i.e. the rate that exactly discounts the
expected stream of future cash payments through maturity or
the next market-based repricing date to the current net
carrying amount of the financial asset. The carrying amount of
the trade receivable is reduced through use of an allowanceaccount. The loss is recognised in the Consolidated
Income Statement.
Cash and Cash Equivalents – Cash and cash equivalents
consist of cash on hand, cash in bank, checks, fixed deposits
having a short-term maturity and short-term securities that arereadily convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value.

40

EADS Financial Statements and Corporate Governance 2004a) Hedging: The Group seeks to apply hedge accounting to
all its hedging activities. Hedge accounting recognises
symmetrically the offsetting effects on net profit or loss ofchanges in the fair values of the hedging instrument and therelated hedged item. The conditions for such a hedging
relationship to qualify for hedge accounting include: The
hedge transaction is expected to be highly effective inachieving offsetting changes in cash flows attributable to thehedged risk, the effectiveness of the hedge can be reliably
measured and there is adequate documentation of the hedging
relationships at the inception of the hedge.
Depending on the nature of the item being hedged, EADS
classifies hedging relationships that qualify for hedge
accounting as either (i) hedges of the fair value of recognised
assets or liabilities (‘‘Fair Value Hedges’’), (ii) hedges of thevariability of cash flows attributable to recognised assets or
liabilities, highly probable forecasted transactions or
unrecognised firm commitments (‘‘Cash Flow Hedges’’) or(iii) hedges of a net investment in a foreign entity.
i) Fair Value Hedge: Fair value hedge accounting is mainly
applied to certain interest rate swaps. For derivative financial
instruments designated as fair value hedges, changes in fairvalue of both the hedging instrument and the hedged asset or
liability are simultaneously recognised in the Consolidated
Income Statement.
ii) Cash Flow Hedge: The Group applies cash flow hedge
accounting generally to foreign currency derivative contracts on
future sales as well as to certain interest rate swaps. Changes
in fair value of the hedging instruments related to theeffective part of the hedge are reported in a separate
component of shareholder’s equity AOCI, net of applicable
income taxes and recognized in the Consolidated Income
Statement in conjunction with the result of the underlying

1

1.2 Financial statements (continued)

2

Notes to the consolidated financial statements (IFRS)Basis of presentation

3
hedged transaction, when realised. Any hedge ineffectivenessis immediately recorded in ‘‘Net income (loss)’’. If hedgedtransactions are cancelled or postponed for more than arelatively short period of time, gains and losses on the hedging
instrument that were previously recorded in equity are
generally recognized in profit or loss.
iii) Net Investment Hedge: Hedges of net investments inforeign entities are accounted for similarly to cash flow
hedges. Any gain or loss on the hedging instrument relating
to the effective portion of the hedge is recognised in AOCI;
the gain or loss relating to the ineffective portion is recognised
immediately in the Consolidated Income Statement.
Gains and losses accumulated in AOCI are included in theConsolidated Income Statement when the foreign entity is
disposed of.
In case certain derivative transactions, while providing effective
economic hedges under the Group’s risk management policies,
do not qualify for hedge accounting under the specific rules of
IAS 39, changes in fair value of such derivative financial
instruments are recognized immediately in ‘‘Net income (loss)’’.
b) Embedded Derivatives: Derivative components embedded
in a non-derivative-host contract are separately recognized andmeasured at fair value if they meet the definition of a
derivative and their economic risks and characteristics are notclearly and closely related to those of the host contract.
Changes in fair value of these instruments are recorded in‘‘Other Financial Result’’.
See Note 26, ‘‘Information about financial instruments’’ for a
description of the group’s financial risk management strategies,
the fair values of the Group’s derivative financial instruments
as well as the methods used to determine such fair values.
Provisions – Provisions are recognized when the Group has apresent obligation (legal or constructive) as a result of a past
event, it is probable that an outflow of resources embodying
economic benefits will be required to settle the obligation anda reliable estimate of the obligation’s amount can be made.
Provisions for financial guarantees corresponding to aircraft
sales are recorded to reflect the underlying risk to the Groupin respect of guarantees given when it is probable that an
outflow of resources embodying economic benefits will be
required to settle the obligation and reliable estimates can bemade of the amount of the obligation. The amount of theseprovisions is calculated to cover the difference between theGroup exposure and the estimated value of the collateral.

EADS Financial Statements and Corporate Governance 2004

Outstanding costs are provided for at the best estimate of
future cash outflows. Provision for other risks and charges
relate to identifiable risks representing amounts expected tobe realized.
Provisions for contract losses are recorded when it becomesprobable that total estimated contract costs will exceed total
contract revenues. Such provisions are recorded as write-downsof work-in-process for that portion of the work which has
already been completed, and as provisions for risks for theremainder. Losses are determined on the basis of estimatedresults on completion of contracts and are updated regularly.
Provisions for litigation and claims are set in case legal actions,
governmental investigations, proceedings and other claims are
pending or may be instituted or asserted in the future against
the Group which are a result of past events, where it isprobable that an outflow of resources embodying economic
benefits will be required for the settlement and a reliable
estimate of the obligation’s amount can be made.
The valuation of pension and post-retirement benefits
classified as defined benefit plans is based upon the projected
unit credit method in accordance with IAS 19, ‘‘Employee
Benefits’’. According to the corridor approach of IAS 19.92,
EADS does not recognize actuarial gains and losses as income
and expense unless, they exceed 10% of the higher of thepresent value of the defined benefit obligation and the fairvalue of plan assets. Such actuarial gains and losses aredeferred and recorded over the expected average remaining
working lives of the employees participating.
Termination benefits are payable whenever an employee’s
employment is terminated before the normal retirement dateor whenever an employee accepts voluntary redundancy inexchange for these benefits. The Group recognizes termination
benefits when it is demonstrably committed to either
terminate the employment of current employees according to adetailed formal plan without possibility of withdrawal or toprovide termination benefits as a result of an offer made toencourage voluntary redundancy.
When sufficient information is not available to use defined
benefit accounting for a defined benefit multi-employer plan,
the Group accounts for the plan as if it were a defined
contribution plan.
Financial Liabilities – Financial liabilities are recorded initiallyat the proceeds received, net of transaction costs incurred.
Subsequently, financial liabilities are measured at amortizedcost using the effective interest rate method with any

41

1.2 Financial statements (continued)
Notes to the consolidated financial statements (IFRS)Basis of presentationdifference between proceeds (net of transaction costs) andredemption amount being recognized in ‘‘Financial result’’ overthe period of the financial liability.
Refundable Advances – Refundable advances from European
Governments are provided to the Group to finance researchand development activities for certain projects on a risk-sharing
basis, i.e. they have to be repaid to the European Governments
according to the success of the project. Because of their risksharing basis, such refundable advances are recorded as‘‘Other Liabilities’’.
Equity Compensation Plans – EADS classifies equity
compensation plans as either compensatory plans or noncompensatory plans. If a plan qualifies as a non-compensatory
plan, no compensation expense is recorded. On the other hand,a compensatory plan may result in recognition of compensation
expense. Upon adoption of a new plan, the Group determines
whether the plan is compensatory or non-compensatory. EADS
recognises all employee stock ownership plans to be noncompensatory if, at grant date, the granted discount does notexceed a significant portion of the market share price, and theplan covers virtually all of the Group’s employees.
Compensation cost for compensatory equity compensationplans is measured on the measurement date, which is the dateon which both the number of shares and the exercise price are
first known, using the intrinsic-value-based method of
accounting. If the terms of the plan or award are such that the
number of shares and exercise price are set on the grant date,fixed-plan accounting applies. If, on the other hand, thenumber of shares, the exercise price, or both is not ‘‘fixed’’ on
the grant date, variable-plan accounting applies.
Fixed-plan accounting prescribes calculating compensation coston the grant date. When the share price at grant date exceeds
significantly the granted exercise price, compensation has to berecognized as compensation expense over the vesting period.
The compensation cost that is calculated cannot be adjusted(assuming that future events do not trigger the need tosubsequently apply variable-plan accounting or to re-measurecompensation cost) for future changes in the stock-based
compensation award’s intrinsic value. On the other hand,variable-plan accounting requires a continual recalculation ofcompensation cost until both the number of shares and theexercise price are known (i.e., until there has been ameasurement date).
Litigation and Claims – Various legal actions, governmental
investigations, proceedings and other claims are pending or
may be instituted or asserted in the future against the Group.
Litigation is subject to many uncertainties, and the outcome of

42

EADS Financial Statements and Corporate Governance 2004individual matters is not predictable with assurance. EADS
believes that it has made adequate provisions to cover current
or contemplated litigation risks. It is reasonably possible thatthe final resolution of some of these matters may require theGroup to make expenditures, in excess of established reserves,
over an extended period of time and in a range of amounts
that cannot be reasonably estimated. The term ‘‘reasonably
possible’’ is used herein to mean that the chance of a futuretransaction or event occurring is more than remote but lessthan likely. Although the final resolution of any such matters
could have an effect on the Group’s consolidated operating
results for the particular reporting period in which an
adjustment of the estimated reserve would be recorded, theGroup believes that any such potential adjustment should notmaterially affect its Consolidated Financial Statements.
Use of Estimates – The preparation of the Group Financial
Statements in accordance with IFRS requires management tomake certain estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure ofcontingent amounts at the date of the financial statements
and reported amounts of revenues and expenses during thereporting period. Actual results could differ fromthose estimates.
3. Scope of consolidation
Perimeter of consolidation (31st December 2004) – The
Consolidated Financial Statements include, in addition to
EADS N.V.:– 250 companies which are fully consolidated– 23 companies which are proportionately consolidated,– 20 companies which are investments in associates and areaccounted for using the equity method.
Significant subsidiaries, associates, and joint ventures arelisted in the appendix entitled ‘‘Information on
principal investments’’.
4. Acquisitions and disposalsa) Acquisitions

On 4th October 2004, the Group acquired RIG Holdings,
Inc., Delaware/USA together with its subsidiaries Racal
Instruments US and Racal Instruments Group Ltd. from RIG
Holdings, LP, Delaware for an amount of US$105 million
cash and debt free. EADS has agreed with the sellers to an
earn out formula whereby the Group pays up to additional
US$25 million for guaranteed future order intake until
30th June 2005. The impact of the acquisition to the1

1.2 Financial statements (continued)

2

Notes to the consolidated financial statements (IFRS)Basis of presentation

3
Consolidated Financial Statements is not material. The initialaccounting for this business combination is determined on aprovisional basis.

family member has offered to Daimler Chrysler AG according
to a put-option agreement. The closing of the transaction is
expected to be effective in 2005.

In 2003, EADS acquired BAE SYSTEMS’ (‘‘BAES’’)25 percent interest (27,5 percent economic share) in
Astrium N.V. The transaction was signed on 30th January
2003 and is accounted for under the purchase method.
Control of Astrium N.V. has been transferred to EADS at
this date. At completion of this transaction, EADS acquired
BAES’ share in Astrium N.V. for 484 million. Prior tocompletion, EADS and BAES each made a capital contribution
into Astrium N.V. of 484 million (total 4168 million). Taking
the cash contribution into account, BAES’ interest has beeneffectively transferred to EADS for no net cash consideration.

As of 31st December 2003, EADS obtained control of ASL
Aircraft Services Lemwerder GmbH. The acquisition costs forthe company amount to 415 million.

On 21st October 2003, a Dornier family member being
shareholder of Dornier GmbH exercised a put option andoffered 17.7% of the shares in Dornier GmbH to
DaimlerChrysler. DaimlerChrysler exercised the right to sell
its shares to DADC Luft- und Raumfahrt Beteiligungs AG(‘‘DADC’’), a subsidiary of EADS, in the amount of
462 million. As a result, EADS holds indirectly through
DADC 94% of the share of Dornier GmbH (2002: 76%). The
minority stockholders of Dornier GmbH, a subsidiary of
DADC Luft- und Raumfahrt Beteiligungs AG, have the right,
exercisable at any time, to exchange their shareholdings in
Dornier GmbH for cash or holdings in Daimler Chrysler AG
or its subsidiary DaimlerChrysler Luft-und Raumfahrt Holding
Aktiengesellschaft. In December 2004, DADC, a subsidiary of
EADS N.V., signed a binding offer with Daimler
Chrysler AG to take on all shares (3.5%) which a Dornier

EADS Financial Statements and Corporate Governance 2004

Apart from those mentioned, other acquisitions by the Groupare not significant.
b) Disposals
In 2003, Nortel Networks and EADS reorganized their joint
telecommunications activities in France and Germany. On
18th September 2003, EADS exchanged its 42 percent
ownership interest in Nortel Networks Germany GmbH &Co. KG and its 45 percent ownership interest in Nortel
Networks France S.A.S. for a 41 percent interest in EADS
Telecom France S.A.S. (‘‘ETF’’), a net additional payment of
442 million by Nortel Networks and a waiver of Nortel
Networks for financial receivables of 472 million. At
completion of transaction, EADS holds 100% of the sharesof ETF.

Apart from the mentioned, other disposals by the Group were
not significant.
c) Subsequent changes in value of assets and liabilities acquiredand cost of acquisition

In 2004, no material subsequent changes in the value of assets
and liabilities acquired and cost of acquisition occurred.

43

1.2 Financial statements (continued)
Notes to the IFRS consolidated statements of income
5. Segment Reporting

The Group operates in 5 divisions (segments) which reflect the internal organizational and management structure according to thenature of the products and services provided:– Airbus – Development, manufacturing, marketing and sale of commercial jet aircraft of more than 100 seats and thedevelopment and manufacturing of aircraft for military use.
– Military Transport Aircraft – Development, manufacturing, marketing and sale of military transport aircraft and special
mission aircraft.
– Aeronautics – Development, manufacturing, marketing and sale of civil and military helicopters, regional turboprop aircraft andlight commercial aircraft; and civil and military aircraft conversion and maintenance services.
– Defence & Security Systems – Development, manufacturing, marketing and sale of missiles systems; military combat andtraining aircraft; and provision of defence electronics, defence-related telecommunications solutions; and logistics, training,
testing, engineering and other related services.
– Space – Development, manufacturing, marketing and sale of satellites, orbital infrastructures and launchers; and provision of
space services.
The following tables present information with respect to the Group’s business segments. Consolidation effects, the holding
function of EADS headquarters and other activities not allocable to the divisions are disclosed in the column ‘‘HQ/Conso’’.
a) Business Segment Information for the year ended 31st December 2004
AirbusMilitary
Transport
AircraftAeronautics

Defence &Security
SystemsSpace

HQ/Conso.

Consolidated

Total revenues
Internal revenues
Revenues

20,224(621)
19,603

1,304
(227)
1,077

3,876
(356)
3,520

5,385
(424)
4,961

2,592
(10)
2,582

31
(13)
18

33,412(1,651)
31,761

EBIT pre goodwill amortization and exceptionals(see definition below)

1,922

26

206

228

10

52

2,444

1,796
7

13
0

202
0

212
3

0
0

(80)
78

2,143
88

in 1m

Income from operating activities
Income from associates
Income/loss from other investments, interest andother financial result
Income taxes
Profit from ordinary activities
Minority interest
Net income
Other information
Identifiable segment assets (incl. goodwill)1
Goodwill
Investments in associates
Segment liabilities1
Capital expenditures
Depreciation, amortization
Research and development expenses

(334)
(664)
1,233
(203)
1,030
32,4086,342
019,290
2,778
1,088
1,734

1 Segment assets and liabilities exclude current and deferred tax assets and liabilities.

44

EADS Financial Statements and Corporate Governance 2004

1,159
12
0
940
49
34
26

4,234
111
9
3,153
177
106
68

8,998
2,407
24
6,481
174
139
185

4,239
559
0
4,027
423
110
61

4,383
29
1,705
709
72
144
52

55,4219,460
1,738
34,600
3,673
1,621
2,126

1

1.2 Financial statements (continued)

2

Notes to the IFRS consolidated statements of income3b) Business Segment Information for the year ended 31st December 2003
AirbusMilitary
Transport
AircraftAeronautics

Defence &Security
SystemsSpace

HQ/Conso.

Consolidated

Total revenues
Internal revenues
Revenues
EBIT pre goodwill amortization and exceptionals(see definition below)

19,048(363)
18,685

934
(236)
698

3,803
(372)
3,431

5,165
(319)
4,846

2,424
(10)
2,414

81
(22)
59

31,455(1,322)30,133

1,353

30

217

171

(400)

172

1,543

Income from operating activities
Income from associates
Income/loss from other investments, interest andother financial result
Income taxes
Profit from ordinary activities
Minority interest
Net income
Other information
Identifiable segment assets (incl. goodwill)2
Goodwill
Investments in associates
Segment liabilities1
Capital expenditures
Depreciation, amortization
Research and development expenses

809
5

15
0

203
0

19
(6)

(425)
0

(60)
225

561
224

in 1m

(93)
(474)
218
(66)
152
29,2906,342
017,501
2,027
1,628
1,819

930
0
0
675
28
31
23

3,978
111
0
2,948
142
136
62

8,743
2,321
7
6,670
207
287
223

3,717
545
0
3,544
473
134
62

4,664
53
1,633
715
74
159
0

51,3229,372
1,640
32,053
2,951
2,375
2,189

1 Segment assets and liabilities exclude current and deferred tax assets and liabilities.

As a rule, inter-segment transfers are carried out on an arm’s length basis. Inter-segment sales predominantly take place between
Aeronautics, Defence & Security Systems and Airbus; as the Aeronautics and Defence & Security Systems divisions act as
suppliers for Airbus aircraft. Moreover, Airbus acts as a main supplier for the A400 M program which is led by the MilitaryTransport Division.
Capital expenditures represent the additions to property, plant and equipment and to intangible assets (excluding additions togoodwill of 483 million, mainly for the acquisition of RIG Holdings Inc. with its subsidiaries Racal Instruments US and Racal
Instruments Group Ltd. within the Defence & Security Systems division; for further details see Note e. –‘‘capital expenditures’’.
c) EBIT pre goodwill amortization and exceptionals

EADS uses EBIT pre goodwill amortization and exceptionals as a key indicator of its economic performance. The term‘‘exceptionals’’ refers to such items as amortization expenses of fair value adjustments relating to the EADS merger, the Airbus
Combination and the formation of MBDA, as well as impairment charges thereon. EBIT pre goodwill amortization andexceptionals is treated by management as a key indicator to measure the segments’ economic performances.
in 1m

2004

2003

2002

Income from operating activities

2,143

561

160

Goodwill amortization and related impairment charges
Exceptional depreciation (fixed assets)
Exceptional depreciation (inventories)
Income from investments
EBIT pre goodwill amortization and exceptionals

0
212
5
84
2,444

567
214
15
186
1,543

936
227
16
87
1,426

EADS Financial Statements and Corporate Governance 200445

1.2 Financial statements (continued)
Notes to the IFRS consolidated statements of income
In the context of the Project Airbus Conversion in Euro(PACE) and the relating Advance Pricing Agreement signed in
April 2004 with tax authorities (France, UK, Germany andSpain), the Airbus GIE – a US$ denominated entity – hasbeen merged within Airbus SAS – a Euro denominatedentity – with retroactive effect as of 1st January 2004.
As a consequence, operations of former Airbus GIE are from
1st January 2004, considered as ‘‘foreign currency operations’’
and accounted for in accordance with accounting principles
consistently adopted by EADS. Before the merger, Airbus GIE
operations used to be recorded at the current exchange rate of
the period except for those hedged with financial instruments.
From 1st January 2004, former Airbus GIE operations arerecorded on the basis of historical exchange rates.
As a result, no additional Currency Translation Adjustment(CTA) is generated from former Airbus GIE operations. The
portion of outstanding CTA as at 31st December 2003,
booked for balance sheet items that relate to futuretransactions as from 1st January 2004, is gradually released
according to realization of such operations, namely
aircraft deliveries.
d) Revenues by destinationin 1m

Germany
FranceUnited Kingdom
Spain
Other European Countries
North America
Asia/PacificMiddle East
Latin America
Other Countries
Consolidated

2004

2003

2002

4,322
3,326
2,653
1,253
2,974
8,715
4,938
2,286
505
789
31,761

3,651
3,521
2,121
1,000
3,687
8,056
4,033
2,873
677
514
30,133

2,476
3,872
2,452
1,309
4,248
10,562
2,010
1,258
1,259
455
29,901

Revenues are allocated to geographical areas based on thelocation of the customer.
Most of the Group’s assets are located in the European Union.

46

EADS Financial Statements and Corporate Governance 2004e) Capital expenditures
in 1m

2004

FranceGermany
United Kingdom
Spain
Other Countries
Capital expenditures excluding leased assets
Leased assets
Capital expenditures

986
823
687
195
326
3,017
656
3,673

6. Revenues
Revenues in 2004 reached 431,761 million compared to430,133 million in 2003 and 429,901 million in 2002.
Revenues in 2004 increased in comparison to 2003 in alldivisions. Despite a lower US Dollar exchange rate comparedto Euro and less favourable hedges compared to 2003,
revenues increased mainly due to increased deliveries and amore favourable aircraft mix at Airbus.

Revenues are mainly comprised of sales of goods and services,
as well as of revenues associated with construction contracts
accounted for under the percentage-of-completion-method,
contracted research and development and customer financing
revenues. For a breakdown of revenues by business segment
and geographical region, refer to Note 5, ‘‘Segment reporting’’.
Detail of Revenues:
in 1m

Total revenues
Thereof revenues from thedelivery of goods & services
Thereof revenues fromconstruction contracts(including contracted
research and development)

2004

2003

2002

31,76130,13329,901

26,20825,11025,832

4,816

4,295

3,741

The revenues from construction contracts increased in 2004
mainly in the Military Transport Aircraft division resulting
from the A400M program and in the Aeronautics division
resulting from the Tiger and NH90 programs partly offset by
the decrease in the Space division due to the finalization ofmajor development programs such as Ariane 5 and the M51
ballistic missile.

1

1.2 Financial statements (continued)

2

Notes to the IFRS consolidated statements of income

3
7. Functional costs and other expenses

9. Financial result

Included in cost of sales and other functional costs are Costof materials of 419,498 million (2003: 418,838 million, 2002:
419,216 million).
Cost of sales include the amortization expenses of fair value
adjustments of fixed assets and inventories in the amount of
4217 million (2003: 4229 million; 2002: 4243 million); these
are relating to the EADS merger, the Airbus Combination andthe formation of MBDA.
Selling, administrative and other expenses arecomprised of:
in 1m

2004

2003

2002

798
1,321
177

776
1,386
256

829
1,422
241

14

15

5

13
2,296

12
2,418

16
2,492

2004

2003

2002

7,605

7,238

7,147

327
7,932

359
7,597

319
7,466

in 1m

2004

2003

2002

Other income
Thereof rental income
Thereof release of allowances
Thereof income from sales of
fixed assets

314
42
34

196
39
17

248
38
8

20

7

89

Selling expenses
Administrative expenses
Other expenses
Thereof losses from sales of
fixed assets
Thereof restructuring
measures
Total

Personnel expenses are:in 1mWages, salaries and social
contributions
Net periodic pension cost (seeNote 19 b)
Total
8. Other income

The other income in 2004 includes the release of theprovision for the VT 1 claim in the amount of 4106 million(see note 24 ‘‘Litigation and Claims’’).
The income from sale of fixed assets included in 2002 a gainon the disposal of EADS’ 50% share in Aircelle (463 million).

EADS Financial Statements and Corporate Governance 2004

in 1m

Income from investments
Interest result
Other financial result
Total

2004

2003

2002

84
(275)
(55)
(246)

186
(203)
148
131

87
(81)
21
27

The income from investments in 2004 is mainly derived
from the result of the equity investment in Dassault Aviationof in 478 million (2003: 4225 million; 2002: 4111 million), in
previous years partly offset by impairment of investments (in2003: 430 million for CAC Systèmes and Hispasat; in 2002:
429 million for Arianespace Participation S.A.).
Since for the second half-year 2004 no financial informationaccording to IFRS is available yet from Dassault Aviation, thenet income of the second half year 2003 of Dassault Aviation
has been used as the best estimate to report the current second
half year’s net income for 2004. The current year’s equity
investment income from Dassault Aviation also includes anegative catch up of the prior year financial performance inaccordance with IFRS, which amounts to (433) million (in2003 a positive catch up of 477 million).
Interest result in 2004 comprises interest income of4352 million (2003: 4371 million) and interest expense of(4627) million (2003: (4574) million). The 2003 grosspresentation of interest income and interest expense has been
restated by 485 million to be comparable with the current
presentation. Included in interest income is the return on cash
and cash equivalents, securities and financial assets such asloans and finance leases. Interest expense includes interest on
European Government refundable advances of 4245 million(2003: 4218 million) and on financial liabilities. The netinterest expense in 2003 increased compared to 2002
principally due to higher interest charges on European
Governments refundable advances received, to an increased
spread between interest received on positive balances invested
in short-term liquid instruments and to interest paid on
longer-term debt.
Other financial result in 2004 includes interest expenses
related to taxes of (428) million as well as the impact from thefair value measurement of embedded derivatives not used in
hedging relationships in the amount of (410) million (2003:
470 million, 2002: 426 million).

47

1.2 Financial statements (continued)
Notes to the IFRS consolidated statements of income
10. Income taxes

The (expense for) benefit from income taxes is comprised of the following:in 1mCurrent tax expense
Deferred tax (expense)/benefit
Total

2004

2003

2002

(127)
(537)
(664)

(612)
138
(474)

(198)
(255)
(453)

The Group’s parent company, EADS N.V., legally seated in Amsterdam, The Netherlands, applies Dutch tax law using an
income tax rate of 34.5% for 31st December 2004, 2003 and 2002. In December 2004, a new tax law was enacted reducing theincome tax rates in 2005 to 31.5%, in 2006 to 30.5% and from 2007 onwards to 30.0%. Accordingly, deferred tax assets andliabilities for the Group’s Dutch entities were calculated using the respective enacted rates. All foreign subsidiaries however
apply their national tax rates, among others Great Britain 30% and Spain 35%.
In France, the corporate tax rate in effect for 2004, 2003 and 2002 was 331/3% plus surcharges of 3% (‘‘contribution
additionelle’’) and 3.3% (‘‘contribution sociale’’). In 2004, the French Finance Law (FFL) for 2005 was enacted resulting in a
reduction of the ‘‘contribution additionelle’’ to 1.5% in 2005 and nil for 2006 onwards. Accordingly, deferred tax assets andliabilities for the Group’s French subsidiaries were calculated at 31st December 2004 using the enacted tax rate of 34.93% for
temporary differences that reverse in 2005 and 34.43% for temporary differences with a reversal scheduled later than 2005
(35.43% at 31st December 2003 and 2002).
For the Group’s German subsidiaries, income taxes are calculated using a federal corporate tax rate of 25.0% for 31st December
2004, plus (i) an annual solidarity surcharge of 5.5% on the amount of federal corporate taxes payable and (ii) the after federal
tax benefit rate for trade tax of 12.125% for 2004. In aggregate, the tax rate applied to German income taxes amounts to 38.5%
in 2004 (40.0% at 31st December 2003 and 38.5% at 31st December 2002).
The following table shows a reconciliation from the theoretical income tax expense – using the Dutch corporate tax rate of
34.5% as at 31st December 2004, at 31st December 2003 and at 31st December 2002 – to the reported tax expense. The
reconciling items represent, besides the impact of tax rate differentials and changes, non-taxable benefits or non-deductible
expenses arising from permanent differences between the local tax base and the reported financial statements according to
IFRS rules.

in 1m

2004

Profit before income taxes and minority interests
Corporate income tax rate
Expected (expense) for income taxes

1,897
34.5 %(654)

Effects from tax rate differentials and changes
Goodwill amortization and impairments
Change in valuation allowances
Tax credit for R&D expenses
Results on associates (at equity)
Tax effect on investments
Other
Reported tax expense

(36)
3
(11)
80
22
4
(72)
(664)

48

EADS Financial Statements and Corporate Governance 2004

2004 in %of ‘‘Profit
beforeincometaxes andminority
interests’’

2003

2002

34.5 %

692
34.5 %(239)

187
34.5 %(65)

1.9 %(0.2)%
0.6 %(4.2)%(1.2)%(0.2)%
3.8 %
35.0 %

(26)
(191)
(119)
69
76
(35)
(9)
(474)

(35)
(321)
(11)
53
28
(39)
(63)
(453)

1

1.2 Financial statements (continued)

2

Notes to the IFRS consolidated statements of income

3
Deferred income taxes are the result of temporary differences between the carrying amounts of certain assets and liabilities in
the financial statements and their tax bases. Future tax impacts from net operating losses and tax credit carry forwards are also
considered in the deferred income tax calculation. Deferred income taxes are related to the following assets and liabilities:

in 1m

Deferredtax
assets2004

Deferredtax
assets
2003

Deferredtax
liabilities
2004

Deferredtax
liabilities
2003

Net
31st
December
2004

Net
31st
December
2003

Intangible assets
Property, plant and equipment
Investments and long-term financial assets
Inventories
Receivables and other current assets
Prepaid expenses
Retirement plans
Other provisions
Liabilities
Deferred income
Net operating loss and tax credit carry forwards
Deferred tax assets/(liabilities) before netting
Valuation allowances on deferred tax assets
Set-off
Net Deferred tax assets/(liabilities)
Thereof less than one year
Thereof more than one year

8
37
33
357
58
1
700
607
821
579
1,260
4,461
(570)
(1,348)
2,543
858
1,685

23
7
25
287
666
8
674
729
1,230
698
817
5,164
(729)
(1,711)
2,724
1,237
1,487

(97)
(1,087)(149)(191)(3,557)
(26)
0
(41)
(305)
(29)
–
(5,482)–
1,348(4,134)(1,379)(2,755)(37)(1,108)(145)(273)(3,159)
(45)
0
(82)
(505)
(21)
–
(5,375)–
1,711(3,664)(955)(2,709)(89)(1,050)(116)
166(3,499)
(25)
700
566
516
550
1,260
(1,021)(570)–(1,591)(521)(1,070)(14)(1,101)(120)
14(2,493)
(37)
674
647
725
677
817
(211)
(729)
–
(940)
282
(1,222)

The amount of the Group’s deferred tax assets’ allowances is based upon management’s estimate of the level of deferred tax
assets that will be realized in the future. In future periods, depending upon the Group’s financial results, management’s estimateof the amount of the deferred tax assets considered realizable may change, and hence the write down of deferred tax assets may
increase or decrease.

EADS Financial Statements and Corporate Governance 200449

1.2 Financial statements (continued)
Notes to the IFRS consolidated statements of income
Deferred taxes on Net Operating Losses and Tax Credit carry forwards:
in 1mFranceGermany

Spain

UK

Other
countries

Net Operating Losses (NOL)
Capital losses
Trade tax loss carry forwards
Tax credit carry forwards
Tax effect
Valuation allowances
Deferred tax assets on NOL’s and tax credit carryforwards

816

966

27

1,237

171

371

5
55

871
281

363

181
190

31st
December
2004

31st
December
2003

3,217
0
871
186
1,260
(349)

1,974
18
706
131
817
(357)

911

460

NOL’s, capital losses and trade tax loss carry forwards are indefinite in France, Germany and in Great Britain. In Spain NOL’s
and tax credit carry forwards expire after 15 years. The first tranche of tax credit carry forwards (44 million) will expire in 2014.
Roll forward of deferred taxes:
in 1m

Net deferred tax asset/(liability) beginning of the year
Deferred tax income (expense) in income statement
Deferred tax recognized directly in AOCI (IAS 39)
OthersNet deferred tax (liability) at year end

2004

2003

(940)
(537)
(300)
186
(1,591)

978
138(1,762)
(294)
(940)

2004

2003

4
(3,109)(3,105)

5(2,810)(2,805)The deferred tax recognized directly in AOCI is as follows:in 1m

Available-for-sale investments
Cash flow hedges
Total

50

EADS Financial Statements and Corporate Governance 2004

1

1.2 Financial statements (continued)

2

Notes to the IFRS consolidated balance sheets3
11. Intangible assets

A schedule detailing gross values, accumulated depreciation and net values of intangible assets is as follows:
Cost
in 1m

Balance at
31st
December
2003

Eliminationofaccumulated
amortization

Adjustedbalance at
1st January
2004

Exchangedifferences

Additions

Changes in
consolidation scope

Reclassification

Disposals

Balance at
31st
December
2004

Goodwill
Other intangible assets
Total

12,710650
13,360(2,198)0(2,198)10,512650
11,162

(1)
(2)
(3)

83
364
447

13
6
19

0
6
6

0
(15)
(15)

10,607
1,009
11,616

Amortization/Impairment
in 1m

Balance at
31st
December
2003

Eliminationofaccumulated
amortization

Adjustedbalance at
1st January
2004

Exchangedifferences

Additions

Changes in
consolidation scope

Reclassification

Disposals

Balance at
31st
December
2004

Goodwill
Other intangible assets
Total(3,338)(328)(3,666)

2,198
0
2,198

(1,140)(328)(1,468)

(2)
0
(2)

0
(137)
(137)

(5)
(1)
(6)

0
(3)
(3)

0
8
8

(1,147)(461)(1,608)Net book value
in 1mBalance at
31st
December
2003

Eliminationofaccumulated
amortization

Adjustedbalance at
1st January
2004

Exchangedifferences

Additions

Changes in
consolidation scope

Reclassification

Disposals

Balance at
31st
December
2004

Goodwill
Other intangible assets
Total

9,372
322
9,694

0
0
0

9,372
322
9,694

(3)
(2)
(5)

83
227
310

8
5
13

0
3
3

0
(7)
(7)

9,460
548
10,008Additions to goodwill in 2004 mainly result from the acquisition of RIG Holdings Inc. with its subsidiaries Racal Instruments
US and Racal Instruments Group Ltd. (+476 million).
As EADS decided to early adopt IFRS 3 as of 1st January 2004, the carrying amount of the accumulated amortization of
Goodwill was eliminated, with a corresponding decrease in Goodwill. As at 31st December 2004 the accumulated impairments
amount to 41,147 million.
Goodwill impairment tests

Similar to previous periods, EADS performed impairment tests on level of Cash Generating Units (on segment level or one level
below). The goodwill is tested annually for impairment in the fourth quarter of the financial year by using cash flow projections
based on current operative planning covering normally a three-year period. These current forecasts are based on past experience
as well as on future expected market developments.
As of 31st December 2004 and 2003, goodwill was allocated to Cash Generating Units, which is summarized in the following
schedule on segment level:
AirbusMilitary
Transport
AircraftAeronautics

Defence &Security
SystemsSpace

HQ/
Conso.

Consolidated

6,342
6,342
0

12
0
12

111
111
0

2,407
2,321
86

559
545
14

29
53
(24)

9,460
9,372
88

in 1m

Goodwill as of 31st December 2004
Goodwill as of 31st December 2003
Deviation

The current operative planning takes into account general economic data derived from external macroeconomic and financial
studies. The operative planning assumptions reflect for the periods under review specific inflation rates and future labour
expenses in the European Countries where the major production facilities are located. Regarding the expected future labour
expenses an increase on average of 3% was implied. In addition, future interest rates are projected for the European Monetary
Union, Great Britain and the U.S.A.

EADS Financial Statements and Corporate Governance 200451

1.2 Financial statements (continued)
Notes to the IFRS consolidated balance sheets
The assumption for the growth rate used to calculate the terminal value in general amounts to 2%. Airbus is using for new
programs specific business assumptions. Based on these current forecasts and projections of future pre-tax cash-flows the value in
use of Cash Generating Units is computed by applying pre-tax discount rates in the range of 12.5% to 14.0%.
Airbus operates in a cyclical market, nevertheless signs of recovery have been appearing since 2003. To face growing demandand based on an order backlog of 1,500 aircraft, Airbus has planned for a production ramp up program to prepare for a
production rate of up to 30 single aisle and up to 8 long range aircraft per month. Airbus future profits should be mainly
affected by the expected growth, the exchange rate assumptions, the hedge book (details see below) and the cost saving program
Route 06. Altogether, this is expected to trigger EBIT improvement, which should be further enhanced by the entry into serviceof the A380.
For the Defence & Security Systems division a moderate increase in revenues is assumed in the operative planning, based
namely on the order book, expected order intake as well as the sustained level of Eurofighter deliveries based on tranche two
which stabilizes the program beyond 2007. Operating margin of the overall division is expected to increase over the operativeplanning period thanks to the benefits from past restructuring measures and expected growth, partly offset by continuing selffinanced investment in campaigns and projects such as Euromale.
The order book of the Space division as of 31st December 2004 (including satellites, launchers and ballistic missile) supports themoderate revenues increase which is assumed for this division over the operative planning period. The current development of
the Skynet V satellites is weighing on EADS Space cash flow until these spacecraft are launched and operated with their fullcapability by 2008 to generate a ramped up level of revenues from the UK MoD. The Space restructuring program SARA
successfully delivered EBIT turnaround in 2004 and is expected to lay the ground for further profits.
EADS follows an active policy of foreign exchange risk hedging. As of 31st December 2004 the total hedge portfolio withmaturities up to 2011 amounts to US$40 bn and covers a major portion of the net exposure expected over the period of theoperative planning (2005 to 2007). The average US$/4 hedge rate of the total hedge portfolio until 2011 amounts to
1.03 US$/4. For the determination of the operative planning, management assumed future exchange rates of 1.30 US$/4 and0.68 GBP/4 to convert in 4 the portion of future US$ and GBP denominated revenues which are not hedged. Net exposure
arises mostly from Airbus and to a lesser extent from Aeronautics, Space and the Defence & Security Systems divisions.
The recoverable amounts based on value in use have exceeded the carrying amounts of the Cash Generating Units under review,
indicating no goodwill impairment for 2004 as it was the case for 2003.
In 2002 an impairment charge of 4350 million was set up for the Cash Generating Units Satellite and Communication and Casa
Space Business.
Development Costs

EADS capitalized development costs in the amount of 4169 million as of 31st December 2004 (44 million as of 31st December
2003) as internally generated intangible asset mainly for Airbus A380 program.
12. Property, plant and equipment

Schedules detailing gross values, accumulated depreciation and net values of property, plant and equipment show the following:
Cost
in 1m

Land, leasehold improvements and buildings including
buildings on land owned by others
Technical equipment and machinery
Other equipment, factory and office equipment
Advance payments relating to plant and equipment
as well as construction in progress
Total

52

Additions

Change inconsolidation scope

Reclassification

Disposals

Balance at
31st
December
2004

(6)
(76)
(211)

252
450
924

18
8
4

409
288
34

(46)
(129)
(644)

5,496
6,682
6,321

(15)
(308)

1,683
3,309

0
30

(731)
(0)

(14)
(833)

3,236
21,735

Balance at
1st January
2004

Exchangedifferences

4,869
6,141
6,214
2,313
19,537

EADS Financial Statements and Corporate Governance 2004

1

1.2 Financial statements (continued)

2

Notes to the IFRS consolidated balance sheets

3
Depreciation
in 1m

Land, leasehold improvements and buildings including
buildings on land owned by others
Technical equipment and machinery
Other equipment, factory and office equipment
Advance payments relating to plant and equipment
as well as construction in progress
Total

Balance at
1st January
2004

Exchangedifferences

Depreciation
chargeChange inconsolidation scope

Reclassification

Disposals

Balance at
31st
December
2004(1,739)(3,526)(2,783)

4
27
85

(251)
(557)
(567)

(7)
(5)
(2)

(19)
8
12

39
119
376

(1,973)(3,934)(2,879)(41)(8,089)0116(2)(1,377)

0
(14)

(1)
0

0
534

(44)
(8,830)

Balance at
1st January
2004

Exchangedifferences

Additions

Change inconsolidation scope

Reclassification

Disposals

Balance at
31st
December
2004

3,130
2,615
3,431

(2)
(49)
(126)

1
(107)
357

11
3
2

390
296
46

(7)
(10)
(268)

3,523
2,748
3,442

2,272
11,448

(15)
(192)

1,681
1,932

0
16

(732)
(0)

(14)
(299)

3,192
12,905Net book value
in 1m

Land, leasehold improvements and buildings including
buildings on land owned by others
Technical equipment and machinery
Other equipment, factory and office equipment
Advance payments relating to plant and equipment
as well as construction in progress
Total

The Property, plant and equipment include at 31st December 2004 and 2003, buildings, technical equipment and otherequipment accounted for in fixed assets under finance lease agreements for net amounts of 4103 million and 4122 million, netof accumulated depreciation of 4336 million and 4317 million. The related depreciation expense for 2004 was 419 million (2003:
422 million; 2002: 423 million).
For investment property recorded under property, plant and equipment, refer to Note 29.
The item ‘‘Other equipment, factory and office equipment’’ includes the net book value of ‘‘aircraft under operating lease’’for 42,743 million and 42,771 million as of 31st December 2004 and 2003, respectively; related accumulated depreciation is41,604 million and 41,702 million. Depreciation expense for 2004 amounts to 4327 million (2003: 4439 million, 2002:
4263 million).
The ‘‘aircraft under operating lease’’ include:(i) Group’s sales finance activity in the form of aircraft which have been leased out to customers and are classified as operatingleases: They are reported net of the accumulated impairments. These sales financing transactions are generally secured by theunderlying aircraft used as collateral. (See Note 25, ‘‘Commitments and contingencies’’ for details on sales financing transactions).
The corresponding non-cancellable future operating lease payments (not discounted) due from customers to be included inrevenues, at 31st December 2004 are as follows:
in 1m

not later than 2005
later than 2005 and not later than 2009
later than 2009
Total

EADS Financial Statements and Corporate Governance 2004

156
372
219
747

53

1.2 Financial statements (continued)
Notes to the IFRS consolidated balance sheets(ii) Aircraft which have been accounted as ‘‘operating lease’’because they were sold under terms that include asset value
guarantee commitments with the present value of theguarantee being more than 10% of the aircraft’s sales price(assumed to be the fair value). Upon the initial sale of theseaircraft to the customer, their total cost previously recognized
in inventory is transferred to ‘‘Other equipment, factory andoffice equipment’’ and depreciated over its estimated useful
economic life, with the proceeds received from the customer
being recorded as deferred income (see Note 22,‘‘Deferred income’’).
The total net book values of aircraft under operating leaseis as follows:in 1m(i) Net book value of aircraft underoperating lease before impairment charge
Accumulated impairment
Net book value of aircraft under operating
lease(ii) Aircraft under operating lease with thepresent value of the guarantee being morethan 10%
Total Net Book value of aircraft underoperating leases

31st
December
2004

31st
December
2003

1,981
(532)

1,856
(590)

1,449

1,266

1,294

1,505

2,743

2,771

13. Investments in associates, other investments andlong-term financial assets

The following table sets forth the composition of investments
in associates, other investments and long-term financial assets:
in 1m

Investments in associates
Other investments
Other financial assets
Thereof loans from aircraft financing
Thereof finance lease receivables fromaircraft financing
OthersTotal

A list of major investments in associates and the proportionof ownership is included in Appendix ‘‘Information on
principal investments’’.
Other investments comprise EADS’ investment in various
non-consolidated entities, the most significant being at
31st December 2004, investments in Embraer of 472 million(2003: 486 million) and in Patria of 450 million(2003: 442 million).
Other financial assets encompass mainly the Group’s sales
finance activities in the form of finance lease receivables andloans from aircraft financing. They are reported net ofaccumulated impairments. These sales financing transactions are
generally secured by the underlying aircraft used as collateral.
(See Note 25, ‘‘Commitments and contingencies’’ for details onsales financing transactions).
Loans from aircraft financing are provided to customers tofinance the sale of aircraft. These loans are long-term andnormally have a maturity which is linked to the use of theaircraft by the customer. The calculation of the net bookvalue is:31st
December
2004

31st
December
2003

1,738
459
1,893
635

1,640
560
1,929
812

Outstanding gross amount of loans tocustomers
Accumulated impairment
Total net book value of loans

965
293
4,090

898
219
4,129

Finance lease receivables from aircraft financing are as follows:

Investments in associates are accounted for using the equity
method. As of 31st December 2004 and 2003, investments inassociates contain EADS’ interest in Dassault Aviation (46.22%
at 31st December 2004 and 46.03% as at 31st December 2003)
of 41,705 million and 41,633 million. Since for the second
half-year 2004 no financial information according to IFRS is

54

available yet from Dassault Aviation, the net income of thesecond half-year 2003 of Dassault Aviation according to IFRS
has been used as the best estimate to report the current second
half year’s net income. The current year’s equity investment
from Dassault Aviation also includes a negative catch up of
the prior year equity according to IFRS in the amount of(433) million (in 2003 a positive catch-up of 477 million),
which relates to income from investments (see Note 9,‘‘Financial result’’) and in addition 438 million (in 2003:
469 million) recognized in AOCI.

EADS Financial Statements and Corporate Governance 2004

in 1m

in 1m

Minimum lease payments receivables
Unearned finance income
Accumulated impairment
Total net book value of finance leasereceivables

31stDecember
2004

31st
December
2003

946
(311)
635

1,080
(268)
812

31st
December
2004

31st
December
2003

1,299
(179)
(155)

1,262
(201)
(163)

965

898

1

1.2 Financial statements (continued)

2

Notes to the IFRS consolidated balance sheets3
Future minimum lease payments from investments in financeleases to be received are as follows (not discounted):
in 1m

not later than 2005
later than 2005 and not later than 2009
later than 2009
Total

177
358
764
1,299

Other financial assets include 4293 million and 4219 millionof other loans as of 31st December 2004 and 2003, e.g. loans
to employees.
Defeased bank deposits of 41,089 million and 41,131 million
as of 31st December 2004 and 2003, respectively have been
offset against financial liabilities (see Note 2: ‘‘Summary ofsignificant accounting policies’’).
14. Inventories, net of advances received

Inventories, net of advances received at 31st December 2004
and 2003 consist of the following:in 1m

Raw materials and manufacturing
supplies
Work in progress
Finished goods, parts and products held
for resale accounted for at lower of costand net realizable value
Advance payments to suppliers
Less: Advance payments received
Total

31st
December
2004

31st
December
2003

987
8,505

938
8,088

1,039
1,803
12,334(9,259)
3,075

1,804
1,799
12,629(9,350)3,279

The increase in work in progress of 4417 million was mainly
driven by Airbus. Finished goods, parts and products held forresale decreased by 4765 million, reflecting Airbus higherdelivery rate, compared to its production rate.
The at cost value of finished goods, parts and products held
for resale amounts to 41,354 million in 2004
(2003: 42,158 million).

15. Trade receivables

Trade receivables at 31st December 2004 and 2003 consist of
the following:
in 1m

31st
December
2004

31st
December
2003

Receivables from sales of goods andservices
Allowance for doubtful accounts
Total

4,784
(378)
4,406

4,335
(334)
4,001

Trade receivables are classified as current assets. As of
31st December 2004 and 2003, respectively, 477 million and4223 million of trade receivables are not expected to becollected within one year.
In application of the percentage of completion method, as of
31st December 2004 an amount of 41,313 million (in 2003:
4972 million) for construction contracts is included in the
trade receivables net of advance payments received.
16. Other receivables and other assets

Other receivables and other assets at 31st December 2004 and2003 consist of the following:in 1mReceivables from affiliated companies
Receivables from related companies
Positive fair values of derivative financial
instruments
Capitalized settlement payments toGerman Government
Value Added Tax claims
Income tax claims
Others
Total

31st
December
2004

31st
December
2003

121
333

171
479

8,948

7,964

287
462
303
651
11,105

315
386
332
633
10,280The capitalized settlement payments to the German
Government are attributable to refundable advances which areamortized through the income statement (in cost of sales) at
the delivery pace of the corresponding aircraft.

The advance payments received are composed of advancepayments for construction, delivery and service contracts.

The residual amount in other receivables and other assets as of
31st December 2004 and 2003 (4651 million and4633 million, respectively) includes positive market value ofembedded derivatives within purchase contracts in the amountof 486 million and 496 million, respectively.

EADS Financial Statements and Corporate Governance 2004

55

1.2 Financial statements (continued)
Notes to the IFRS consolidated balance sheets
Other receivables and other assets, which are expected to becollected within one year, amount to 44,583 million as of
31st December 2004 (44,664 million as of 31st December
2003) and are classified as current assets.
17. Securities

The Group’s security portfolio amounts to 4466 million and4468 million as of 31st December 2004 and 2003,
respectively. It includes only debt securities classified as‘‘Available-for-Sale’’.

18. Shareholders’ equity

The change of shareholders’ equity is provided in theConsolidated Statements of Changes in Shareholders’ Equity.
The following table shows the development of the number ofshares outstanding:in 1mIssued as at 1st January
Issued for ESOP
Issued for exercised options
Cancelled
Issued as at 31st December
Treasury shares as at 31st
DecemberOutstanding as at
31st December

Furthermore, the Shareholders’ General Meeting authorizedboth the Board of Directors and the Chief Executive Officers,
with power of substitution, to cancel up to a maximum of
5,727,515 shares. On 20th July 2004, the Chief Executive
Officers decided to cancel 5,686,682 treasury shares.
In total EADS purchased in 2004 3,787,523 (in 2003:
1,686,682) of its own shares and cancelled 5,686,682 shares,
resulting in an amount of 10,028,775 treasury shares at
31st December 2004 (in 2003: 11,927,934).
On 6th May 2004, the Shareholders’ General Meeting alsodecided to pay a cash distribution related to the fiscal year
2003 for a gross amount of 40.40 per share, which was paid
on 4th June 2004.

2004

2003

812,885,182
2,017,822
362,747(5,686,682)
809,579,069

811,198,500
1,686,682
00812,885,182

Capital stock comprises the nominal amount of shares
outstanding. The addition to capital stock represents thecontribution of 42,017,822 (in 2003: 41,686,682) byemployees under the 2004 Employee Stock Ownership Plan
and for exercised options of 4362,747 (in 2003: 40) incompliance with the implemented stock option plans.

(10,028,775)(11,927,934)

799,550,294

800,957,248

Reserves contain capital reserves, retained earnings as well as
the net result for the period. Accumulated othercomprehensive income consists of all amounts recognizeddirectly in equity resulting from changes in fair value offinancial instruments that are classified as available-for-sale orthat form part of hedging relationships in effective cash-flow
hedges as well as from currency translation adjustments offoreign entities. Treasury shares represent the amount paid forown shares held in treasury.

EADS’ shares are exclusively ordinary shares with a par valueof 41.00. The authorized share capital consists of
3,000,000,000 shares. In connection with the 2004 Employee
Stock Ownership Plan (see Note 27, ‘‘Stock-based
compensation’’), EADS issued 2,017,822 shares (in 2003:
1,686,682), representing a nominal value of 42,017,822 (in2003: 41,686,682).
The Shareholders’ General Meeting of EADS held on
6th May 2003, renewed the authorization given to the Boardof Directors by the Annual General Meeting of 17th May
2002, to repurchase shares of the Company within the limit
of 5% of the Company’s issued share capital. As of
10th October 2003, the Group’s Board of Directors decided to
set up and implement plans for the repurchase of up to
2,027,996 shares within the limits approved by the
Shareholders’ General Meeting of EADS.
On 6th May 2004, the Shareholders’ General Meeting of
EADS renewed the authorization given to the Board of
Directors to repurchase shares of the Company as long as,
upon such repurchase, the Company will not hold more than

56

5% of the Company’s issued share capital. The Group’s Boardof Directors decided on 8th October 2004, to set up andimplement plans for the repurchase of up to 4,909,000 shares.

EADS Financial Statements and Corporate Governance 2004

19. Provisions
Provisions are comprised of the following:in 1mProvision for retirement plans (seeNote 19 b)
Provision for deferred compensation (seeNote 19 a)
Retirement plans and similar obligations
Financial instruments (see Note 19 c)
Other provisions (see Note 19 d)
Total

31st
December
2004

31st
December
2003

3,876

3,718

71
3,947
181
4,445
8,573

54
3,772
100
4,854
8,726

1

1.2 Financial statements (continued)

2

Notes to the IFRS consolidated balance sheets3
As of 31st December 2004 and 2003, respectively,
43,680 million and 43,533 million of retirement plans andsimilar obligations, 4137 million and 41 million of financial
instruments as well as 42,813 million and 42,844 million ofother provisions mature after more than one year.
a) Provisions for deferred compensation
This amount represents obligations that arise if employees
elect to convert all or part of their variable remuneration orbonus into an equivalent commitment for deferredcompensation. Unlike retirement plans, deferred compensation
is paid out in a lump sum upon the employee’s retirement.
b) Provisions for retirement plans

When Group employees retire, they receive indemnities as
stipulated in retirement agreements, in accordance withregulations and practices of the countries in which the Group
operates.
French law stipulates that employees are paid retirement
indemnities on the basis of the length of service.
In Germany, EADS introduced a new pension plan (P3) for
non executive employees in 2004. Under the new plan, theemployer makes contributions during the service period, which
are dependent on salary in the years of contribution and yearsof service. These contributions are converted into components
which become part of the accrued pension liability at the endof the year. Accrued benefits under the old plan are
considered through an initial component. Total benefits arecalculated as a career average over the entire period of service.
On an overall basis, the application of the new plan had no
significant effect on pension expense for 2004. Certain
employees that are not covered by the new plan receive
retirement indemnities based on salary earned in the last year
or on an average of the last three years of employment. For
executive employees, benefits are depending on final salary at
the date of retirement and the time period as executive.
Actuarial assessments are regularly made to determine theamount of the Group’s commitments with regard to
retirement indemnities. This assessment includes anassumption concerning changes in salaries, retirement ages andlong-term interest rates. It comprises all the expenses theGroup will be required to pay to meet these commitments.

EADS Financial Statements and Corporate Governance 2004

The weighted-average assumptions used in calculating theactuarial values of the retirement plans are as follows:in %Assumptions
Discount rate
Rate of compensation increase
Inflation rate
Expected return on plan assets

31st
December
2004

31st
December
2003

31st
December
2002

4.75-5.0
3.0
1.5-2.0
6.5

5.0-5.25
3.0
1.25-2.0
6.5

5.0-5.75
3.0
1.75
6.5

Actuarial gains and losses of the current year are notrecognized in profit/loss but added to the balance of
unrecognized net actuarial gain or loss. If the accumulated
amount of unrecognized net gains and losses as of the
beginning of the year exceeds the greater of 10% of thepresent value of the defined benefit obligation and 10% of thefair value of plan assets of each respective legal entity, theexcess is amortized through profit and loss on a straight line
basis over the average remaining working lives of theemployees participating in each plan.
The amount recorded as provision on the balance sheet can bederived as follows:in 1m

Change in defined benefit
obligations
Defined benefit obligations at
beginning of year
Service cost
Interest cost
Plan amendments
Plan curtailments andsettlements
Actuarial losses
Acquisitions and otherBenefits paid
Defined benefit obligations at
end of year

2004

2003

2002

4,735
125
243
0

4,287
122
241
14

3,880
124
229
0

(4)
281
3
(185)

0
9
237
(175)

0
201
8
(155)

5,198

4,735

4,287

57

1.2 Financial statements (continued)
Notes to the IFRS consolidated balance sheets
in 1m

2004

2003

2002

Change in plan assets
Fair value of plan assets at
beginning of year
Actual return on plan assets
Contributions
Acquisitions and otherBenefits paid
Fair value of plan assets at
end of year

619
52
45
0
(58)

532
27
16
92
(48)

571
(35)
42
0
(46)

658

619

532

Funded status1
Unrecognized actuarial net(losses)
Unrecognized past service cost
Net amount recognized asprovision

in 1m

2004

2003

2002

125
243
(41)
0
327

122
241
(33)
29
359

124
229
(42)
8
319

31st
December
2004

31st
December
2003

31st
December
2002

4,540

4,116

3,755

(659)
(5)

(384)
(14)

(398)
0

The following table sets forth the development of theprovision for pension obligations:

3,876

3,718

3,357

in 1m

1 Difference between the defined benefit obligations and the fair value of plan
assets at the end of the year.

The defined benefit obligation at the end of the year is thepresent value, without deducting any plan assets, of expected
future payments required to settle the obligation resulting
from employee service in the current and prior periods. The
increase in the unrecognized actuarial losses results mainly
from the decrease in the discount rate for pension obligationsin Germany from 5.25% to 4.75%, partially offset by theincrease in the assumed inflation rate for Germany from 1.25%
to 1.5%.
The fair value of plan assets at end of the year comprises
assets held by long-term employee benefit funds that exist
solely to pay or fund employee benefits. Plan assets are notentirely exposed to fluctuations of stock markets, as the major
portion of plan assets is invested in fixed income instruments.

58

The components of the net periodic pension cost, included in‘‘Income from operating activities’’, are as follows:
Service cost
Interest cost
Expected return on plan assets
Net actuarial loss
Net periodic pension cost

Based on past experience, EADS expects a return rate for plan
assets of 6.5%.
in 1m

The net amount of 43,876 million (2003: 43,718 million)
represents the amount recorded as provision on the balance
sheet. The provision contains the funded status, adjusted byactuarial net gains/losses which do not have to be recognizedbecause they do not meet the recognition criteria. Net actuarial
gains and losses include both actuarial gains/losses on thedefined benefit obligation and the difference between theactual and expected return on plan assets.

EADS Financial Statements and Corporate Governance 2004

Change in provision for pension
obligations in 2004
Provision for pension obligations at
beginning of year
Net periodic pension cost
Contributions
Consumption (benefits paid)
Acquisitions and other
Provision for pension obligations at endof year

2004

2003

3,718
327
(45)
(127)
3

3,357
359
(16)
(127)
145

3,876

3,718

c) Financial instruments
The provision for financial instruments amounts to4181 million as of 31st December 2004 (4100 million as of
31st December 2003) and includes the negative fair market
value of synthetic foreign currency forwards and interest rate
swaps (see Note 26 (c), ‘‘Fair value of financial instruments’’).

1

1.2 Financial statements (continued)

2

Notes to the IFRS consolidated balance sheets

3d) Other provisions

Movements in provisions during the year were as follows:in 1m

Aircraft financial risks
Outstanding costs
Contract losses
Tax provisions
Warranties
Litigations and claims
Personnel charges
Restructuring measures
Obligation from services andmaintenance agreements
Other risks and charges
Total

Balance at
1stJanuary
2004

Exchangedifferences

Additions

Reclassification/
Change inconsolidated
group

Used

Released

Balance at
31st
December
2004

1,021
883
439
339
160
220
365
445

(2)
0
1
0
0
0
0
0

97
408
91
47
69
97
278
83

(1)
(48)
(34)
0
1
0
0
(2)

(124)
(308)
(96)
(166)
(51)
(3)
(148)
(232)

(52)
(74)
(36)
(18)
(21)
(112)
(17)
(23)

939
861
365
202
158
202
478
271

189
793
4,854

0
(5)
(6)

81
208
1,459

0
(6)
(90)

(14)
(195)
(1,337)

(1)
(81)
(435)

255
714
4,445

The provision for aircraft financial risks fully covers, in line with the Group’s policy for sales financing risk, the net exposure toaircraft financing of 4466 million (4583 million at 31st December 2003) and asset value risks of 4473 million (4438 million at
31st December 2003) related to Airbus and ATR (see Note 25 ‘‘Commitments and contingencies’’).
The use of the provision for restructuring measures mainly relates to the Space division.
The provision for litigations and claims covers various legal actions, governmental investigations, proceedings and other claims,
which are pending or may be instituted or asserted in the future against the Group.
The main release under ‘‘Litigations and Claims’’ relates to the settlement of the VT 1 claim (4106 million).
‘‘Reclassification/Change in consolidated group’’ mainly comprises reclassifications to trade liabilities.
20. Financial liabilities

In 2004, the EIB (European Investment Bank) granted a long-term loan to EADS in the amount of 4309 million bearing a fixedinterest rate of 5.1%. Included in financial liabilities are 4546 million which were drawn under a long-term bank facility for thefunding of Skynet V with an interest of 3 M-Libor, swapped into a fixed interest rate of 4.8%. EADS raised in 2003 41.5 bn
through two Eurobond issues under its EMTN (Euro Medium Term Note) program. The first issue of 41 bn carries a coupon of
4.625% which was swapped into variable rate of 3 M-Euribor + 1.02% and subsequently capped to 4%. The second issue of
40,5 bn maturing in 2018 carries a coupon of 5.5%.

EADS Financial Statements and Corporate Governance 2004

59

1.2 Financial statements (continued)
Notes to the IFRS consolidated balance sheets

in 1m

Bonds
Liabilities to financial institutions
Liabilities to affiliated companies
Loans
Liabilities from finance leases
OthersShort-term financial liabilities (duewithin one year)
Bonds
thereof due in more than five years: 1,511(31st December 2003: 1,598)
Liabilities to financial institutions
thereof due in more than five years: 1,369(31st December 2003: 570)
Liabilities to affiliated companies
thereof due in more than five years: 0(31st December 2003: 3)
Loansthereof due in more than five years: 672(31st December 2003: 541)
Liabilities from finance leases
thereof due in more than five years: 46(31st December 2003: 47)
Long-term financial liabilities
Total

31st
December
2004

31st
December
2003

23
145
110
45
52
345

21
314
90
84
82
387

720
1,648

978
1,640

1,629

1,075

0

6

911

799

218

269

4,406
5,126

3,789
4,767

Included in ‘‘Others’’ are financial liabilities against joint
venture partners.
Non recourse Airbus financial liabilities (risk is supported byexternal parties) amounts to 4988 million (4679 million
in 2003).
Defeased bank deposits for aircraft financing of 41,089 million
and 41,131 million as of 31st December 2004 and 2003
respectively have been offset against financial liabilities.
The aggregate amounts of financial liabilities maturing during
the next five years and thereafter are as follows:in 1m

Financialliabilities

2005
2006
2007
2008
2009
Thereafter
Total

720
326
142
175
165
3,598
5,126

60

EADS Financial Statements and Corporate Governance 2004

21. Trade and other liabilities
in 1m

Trade liabilities
Other liabilities
Thereof customer advance payments
Thereof European Governments
refundable advances
Thereof tax liabilities including wage tax
Thereof liabilities to affiliated companies
Thereof liabilities to related companies
others
Total

31st
December
2004

31st
December
2003

5,860
13,2405,610

5,117
11,318
3,807

5,119
612
35
74
1,790
19,100

4,851
833
50
31
1,746
16,435The increase in European Governments refundable advances
relates mostly to accrued interest. Regarding the interest
expense on European Governments refundable advances see
Note 9, ‘‘Financial result’’. Due to their specific nature,
namely their risk-sharing features and the fact that such
advances are generally granted to EADS on the basis ofsignificant development projects, European Government
refundable advances are accounted for by EADS within‘‘Other Liabilities’’ on the balance sheet including
accrued interest.
Maturities – Out of trade liabilities as of 31st December
2004, 4155 million (446 million as of 31st December 2003)
mature after more than one year. Included in ‘‘Otherliabilities’’ are 45,082 million (44,135 million as of
31st December 2003) due within one year and 43,918 million(44,264 million as of 31st December 2003) maturing after
more than five years.
22. Deferred income
The main part of deferred income is related to sales of Airbus
and ATR aircraft that include asset value guarantee
commitments and that are accounted for as operating leases(41,567 million and 42,009 million as of 31st December 2004
and 2003, respectively). The decrease results mainly from
Airbus renegotiation of residual value guarantees, resulting torevenue recognition in the amount of 4298 million.

1

1.2 Financial statements (continued)

2

Notes to the IFRS consolidated statements of cash-flows

3
23. Consolidated Statement of Cash Flows

As of 31st December 2004, EADS’ cash position (stated as
cash and cash equivalents in the Consolidated Statement of
Cash-Flows) includes 4687 million (4273 million, 4227 million
as of 31st December 2003 and 2002) representing the amount
Airbus has deposited at BAES. Additionally included are
4602 million, 4613 million and 4596 million as of
31st December 2004, 2003 and 2002, respectively, which
represent EADS’ share in MBDA’s cash and cash equivalents,
deposited at BAES and Finmeccanica and are available
upon demand.
For the 31st December 2002 Consolidated Balance Sheet’s andthe 2002 Consolidated Statement of Cash-Flow’s presentation,
EADS considered as part of the cash position (being cash andcash equivalents and certain qualifying securities), inter alia, anamount of 4160 million related to Astrium. Due to the
proportionate consolidation method for Astrium, this amountcorresponds to cash advances made to Astrium for which
EADS could claim the reimbursement from BAES, in
accordance with the Astrium shareholders’ agreement.
The change in financial liabilities in 2004 results fromadditions to financial liabilities in the amount of
41,302 million and repayments of 4(828) million.
The following charts provide details on acquisitions (resulting
in additional assets and liabilities acquired) and disposals ofsubsidiaries and business units:
in 1mTotal (purchase)/selling price, net
thereof (paid in)/received by cash and cash
equivalents
Cash and cash equivalents included in theacquired/(disposed) subsidiaries or otherbusiness units, net
Cash Flow from net(acquisitions)/disposals, net of cash

31st
December
2004

31st
December
2003

(108)

32

(108)

32

8

(3)

(100)

29

EADS Financial Statements and Corporate Governance 2004

Included in the aggregate net purchase price in 2004 of
4(100) million is mainly the acquisition of RIG Holding Inc.
with its subsidiaries Racal Instruments US and Racal
Instruments Group Ltd.
31st
December
2004

31st
December
2003

(2)
6
11
5
8

62
5
115
126
3

28

311

Provisions
Trade liabilities
Financial liabilities
OthersLiabilities
Fair value of net assets

(4)
2
(2)
1
(3)
25

(235)
(143)
(109)
(14)
(501)
(190)

Goodwill arising on acquisitions
Less own cash and cash equivalents of(purchased)/sold subsidiaries
Cash Flow from net
acquisitions/(disposals), net of cash

83

164

(8)

(3)

100

(29)

in 1m

Property, plant and equipment
Financial assets
Inventories, net of advances received
Trade receivables
Cash and cash equivalents
AssetsThe line ‘‘Results on disposal of fixed assets/businesses andresult of associates (equity method)’’ in the Consolidated
Statement of cash Flows includes the result of associatedcompanies (488 million, 4246 million and 4134 million in
2004, 2003 and 2002, respectively).
In 2003 there have been additional cash investments in thefollowing already fully consolidated subsidiaries; DornierGmbH 4(62) million, Aeronautica Industrial 4(12) million,
EADS Telecom France 4(10) million and Gesellschaft für
Flugzieldarstellung 4(7) million.

61

1.2 Financial statements (continued)
Other notes to the IFRS consolidated financial statements
24. Litigation and claims

EADS is involved in a number of claims and arbitrations thathave arisen in the ordinary course of business. EADS believes
that it has made adequate provisions to cover current orcontemplated general and specific litigation risks.
In its defence against an arbitration proceeding initiated byThales, EADS (more specifically Euromissile GIE) was awarded
at the end of 2002 damages on the basis of its counterclaim,
the principal amount of which totals 4108 million. In thiscontext, damages were paid to Euromissile on 17th February
2003 and Thales filed an appeal for annulment of thearbitration decision. On 18th November 2004 the Paris Courtof Appeal upheld the arbitration award. Since this decision has
not been appealed to the French Supreme Court, this litigation
is now closed. Consequently, the relating provision was
released in 2004.
DaimlerChrysler has become a party to judicial and arbitration
proceedings with one of the Dornier family shareholders, aminority shareholder of Dornier GmbH, an indirect subsidiaryof EADS. These proceedings concern claims on alleged
acquisition rights for a price below market value regarding apart of Dornier GmbH’s real estate in Oberpfaffenhofen andcould have an economic effect on Dornier GmbH.
At the end of 2002, a request for arbitration was filed against
a subsidiary of EADS involved in the supply of equipment
under a commercial contract that was completed several years
ago. EADS believes it has strong defences, both proceduraland of substance, to oppose the claim. At this stage of theprocedure the financial risk cannot be assessed, since in June
2003, EADS was notified that the arbitration procedure wassuspended at the request of the claimant.
EADS is not aware of any other exceptional items or pendingor threatened legal or arbitration proceedings that may have, or
may have had in a recent period, a material adverse effect on
the financial position, the activities or the results of its grouptaken as a whole, except as stated above.
EADS recognizes provisions for litigation and claims when(i) it has a present obligation from legal actions, governmental
investigations, proceedings and other claims resulting from past
events that are pending or may be instituted or asserted in the
future against the Group, (ii) it is probable that an outflow ofresources embodying economic benefits will be required tosettle such obligation and (iii) a reliable estimate of the amountof such obligation can be made. For the amount provided forrisk due to litigations and claims, see Note 19 (d):‘‘Other provisions’’.

62

EADS Financial Statements and Corporate Governance 2004

25. Commitments and contingencies
Commitments and contingent liabilities

Sales financing – In relation to its Airbus and ATR activities,
EADS is committing itself in sales financing transactions withselected customers. Sales financing transactions are generally
collateralized by the underlying aircraft. Additionally, Airbus
and ATR benefit from protective covenants and from security
packages tailored according to the perceived risk and the legal
environment. EADS believes that the estimated fair value ofthe aircraft securing such commitments will substantially
offset any potential losses from the commitments. Anyremaining difference between the amount of financing
commitments given and the collateral value of the aircraft
financed is provided for as an impairment to the relating asset,
if assignable, or as a provision for aircraft financial risk. The
basis for this write-down is a risk-pricing-model, which isapplied at every closing to closely monitor the remaining valueof the aircraft.
Depending on which party assumes the risks and rewards ofownership of a financed aircraft, the assets relating to sales
financing are accounted for on the balance sheet either as(i) an operating lease (see Note 12, ‘‘Property, plant andequipment’’) or (ii) a loan from aircraft financing or (iii) a
finance lease receivable (see Note 13, ‘‘Investments inassociates, other investments and long-term financial assets’’) or(iv) in inventory. As of 31st December 2004, related
accumulated impairment amounts to 4532 million(2003: 4590 million) for operating lease and 4466 million(2003: 4431 million) for loans and finance lease. 433 million(2003: 438 million) are recorded as part of provisions foraircraft financial risks (see Note 19 (d), ‘‘Other provisions’’).
Certain sales financing transactions include the sale and leaseback of the aircraft with a third party lessor under operatinglease. Unless the Group has sold down the relating operatinglease commitments to third parties, which assume liability forthe payments, it is exposed to future lease payments. Futurenominal operating lease payments that result from aircraft
sales financing transactions are recorded off balance sheet andare scheduled to be paid as follows:
in 1m

not later than 2005
later than 2005 and not later than 2009
later than 2009
Total
Of which commitments where the transaction has
been sold to third parties
Total aircraft lease commitments where EADS
bears the risk (not discounted)

170
724
935
1,829
(1,124)705

1

1.2 Financial statements (continued)

2

Other notes to the IFRS consolidated financial statements

3
Total aircraft lease commitments of 41,829 million as of 31st
December 2004, arise from aircraft head-leases and are
typically backed by corresponding sublease income from
customers with an amount of 41,378 million. A large part ofthese lease commitments (41,124 million as of 31 st December2004) arises from transactions that were sold down to third
parties, which assume liability for the payments. EADS
determines its gross exposure to such operating leases as thepresent value of the related payment streams. The difference
between gross exposure and the estimated value of underlying
aircraft used as collateral, the net exposure, is provided for infull with an amount of 4433 million as of 31st December
2004, as part of the provision for aircraft financial risk (seeNote 19d, ‘‘Other provisions’’).
As of 31st December 2004 and 2003, the total consolidated– on and off balance sheet – Commercial Aviation Sales
Financing Exposure is as follows (Airbus 100% and ATR 50%):
in 1m

31st
December
2004

31st
December
2003

Total gross exposure
Estimated fair value of collateral (aircraft)
Net exposure (fully provided for)

3,681
(2,216)
1,465

4,225
(2,594)
1,631

Detail of provisions/accumulated impairments are as follows:in 1m

Accumulated impairment on operatingleases (see Note 12, ‘‘Property plant andequipment’’)
Accumulated impairment on loans fromaircraft financing and finance leases (seeNote 13, ‘‘Investments in associates, otherinvestments and long-term financial assets’’)
Accumulated impairment on inventories
Provisions for aircraft financial risk (onbalance sheet) (see Note 19 (d),‘‘Other provisions’’)
Provisions for aircraft financial risk
(commitment off balance sheet)(see Note 19 (d), ‘‘Other provisions’’)
Total provisions/accumulated
impairments for sales financing exposure

31st
December
2004

31st
December
2003

532

590

466
1

431
27

33

38

433

545

1,465

1,631

Asset value guarantees – Certain sales contracts may include
the obligation of an asset value guarantee whereby Airbus or
ATR guarantee a portion of the value of an aircraft at a
specific date after its delivery. Management considers the

EADS Financial Statements and Corporate Governance 2004

financial risks associated with such guarantees to be
manageable. Three factors contribute to this assessment: (i) theguarantee only covers a tranche of the estimated future valueof the aircraft, and its level is considered prudent incomparison to the estimated future value of each aircraft;(ii) the asset value guarantee related exposure is diversified
over a large number of aircraft and customers; and (iii) the
exercise dates of outstanding asset value guarantees are
distributed through 2018. If the present value of theguarantee given exceeds 10% of the sales price of the aircraft,
the sale of the underlying aircraft is accounted for as an
operating lease (see Note 12, ‘‘Property, plant and equipment’’and Note 22, ‘‘Deferred income’’). In addition, EADS iscontingently liable in case asset value guarantees with less than
10% are provided to customers as part of aircraft sales.
Counter guarantees are negotiated with third parties andreduce the risk to which the group is exposed. As of
31st December 2004 the nominal value of asset value
guarantees provided to airlines, that do not exceed the 10%
criteria, amount to 4810 million, excluding 4413 million
where the risk is considered to be remote. In many cases therisk is limited to a specific portion of the residual value of theaircraft. The present value of the risk inherent to the given
asset value guarantees where a settlement is being considered
as probable is fully provided for and included in the total
amount of provisions for asset value risks of 4473 million (seeNote 19 (d): ‘‘Other provisions’’). This provision covers apotential expected shortfall between the estimated value of theaircraft of the date upon which the guarantee can be exercised
and the value guaranteed on a transaction basis taking counter
guarantees into account.
Because exercise dates for asset value guarantees are on averagein the 10th year following aircraft delivery, asset value
guarantees issued in 2004 will generally not be exercisable
prior to 2014, and, therefore, an increase in near-term
exposure is not expected.
Despite the underlying collateral, if Airbus should be unable
to honour its obligations under sales financing transactions andasset value guarantees, certain EADS and BAES groupcompanies retain joint and several liability for sales financing
exposure incurred by Airbus prior to 1st January 2001. EADS’
exposure to liabilities incurred by Airbus following
1st January 2001 is limited by its status as a shareholder in
Airbus S.A.S. With respect to ATR, each shareholder is
jointly and severally liable to third parties without limitation.
Amongst the shareholders, the liability is limited to eachpartner’s proportionate share.

63

1.2 Financial statements (continued)
Other notes to the IFRS consolidated financial statements
While backstop commitments to provide financing related toorders on Airbus’ and ATR’s backlog are also given, suchcommitments are not considered to be part of gross exposure
until the financing is in place, which occurs when the aircraft
is delivered. This is due to the fact that (i) past experiencesuggests it is unlikely that all such proposed financings
actually will be implemented (although it is possible that
customers not benefiting from such commitments may
nevertheless request financing assistance ahead of aircraft
delivery), (ii) until the aircraft is delivered, Airbus or ATR
retain the asset and do not incur an unusual risk in relation
thereto, and (iii) third parties may participate in the financing.
In order to mitigate Airbus and ATR exposure to unacceptable
credits, such commitments typically contain financial
conditions which guaranteed parties must satisfy in order tobenefit therefrom.
Pension commitments – EADS has several common
investments with BAES, of which the most significant interms of employees are Airbus and MBDA. In respect of each
investment, for so long as BAES remains a shareholder,
UK employees may stay in the BAES pensions schemes,
which currently qualify as defined benefit plans. According to
UK Accounting Standard FRS 17, BAES has disclosed for its
pension schemes in UK and US a net (after tax) pension
liability as of 31st December 2004 in a total amount of
GBP 2,990 million. As participants in the BAES schemes,
EADS investments are potentially affected by any shortfall of
BAES schemes. However, the agreements between EADS and
BAES have the effect of capping the contributions that theinvestment has to make to the pension scheme for a certain
period of time (e.g. until 2011 for Airbus). Any additional
contribution would be paid by BAES. EADS is therefore notexposed to increased contribution payments resulting from thepension underfunding during the period of the contribution
caps. At present, EADS has only limited information about
how the underfunding could impact the investments after theperiod of contribution caps has expired. Consequently, EADS
expenses the contributions made to the pension scheme as if
the plans were defined contribution plans.
Other commitments – Other commitments comprisecontractual guarantees and performance bonds to certain
customers as well as commitments for future
capital expenditures.

64

EADS Financial Statements and Corporate Governance 2004

Future nominal operating lease payments (for EADS as alessee) for rental and lease agreements (not relating to aircraft
sales financing) amount to 4976 million as of 31st December
2004, and relate mainly to procurement operations(e.g., facility leases, car rentals). Maturities are as follows:
in 1m

Not later than 2005
later than 2005 and not later than 2009
later than 2009
Total

97
296
583
976

26. Information about financial instrumentsa) Financial risk management

By the nature of the activities carried out, EADS is exposed toa variety of financial risks, especially foreign currency exchange
rate risks and interest rate risks, as explained below. The
management and limitation of the foreign exchange currency
risks at EADS is generally carried out by a central treasury
department at EADS Headquarters under policies approved by
the Board of Directors. The identification, evaluation andhedging of the financial risks is in the responsibility of
established treasury committees and the Group’s Divisions andBusiness Units.
Market risk
Currency risk – EADS manages a long-term hedge portfoliowith a maturity of several years covering its net exposure to
US Dollar sales, mainly from the activities of Airbus. This
hedge portfolio covers the majority of the Group’s highly
probable transactions.

Significant parts of EADS’ revenues are denominated in
US Dollars, whereas a major portion of its costs is incurred inEuros and to a smaller extent in GBP. Consequently, to theextent that EADS does not use financial instruments to coverits net current and future foreign currency exchange rate
exposure, its profits are affected by changes in the Euro-US
Dollar exchange rate. As the Group intends to generate profits
only from its operations and not through speculation on
foreign currency exchange rate movements, EADS uses
hedging strategies to manage and minimize the impact of
exchange rate fluctuations on these profits.
For financial reporting purposes, EADS designates a portion of
the total firm future cash flows as the hedged position tocover its net foreign currency exposure, as described in thefollowing paragraph. As hedging instruments, EADS primarily
uses foreign currency forwards and option contracts.

1

1.2 Financial statements (continued)

2

Other notes to the IFRS consolidated financial statements

3
EADS endeavours to hedge the majority of its exposure basedon firm commitments and forecasted transactions. For products
such as aircraft, EADS typically hedges forecasted sales in
US Dollar for the following year up to 2011. The hedged
items are defined as first forecasted highly probable future
cash inflows for a given month based upon final payments atdelivery. The amount of the flows to be hedged is decided bya treasury committee and can cover up to 100% of theequivalent of the net US Dollar exposure. For EADS, aforecasted transaction is regarded as highly probable if the
future delivery is included in the internally audited orderbook or is very likely to materialize in view of contractual
evidence. The coverage ratio is adjusted to take into accountmacroeconomic movements affecting the spot and interest
rates, as applicable.
The company also has foreign currency derivative instruments
which are embedded in certain purchase and lease contracts
denominated in a currency other than the functional currencyof the significant parties to the contract, principally USD and
GBP. Gains or losses relating to such embedded foreign
currency derivatives are reported in other financial result.
Interest rate risk – The Group uses an asset and liability
management approach with the objective to limit its interest
rate risk. The Group undertakes to match the risk profile ofits assets with a corresponding liability structure. The
remaining net interest rate exposure is managed throughseveral types of interest rate derivatives in order to minimizerisks and financial impacts.
Hedging instruments that are specifically designated to debt
instruments have at the maximum the same nominal amounts
as well as the same maturity dates compared to the hedged
item. Regarding cash, EADS is mainly investing in short-term
instruments and/or instruments that are related to a floatinginterest index in order to further minimize any interest risk in
its cash and securities portfolio.
Price Risk – The cash and cash equivalents and securities
portfolio of the Group is invested mainly in non-speculative
financial instruments, mostly highly liquid, such as certificatesof deposits, overnight deposits, commercial papers and othermoney market instruments which generally are short term andsubject to only an insignificant price risk. Therefore, theGroup assesses its exposure towards price risk as minor.

EADS Financial Statements and Corporate Governance 2004

Liquidity risk

The Group’s policy is to maintain sufficient cash and cash
equivalents at any time to meet its present and futurecommitments. This is safeguarded by the reported total
amount of the Group’s cash and cash equivalents, which isfurther supported by a substantial amount of unused
committed credit facility (42.0 bn as 31st December 2004). Ona daily basis, EADS invests any surplus cash mainly in nonspeculative highly liquid financial instruments, such as
certificates of deposits, overnight deposits, commercial papers
and other money market instruments which are generally
short term.
Credit risk
EADS is exposed to credit risk to the extent of nonperformance by either its customers (e.g., airlines) or its
counterparts with regards to financial instruments. However,the Group has policies in place to avoid concentrations ofcredit risk and to ensure that credit risk is limited. Sales of
products and services are made to customers with anappropriate credit history. Cash transactions and derivative
counterparts are limited to high credit quality financial
institutions. EADS has set up a credit limit system to actively
manage and limit its credit risk exposure. This limit systemassigns maximum exposure lines to counterparts of financialtransactions, based at a minimum on their credit ratings as
published by Standard & Poors, Moody’s and Fitch IBCA. The
respective limits are regularly monitored and updated.

In order to support product sales, primarily at Airbus and
ATR, EADS may agree to participate in the financing ofcustomers, on a case-by-case basis, directly or throughguarantees provided to third parties. In determining theamount and terms of the financing transaction, Airbus and
ATR take into account the airline’s credit rating as well as risk
factors specific to the intended operating environment of theaircraft and its expected future value. Market yields andcurrent banking practices also serve to benchmark the financing
terms offered to customers, including price.
b) Notional amounts
The contract or notional amounts of derivative financial
instruments shown below do not necessarily represent
amounts exchanged by the parties and, thus, are notnecessarily a measure for the exposure of the Group throughits use of derivatives.

651.2 Financial statements (continued)
Other notes to the IFRS consolidated financial statements
The notional amounts of foreign exchange derivative financial
instruments are as follows, specified by year of
expected maturity:
Year ended 31st December 2004
in 1m

Foreign Exchange
Contracts:
Net forward sales
contracts
Structured USD
forward:Purchased USD call
options
Purchased USD put
options
Written USD call
options
FX swap contracts

notexceeding
1 yearRemaining period
1 yearup to
5 yearsmore
than
5 years

Total

7,780

19,8291,277

28,886

180

452

0

632

180

452

0

632

180
189

452
102

0
0

632
291

more
than
5 years

Total

Year ended 31st December 2003
notexceeding
1 yearin 1mForeign Exchange
Contracts:
Net forward sales
contracts
Purchased USD put
options
USD swap contracts

Remaining period
1 yearup to
5 years

7,104

22,581

3,604

33,289

285
1,800

0
0

0
0

285
1,800

The notional amounts of interest rate contracts are as follows,
specified by year of expected maturity:
Year ended 31st December 2004
notexceeding
1 yearin 1m

Interest Rate
Contracts:

30

Year ended 31st December 2003
notexceeding
1 yearin 1m

Interest Rate
Contracts:0Remaining period
1 yearup to
5 years

298
Remaining period
1 yearup to
5 years

802

more
than
5 years

Total

2,818

3,146

more
than
5 years

Total

2,964

3,766

Included in the interest rate contracts are interest rate swaps
and interest rate caps.

66

EADS Financial Statements and Corporate Governance 2004c) Fair value of financial instruments

The fair value of a financial instrument is the price at which
one party would assume the rights and/or duties of anotherparty. Fair values of financial instruments have been
determined with reference to available market information at
the balance sheet date and the valuation methodologies
discussed below. Considering the variability of their valuedetermining factors and the volume of financial instruments,
the fair values presented herein may not be indicative of theamounts that the Group could realize in a current
market environment.
The following interest rate curves are used in thedetermination of the fair value in respect of the financial
instruments as of 31st December 2004 and 2003:
31st December 2004
Interest rate in %6 months
1 year
5 years
10 years
31st December 2003
Interest rate in %6 months
1 year
5 years
10 years

EUR

USD

GBP

2.25
2.45
3.16
3.75

2.78
3.12
4.00
4.64

4.78
4.79
4.86
4.86

EUR

USD

GBP

2.19
2.33
3.73
4.52

1.18
1.42
3.77
4.90

4.16
4.35
4.95
5.04

1

1.2 Financial statements (continued)

2

Other notes to the IFRS consolidated financial statements

3
The carrying amounts and fair values of the Group’s financial
instruments are as follows:in 1m

Balance Sheet
Treasury Instruments
Assets:Other investments andlong-term financial
assetsSecurities
Cash and cash
equivalents
Liabilities:
Financial liabilities
Derivative Financial
Instruments
Currency contracts
with positive fair values
Currency contracts
with negative fairvaluesInterest rate contracts
with positive fair values
Interest rate contracts
with negative fairvaluesEmbedded foreign
currency derivatives
with positive fair values

31st
December
2004
Carrying
amount

31st
December
2004
Fair
value

31st
December
2003
Carrying
amount

31st
December
2003
Fair
value

2,352
466

2,352
466

2,489
468

2,489
468

8,718

8,718

7,404

7,404

5,126

5,411

4,767

4,776

8,925

8,925

7,932

7,932

(95)

(95)

(18)

(18)

23

23

32

32

(86)

(86)

(82)

(82)

86

86

96

96

The fair value of financial liabilities as of 31st December 2004
has been estimated including all future interest payments andalso reflects the interest rate as stated in the tables above.
The European Governments refundable advances of45,119 million (in 2003: 44,851 million) are measured atamortized cost; a fair value can not be measured reliably due
to their risk sharing nature and uncertainty about therepayment dates.

The development of the foreign exchange rate hedging
instruments recognized in AOCI is as of 31st December 2004
and 2003 as follows:
in 1m

1st January 2003
Unrealized gains and losses
from valuations, net
Reclassification to theConsolidated Income Statement,
net
Changes in fair values ofhedging instruments, net
31st December 2003/
1st January 2004
Unrealized gains and losses
from valuations, net
Reclassification to theConsolidated Income Statement,
net
Changes in fair values ofhedging instruments, net
31st December 2004

Shareholders’equityMinority
interests

Total

1,498

416

1,914

3,292

776

4,068

(768)

(177)

(945)

2,524

599

3,123

4,022

1,015

5,037

1,596

390

1,986

(1,118)(258)(1,376)

478
4,500

132
1,147

610
5,647

Financial Assets and Liabilities – Fair values are based on
estimates using various valuations techniques, such as present
value of future cash flows. However, methods andassumptions followed to disclose data presented herein are
inherently judgmental and involve various limitations likeestimates as of 31st December 2004 and 2003, which are notnecessarily indicative of the amounts that the Company
would record upon further disposal/termination of thefinancial instruments.
The methodologies used are as follows:
Short-term investments, cash, short-term loans,
suppliers – The carrying amounts reflected in the annual
accounts are reasonable estimates of fair value because of therelatively short period of time between the origination of the
instruments and its expected realization.
Long-term debt, short-term debt – Neither long term nor
short term debt is classified as liabilities held for trading.
Securities – The fair value of securities included in availablefor-sale investments is estimated by reference to their quoted
market price at the balance sheet date. If a quoted market priceis not available, fair value is determined on the basis ofgenerally accepted valuation methods on the basis of market
information available at the reporting date.

EADS Financial Statements and Corporate Governance 200467

1.2 Financial statements (continued)
Other notes to the IFRS consolidated financial statements
Currency and Interest Rate Contracts – The fair value of these instruments is the estimated amount that the Company
would receive or pay to settle the related agreements as of 31st December 2004 and 2003.
27. Stock-based compensationa) Stock Option Plans

Based on the authorization given to it by the shareholders’ meetings (see dates below), the Group’s Board of Directors approved(see dates below) stock option plans in 2004, 2003, 2002, 2001 and 2000. These plans provide to the members of the Executive
Committee as well as to the Group’s senior management the grant of options for the purchase of EADS shares.
For the 2004 stock option plan, analogous to all of EADS’ previous existing stock option plans, the granted exercise price wasexceeding the share price at grant date. Therefore, no compensation expense has been recognized.
The principal characteristics of these options are summarized in the tables below:
First Tranche

Date of shareholders’ meeting
Date of Board of Director meeting (grant date)
Number of options granted
Number of options outstanding
Total number of eligible employees
Exercise Date

Expiry dateConversion Right
VestedExercise Price
Exercise Price Conditions

Number of exercised options

68

Second Tranche

Third Tranche

24th May 2000
24th May 2000
10th May 2001
26th May 2000
26th October 2000
12th July 2001
5,324,884
240,000
8,524,250
4,635,900
238,000
7,490,225
850
34
1,650
50% of options may be exercised after a period of two years and four weeks
from the date of grant of the options; 50% of options may be exercised as of
the third anniversary of the date of grant of the options; moreover, the options
may not be exercised during a period of 3 weeks preceding each annual
general meeting of shareholders or the date of announcement of annual orsemi-annual results or quarterly figures.
Tenth anniversary of the date of the grant of the option
One option for one share
100% vested
100% vested
100% vested
Euro 20.90
Euro 20.90
Euro 24.66
110% of fair market
110% of fair market
110% of fair market
value of the shares atvalue of the shares atvalue of the shares atthe date of grantthe date of grantthe date of grant
90,500
0
0

EADS Financial Statements and Corporate Governance 2004

1

1.2 Financial statements (continued)

2

Other notes to the IFRS consolidated financial statements

3
Fourth Tranche

Date of shareholders’ meeting
Date of Board of Director meeting (grant date)
Number of options granted
Number of options outstanding
Total number of eligible employees
Exercise date

Expiry dateConversion Right
VestedExercise Price
Exercise Price Conditions

Number of exercised options

Fifth Tranche

Sixth Tranche

10th May 2001
6th May 2003
6th May 2004
9th August 2002
10th October 2003
8th October 2004
7,276,700
7,563,980
7,777,280
6,777,828
7,456,440
7,777,280
1,562
1,491
1,495
50% of options may be exercised after a period of two years and four weeks
from the date of grant of the options; 50% of options may be exercised as of
the third anniversary of the date of grant of the options; moreover, the options
may not be exercised during a period of 3 weeks preceding each annual
general meeting of shareholders or the date of announcement of annual orsemi-annual results or quarterly figures.
As regards to the sixth tranche, part of the options granted to the top EADS
Executives are performance related.
Tenth anniversary of the date of the grant of the option
One option for one share
50%
0%
0%
Euro 16.96
Euro 15.65
Euro 24.32
110% of fair market
110% of fair market
110% of fair market
value of the shares atvalue of the shares atvalue of the shares atthe date of grantthe date of grantthe date of grant
262,647
9,600
0

The following table summarizes the development of the number of stock options:First & Second Tranche

2000
2001
2002
2003
2004

Third Tranche

2001
2002
2003
2004

Fourth Tranche

2002
2003
2004

EADS Financial Statements and Corporate Governance 2004

Options
grantedBalance at
1st January

Number of
Options
Exercised

Forfeited

Balance at
31st December

5,564,884
–
–
–
–

–
5,375,400
5,375,400
5,375,400
5,300,400––––(90,500)(189,484)––(75,000)(336,000)

5,375,400
5,375,400
5,375,400
5,300,400
4,873,900

Options
grantedBalance at
1st January

Number of
Options
Exercised

Forfeited

Balance at
31st December

8,524,250––––
7,926,425
7,926,425
7,818,725––––(597,825)–(107,700)(328,500)

7,926,425
7,926,425
7,818,725
7,490,225

Options
grantedBalance at
1st January

Number of
Options
Exercised

Forfeited

Balance at
31st December

7,276,700–––
7,276,100
7,205,975––(262,647)(600)(70,125)(165,500)

7,276,100
7,205,975
6,777,82869

1.2 Financial statements (continued)
Other notes to the IFRS consolidated financial statements
Number of
Options
Exercised

Forfeited

Balance at
31st December

Fifth Tranche

Options granted

Balance at
1st January

2003
2004

7,563,980––
7,563,980–(9,600)–(97,940)

7,563,980
7,456,440

Sixth Tranche

Options granted

Balance at
1st January

Number of
Options
Exercised

Forfeited

Balance at
31st December

7,777,280
36,707,094–––(362,747)–(1,968,674)

7,777,280
34,375,673

2004
Total
b) Employee Stock Ownership Plan (ESOP)In 2004, the Board of Directors approved an additional ESOP following four ESOPs established in 2003, 2002, 2001 and in
2000. For the 2004 ESOP, eligible employees were able to purchase a maximum of 500 shares per employee of previously
unissued shares. The offer was broken down into two tranches which were available for all employees to choose. The
subscription price for tranche A was 418.00. The subscription price for tranche B was the higher of the subscription price fortranche A or 80% of the average opening market price for EADS shares on the Paris stock exchange over the twenty trading
days preceding 8th October 2004, resulting in a subscription price of 418.00.
During a lockup period of at least one year under tranche A or five years under tranche B, employees are restricted from sellingthe shares, but have the right to receive all dividends paid as well as have the ability to vote at the annual shareholder meetings.
EADS sold 2,017,822 ordinary shares with a nominal value of 41.00 under both tranches. No compensation expense wasrecognized in connection with the ESOP 2004.
28. Related party transactions

Related parties – The Group has entered into various transactions with related companies in 2004, 2003 and 2002 that have all
been carried out in the normal course of business. As is the Group’s policy, all related party transactions have to be carried out
at arm’s length. Transactions with related parties include the French State, DaimlerChrysler, Lagardère, and SEPI (Spanish State).
Except for the transactions with the French State the transactions are not considered material to the Group either individually orin the aggregate. The transactions with the French State include mainly sales from the Aeronautics, Defence & Security Systems,
and Space divisions.
Remuneration – Remuneration and related costs of the members of the Board of Directors and former Directors amount to48.79 million as of 31st December 2004 (2003: 48.01 million). Since the exercise price for stock options granted to Directors
exceeded the share price at grant date, this amount does not comprise compensation cost for stock-based compensation. EADS
has not provided any loans to/advances to/guarantees on behalf of (retired) Directors. Reference is made to Note 27, ‘‘Stockbased compensation’’, in this document and to Note 8, ‘‘Remuneration’’, of the Notes to EADS N.V. Financial Statements.
29. Investment property

The Group owns investment property accounted for under property, plant and equipment, mainly contributed by Dasa to
EADS, that is leased to third parties. The investment property contributed by Dasa was recorded at fair value as of 1st July
2000. For the purposes of IAS 40, ‘‘Investment property’’, disclosure requirements, EADS developed the fair values ofinvestment property based on the values on the opening balance sheet of EADS.
The fair values have been determined by using market based multiplier for estimated rental income or using available
market prices.
Buildings held as investment property are depreciated on a linear basis over their useful life up to 20 years. The values assigned
to investment property are as follows:in 1mBook value of Investment Property

70

Historical cost

Accumulated
depreciation
31st December
2003

Book value
31st December
2003

Depreciation
Amortisation

Disposal

283

(42)

241

(50)

(9)

EADS Financial Statements and Corporate Governance 2004

Transfer

Accumulated
depreciation
31st December
2004

Net at31st December
2004

(23)

(92)

159

1

1.2 Financial statements (continued)

2

Other notes to the IFRS consolidated financial statements

3
As of 31st December 2004, the fair value of the Group’s
investment property amounts to 4159 million. Related rental
income in 2004 is 49 million with direct operating expenses
amounting to 45 million.
Included in the depreciation is an impairment charge of
440 million recognized in cost of sales.
30. Interest in Joint Ventures

The Group’s principal investments in joint ventures and the
proportion of ownership are included in Appendix‘‘Information on principal investments’’. Joint ventures areconsolidated for using the proportionate method.
The following amounts represent the Group’s aggregate shareof the assets and liabilities and income and expenses of thejoint ventures:in 1mFixed assets
Non-fixed assets
Provisions
Liabilities
Revenues
Profit from ordinary activities
Net income

2004

2003

589
1,805
187
1,671
1,732
99
78

572
1,745
176
1,599
1,471
88
76

31. Earnings Per Share

2004

2003

2002

01,030 m

0152 m0(299) m

801,035,035

800,957,248

804,116,877

01.29

00.19

0(0.37)

EADS Financial Statements and Corporate Governance 2004

Net income/(loss)
attributable toshareholders
Weighted average
number of ordinary
sharesDiluted earnings
per share

2004

2003

2002

01,030 m

0152 m0(299) m

804,082,872

800,957,248

804,116,877

01.28

00.19

0(0.37)

32. Number of Employees

The number of employees at 31st December 2004 is 110,662
as compared to 109,135 at 31st December 2003.
33. Events after the balance sheet date
In February 2005, EADS has sold its Enterprise TelephonyBusiness to Aastra. This business has generated revenues of4164 million in Defence & Security Systems division in 2004.

Basic earnings per share – Basic earnings per share is
calculated by dividing net income (loss) attributable toshareholders by the weighted average number of issued
ordinary shares during the year, excluding ordinary sharespurchased by the Group and held as treasury shares.
Net income/(loss)
attributable toshareholders
Weighted average
number of ordinary
sharesBasic earnings per
share

Diluted earnings per share – For the calculation of thediluted earnings per share, the weighted average number ofordinary shares is adjusted to assume conversion of all
potential ordinary shares. The Group’s only category of
dilutive potential ordinary shares is stock options. In 2004, theaverage share price of EADS exceeded the exercise price of thestock options under the 4th and 5th stock option plans.
Hence, 3,047,837 shares were considered in the calculation ofdiluted earnings per share. In 2002 and 2003, there was no
dilution impact of shares under all existing stock option plans.
As a consequence, the weighted average number of shares
outstanding were the same for both basic and diluted earnings
per share.

The financial statements have been authorized for issuance by
the Board of Directors on 8th March 2005.

71

1.2 Financial statements (continued)
Notes to the consolidated financial statements – Consolidation scope‘‘Information on principal investments’’ – Consolidation Scope
2004

%

2003

%

F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F

80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00

F
F

80.00
80.00

F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F

80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00
80.00

F
F
F
F
F
F
E
F
F
F
F
F
F

80.00
80.00
80.00
80.00
80.00
80.00
16.00
80.00
80.00
80.00
80.00
80.00
80.00

F
F
F
F
F
F
E
F
F
F
F
F
F

80.00
80.00
80.00
80.00
80.00
80.00
16.00
80.00
80.00
80.00
80.00
80.00
80.00

Company

Head office128829 Canada Inc.
A 320 Financing limited
AA Credit Aircraft Leasing Limited
AFC USA 1 inc
AFS (Cayman) Ltd
AFS Cayman 11 Limited
AFS Cayman Aerospace Limited
AI leasing Inc.
AI Participations S.A.R.L.
AIFI LLC
AIFS (Cayman) ltd.
AIFS Cayman Liquidity ltd.
AIFS Leasing Company Limited
AINA Inc.
Airbus China limited
Airbus Deutschland GmbH
Airbus Espana SL
Airbus Finance Company Ltd
Airbus Financial Service Holdings ltd.
Airbus Financial Service ltd.
Airbus France S.A.S
Airbus Holding SA
Airbus Industrie Financial Service Holdings B.V.
Airbus Industrie G.I.E.
Airbus Invest
Airbus North America engineering (in 2003:
Wichita)
Airbus North American Holdings Inc. (AINA)
Airbus S.A.S
Airbus Service Company Inc. (ASCO)
Airbus Transport International S.N.C. (ATI)
Airbus UK Limited
Aircabin GmbH
Alexandra Bail G.I.E
Avaio Aerospace Limited
Avaio Aviation Limited
Avaio International Limited
Avaio Leasing Limited
Avaio Limited
Aviateur Aerospace Limited

CanadaIrelandIsle Of Man
USA
Ireland
Cayman Isle
Ireland
U.S.A.
Blagnac (France)
Isle Of Man
Cayman Isle
Cayman Isle
Ireland
U.S.A.
Hong-Kong
Hamburg (Germany)
Madrid (Spain)
Dublin (Ireland)
Ireland
Ireland
Toulouse (France)
FranceNetherlands
Blagnac (France)
Toulouse (France)
U.S.A.

Airbus72

EADS Financial Statements and Corporate Governance 2004

U.S.A.
Toulouse (France)
U.S.A.
Blagnac (France)UK
Laupheim (Germany)
FranceIreland
Ireland
Ireland
IrelandIsle Of Man
Ireland1

1.2 Financial statements (continued)

2

Notes to the consolidated financial statements – Consolidation scope

3
2004

%

2003

%

Company

Head office

F
80.00
F
F
80.00
F
F
80.00
F
F
80.00
F
F
80.00
F
E
26.40
F
80.00
F
F
80.00
F
F
80.00
F
F
80.00
F
F
80.00
F
F
80.00
F
F
80.00
F
Additionally consolidated are 45 SPE’s
Defence & Security Systems
F
100.00
F
P
37.50
P
F
100.00
F
F
99.99
F
F
55.00
F
P
50.00
P

80.00
80.00
80.00
80.00
80.00

Aviateur Eastern Limited
Aviateur Finance Limited
Aviateur International Limited
Aviateur Leasing Limited
Aviateur Limited
Avion Capital Limited
Avion Finance Limited
AVSA Canada Inc.
AVSA SARLKID-Systeme GmbH
NorbusStar Real Estate SAS
Total Airline Service Company

Ireland
Ireland
Ireland
Ireland
Ireland
Ireland
Ireland
CanadaBlagnac (France)
Buxtehude (Germany)
U.S.A.
Boulogne (France)
United Arab Emirates

100.0037.50
100.00
99.99
55.00
50.00

Lemwerder (Germany)
Valenton (France)
FranceCA, USASaint-Gilles (France)
Aschau/Inn (Germany)

100.00100.0093.58

Aircraft Services Lemwerder GmbH
ALKAN
Apsys
ARC
Aviation Defense Service S.A.
Bayern-Chemie Gesellschaft für flugchemische
Antriebe mbH
Cogent Defence & Security Networks
Dornier Flugzeugwerft GmbH
Dornier Services GmbHF
F
F

100.00100.00
93.58

F
F
F

F

93.58

F

93.58

Dornier Verteidigung und Zivile Systeme

FF
F

100.00100.00100.00F
F
F

100.00100.00100.00F

100.00F

100.00EADS CASA Military Aircraft
EADS Defence & Security Systems SA
EADS Deutschland GmbH – Military
Aircraft TB 51
EADS Deutschland GmbH – VA (Restaktivitäten)

F

100.00F

100.00

F
F
F
F
F
F

100.00100.00100.00100.00100.00100.00

F
F
F
F
F
F

100.00100.00100.00100.00100.00100.00

80.00
80.00
80.00
80.00
80.00
80.00
80.00

EADS Deutschland GmbH – Verteidigung und
Zivile Systeme
EADS Operations & Services UK
EADS Services
EADS System & Defence Electronics Belgium
EADS Telecom Benelux
EADS Telecom Danmark
EADS Telecom Deutschland GmbHEADS Financial Statements and Corporate Governance 2004

Newport, Wales (UK)
Manching (Germany)
Friedrichshafen(Germany)Friedrichshafen(Germany)
Madrid (Spain)
Velizy (France)
Munich (Germany)
Unterschleißheim
(Germany)
Ulm (Germany)
UK
Boulogne (France)
Oostkamp (Belgium)
Bruxelles (Belgium)
Copenhague (Denmark)Ulm (Germany)73

1.2 Financial statements (continued)
Notes to the consolidated financial statements – Consolidation scope

74

2004

%

2003

%

Company

Head officeF

100.00F

100.00EADS Telecom Deutschland GmbH

F
F
F
F
F
F
F
F
F

100.00100.00100.00100.0098.95
100.00100.00100.00100.00EADS Telecom Espana
EADS Telecom Federal Systems Division
EADS Telecom Inc
EADS Telecom Mexico SA de CV
EADS Telecom North America Inc
EADS Telecom SAS
EADS Telecom Spa
EADS Telecom UK Ltd
EUROBRIDGE Mobile Brücken GmbH

100.00100.00FF

100.00100.00Ewation GmbH
Fairchild Controls Corporation

F
P
F

100.0050.00
100.00F
P
F

100.0050.00
100.00FmElo Elektronik- und Luftfahrtgeräte GmbH
Forges de Zeebrugge S.A.
Germantown Holding Company

F
F
F
F
F

100.00100.0098.95
100.00
81.25

F
F
F
F
F

100.00100.0098.95
100.0081.25

Gesellschaft für Flugzieldarstellung mbH
Hagenuk Marinekommunikation GmbH
Intecom Holding ULC
International Test & Services
LFK – Lenkflugkörpersysteme GmbHF

100.00F

100.00LFK Objekt Nabern GmbH & Co.KG

F
F
P

100.00100.00
50.00

F
F
P

100.00100.0050.00

M.C.N. SAT HOLDING
M.P. 13Maı̂trise d’Oeuvre SyStèmeF

100.00F

100.00Manhattan Beach Holdings Co.

P
F

37.50
100.00PF

37.50
100.00Marconi Overside Ldt.
Matra Aerospace Inc.

F
P

100.0037.50

FP

100.0037.50

Matra Défense
Matra Electronique

F
P
P
P
P

100.00
37.50
37.50
37.50
37.50

F
P
P
P
P

100.00
37.50
37.50
37.50
37.50

Matra Holding GmbH
MBDA France
MBDA Holding
MBDA Inc
MBDA Italy SpA

Untershleissheim(Germany)
Madrid (Spain)
San Antonio, TX, USA
Dallas, Texas (USA)
Mexico DF (Mexico)
Dallas, Texas (USA)Bois d’Arcy (France)
Milan (Italy)
Newport, Wales (UK)Friedrichshafen(Germany)
Ulm (Germany)
Frederick Maryland(USA)
Ulm (Germany)
Herstal-Liege (Belgium)
Frederick Maryland(USA)
Germany
Flintbek (Germany)
Dallas, Texas (USA)
Velizy (France)
Unterschleißheim
(Germany)
Unterschleißheim
(Germany)
Velizy (France)
Paris (France)
Issy les Moulineaux(France)
Frederick Maryland(USA)
Chelmsford (UK)Frederick Maryland(USA)
Velizy (France)
La Croix Saint-Ouen(France)Frankfurt (Germany)
Velizy (France)
Velizy (France)
Westlack, CA (USA)Roma (Italy)

F
F
F
F
F
F
F
F
F

100.00100.00100.00100.0098.95
100.00100.00100.00100.00FF

EADS Financial Statements and Corporate Governance 2004

1

1.2 Financial statements (continued)

2

Notes to the consolidated financial statements – Consolidation scope

3
2004

%

2003

%

Company

Head office

P

37.50

P

37.50

MBDA M S.A.

100.00

P
P
P
P
F
F

37.50
37.50
37.50
37.50
100.00100.00MBDA SAS
MBDA Services
MBDA Treasury
MBDA UK Ltd.
MULTICOMS
Operations Services Germany

F
F
P

80.00
100.00
50.00

F
F
P

80.00
100.0050.00

Pentastar Holding
Proj2
Propulsion Tactique S.A.

F
F

98.95
100.00F

98.95

Pyderion Contact Technologies Inc.
Racal Instruments US

F
E

100.00
33.00

E

33.00

Racal Instruments UK
Reutech Radar Systems (Pty) Ltd.

E

18.75

E

18.75

Roxel

F

100.00F

100.00Sycomore S.A.

F

67.00

F

67.00

TAURUS Systems GmbH

P

50.00

P

50.00

TDA – Armements S.A.S.

F

98.00

F

98.00

E

25.00

E

25.00

F
E
E
E
F

100.00
50.00
50.00
50.00
90.00

F
E
E
E

100.00
50.00
50.00
50.00

TDW- Ges. für verteidigungstechnische
Wirksysteme GmbH
Telefunken (in 2003: EADS Radio Communication
Systems GmbH & Co. KG)
TYX Corp.
United Monolithic Semiconductors France SAS
United Monolithic Semiconductors Holding
United Monolithics Semiconductor GmbHUTE CASA A.I.S.A.

Chatillon sur Bagneux(France)
Velizy (France)
Velizy (France)
Jersey (UK)
Stevenage, Herts (UK)Vélizy (France)
Unterschleißheim
(Germany)
Paris (France)
Paris (France)
La Ferte Saint Aubin(France)
Dallas, Texas (USA)San Antonio, Texas(USA)
Wimborne, Dorset, UK
Stellenbosch (South
Africa)Saint-Médard-en-Jalles(France)Boulogne-Billancourt(France)
Schrobenhausen(Germany)
La Ferte Saint Aubin(France)
Schrobenhausen(Germany)
Ulm, Germany

P
P
P
P

37.50
37.50
37.50
37.50

F

F
F
F
F
F

100.00100.00100.00100.00100.00F
F
F
F
F

100.00100.00100.00100.00100.00Computadoras, Redes e Ingenieria SA (CRISA)EADS Astrium GmbHEADS Astrium Jersey Ltd.
EADS Astrium Ltd.
EADS Astrium N.V.

F
F

100.00100.00FF

100.00100.00EADS Astrium SAS
EADS CASA Espacio S.L.

Reston, VA, USA
Orsay (France)
Orsay (France)
Ulm (Germany)
Madrid (Spain)Space

EADS Financial Statements and Corporate Governance 2004

Madrid (Spain)
Munich (Germany)
Jersey (UK)
Stevenage (UK)The Hague(Netherlands)
Toulouse (France)
Madrid (Spain)75

1.2 Financial statements (continued)
Notes to the consolidated financial statements – Consolidation scope
2004

%

2003

%

Company

Head officeF
F
F

100.0068.40
100.00F
F
F

100.0068.40
100.00EADS Deutschland GmbH – Space Services
EADS Dornier Raumfahrt Holding GmbHEADS Space B.V.

F
F
F

100.00100.00100.00EADS Space Management & Services SAS
EADS Space Transportation (Holding) SAS
EADS Space Transportation GmbHEADS Space Transportation N.V.

100.00100.00100.00FF

100.00100.00EADS Space Transportation SAS
Global DASA LLC
Infoterra GmbH

100.00100.00100.00
47.40

F
F
F
E

100.00100.00100.0047.40

Infoterra Ltd
Matra Marconi Space UK Ltd.
MMS Systems Ltd
Nahuelsat S.A.

F
100.00F
100.00F
100.00F
100.00F
100.00
Military Transport Aircraft
F
76.12
F
100.00F
100.00F
F
F
F
F

100.00100.00100.00100.00100.00

Paradigm Secure Communications (Holding) Ltd.
Paradigm Secure Communications Ltd
Paradigm Services Ltd
TESAT-Spacecom Geschäftsführung GmbHTESAT-Spacecom GmbH & Co. KG

Munich (Germany)
Munich (Germany)
Amsterdam(Netherlands)
Paris (France)
Paris (France)
Munich (Germany)
Amsterdam(Netherlands)
Les Muraux (France)
New York (USA)Friedrichshafen(Germany)Southwood (UK)
Stevenage (UK)
Stevenage (UK)
Buenos Aires(Argentina)
Stevenage (UK)
Stevenage (UK)
Stevenage (UK)
Backnang (Germany)
Backnang (Germany)

F
F
F
F

100.00100.00100.00100.00

F
F
F
F
F
F
E

F
F
F

76.12
100.00100.00Airbus Military S.L.
EADS CASA North America, Inc
EADS CASA S.A. (Unit: EADS CASA MilitaryTransport Aircraft)
EADS PZL ‘‘WARSZAWA-OKECIE’’ S.A.

Madrid (Spain)
Chantilly/Virginia (USA)
Madrid (Spain)

Aerobail GIE
American Eurocopter Corp.
American Eurocopter LLC
ATR Eastern Support
ATR GIE
ATR International SARLATR North America Inc
ATR Training Center SARL
ATRiam Capital Ltd
Composites Aquitaine S.A.
Composites Atlantic Ltd.
EADS Aeroframe services LLC

Paris (France)
Dallas, Texas (USA)
Dallas, Texas (USA)Singapour (Singapour)Toulouse (France)
Toulouse (France)
Washington D.C. (USA)
Toulouse (France)
Dublin (Ireland)
Salaunes (France)
Halifax (Canada)
Lake Charles, Louisiana
(USA)

F

75.00

F
F
F
P
P
P
P
P
P
F
F
F

80.00
100.00
60.00
50.00
50.00
50.00
50.00
50.00
50.00
50.10
50.00
88.00

Warsaw (Poland)

Aeronautics

76

F
F
F
P
P
P
P
P
P
F
F
F

80.00
100.00
60.00
50.00
50.00
50.00
50.00
50.00
50.00
50.10
50.00
88.00

EADS Financial Statements and Corporate Governance 2004

1

1.2 Financial statements (continued)

2

Notes to the consolidated financial statements – Consolidation scope

3
2004

%

2003

%

Company

Head officeFF

100.00100.00FF

100.00100.00Toulouse (France)
Munich (Germany)

100.00EADS ATR S.A.
EADS EFW Beteiligungs- und
Verwaltungsgesellschaft GmbHEADS Revima APU S.A.

E

49.99

F

F

100.00F

100.00EADS Revima S.A.

F
100.00FF
100.00FF
100.00
F
F
50.10
F
F
100.00
F
F
75.00
F
F
100.00FF
100.00FF
100.00F
100.00FF
100.00
F
F
76.52
F
F
100.00FF
100.00FF
100.00FF
100.00FF
100.00F
Additionally consolidated are 41 SPE’s
Headquarters
F
100.00
F
F
75.00
F
E
46.22
E
E
46.22
E
E
46.22
E
E
46.22
E
E
46.22
E
E
46.22
E
E
46.22
E
F
93.58
F

100.00100.00100.0050.10
100.0075.00
100.00100.00100.00100.0076.52
100.00100.00100.00100.00100.00EADS Seca S.A.
EADS Socata S.A.
EADS Sogerma S.A.
EADS Sogerma Tunisie
Elbe Flugzeugwerke GmbHEurocopter South East Asia
Eurocopter Canada Ltd.
Eurocopter Deutschland GmbHEurocopter España S.A.
Eurocopter Holding S.A.
Eurocopter S.A.
Helibras – Helicopteros do Brasil S.A.
Maroc Aviation S.A.
Noise Reduction Engineering B.C.
Socata Aircraft Inc.
Sogerma America Barfield B.C.
Sogerma Drawings S.A.

100.00
75.00
46.03
46.03
46.03
46.03
46.03
46.03
46.03
93.58

Airbus Financial Company Holding B.V.
DADC Luft- und Raumfahrt Beteiligungs AG
Dassault Aero Service
Dassault Assurances Courtage
Dassault Aviation
Dassault Falcon Jet and subsidiaries
Dassault Falcon Service
Dassault International France
Dassault International lnc
Dornier Zentrale

F
F
F
F
F

100.00100.00100.00100.00100.00EADS CASA France
EADS CASA S.A. (Headquarters)
EADS Deutschland GmbH – Zentrale
EADS Deutschland GmbH, FO – Forschung
EADS Deutschland GmbH, LO –Liegenschaften OTN

100.00100.00100.00100.00100.00F
F
F
F
F

EADS Financial Statements and Corporate Governance 2004

Caudebec en Caux
(France)
Tremblay en France(France)
Le Bourget (France)
Le Bourget (France)Mérignac (France)
Monastir (Tunisia)
Dresden (Germany)
Singapore (Singapore)
Ontario (Canada)
Donauwörth (Germany)
Madrid (Spain)
Paris (France)
Marignane (France)
Itajuba (Brazil)
Casablanca (Morocco)
Washington D.C. (USA)Miami, Florida (USA)Miami, Florida (USA)Mérignac (France)

Dublin (Ireland)
Munich (Germany)

Paris (France)
Teterboro NJ (USA)
Vaucresson (France)
Paramus NJ (USA)Friedrichshafen(Germany)
Paris (France)
Madrid (Spain)
Munich (Germany)
Munich (Germany)
Munich (Germany)77

1.2 Financial statements (continued)
Notes to the consolidated financial statements – Consolidation scope
2004

%

2003

%

F

100.00F
F
F
F

100.00100.00100.00
93.58

F
F
F

100.00100.00100.00

E
E
E

46.22
46.22
46.22

E
E
E

46.03
46.03
46.03

Company

Head office

EADS Finance B.V.

Amsterdam(Netherlands)
Paris (France)
Washington (USA)Ottobrunn (Germany)
Taufkirchen (Germany)

EADS France
EADS North America Inc.
EADS Raumfahrt Beteiligungs GmbHEADS Real Estate Dornier Grundstücke GmbH &Co. KG
IPS
Société Toulouse Colomiers
Sogitec Industries

F: Fully consolidated
P: Proportionate
E: Equity method
The respective stated percentage of ownership is considered to represent the direct participation in the company.

78

EADS Financial Statements and Corporate Governance 2004

Suresnes (France)

1

1.2 Financial statements (continued)

2

Auditors’ Report on the IFRS Consolidated Financial Statements

3
Auditors’ Report
Introduction

We have audited the accompanying IFRS consolidated financial statements of EADS N.V., Amsterdam for the year 2004. TheseIFRS consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these IFRS consolidated financial statements based on our audit.
Scope

We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the IFRS consolidated financial statements are free from material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the IFRS
consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates madeby management, as well as evaluating the overall presentation of the IFRS consolidated financial statements. We believe that our
audit provides a reasonable basis for our opinion.
OpinionIn our opinion, the IFRS consolidated financial statements give a true and fair view of the company’s financial position as of
31st December 2004 and of the result for the year then ended in accordance with International Financial Reporting Standards.
Rotterdam, 8th March 2005:
KPMG Accountants N.V.

EADS Financial Statements and Corporate Governance 2004

Amsterdam, 8th March 2005:
Ernst & Young Accountants

791.2 Financial statements (continued)

1.2.2 Financial Statements (Dutch GAAP)
1.2.2.1 Consolidated financial statements (Dutch GAAP)
Consolidated Income Statements for the years 2004, 2003, 2002
In millions of 1

2004

2003

2002

Revenues
Cost of sales
Gross margin

31,761(25,510)6,251

30,133(24,594)
5,539

29,901(24,465)
5,436

Selling expenses
Administrative expenses
Research and development expenses
Other income
Other expenses
thereof goodwill amortisation and related impairment losses
Income from operating activities(798)(1,321)(2,126)
314
(769)
(592)
1,551

(776)
(1,386)(2,189)
196
(823)
(567)
561

(829)
(1,422)(2,096)248(1,177)
(936)
160

58
62
(275)
(55)
(272)
(664)
615
(128)
487

186
224
(203)
148
131
(474)
218
(66)
152

87
108
(81)
21
27
(453)
(266)
(33)
(299)

Income from investments
thereof income from associates
Interest result
Other financial result
Financial result
Income taxes
Profit (loss) from ordinary activities
Minority interests
Net income (loss)

The accompanying notes are an integral part of these Consolidated Financial Statements.

80

EADS Financial Statements and Corporate Governance 2004

Note

4
4
5
5

6

1

1.2 Financial statements (continued)

2
3

Consolidated Balance Sheets at December 31, 2004 and 2003
in millions of 1

AssetsIntangible assets
Property, plant and equipment
Investments in associates
Other investments and long-term financial assets
Fixed assets
Inventories
Trade receivables
Other receivables and other assets
Securities
Cash and cash equivalents
Non-fixed assets
Deferred taxes
Prepaid expenses
Total assets

Note

2004

2003

4

9,416
12,905
1,712
2,352
26,385
3,075
4,406
11,105466
8,718
27,7702,543
951
57,6499,694
11,4481,640
2,489
25,271
3,279
4,001
10,280468
7,404
25,432
2,724
951
54,378

810
9,711
6,086
(177)
16,430

813
9,589
5,934
(187)
16,149

2,295
8,573
5,126
5,860
13,24024,226
4,134
1,991
57,649

2,179
8,726
4,767
5,117
11,31821,202
3,664
2,458
54,3785Liabilities and shareholders’ equity
Capital stockReserves
Accumulated other comprehensive income
Treasury shares
Shareholders’ equity
Minority interests
Provisions
Financial liabilities
Trade liabilities
Other liabilities
Liabilities
Deferred taxes
Deferred income
Total liabilities and shareholders’ equity

6

The accompanying notes are an integral part of these Consolidated Financial Statements.

EADS Financial Statements and Corporate Governance 2004

81

1.2 Financial statements (continued)

Consolidated Statements of Cash Flows for the years 2004, 2003 and 2002
In millions of euros

2004

2003

2002

Net income (loss)
Income applicable to minority interests
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization of fixed assets
Valuation adjustments and CTA release
Deferred tax expenses (income)Results on disposal of fixed assets/businesses and result of associates (equity method)
Change in provisions
Change in other operating assets and liabilities:

487
128

152
66

(299)
33

2,213
(200)
537
(70)
(237)
2,155

2,375
263
(138)
(274)
246
2,019

2,768
177
255
(227)
(845)
804

– Inventories, net

282

160

274

– Trade receivables

(403)

168

895

– Trade liabilities

756

116

(139)

– Other assets and liabilities
Cash provided by operating activities
Investments:– Purchases of intangible and fixed assets– Proceeds from disposals of intangible and fixed assets– Acquisitions of subsidiaries (net of cash)– Proceeds from disposals of subsidiaries (net of cash)– Payments for investments in other financial assets– Proceeds from disposals of other financial assets– Increase in equipment of leased assets– Proceeds from disposals of leased assets– Increase in finance lease receivables– Decrease in finance lease receivables– Dividends paid by companies valued at equity
Change in securities
Change in cash from changes in consolidation
Cash used for investing activities
Change in financial liabilities
Cash distribution paid to shareholders
Repayments/dividends to minorities
Capital increase
Purchase of treasury shares
OthersCash provided by (used for) financing activities
Effect of foreign exchange rate changes and other valuation adjustments on cash andcash equivalents
Net increase (decrease) in cash and cash equivalents

1,520
5,013

1,575
4,709

(226)
2,666

(3,017)
36
(100)
0
(482)
492
(656)
74
(261)
110
36
10
9
(3,749)
474
(320)
(64)
43
(81)
0
52

(2,672)
47
(92)
32
(728)
346
(279)
8
(443)
84
38
336
(152)
(3,475)
1,132
(240)
(38)
21
(31)
8
852

(2,213)120(19)84(1,115)
735
(101)
120
(749)
150
30
(264)
5
(3,217)
(774)
(403)
(127)
16
(156)
(3)
(1,447)

(2)
1,314

(83)
2,003

(82)
(2,080)Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

7,404
8,718

5,401
7,404

7,481
5,401

82

EADS Financial Statements and Corporate Governance 2004

1

1.2 Financial statements (continued)

2
3

The following represents supplemental information with respect to cash flows from operating activities:
in millions of 1

Interest paid
Income taxes paid
Interest received
Dividends received

2004

2003

2002

(367)
(302)
329
57

(311)
(383)
338
55

(407)
(318)
403
49

The accompanying notes are an integral part of these Consolidated Financial Statements.

EADS Financial Statements and Corporate Governance 200483

1.2 Financial statements (continued)
Notes to the consolidated financial statements (Dutch GAAP)
1. Accounting principles applied for Dutch GAAP purposes

The financial statements of EADS N.V. and the consolidated
financial statements that are included in this section areprepared on a basis consistent with generally accepted
accounting principles in the Netherlands (‘‘Dutch GAAP’’).
These accounting principles are largely in conformity with theaccounting policies that are applied in the Company’s primaryconsolidated financial statements as prepared underInternational Financial Reporting Standards (IFRS).
The notes to the consolidated financial statements as prepared
under IFRS are an integral part of the financial statements as
prepared under Dutch regulations in this section. Material
differences based on differences between IFRS and
Dutch GAAP are disclosed separately in this section.
Goodwill, which represents the excess of purchase price overfair value of net assets acquired, is amortized on a straight-line
basis over the expected periods to be benefited, not exceeding
20 years under Dutch GAAP. The Company assesses therecoverability by determining whether the unamortized balanceof goodwill can be recovered from future operating cash flowsof the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted
future operating cash flows.
2. Presentation of financial statements

In accordance with article 362:4 of the Netherlands Civil
Code, the financial statements presentation in thisDutch GAAP section does not fully comply with Dutch
regulations as these are presented to align entirely with the
IFRS financial statements including the notes thereto.
Additionally this presentation is consistent with priorreporting periods.

3. Dutch GAAP reconciliation
The accounting principles applied in the preparation of IFRS
consolidated financial statements differ in some respects fromthose generally accepted in the Netherlands. For thedetermination of net income and stockholders’ equity inaccordance with Dutch GAAP, the following difference withIFRS has to be taken into account:

EADS decided to adapt early IFRS 3 and revised IAS 36 andIAS 38 and to apply these standards as of January 1, 2004
mainly to the abolishment of goodwill amortization. As aconsequence, goodwill is no longer amortized regularly in the
consolidated IFRS financial statements, but tested for
impairment on an annual basis or if indicators of an
impairment arise. Under Dutch law, goodwill has to beamortized on a straight-line basis over a period not exceeding
20 years. As a result, goodwill amortization and impairment
charges are different from IFRS.
Reconciliation of net income from IFRS to Dutch GAAP:
in 1m

Net income in the consolidated financial
statements according IFRS
Goodwill amortization
Net income in accordance with
Dutch GAAPin EuroBasic
Diluted

1,030
(543)

152
–

487

152

2004

2003

0.61
0.61

0.19
0.19

Reconciliation of stockholders’ equity from IFRS to
Dutch GAAP:
Stockholders’ equity in the consolidated
financial statements according IFRS
Goodwill amortization
Stockholders’ equity in accordance with
Dutch GAAPEADS Financial Statements and Corporate Governance 2004

2003

Earnings per share:

in 1m

84

2004

2004

2003

16,973(543)

16,149–16,43016,149

1

1.2 Financial statements (continued)

2

Notes to the consolidated financial statements (Dutch GAAP)

3
4. Other operating expenses/Intangible assets

5. Income from investments/Investments in associates

See note 7 and 11 to the consolidated financial statements
based on IFRS.

See note 9 and 13 to the consolidated financial statements
based on IFRS.

The movement in intangible assets are detailed as follows:

The movement in investments in associates are detailed
as follows:

In 1m

Goodwill

Other
Intangible
AssetsBalance at December 31, 2003
Additions
Amortization
Disposals
OthersBalance at December 31,
2004

9,372
83
(592)
–
5

322
364
(137)
(7)
6

9,694
447
(729)
(7)
11

8,868

548

9,416

Total

The difference of 4592 million in 2004 between IFRS and
Dutch GAAP relates to the amortization of goodwill and iscaused by the fact the goodwill is no longer amortizedunder IFRS.

EADS Financial Statements and Corporate Governance 2004

In 1m

Balance at December 31, 2003
Additions
Amortization goodwill
Others/Reclassifications
Balance at December 31, 2004

Investments
in associates

1,640
87
(26)
11
1,712

The difference of 426 million in 2004 between IFRS and
Dutch GAAP relates to the amortization of goodwill in
associated companies accounted for using the equity method.
6. Minority interests
The difference of 475 million in 2004 between IFRS and
Dutch GAAP relates to the amortization of goodwill andreflects the third-party share.

85

1.2 Financial statements (continued)

1.2.2.2 EADS NV financial statements (Dutch GAAP)EADS NV Balance Sheet (Dutch GAAP)in millions of 1

AssetsGoodwill
Financial assets
Loans
Fixed assets
Receivables and other assets
Securities
Cash and cash equivalents
Non-fixed assets
Total assets
Liabilities and stockholders’ equity
Capital stock
General reserves
Stockholders’ equity
Financial liabilities
Other liabilities
Liabilities
Total liabilities and stockholders’ equity

Note

2
2
2
3
4
4

5
6

At
31st
December
2004

At
31st
December
2003

4,091
10,927695
15,713
2,248
304
6,985
9,537
25,250

4,354
9,647
–
14,001
3,778
307
6,117
10,202
24,203810
15,62016,430
309
8,511
8,820
25,250813
15,33616,149
194
7,860
8,054
24,203

2004

2003

763
(276)
487

398
(246)
152

EADS NV Income Statement (Dutch GAAP)in millions of euros

Income from investments
Other results
Net result

86

EADS Financial Statements and Corporate Governance 2004

1

1.2 Financial statements (continued)

2

Notes to EADS N.V. financial statements (Dutch GAAP)

3
1. General

EADS N.V., having its legal seat in Amsterdam, theNetherlands, is engaged in the holding, coordinating andmanaging of participations or other interests in and to financeand assume liabilities, provide for security and/or guarantee
debts of legal entities, partnerships, business associations andundertakings that are involved in the aeronautic, defence, space
and/or communication industry or activities that arecomplementary, supportive or ancillary thereto.
The description of the company’s activities and the groupstructure, as included in the notes to the consolidated IFRS
financial statements, also apply to the company statutoryfinancial statements. In accordance with article 402 Book 2 of
the Dutch Civil Code the statement of income is presented inabbreviated form.
2. Fixed assets

in 1m

Balance at
December 31, 2003
Additions
Amortization
Net income frominvestments
Fair value adjustments
financial instruments/
othersDividends received
Balance at
December 31, 2004

Goodwill

The loans are provided to affiliated companies.
3. Receivables and other assets
in 1m

Receivables from affiliated companies
Receivables from related companies
Other assets
Total receivables and other assets

2004

2003

2,104
42
102
2,248

3,561
57
160
3,778

The receivables from affiliated companies include mainly
receivables in connection with the cash pooling in EADS N.V.
All receivables and other assets mature within one year.

The movement in fixed assets are detailed as follows:
Financial
AssetsParticipating
Interests

The fair value adjustments on financial instruments/othersreflect mainly the impact in the Other Comprehensive Incomein the participating interests related to the applicationof IAS 39.

4. Securities, Cash and cash equivalents
Loans

Total

4,354
–
(263)

9,647
683
–

–
695
–

14,001
1,378
(263)

–

763

–

763

–
–

142
(308)

–
–

142
(308)

4,091

10,927695

15,713

EADS Financial Statements and Corporate Governance 2004

The securities comprise mainly Available-for-Sale Securities.
Short term securities which are subject to an insignificant riskof changes in value are classified to line item ‘‘Cash andcash equivalents’’.

87

1.2 Financial statements (continued)
Notes to EADS N.V. financial statements (Dutch GAAP)
5. Stockholders’ equity
Capital
stock

in 1m

Balance at December 31, 2002
Capital increase
Net income
Cash distribution
Transfer to legal reserve
Repurchase treasury shares
Other comprehensive income
Balance at December 31, 2003
Capital increase
Net income
Cash distribution
Transfer to legal reserve
Repurchase treasury shares
Cancellation shares
Other comprehensive income(1) Balance at December 31, 2004

811
2

Share
premium
fromcontributions

Sharepremiumfromcash

Accumulated
othercomprehensive
incomeTreasurysharesLegalreserves

Retainedearnings

Total
equity

8,459

1,079
19

2,452

(156)

280

(160)

12,765
21
152
(240)

152
(240)
190

(190)

(31)
813
2

8,459

858
41

3,482
5,934

(187)

470

(198)

487
(320)
181
(5)
810

8,459

493

(181)

(81)
91

(86)
152
6,086

(177)

(31)
3,482
16,149
43
487
(320)
(81)

651

–
108

152
16,430For further information to the Stockholders’ equity, please see note 18 of the consolidated IFRS financial statements.
The cumulative foreign exchange translation adjustments are part of the accumulated other comprehensive income.
The accumulated other comprehensive income relates mainly to the fair value adjustments of financial instruments in relation toparticipating interests.
The legal reserves as required by Dutch law are related to EADS’ share in the undistributed results from investments for
4482 million (2003: 4466 million) and the internally generated capitalized development costs of 4169 million (2003: 44 million).
6. Other liabilities
in 1m

Liabilities to affiliated companies
Liabilities to related companies
Other liabilities
Total

2004

2003

7,745
680
86
8,511

6,999
765
96
7,860

The liabilities to affiliated companies include mainly liabilities in connection with the cash pooling in EADS N.V.

88

EADS Financial Statements and Corporate Governance 2004

1

1.2 Financial statements (continued)

2

Notes to EADS N.V. financial statements (Dutch GAAP)

3
7. Commitments and contingent liabilities

Guarantees totaling 425 million have been given on behalf of other group companies.
8. Remuneration

The total remuneration and related costs of the members of the Board of Directors and former directors in 2004 can be specified
as follows:in Euro

Fixum
Bonus (related to reporting period)
Fees

2004

2003

3,949,425
4,549,050
290,000
8,788,475

3,981,000
3,821,930
205,000
8,007,930

The cash remuneration of the individual members of the Board of Directors was as follows:
2004

Directors
Manfred Bischoff
Arnaud LagardèrePhilippe Camus
Rainer HertrichNoël Forgeard
Hans-Peter Ring
François David
Rüdiger Grube
Michael Rogowski
Former directors
Eckhard Cordes
Pedro Ferreras
Jean-René Fourtou
Total:EADS Financial Statements and Corporate Governance 2004

Fixumin EuroBonusin Eurorelated to 2004

Fees
in EuroTotal
in Euro60,00040,0001,093,942
1,093,942
1,079,153
462,388––
30,000200,000
200,000
1,096,345
1,096,345
1,119,751
482,440
66,667
66,667100,000

110,000
80,000––––20,00035,00020,000370,000
320,000
2,190,287
2,190,287
2,198,904
944,828
86,667
101,667
150,000

30,00030,00030,0003,949,425

33,334
54,16733,3344,549,050

10,00015,000–290,000

73,334
99,167
63,334
8,788,475

89

1.2 Financial statements (continued)
Notes to EADS N.V. financial statements (Dutch GAAP)

2003

Directors
Manfred Bischoff
Arnaud Lagardère1
Philippe Camus
Rainer HertrichNoël Forgeard
Hans-Peter Ring
Eckhard Cordes
Pedro Ferreras
Jean-René Fourtou
Michael Rogowski
Former directors
Jean-Luc Lagardère1
Axel Arendt
Total:Fixumin EuroBonusin Eurorelated to 2003

Fees
in EuroTotal
in Euro60,000–1,114,500
1,114,500
1,097,000
310,000
30,00030,00030,00030,000153,000
102,000
916,309916,309
1,067,949
322,11376,50076,50076,50076,50070,00040,000––––25,00025,00010,00025,000283,000
142,000
2,030,809
2,030,809
2,164,949
632,113
131,500
131,500
116,500
131,500

60,000105,000
3,981,000

38,250–3,821,930

10,000–205,000

108,250
105,000
8,007,930

1 The bonuses for Mr. Jean-Luc Lagardère and Mr. Arnaud Lagardère are included pro rata in accordance with their membership in the Board of Directors.

90

EADS Financial Statements and Corporate Governance 2004

1

1.2 Financial statements (continued)

2

Notes to EADS N.V. financial statements (Dutch GAAP)

3
The table below gives an overview of the interests of the members of the Board of Directors under the stock options plans
of EADS:
As ofJan. 1
2004

Philippe Camus

135,000
135,000
135,000
135,000

Rainer Hertrich

135,000
135,000
135,000
135,000

Noël Forgeard

110,000
88,000108,000
108,000

Hans-Peter Ring

10,00028,00037,00050,000Total:

1,619,000

Number of options
grantedduring
2004

–
–
–
–
135,000–––
135,000––––
108,000––––
50,000428,000

As of
Dec. 31
2004

Exercise
price
Euro

Expiry date

135,000
135,000
135,000
135,000
135,000
135,000
135,000
135,000
135,000
135,000
110,000
88,000108,000
108,000
108,000
10,00028,00037,00050,00050,0002,047,000

20.90
24.66
16.96
15.65
24.32
20.90
24.66
16.96
15.65
24.32
20.90
24.66
16.96
15.65
24.32
20.90
24.66
16.96
15.65
24.32

July 8, 2010
July 12, 2011
August 8, 2012
October 9, 2013
October 7, 2014
July 8, 2010
July 12, 2011
August 8, 2012
October 9, 2013
October 7, 2014
July 8, 2010
July 12, 2011
August 8, 2012
October 9, 2013
October 7, 2014
July 8, 2010
July 12, 2011
August 8, 2012
October 9, 2013
October 7, 2014

The value of the stock options granted to the Executive members of the Board of Directors is 415 million. To the othermembers of the Executive Committee and to the Group’s senior management stock options with a value of 4233 million are
granted. The expected value of the performance of stock options is based on the Black-Scholes Model, which is in line withinternational accounting regulations. For further information, please see note 27 of the consolidated IFRS financial statements.
The pension benefit obligation for the Executive members of the Board of Directors is as follows:
The Executive Board members have pension promises as part of their employment agreements. The general policy is to givethem annual pension of 50% of their annual base salary after five years in the Executive Committee of EADS at the age of 60
to 65. In case of the CEO’s, the retirement age is 60. This obligation will increase to 60% after ten years of service in the
EADS Executive Committee.
These pension schemes have been implemented and financed through collective executive pension plans in France and Germany.
These pension promises have also separate rules e.g. for minimum length of service and other conditions to comply withnational regulations.
The amounts reported for the Executive Board members are free of benefits in kind they are entitled to as well as the nationalsocial and tax impact.
Executives Board members are entitled to a company car. Mr. Rainer Hertrich benefits also from a free accommodation in France.
EADS has not provided any loans to/advances to/guarantees on behalf of (retired) directors.

EADS Financial Statements and Corporate Governance 200491

1.2 Financial statements (continued)
Supplementary Information
1. Auditors’ report
Introduction

We have audited the accompanying financial statements of EADS N.V., Amsterdam for the year 2004. These financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audit.
Scope

We conducted our audit in accordance with auditing standards generally accepted in the Netherlands. Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis forour opinion.
OpinionIn our opinion, the financial statements give a true and fair view of the company’s financial position as of December 31, 2004
and of the result for the year then ended in accordance with accounting principles generally accepted in the Netherlands andcomply with the financial reporting requirements included in Part 9 of Book 2 of the Netherlands Civil Code.
Rotterdam, March 8, 2005
KPMG Accountants N.V.

Amsterdam, March 8, 2005
Ernst & Young Accountants

2. Appropriation of result

Articles 30 and 31 of the Articles of Association provide that the board of directors shall determine which part of the result
shall be attributed to the reserves. The general meeting of shareholders may dispose of a reserve only upon a proposal of theBoard of Directors and to the extent it is permitted by law and the Articles of Association. Dividends may only be paid after
adoption of the annual accounts from which it appears that the shareholders’ equity of the company is more than the amount of
the issued and paid-in part of the capital increased by the reserves that must be maintained by law.
It will be proposed at the Annual General Meeting of Shareholders that the net profit of 4487 million as shown in the profit
and loss statement for the financial year 2004 is to be added to retained earnings and that a payment of a gross amount of
40,50 per share shall be made to the shareholders from distributable reserves.
3. Subsequent Events

For further information please see note 33 of the consolidated IFRS financial statements.

92

EADS Financial Statements and Corporate Governance 2004

1

1.3 Statutory Auditors’ Fees

2
3

Services of Statutory Auditors and Members of their Network rendered to the Group for the financial years 2004 and 2003:
KPMG Accountants N.V.
2004
Amount(in K 1)%

2003
Amount(in K 1)%

Ernst & Young Accountants
2004
2003
AmountAmount(in K 1)%(in K 1)%

Audit

Audit process, certification, examination ofindividual and consolidated accounts

5,073

57.3

4,514

65.1

4,795

70.0

4,263

64.2

Additional tasks
Sub-total
Other services as relevant

3,048
8,121

34.5
91.8

2,133
6,647

30.7
95.8

1,747
6,542

25.5
95.5

1,108
5,371

16.7
80.9

Legal, tax, employment

729

8.2

294

4.2

294

4.3

1,105

16.7

Information technology

–

–

–

–

–

–

28

0.4

–
729
8,850

–
8.2
100.0

–
294
6,941

–
4.2
100.0

13
307
6,849

0.2
4.5
100.0

132
1,265
6,636

2.0
19.1
100.0

Other (to be specified if H10% of the fees
for the audit)
Sub-total
Total

EADS Financial Statements and Corporate Governance 2004

93

1.4 Risk Factors
EADS is subject to many risks and uncertainties that may
affect its financial performance. The business, financial
condition or results of operations of EADS could be materiallyadversely affected by the risks described below. These risks
are not the only ones facing EADS. Additional risks notpresently known to EADS or that it currently deems
immaterial may also impair its business operations.
1.4.1 Market Risks
Exposure to Foreign Currencies

EADS’ revenues are mainly denominated in U.S. dollars, while
the major portion of its costs is incurred in Euro and Pounds
Sterling. Consequently, to the extent EADS were not to use
financial instruments to cover its exposure resulting from thisforeign currency mismatch, its profits would be affected bychanges in the Euro-U.S. dollar and Pound Sterling-U.S. dollar
exchange rates. EADS has, therefore, implemented an
exchange rate strategy in order to manage and minimize such
exposure. In order to secure the rates at which U.S. dollar
revenues (arising primarily at Airbus and in the commercial
satellite business) are converted into Euro or Pounds Sterling,
EADS manages a long term hedging portfolio. There arecomplexities inherent in determining whether and when
foreign exchange rate exposure of EADS will materialize, inparticular given the possibility of unpredictable revenue
variations arising from order cancellations and postponements.
Furthermore, as a significant portion of EADS’ foreign
currency exposure is hedged through contractual arrangementswith third parties, EADS is exposed to the risk of nonperformance by its approximately 40 hedging counterparties.
See ‘‘1.1.8 Management of Market Risks – Exchange Rate
Risk’’. No assurances may be given that EADS’ exchange rate
hedging strategy will protect it fully from significant changes
in the exchange rate of the U.S. dollar to the Euro and thePound Sterling and that such changes will not affect its resultsof operation and financial condition.
EADS’ consolidated revenues, costs, assets and liabilities
denominated in currencies other than the Euro are translated
into the Euro for the purposes of compiling its financial
statements. As EADS’ exchange rate hedging strategy aims tocover its cash flows, and, to a large extent, EBIT*, changes inthe value of these currencies relative to the Euro will have aneffect on the Euro value of EADS’ reported revenues, costs,
assets and liabilities and, to a lesser extent, EBIT*.
Currency exchange rate fluctuations in those currencies otherthan the U.S. dollar in which EADS incurs its principal
manufacturing expenses (mainly the Euro) may have the effectof distorting competition between EADS and competitors
whose costs are incurred in other currencies.

94

EADS Financial Statements and Corporate Governance 2004

This is particularly true with respect to fluctuations relative to
the U.S. dollar, as many of EADS’ products and those of its
competitors (e.g., in the defence export market) are priced in
U.S. dollars. EADS’ ability to compete with competitors may
be eroded to the extent that any of EADS’ principal currencies
appreciates in value against the principal currencies ofsuch competitors.
See ‘‘1.1.4 Measurement of Management’s Performance –EBIT* Performance by Division – Hedging Impact on EBIT*’’and ‘‘1.1.8 Management of Market Risks – Exchange Rate
Risk’’ for quantitative information about EADS’ exchange raterisk and a discussion of its foreign currency hedging policy.
See ‘‘1.1.3 Critical Accounting Considerations, Policies andEstimates – Accounting for Hedged Foreign Exchange
Transactions in the Financial Statements’’ for a summary of
EADS’ accounting treatment of foreign currency
hedging transactions.
Other Fluctuations in Financial Markets Risk
EADS is exposed not only to currency exchange rate risk, butalso to interest rate, credit, liquidity and other financial market
risks. For a discussion of these risks and the management ofthem by EADS, see ‘‘1.1.8 Management of Market Risks’’.
Exposure to Sales Financing Risk
In support of sales, EADS (primarily through Airbus andATR) may agree to participate in the financing of customers.
As a result, EADS has a significant portfolio of leases andother financing arrangements with airlines. The risks arisingfrom EADS’ sales financing activities may be classified into
two categories: (i) credit risk, which concerns the customer’sability to perform its obligations under a financing
arrangement and (ii) aircraft value risk, which primarily relates
to unexpected decreases in the future value of aircraft.
Measures taken by EADS to mitigate these risks include
optimised financing and legal structures, diversification over anumber of aircraft and customers, credit analysis of financing
counterparties, provisioning for the credit and asset value
exposure, and transfers of exposure to third parties. No
assurances may be given that these measures will protect
EADS fully from defaults by its customers or significant
decreases in the value of the financed aircraft in theresale market.

EADS’ sales financing arrangements expose it to aircraft valuerisk, because it retains collateral interests in aircraft for the
purpose of securing customers’ performance of their financial
obligations to EADS, and because it guarantees part of themarket value of certain aircraft during limited periods after
their delivery to customers. Under adverse market conditions,1

1.4 Risk Factors (continued)

2
3

the market for used aircraft could become illiquid and themarket value of used aircraft could significantly decrease below
projected amounts. In the event of a financing customer
default at a time when the market value for a used aircraft has
unexpectedly decreased, EADS would be exposed to thedifference between the outstanding loan amount and themarket value of the aircraft. Similarly, if an unexpected
decrease in the market value of a given aircraft coincided withthe exercise window of an asset value guarantee (‘‘AVG’’)
with respect to that aircraft, EADS would be exposed tolosing as much as the difference between the market value ofsuch aircraft and the AVG amount. No assurances may be
given that the provisions taken by EADS will be sufficient tocover these potential shortfalls. See ‘‘1.1.8 Management ofMarket Risks – Sales Financing Risk’’.
Through the Airbus Asset Management Division or as a resultof past financing transactions, EADS is the owner of usedaircraft, exposing it directly to fluctuations in the market valueof these used aircraft.
1.4.2 Business-Related Risks
Aircraft Market Cyclicality

In 2004, the combined revenues generated from Airbus and
ATR represented approximately two thirds of EADS’
consolidated revenues. Historically, the commercial passenger
aircraft market has shown cyclical trends due in part to thesensitivity of passenger demand in the air travel market to
growth in gross domestic product (‘‘GDP’’). The growth in
EADS’ commercial aircraft activities has consequently beencorrelated to growth in GDP. Other factors, however, play animportant role, such as (i) the average age and technicalobsolescence of the fleet relative to new aircraft, (ii) the
number and characteristics of aircraft taken out of service andparked pending potential return into service, (iii) passenger loadfactors, (iv) airline pricing policies, (v) airline financial healthand (vi) deregulation.
EADS and the Airbus Division have implemented a flexible
manufacturing organisation that is intended to help them adapt
to cyclical market changes in demand. See ‘‘Part 2/1.1.2
Airbus – Market’’. Nevertheless, EADS expects that themarket for passenger aircraft will continue to be cyclical anddownturns in broad economic trends, such as those currently
being experienced, may have a negative effect on its future
results of operation and financial condition.

Impact of Terrorism, Epidemics and Catastrophic Events On
Aircraft Market

As the terrorist attacks in New York and Madrid, and the
spread of the SARS virus have demonstrated, terrorism andepidemics may negatively affect public perception of air travel
safety and comfort and the demand for air travel andcommercial aircraft. Furthermore, major airplane crashes may
have a negative effect on the public’s or regulators’ perceptionsof the safety of a given class of aircraft, form of design, or
airline. As a consequence of terrorism, epidemics and othercatastrophic events, an airline may be confronted with sudden
reduced demand for air travel and be compelled to take costly
security and safety measures. In response to such events, andthe resulting negative impact on the airline industry or
particular airlines, EADS may suffer from a decline in demand
for all or certain types of its aircraft and EADS’ customers
may postpone delivery of new aircraft or cancel orders.
Dependence on Defence Spending
In 2004, approximately 24% of EADS’ consolidated revenues
was derived from defence spending. In any single market,
defence spending depends on a complex mix of geopoliticalconsiderations, budgetary constraints and the ability of thearmed forces to meet specific threats and perform certain
missions. Defence spending may be subject to significant
fluctuations from year to year and country to country.
Adverse economic and political conditions, as well as
downturns in broad economic trends in EADS’ defence
markets, may have a negative effect on EADS’ future resultsof operations and financial condition.

In the case where several countries undertake to enter together
into defence procurement contracts, economic, political and/or
budgetary constraints in any one of these countries may havea negative effect on the ability of EADS to enter into or
perform such contracts.
Emergence of Public-Private Partnerships and Private FinanceInitiatives

Defence customers, particularly in the U.K., increasingly
request proposals and grant contracts under schemes known as
public-private partnerships (‘‘PPPs’’) or private financeinitiatives (‘‘PFIs’’). PPPs and PFIs differ substantially fromtraditional defence equipment sales, as they often incorporate
elements such as:– the provision of extensive operational services over the lifeof the equipment,

EADS Financial Statements and Corporate Governance 200495

1.4 Risk Factors (continued)– continued ownership and financing of the equipment by aparty other than the customer, such as theequipment provider,– mandatory compliance with specific customer requirements
pertaining to public accounting or government procurement
regulations; and– provisions allowing for the service provider to seek out
additional customers for unused capacity.
EADS is party to PPP and PFI contracts, for example throughParadigm with Skynet 5 and related telecommunications
services, and involved in additional PFI proposals, such as theAirtanker (FSTA) project. One of the complexities presented
by PFIs lies in the allocation of risks and the timing thereof
among different parties over the lifetime of the project.
Given that participation in PPPs and PFIs is new for EADS,
there can be no assurances of the extent to which EADS will
efficiently and effectively (i) compete for future PFI or PPP
programmes, (ii) administer the services contemplated under
the contracts, (iii) finance the acquisition of the equipment andthe ongoing provision of services related thereto, or (iv) accessthe markets for the commercialisation of excess capacity. Nor
can EADS be certain that it will not encounter unexpected
political, budgetary, regulatory or competitive risks over thelong duration of PPP and PFI programmes.
Competition and Market Access

Most of EADS’ businesses are subject to significant
competition, in particular in the commercial aircraft market,
where, in the past, Airbus has been affected by downward
price pressure resulting from such competition. EADS believes
that some of the underlying causes of such price competition
have been mitigated by restructuring in the aerospace anddefence industry. However, the recent weakening of demand
has led to greater leverage for certain customers to encourage
competition in respect of a variety of issues, including priceand payment terms. No assurance can be given thatcompetition may not intensify, particularly in the context of a
prolonged downturn.
In addition, the contracts for many aerospace and defence
products are awarded, implicitly or explicitly, on the basis ofhome country preference. Although EADS constitutes amultinational combination broadening a domestic market
constituency, it may remain at a competitive disadvantage incertain countries, especially outside of Europe, relative to local
contractors for certain products. The strategic importance andpolitical sensitivity attached to the aerospace and defence
industries means that political considerations will persist for
many products for the foreseeable future.

96

EADS Financial Statements and Corporate Governance 2004

Availability of Government Financing

In prior years, EADS and its principal competitors havebenefited from government financing of product research anddevelopment and EADS has recently received financing fromcertain governments in relation to the A380 commercial
aircraft program. No assurances can be given that financing
will continue to be made available for future projects. Since
1992, the E.U. and the U.S. have operated under an agreementthat sets the terms and conditions of financial support thatgovernments may provide to civil aircraft manufacturers. The
unilateral withdrawal from the 1992 agreement by the
U.S. government in late 2004 has led to a new round ofnegotiations between the EU and the U.S. The terms andconditions of any new agreement may limit access by Airbus
to risk-sharing-funds for large projects or establish an
unfavorable balance of access to government funds by EADS
as compared to its U.S. competitors.
Technologically Advanced Products and Services
EADS develops and manufactures products that are, for themost part, technologically advanced and, sometimes, novel.
Most of EADS’ products must function under demanding
operating conditions. Even though EADS believes it employs
sophisticated design, manufacturing and testing practices, there
can be no assurance that EADS’ products will be successfully
developed or operated or that they will be developed or will
perform as intended.

Certain of EADS’ contracts require it to forfeit part of its
expected profit, to receive reduced payments, to provide a
replacement launch or other product or service, or to reduce
the price of subsequent sales to the same customer if its
products fail to be delivered on time or to perform adequately.
EADS has commitments under telecommunication satellite
manufacturing contracts that were signed during a period
when tight delivery schedules were provided in thesecontracts, but market practice allowed extension of schedules
to meet ever more complex technological requirements. No
assurances can be given that performance penalties or contract
cancellations will not be imposed should EADS fail to meetdelivery schedules or other measures of contract performance.
EADS, like other organisations, has experienced occasional
product failures and other problems, including with respect tocertain of its launch vehicles and satellites. There can be noassurances that such problems will not occur in the future. In
addition to any costs resulting from product warranties,
contract performance or required remedial action, such failures
may result in increased costs or loss of revenues and may also

1

1.4 Risk Factors (continued)

2
3

have a significant adverse effect on the competitive reputationof EADS’ products. See ‘‘– Legal Risks – Product Liability andWarranty Claims’’.
Major Research and Development Programmes

The business environment in many of EADS’ principal
operating business segments is characterized by extensive
research and development costs requiring significant up-front
investment. Business plans underlying such investment
contemplate a long payback period before this investment isrecouped. There can be no assurances that the commercial,technical and market assumptions underlying such businessplans will be met, and consequently, the payback period or
returns contemplated therein achieved.
U.K. Pension Commitments

EADS has several common investments with BAE SYSTEMS,
of which the most significant in terms of employees are
Airbus and MBDA. In respect of each investment, for so longas BAE SYSTEMS remains a shareholder, U.K. employees may
stay in the BAE SYSTEMS pensions schemes, which currently
qualify as defined benefit plans. BAE SYSTEMS hasannounced a shortfall of £2,099 million in post retirement
pension assets when compared with the respective liabilities.
This amount would have been recognised in BAE SYSTEMS’
books had the new U.K. accounting standard FRS 17 alreadybeen implemented. As participants in the BAE SYSTEMS
schemes, EADS’ investments are potentially affected by theshortfall. However, the agreements between EADS andBAE SYSTEMS have the effect of capping the contributions
that the investment has to make to the pension scheme for acertain period of time (e.g., until 2011 for Airbus and until
2008 for MBDA). Any additional contribution would be paid
by BAE SYSTEMS. EADS is therefore not exposed toincreased contribution payments resulting from the pension
underfunding during the period of the contribution caps. At
present, EADS has only limited information about how theunderfunding could impact the investments after the period ofcontribution caps has expired.
On 1st November 2003 EADS established a new pension
scheme for Astrium U.K. The defined benefit obligation of
the new plan, calculated under the assumption that all
employees choose to transfer their benefits, amounts to£117 million. Plan assets are recorded at £65 million,
resulting in a net liability of £52 million which covers the
maximum risk associated with the creation of the new plan.
See ‘‘Notes to the IFRS Consolidated Financial Statements –Note 19(b): Provisions for Retirement Plans’’.

EADS Financial Statements and Corporate Governance 2004

1.4.3 Legal Risks
Dependence On Joint Ventures and Minority Holdings

EADS generates a substantial proportion of its revenues
through various consortia, joint ventures and equity holdings
and believes that its alliances and partnerships are a source ofcompetitive advantage. These arrangements include primarily:– the Eurofighter consortium;– two principal joint ventures: MBDA and ATR;
– majority interests: (a) Airbus, (b) Dornier GmbH; and(c) LFK; and– investment in associates: Dassault Aviation.
The formation of partnerships and alliances with other market
players is an integral strategy of EADS and the proportion ofsales generated from consortia, joint ventures and equity
holdings may rise in future years. This strategy may fromtime to time lead to changes in the organisational structure, or
realignment in the control, of EADS’ existing joint ventures.
EADS exercises varying and evolving degrees of control in the
consortia, joint ventures and equity holdings in which it
participates. While EADS seeks to participate only in venturesin which its interests are aligned with those of its partners,
the risk of disagreement or deadlock is inherent in a jointly
controlled entity, particularly in those entities that require theunanimous consent of all members with regard to majordecisions and specify limited exit rights. The other parties inthese entities may also be competitors of EADS, and thus may
have interests which differ from those of EADS.
In addition, in those holdings in which EADS is a minority
partner or shareholder, EADS’ access to the entity’s books andrecords, and as a consequence, EADS’ knowledge of theentity’s operations and results, is generally limited as compared
to entities in which EADS is a majority holder or is involvedin the day-to-day management.
Product Liability and Warranty Claims
EADS designs, develops and produces a number of highprofile products of large individual value, particularly civil andmilitary aircraft and space equipment. EADS is subject to therisk of product liability and warranty claims in the event thatany of its products fail to perform as designed. While EADS
believes that its insurance programs are adequate to protect itfrom such liabilities and that no material claims have been
made against it, no assurances can be given that claims will
not arise in the future or that such insurance cover will
be adequate.

971.4 Risk Factors (continued)

Export Controls and Other Regulations

The export market is a significant market for EADS. In
addition, many of the products EADS designs andmanufactures for military use are considered to be of national
strategic interest. Consequently, the export of such products
outside of EADS’ domestic markets may be restricted or
subject to licensing and export controls, notably by the U.K.,
France, Germany and Spain, where EADS carries out its
principal military activities as well as by other countries where
suppliers come from, notably, the U.S. There can be noassurance (i) that the export controls to which EADS is subject
will not become more restrictive, (ii) that new generations of
EADS products will not also be subject to similar or more
stringent controls or (iii) that geopolitical factors will not makeit impossible to obtain export licenses for one or more clientsor constrain EADS’ ability to perform under previously signed
contracts. Reduced access to military export markets may havea material adverse effect on EADS’ business, financial
condition and results of operations.
EADS is also subject to a variety of other governmental
regulations that may adversely affect its business and financial
condition, including among others, regulations relating to theprotection of the environment, the use of its products, labour
practices and dealings with foreign officials. In addition,
EADS’ ability to market new products and enter new markets
may be dependent on obtaining government certifications andapprovals in a timely manner.
Exceptional Items and Litigation

EADS is involved in a number of claims and arbitrations thathave arisen in the ordinary course of business. EADS believes
that it has made adequate provisions to cover current orcontemplated general and specific litigation risks.
In its defence against an arbitration proceeding initiated byThales, EADS (more specifically Euromissile GIE) was awarded
at the end of 2002 damages on the basis of its counterclaim,
the principal amount of which totals 4108 million. In thiscontext, damages were paid to Euromissile on 17th February
2003 and Thales filed an appeal for annulment of thearbitration decision. On 18th November 2004 the Paris Courtof Appeal upheld the arbitration award. Since this decision has
not been appealed to the French Supreme Court, this litigation
is now closed. Consequently, the relating provision was
released in 2004.
DaimlerChrysler has become a party to judicial and arbitration
proceedings with one of the Dornier family shareholders, aminority shareholder of Dornier GmbH, an indirect subsidiaryof EADS. These proceedings concern claims on alleged

98

EADS Financial Statements and Corporate Governance 2004

acquisition rights for a price below market value regarding apart of Dornier GmbH’s real estate in Oberpfaffenhofen andcould have an economic effect on Dornier GmbH.
At the end of 2002, a request for arbitration was filed against
a subsidiary of EADS involved in the supply of equipment
under a commercial contract that was completed several years
ago. EADS believes it has strong defences, both proceduraland of substance, to oppose the claim. At this stage of theprocedure the financial risk cannot be assessed since, in June
2003, EADS was notified that the arbitration procedure wassuspended at the request of the claimant.
Following its unilateral withdrawal from the 1992
EU-U.S. Agreement on Trade in Large Civil Aircraft, theU.S. lodged a request on 6th October 2004 to initiate
settlement proceedings before the World Trade Organisation(WTO). In response, the E.U. launched a parallel WTO caseagainst the U.S. in relation to its subsidization of Boeing. On
11th January 2005, the E.U. and the U.S. agreed to suspend
their respective WTO cases for three months, with a view
towards reaching a new agreement relating to public fundingof large civil aircraft. However, as of 11th April 2005, theparties had not been able to reach a satisfactory agreement.
Consequently, there is a risk that the legal proceedings before
the WTO may recommence. Although EADS is not a direct
party to this trade dispute, the outcome of any eventual
agreement or WTO decision will be relevant to EADS.
EADS is not aware of any other exceptional items or pendingor threatened legal or arbitration proceedings that may have, or
may have had in a recent period, a material adverse effect on
the financial position, the activities or the results of the Grouptaken as a whole, except as stated above.
EADS recognises provisions for litigation and claims when(i) it has a present obligation from legal actions, governmental
investigations, proceedings and other claims resulting from past
events that are pending or may be instituted or asserted in the
future against the Group, (ii) it is probable that an outflow ofresources embodying economic benefits will be required tosettle such obligation and (iii) a reliable estimate of the amountof such obligation can be made. For the amount provided forrisk due to litigations and claims, see ‘‘Notes to the IFRS
Consolidated Financial Statements – Note 19 (d):‘Other Provisions’ ’’.
1.4.4 Industrial and Environmental Risks
Together with other companies in the principal industries inwhich it operates, EADS is subject to numerous E.U.,
national, regional and local environmental laws and regulations
concerning emissions into the environment, discharges to1

1.4 Risk Factors (continued)

2
3

surface and subsurface water and the disposal and treatment ofwaste materials. EADS believes that its current operations arein substantial compliance with all applicable environmental
regulations. EADS believes that it is currently capable ofsatisfying the stricter environmental standards for the futurecontemplated by current laws or regulations, including
increasingly stringent environmental product quality standards
that will be implemented over the next few years, without
incurring significant capital expenditure. However, there can be
no assurance that increased capital expenditure and operating
costs resulting from future environmental regulations will notadversely affect the results of EADS’ operations and its
financial condition.
For more information, please see ‘‘Part 2/2.3.3
Environmental Care’’.
1.4.5 Insurance

EADS Insurance Risk Management (‘‘IRM’’), centralized at
EADS headquarters, is responsible for all corporate insurance
activities and related protection for the Group. It includes
identification, evaluation, prevention and protection of
insurable risks. Insurance techniques are used to protect theassets and liabilities of EADS against financial consequences
due to unexpected events. Harmonized insurance policies andstandards are in place for all insurance risks underwritten by
the Group.
An information and reporting system is in place to enable
IRM, in close conjunction with insurance managers named by
the EADS business Divisions and Business Units, to respondto insurance related risks of the Group. EADS pursues aninsurance risk management strategy that includes operatingprocedures as well as policies regarding procurement and sales
agreements. A systematic review and monitoring procedure ofprotections systems applicable to all EADS sites is in place,
fostering comprehensive and timely identification of risks andrelated adjustments of insurance coverage.
EADS’ insurance programs cover high risk (Core) and low risk
(Non-Core) exposures.
Core Insurance Policies underwritten by IRM for the Group
cover risks such as:– Property Damage and Business Interruption;– Space Third Party Liabilities including Product Liabilities;– Commercial General Liabilities including non-aviation andnon-space Product Liabilities and risks related toenvironmental accidents; and– Directors & Officers Liability.
Claims related to Property Damage are covered up to a limitof 42 billion per loss and 42 billion as an annual aggregate.
Aviation Liability Coverage is provided up to a limit of
42 billion per loss, with an annual aggregate cap of 42 billion
for product liability claims. Certain sub limits are applicablefor Core Insurance Policies as outlined above.
Non Core Insurance Policies cover risks such as:– Personal Accidents;– Company Automobiles;– Personal and property exposures during business trips; and– Life insurance.
Insurance amounts for Non Core Insurance Lines are covered
up to respective sums and replacement values.
EADS follows a policy of obtaining external insurance
coverage for all main and individual risks that can be insured
at reasonable rates, on sufficient terms and limits provided by
the international insurance markets. All insurance policies are
required to satisfy EADS’ mandatory standards of
insurance protection.
However, to be more independent from volatilities of theinsurance markets, EADS uses the capabilities of a corporateowned reinsurance captive with respect to the Property
Damage and Business Interruption Programme. The captive issufficiently capitalized and protected so as to ensure its ability
to reimburse claims without limiting the scope of coverage ofthe original insurance policies.
The insurance industry is still undertaking efforts to reduce its
overall exposure. These efforts include increasing premiums,
raising deductible amounts and limiting the scope of coverage.
Furthermore, the number of insurers underwriting industrial
risks is shrinking. No assurance can be given that EADS will
be able to maintain its current levels of coverage on similar
financial terms in the future.

– Aviation Third Party Liabilities including Product Liabilities;– Manufacturer’s Aviation Hull Insurance up to thereplacement value of each aircraft;

EADS Financial Statements and Corporate Governance 2004

99

Chapter 2: Corporate Governance

2.1 Management and Control

2.1.1 Board of Directors, Chairmen andChief Executive Officers

Pursuant to the Articles of Association of the Company, theBoard of Directors is responsible for the management and theaffairs of the Company.
The Board of Directors consists of a maximum of elevenmembers appointed and removed by the shareholders’ meeting.
The Board of Directors adopted rules governing its internalaffairs (the ‘‘Rules’’) at a Board of Directors’ meeting held on
7th July 2000. The Rules were amended at a Board of
Directors’ meeting held on 5th December 2003 to take into
account recommendations for changes to corporate governance.
The Rules specify the composition, the role and the key
responsibilities of the Board of Directors, and also determine
the manner of appointment and the responsibilities of the
Chairmen and the Chief Executive Officers. The Rules also
specify the creation of two committees (the Audit and theRemuneration and Nomination Committees) and specify theircomposition, role and operating rules.
The Board of Directors has also adopted specific Insider
Trading Rules, which restrict its members from trading in
EADS shares in certain circumstances (for more information,please see ‘‘Part 2/3.1.3 Governing Law – Dutch Regulations’’).
The parties to the Participation Agreement have agreed thatthe voting rights attached to the Indirect EADS Shares shallbe exercised by EADS Participations B.V. to ensure that theBoard of Directors of EADS comprises the Directors of EADSParticipations B.V. and two additional independent Directors
who are not officers, directors, employees or agents of orotherwise have no significant commercial or professional
connection either with the DaimlerChrysler, SOGEPA or
Lagardère Groups or the French State. Pursuant to theParticipation Agreement, the Board of Directors comprises ten
members of whom:– four nominated by DaimlerChrysler;– four nominated by SOGEADE; and– two independent Directors, one nominated byDaimlerChrysler and one nominated by SOGEADE.
In addition, although from 8th July 2003, SEPI no longer hasa right to nominate a Director, based upon the proposal ofDaimlerChrysler and SOGEADE, the Board of Directors of
EADS decided to propose to the shareholders’ meeting of
EADS to be held on 11th May 2005 to appoint an additional
Spanish Director bringing the total number of Directors
to eleven.

100

EADS Financial Statements and Corporate Governance 2004

Pursuant to the Articles of Association, each member of thefirst Board of Directors holds office for a term expiring at theannual general meeting of the Company to be held in 2005.
Members of the Board of Directors will be elected at suchmeeting and at each fifth annual general meeting thereafter.
The shareholders’ meeting may at all times suspend or dismiss
any member of the Board of Directors. There is no limitationon the number of terms that a Director may serve.
The Board of Directors appointed two Chairmen, one chosenfrom the DaimlerChrysler-nominated Directors and one chosenfrom the SOGEADE-nominated Directors.
The Chairmen ensure the smooth functioning of the Board of
Directors in particular with respect to its relations with theChief Executive Officers whose efforts they support withregard to top level strategic discussions with outside partners.
The Board of Directors also appointed two Chief Executive
Officers to be responsible for the day-to-day management of
the Company, one chosen from the DaimlerChryslernominated Directors and one chosen from the SOGEADEnominated Directors.
The Company is represented by the Board of Directors or by
the Chief Executive Officers acting jointly. Furthermore, theCompany has granted general powers to each of the Chief
Executive Officers, authorizing them to each individually
represent the Company.
In the event of a deadlock between the two Chief Executive
Officers, the matter shall be referred to the two Chairmen.
The Chief Executive Officers shall not enter into transactions
which form part of the key responsibilities of the Board of
Directors unless these transactions have been approved by the
Board of Directors.
The key responsibilities of the Board of Directors include
amongst others:– approving any change in the nature and scope of theactivities of the Group;– approving the overall strategy and the strategic plan of
the Group;– approving the business plan and the yearly budget of
the Group;– setting the major performance targets of the Group;– appointing the members of the Executive Committee (seebelow) and the Corporate Secretary;

1

2.1 Management and Control (continued)

2
3– approving proposals for appointments of members of Airbus
Shareholders’ Committee and Executive Committee andchairmen of the supervisory board (or similar bodies) andthe chief executive officers (or equivalent position) ofimportant Group companies and Business Units;– approving material changes to the organisational structure of
the Group;– approving major investments, projects or product decisions
or divestments of the Group contemplated in the businessplan with a value exceeding 4200 million;– approving major strategic alliances and cooperations of
the Group;– approving any material decision affecting the ballistic
missiles activity of the Group;– approving matters of shareholder policy, major actions or
major announcements to the capital markets; and– approving other measures and business of fundamental
significance for the Group or which involve an abnormal
level of risk.
The Board of Directors met seven times during 2004 and wasregularly informed of developments through business reports
from the Chief Executive Officers, including rolling forecasts
as well as strategic and operational plans. The averageattendance rate at such meetings was 88%. Topics intensively
discussed and operations authorised at these meetings included
EADS’ strategy, reorganisation processes (such as thecontinuation of the restructuring of the Divisions Space andDefence and Security), major business issues (such as theA350 launch decision, the Eurofighter Tranche 2 contract, theimpact of the U.S. dollar evolution on EADS’ business, thereview of the EADS UAV programmes and the acquisition of
Racal Instruments Defence Group in the U.S.), the approval of
operational plans, budgets, hedging policy, remuneration(including a stock option plan and an employee shareownership plan) and the Group’s financial results and forecasts.
The Board of Directors also dealt with topics regarding
personnel and human resources, such as management
qualification as well as attracting, retaining and developing
high potentials in order to ensure the future quality of EADS’management and the multi-national leadership structure.

EADS Financial Statements and Corporate Governance 2004

Following the changes to EADS’ corporate governance decided
in 2003 in light of the corporate governance best practices
developed in the jurisdictions relevant to EADS, the Board of
Directors supervised the implementation of such decisions
during the year 2004. Among other matters, the enhancementof shareholders’ access to information was addressed through,for example, the setting-up of specific corporate governancepages on EADS’ website (such as pages regarding corporate
governance principles, Insider Trading Rules and the Rules),available at www.eads.com.
In addition to the Rules, the Board of Directors adopted, in its
meeting dated 10th December 2004, internal directors’
guidelines (the ‘‘Directors’ Guidelines’’) in light of corporate
governance best practices composed of a Directors’ charter (the‘‘Directors’ Charter’’) detailing the rights and duties of themembers of the Board of Directors, an Audit Committee
charter (the ‘‘Audit Committee Charter’’) and a
Remuneration and Nomination Committee charter (the‘‘Remuneration and Nomination Charter’’) each such
charter setting forth the respective committees’ enhanced roles.
The Directors’ Charter sets out core principles, which bindeach and every Director, such as acting in the best interest of
the Company and its stakeholders, devoting necessary timeand attention to the carrying out of their duties and avoiding
any and all conflicts of interest.
At the shareholders’ meeting held on 6th May 2004, FrançoisDavid and Rüdiger Grube were appointed members of theBoard of Directors as respective successors of Jean-René
Fourtou and Eckhard Cordes who both resigned with effect asfrom the end of such shareholders’ meeting. In addition,
Pedro Ferreras resigned as member of the Board of Directors
with effect as from 12th July 2004.
Philippe Camus and Rainer Hertrich were appointed Directors
by the shareholders’ meeting of EADS held on 10th May
2000 and Chief Executive Officers at the Board of Directors’
meeting held the same day. Manfred Bischoff and Jean-Luc
Lagardère were appointed Directors by the shareholders’meeting of EADS held on 19th June 2000 and their
appointments became effective on 7th July 2000; they wereappointed Chairmen at a meeting held on 7th July 2000. As
successor to Jean-Luc Lagardère, Arnaud Lagardère wasappointed as one of the Chairmen of the Board of Directors
and a member of the Audit and Remuneration and
Nomination Committees at a meeting of the Board of
Directors held on 28th March 2003 to take immediate effectfrom the date of his appointment as Director by the generalshareholders’ meeting of EADS held on 6th May 2003.

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2.1 Management and Control (continued)
Each Director shall have one vote, provided that if there is a vacancy on the Board of Directors’ in respect of a
DaimlerChrysler-nominated Director or a SOGEADE-nominated Director, the DaimlerChrysler-nominated Directors being
present or represented at the meeting can jointly exercise the same number of votes that the SOGEADE-nominated Directors
who are present or represented at the meeting can exercise and vice versa. All decisions of the Board of Directors require a votein favour by at least seven Directors voting in person or by proxy.
The quorum for the transaction of business at meetings of the Board of Directors requires the presence of at least one of the
SOGEADE-nominated Directors and one of the DaimlerChrysler-nominated Directors.
In the event of a deadlock in the Board of Directors, other than a deadlock giving DaimlerChrysler the right to exercise the put
option granted to it by SOGEADE (see ‘‘Part 2/3.3.2 Relationships with Principal Shareholders – Put Option’’), the matter shallbe referred to Arnaud Lagardère (or such person as shall be nominated by Lagardère) as representative of SOGEADE and to thechief executive officer of DaimlerChrysler. In the event that the matter in question, including a deadlock giving DaimlerChrysler
the right to exercise the put option (but in this case with the agreement of SOGEPA and DaimlerChrysler) is a matter within
the competence of the general meeting of EADS, a resolution on the issue shall be put to the general meeting, with the voting
rights of SOGEADE, DaimlerChrysler and SEPI being negated.
Pursuant to the Rules, the Board of Directors is empowered to form committees from its members. In addition to the Audit
Committee and the Remuneration and Nomination Committee, the Board of Directors may form other committees to which it
may transfer certain minor or ancillary decision-making functions although such assignment does not negate the joint
responsibility of all Directors. The quorum for the transaction of business at any meeting of a committee shall be at least one
Director appointed by SOGEADE and at least one Director appointed by DaimlerChrysler. All decisions of a committee require
the simple majority of the members.
Composition of the Board of Directors
Name

Age

Term
startedTerm
expires

Manfred Bischoff
Arnaud Lagardère

62
44

2000
2003

2005 Chairman of EADS2005 Chairman of EADS

Philippe Camus

56

2000

2005 Chief Executive
Officer of EADS

Rainer Hertrich

55

2000

Hans Peter Ring

54

2003

2005 Chief Executive
Officer of EADS2005 CFO of EADS

Noël Forgeard

58

2000

Louis Gallois

61

2000

Rüdiger Grube

53

2004

François David

63

2004

Michael Rogowski

66

2000

102

Principal functionin the Group

2005 President and Chief
Executive Officer of Airbus
2005 Member of the Boardof Directors of EADS2005 Member of the Boardof Directors of EADS2005 Member of the Boardof Directors of EADS2005 Member of the Boardof Directors of EADSEADS Financial Statements and Corporate Governance 2004

Principal role outside
the Group

DaimlerChrysler Delegate for Aerospace
General Partner and Chief Executive Officer of
Lagardère
Deputy Chairman and Deputy Chief Executive
Officer of Arjil Commanditée Arco (General
Partner and Chief Executive Officer of
Lagardère)President of the German Association of
Aerospace Industries, BDLIMember of the Supervisory Board(Aufsichtsrat) and Shareholder Committee of
M+W Zander – D.I.B
Facility Management GmbH.
Member of the Board of Directors of Arcelor
President of SNCF
Member of the Management Board ofDaimlerChrysler
Chairman and Chief Executive Officerof Coface
Chairman of the Supervisory Board of
J.M Voith AG.

1

2.1 Management and Control (continued)

2
3

Curriculum Vitae and other Mandates and Duties Performed in
any Company by the Members of the Board of Directors

Current mandates in addition to those listed in the chart above
are set forth below:

Manfred Bischoff. Dr. Manfred Bischoff joined DaimlerBenz AG in 1976. After different assignments in thecompany, Dr. Bischoff was appointed as the first Chief
Financial Officer of Dasa AG – one of the three EADS
founding companies – in 1989 and became President andChief Executive Officer of Dasa AG from 1995 until 2000.
Dr. Bischoff was also a member of the Board of Managementof DaimlerChrysler from 1995 until the end of 2003,
responsible for Aerospace & Industrial Businesses. He is now
the DaimlerChrysler Delegate for Aerospace. He holds a
master’s degree and a PhD (Dr. rer. pol.) in Economics fromthe University of Heidelberg.

– Chairman of the board of directors of EADSParticipations B.V.;– Chairman and chief executive officer of Lagardère Active;– Chairman and chief executive officer of LagardèreActive Broadcast;– Chairman and chief executive officer of LagardèreActive Broadband;– Chairman and chief executive officer of LagardèreThematiques SA;– Chairman and chief executive officer of LagardèreImages SAS;
– Chairman and chief executive officer of Lagardère SAS;
– Chairman and chief executive officer of Lagardère Media(Hachette SA);– Chairman and chief executive officer of LagardèreCapital & Management;– Chairman of Fondation Jean-Luc Lagardère;– Deputy-chairman of the supervisory board of BanqueArjil & Cie;
– Chairman and chief executive officer of Arjil
Commanditée-ARCO;– Permanent representative of Lagardère Active Publicité
to the board of directors of Lagardère Active
Radio International;– Representative of Hachette SA to the management
committee of SEDI TV-TEVA;– Member of the board of directors of Lagardère Ressources;– Member of the board of directors of LVMH;– Member of the board of directors of France Télécom;– Member of the board of directors of Hachette Livre;– Member of the board of directors of Hachette
Distribution Services;– Member of the board of directors of Fimalac;– Member of the board of directors of Hachette
Filipacchi Médias;– Member of the supervisory board of Virgin Stores;– Member of the supervisory board of DaimlerChrysler;– President of the ‘‘Club des enterprises Paris 2012’’;– President of the ‘‘Association des Amis de Paris Jean
Bouin C.A.S.G’’; and– Member of France China Honorary Committee.

Current mandates in addition to those listed in the chart above
are set forth below:– Chairman of the board of directors of EADSParticipations B.V.;– Chairman of the supervisory board of Dasa AG;– Chairman of the supervisory board of DCLRH;– Member of the supervisory board of Bayerische Hypo- undVereinsbank AG;– Member of the supervisory board of Fraport AG;– Member of the supervisory board of Gerling-Konzern
Versicherungs-Beteiligungs-AG;– Member of the supervisory board of Royal KPN N.V.;– Member of the supervisory board of Lagardère;– Member of the board of directors of Nortel Networks Corp.
and Nortel Networks Ltd; and– Member of the supervisory board of J.M. Voith AG.
Arnaud Lagardère. Mr. Arnaud Lagardère has been General
Partner and Chief Executive Officer of Lagardère since 2003.
He began his career in 1986 as General Manager of MMB, theholding company of Hachette and Europe 1. In 1987, he wasappointed Vice President of the Supervisory Board of Arjilbank followed by his appointment as Head of emerging
activities and electronic media for Matra. In 1994 he became
Chief Executive Officer of Grolier Inc. in the U.S. He has
been Managing Partner of Lagardère since 1998. In 1999, he
was appointed Chief Executive Officer of both LagardèreMedia and Lagardère Active. Arnaud Lagardère graduated in
Economics from the University of Paris Dauphine.

EADS Financial Statements and Corporate Governance 2004103

2.1 Management and Control (continued)
Philippe Camus. Mr Philippe Camus was previously
Chairman of the Management Board of Aerospatiale Matra. In
1982, he joined the general management of the LagardèreGroup where he was Chairman of the Finance Committee ofthe Matra Group until 1992, appointed Chairman andManaging Director of the Finance Committee of the LagardèreGroup in 1993, and then Managing Partner of Lagardère in
1998. Mr. Camus is a former student of the École Normale
Supérieure de Paris, an agrégé in physical sciences and actuarial
science and a graduate of the Institut d’Études
Politiques de Paris.
Current mandates in addition to those listed in the chart above
are set forth below:– Chief executive officer and member of the board of
directors of EADS Participations B.V.;– Chairman of GIFAS – Groupement des Industries Françaises
Aéronautiques et Spatiales;– Permanent representative of Lagardère on the board of
directors of Hachette SA;– Permanent representative of Hachette SA on the board of
directors of Hachette Distribution Services;– President and member of the board of directors of
EADS France;– Member of the board of directors of Dassault Aviation;– Member of the board of directors of LagardèreActive Broadcast;– Member of the board of directors of Hachette FilipacchiMédias SA;– Member of the board of directors of Stichting Administratiekantoor EADS (the ‘‘Foundation’’);– Member of the board of directors of La Provence SA;– Member of the board of directors of Nice Matin;– Member of the supervisory board of Editions P.
Amaury; and– Member of the shareholders and remuneration committeesof Airbus.
Rainer Hertrich. Mr Rainer Hertrich started his career in1977 at Messerschmitt-Bölkow-Blohm (MBB). In 1994 hebecame Senior Vice President for Corporate Controlling ofDeutsche Aerospace AG. In 1996, he was appointed Head of
Dasa’s Aero Engine Business Unit and Chief Executive Officer
of Dasa’s subsidiary MTU. In 2000 he became President andChief Executive Officer of Dasa AG. At the end of 2001, he
was elected President of BDLI, the German Aerospace
Industries Association. Mr. Hertrich studied Business

104

EADS Financial Statements and Corporate Governance 2004

Administration at the Technical University of Berlin and the
University of Nuremberg, graduating with a Bachelorof Commerce.
Current mandates in addition to those listed in the chart above
are set forth below:– Head of EADS Aeronautics Division;– Chief executive officer and member of the board of
directors of EADS Participations B.V.;– President of the German Association of Aerospace
Industries, BDLI;– Chairman of the supervisory board of EADS
Deutschland GmbH;– Chairman of the supervisory board of Elbe
Flugzeugwerke GmbH;– Chairman of the supervisory committee ofEurocopter S.A.S.;– Chairman of the board of directors of EADS Space
B.V.; and– Chairman of the shareholders committee and member of the
remuneration committee of Airbus.
Hans Peter Ring. Mr. Hans Peter Ring began his career at
MBB in 1977. In 1987 he was appointed Head of Controllingof the company’s Missiles business. Subsequently, he wasnamed Head of Controlling of the Aviation and Defense
Division of Dasa AG. From 1992-1995, he was Chief
Financial Officer and member of the board of Dornier
Luftfahrt, a Dasa AG subsidiary. In 1996, he was appointed
Senior Vice President of Controlling of Dasa and subsequentlyof EADS. Hans Peter Ring was appointed Chief Financial
Officer of EADS in 2002. Mr. Hans Peter Ring has a degree
in business administration.
Current mandates in addition to those listed in the chart above
are set forth below:– Member of the shareholders committee of Airbus;– Member of the board of directors of EADS Space B.V.;– Member of the supervisory board of Eurocopter;– Member of the supervisory board of Eurocopter Holding;– Member of the board of directors of EADS CASA;– Member of the board of directors of EADS North America;– Member of the advisory board of Deutsche Bank
(Region Munich); and– EADS’ representative at the ATR assembly of members.

1

2.1 Management and Control (continued)

2
3

Noël Forgeard. Mr. Forgeard joined Matra in 1987 as SeniorVice President of the Defense and Space activities. In 1992, he
was appointed Managing Director of Lagardère and Chief
Executive Officer of Matra Hautes Technologies. He joined
Airbus Industrie as Managing Director in 1998 and became
the first President and Chief Executive Officer of the Airbus
integrated company in 2001. He graduated from the Ecole
Polytechnique and the Ecole des Mines in Paris.
Current mandates in addition to those listed in the chart above
are set forth below:– Chairman and chief executive officer of Airbus Holding SA;– Chairman of the board of directors of Airbus France;– Chairman of the board of directors of Airbus España, SL;– Chairman of the supervisory board of Airbus
Deutschland GmbH;– Chairman of the board of directors of Airbus Military, SL;– Member of the board of directors of Airbus U.K. Ltd;– Member of the board of directors of EADS CASA;– Member of the board of directors of Ecole
Polytechnique; and– Member of the board of directors of France Galop.
Louis Gallois. Mr. Louis Gallois has been Chairman of SNCF
since 1996. From 1972 he worked in various posts for the
Ministry of Economy and Finance, the Ministry of Researchand Industry and the Ministry of Defense. In 1989 he wasnominated Chairman and Chief Executive Officer of
SNECMA and subsequently, in 1992 Chairman and Chief
Executive Officer of Aerospatiale. He graduated from theEcole des Hautes Etudes Commerciales (HEC) in Economic
sciences and is an alumnus of the Ecole Nationaled’Administration (ENA).
Current mandates in addition to those listed in the chart above
are set forth below:– Member of the board of directors of Thales; and– Member of the board of directors of Ecole Centrale des Arts
et Manufactures.
Rüdiger Grube. Dr. Rüdiger Grube is member of the Boardof Management of DaimlerChrysler AG in charge of corporate
development since 2002 and additionally profit and loss
responsible for Greater China Business since 2004. He started
his career in 1989 at MBB. In 1995, he became Director of
Corporate Planning and Technology of Deutsche Aerospace
AG. In 1996, he was appointed Senior Vice President andHead of Corporate Strategy at Daimler-Benz AG and

EADS Financial Statements and Corporate Governance 2004

subsequently of DaimlerChrysler AG. In 2000, he became
Senior Vice President for Corporate Development. Mr. Grube
holds an engineers’ degree in aircraft construction andengineering from the University of Hamburg and a doctorate
in industrial science.
Current mandates in addition to those listed in the chart above
are set forth below:– Chairman of the supervisory board of MTU Friedrichshafen
GmbH and DaimlerChrysler Off-highway GmbH;– Chairman of the board of directors of DaimlerChrysler
China limited, Beijing;– Member of the board of directors of Mitsubishi
Motors Corporation;– Member of the board of directors of McLaren Group
Ltd; and– Member of the supervisory board of DaimlerChrysler
Services AG.
François David. Mr. François David is Chairman and Chief
Executive Officer of Coface, an international credit insurance
and credit management service provider since 1994. He started
his career in 1969 in the French Ministry of Finance as Civil
Administrator at the foreign economic relations department inwhich he held various responsibilities. In 1986, he was named
Director of the Cabinet of the Minister of Foreign Trade. In
1987, he was appointed Director of external economic relations
within the Ministry of Economy, Finance and Budget. In
1990, he was named International Managing Director of the
Aerospatiale company. Mr. David is an alumnus of the École
Nationale d’Administration, a graduate of the Institut d’Études
Politiques de Paris, and he holds a degree in sociology.
Current mandates in addition to those listed in the chart above
are set forth below:– Member of the board of directors of Stichting Administratiekantoor EADS (the ‘‘Foundation’’);– Chairman and chief executive officer of Coface Scrl;– Chairman of the board of directors of Viscontea
Coface (Italy);– Chairman of the supervisory board of AK Coface(Allgemeine Kreditversicherung Aktiengesellschaft
Coface) (Germany);– Member of the board of directors of Rexel;– Member of the board of directors of Vinci; and– Member of the board of directors of the association Coface
Trade Aid.

105

2.1 Management and Control (continued)
Michael Rogowski. Dr. Michael Rogowski has been
Chairman of the Supervisory Board of J.M. Voith AG since2000 and was also the President of the Association of German
Industry from 2000 to 2004. Dr. Michael Rogowski joined
J.M. Voith GmbH in 1974, where he was responsible forhuman resources as well as materials management. In 1982 hetook over responsibility for the power transmission
engineering Division and was named Chairman of theManagement Board of J.M. Voith GmbH in 1986 and then
J.M. Voith AG in 1997. He studied economical engineeringand earned a doctorate at the University of Karslruhe in 1969.
Current mandates in addition to those listed in the chart above
are set forth below:– Member of the board of directors of Stichting Administratiekantoor EADS (the ‘‘Foundation’’);– Vice President of the Federation of German Industries, BDI;– Member of the supervisory board of Deutsche Messe AG;– Member of the supervisory board of Talanx
AG/HDI Versicherung;– Member of the supervisory board of IKB Deutsche
Industrie-Bank AG; and– Member of the supervisory board of KSB AG.
Mandates of all the members of the Board of Directors shall
expire at the general shareholders’ meeting of the Company to
be held on 11th May 2005. Based upon the nominations of
the main EADS shareholders DaimlerChrysler and SOGEADE(Lagardère and French State), the Board of Directors decided
on 8th March 2005 to propose at such general shareholders’meeting to reconstitute the Board of Directors by appointing
Manfred Bischoff and Arnaud Lagardère (to be designated as
Chairmen), Thomas Enders and Noël Forgeard (to be
designated as Chief Executive Officers), Jean-Paul Gut andHans Peter Ring as Executive Directors, Juan ManuelEguiagaray Ucelay, Louis Gallois and Rüdiger Grube as NonExecutive Directors and Francois David and Michael Rogowski
as Independent Directors, each of them for a term of five
years ending at the close of the general shareholders’ meeting
to be held in the year 2010.

106

EADS Financial Statements and Corporate Governance 2004

The Company has not appointed observers to the Board of
Directors. Pursuant to applicable Dutch law, the employees are
not entitled to elect a Director. There is no minimum numberof shares that must be held by a Director.
Independent Directors
The two independent directors appointed pursuant to thecriteria of independence set out above are François David andMichael Rogowski.
Assessment of the Performance of the Board of Directors

Last year’s self-evaluation was conducted as from January 2004
by the Chairmen of the Board of Directors, based upon
responses of members of the Board of Directors to aquestionnaire. The Chairmen jointly evaluated the feedback of
the members of Board of Directors and led a discussion of theresults at the 5th March 2004 Board of Directors meeting.
The self-evaluation comprised a general assessment of themeetings and processes of the Board of Directors and a reviewof the activities of the Board of Directors and its Committees
in the past year. The questionnaire addressed matters such as
the frequency of meetings, the content of discussions and thethoroughness of meeting preparation. The members of theBoard of Directors were also asked to consider the functioning
and the composition of the Board of Directors, the quality andopenness of discussion, the independence of expressed
opinions, the ability to build on differing positions and theaccess to necessary information for the members of the Boardof Directors.
The findings of the first self-assessment concluded thatthe overall performance of the Board of Directors isvery satisfactory.
Overall, the quality of the work carried out by the Board of
Directors’ Committees was also judged very satisfactory. On
5th December 2003, the Board of Directors empowered the
Audit Committee and the Remuneration and Nomination
Committee with an increased scope of authority in line with
the improved corporate governance standards in EADS’ homecountries.

1

2.1 Management and Control (continued)

2
3

Since the last self-assessment in 2004, which had shown
positive results already, further progress has been made by
implementing the described improvement measures.
Additionally, the meeting attendance for Board of Directors
and Remuneration & Nomination Committee meetings has
further increased in 2004 compared to the previous year.
Continuous improvement and effectiveness of governance andmanagement of the Group will remain the focus and key
success factor of EADS.
2.1.2 Audit Committee

Pursuant to the Rules, the Audit Committee makes
recommendations to the Board of Directors on theappointment of auditors and the determination of theirremuneration, the approval of the annual financial statements
and the interim accounts, discusses with the auditors theiraudit programme and the results of their audit of the accounts
and monitors the adequacy of the Group’s internal controls,
accounting policies and financial reporting. The Audit
Committee has responsibility for ensuring that the internaland external audit activities are correctly directed and that theaudit matters are given due importance at meetings of theBoard of Directors. The rules and responsibilities of the Audit
Committee have been set out in more detail in the Audit
Committee Charter.
The Audit Committee reviews the quarterly, half and fullyear accounts on the basis of the documents distributed inadvance and discussions with the auditors. The Head ofaccounting and the Chief Financial Officer are invited tomeetings of the Audit Committee to answer any question.
The Audit Committee is chaired by Manfred Bischoff andArnaud Lagardère and also includes Rüdiger Grube andLouis Gallois.
The Audit Committee meets twice a year, or more frequently
according to requirements. It met five times during 2004, with
a 65% attendance rate, to review the 2003 results as well as
the first half-year results for 2004 of the Company. As
decided by the Board of Directors on 5th December 2003, therole of the Audit Committee was increased with new tasks
such as, in particular, the review of the quarterly financial
reports. It also discussed extensively some specific effects withpositive impact on EADS’ results, which were triggered inparticular by the new Airbus set up, as well as influence of
currency rates on EADS’ business.

EADS Financial Statements and Corporate Governance 2004

2.1.3 Remuneration and Nomination Committee

Pursuant to the Rules, the Remuneration and Nomination
Committee makes recommendations to the Board of Directors
regarding appointments of the Executive Committee members,
the chairmen of the supervisory board (or similar bodies), thechief executive officers (or equivalent positions) of main Group
companies and Business Units and the Corporate Secretary,
human resources and remuneration related strategy and longterm remuneration plans (including playing a central role indetermining and reviewing the variable portion of the
remuneration of the members of the Board of Directors andthe Executive Committee) and decides the service contracts andother contractual matters in relation to the Board of Directors
and Executive Committee members. The rules andresponsibilities of the Remuneration and Nomination
Committee have been set out in more detail in the
Remuneration and Nomination Charter. The Remuneration
and Nomination Committee is chaired by Manfred Bischoffand Arnaud Lagardère and also includes Philippe Camus,
Rainer Hertrich, Rüdiger Grube and Louis Gallois.
The Remuneration and Nomination Committee meets twice ayear, or more frequently according to requirements. It met
four times during 2004, with a 96% average attendance rate, toreview the compensation policy (including pension schemes),
the bonus payments for 2003, the stock option plan and theemployee share ownership plan for 2004, and to recommend
the appointment of the chief executive officer of EADS
Deutschland GmbH and the chief executive officers of EADS
Sogerma Services, Military Aircraft and Defence Electronics’
Business Units and Eurofighter GmbH. Furthermore, theRemuneration and Nomination Committee made a
recommendation to the Board of Directors on the name of a
new member of the Airbus Executive Committee.
2.1.4 Executive Committee
The Chief Executive Officers, supported by an Executive
Committee (the ‘‘Executive Committee’’), are responsible formanaging the day-to-day operations of the Company. The
Executive Committee, chaired by the Chief Executive Officers,
also comprises the Heads of the major and functional
Divisions of the Group. The Executive Committee met eleventimes during 2004.

1072.1 Management and Control (continued)
The following matters are discussed, amongst others, at the Executive Committee meetings:– Setting up and control of the implementation of the strategy for EADS businesses;– Management, organisational and legal structure of the Group;– Performance level of the Group’s businesses and support functions; and– All business issues, including the operational plan of the Group and its Divisions and Business Units.
The internal organisation of the Executive Committee is defined by the business allocation among the members under thesupervision of the Chief Executive Officers. Notwithstanding the joint responsibilities as defined above, each member of the
Executive Committee is individually responsible for the management of his portfolio and must abide by decisions taken by the
Chief Executive Officers and the Executive Committee, as the case may be.
The Chief Executive Officers endeavour to reach consensus among the members of the Executive Committee on the matters
discussed at the Executive Committee meetings. In the event of consensus not being reached, the Chief Executive Officers areentitled to decide the matter. If there is a fundamental or significant disagreement with respect to any undecided matter, thedissenting Executive Committee member may request that the Chief Executive Officers submit such matter to the Chairmen for
their opinion.
The term of office for the Executive Committee members is five years.
Composition of the Executive Committee
Name

Age

Term
startedTerm
expires

Principal Occupation

Philippe Camus
Rainer Hertrich
François Auque
Ralph Crosby
Thomas Enders
Francisco Fernández Sáinz
Noël Forgeard
Jean-Louis Gergorin
Jean-Paul Gut
Gustav Humbert
Jussi Itävuori
Hans Peter Ring

56
55
48
57
46
59
58
58
43
55
49
54

2000
2000
2000
2002
2000
2002
2000
2000
2000
2000
2002
2002

2005
2005
2005
2007
2005
2007
2005
2005
2005
2005
2007
2007

Chief Executive Officer
Chief Executive Officer
Chief Executive Officer of Space Division
Chairman and Chief Executive Officer of EADS North America
Head of Defence and Security Systems Division
Head of Military Transport Aircraft Division
President and Chief Executive Officer of Airbus
Head of Strategic Coordination
Head of EADS International
Airbus Chief Operating Officer
Head of Human Resources
Chief Financial Officer

Philippe Camus, Chief Executive Officer
See ‘‘2.1.1 Board of Directors, Chairmen and Chief Executive Officers – Curriculum Vitae and other Mandates and Duties
Performed in any Company of the Members of the Board of Directors’’.
Rainer Hertrich, Chief Executive Officer and Head of Aeronautics DivisionSee ‘‘2.1.1 Board of Directors, Chairmen and Chief Executive Officers – Curriculum Vitae and other Mandates and Duties
Performed in any Company of the Members of the Board of Directors’’.
François Auque, Chief Executive Officer of Space Division
Mr. Auque joined Aerospatiale as Chief Financial Officer in 1991, after a career with the Suez Group and the French Cour desComptes. He was executive Vice President finance and strategy of Aerospatiale, Chief Financial Officer and Group Managing
Director for satellites and member of the Management Board of Aerospatiale Matra. He graduated from Ecole des Hautes Etudes
Commerciales (HEC), from Ecole Nationale d’Administration (ENA), and from Institut d’Etudes Politiques of Paris (IEP).

108

EADS Financial Statements and Corporate Governance 2004

1

2.1 Management and Control (continued)

2
3

Ralph D. Crosby Jr., Chairman and Chief Executive
Officer of EADS North America
Previously, Mr. Crosby was founder and President of theIntegrated Systems Sector at Northrop Grumman Corporation,
Corporate Vice President and General Manager of thecompany’s Commercial Aircraft Division and of theB-2 Division. He has a Bachelor of Science degree from the
U.S. Military Academy, a master’s degree in international
relations from the Graduate Institute of International Studies
in Geneva and in public administration from
Harvard University.
Thomas Enders, Head of Defence and Security
Systems Division
Mr. Enders joined MBB/Dasa AG in 1991, after various posts
in international research institutes, the German Parliament and
the Planning Staff of the German Minister of Defense. Afterseveral years in the company’s marketing sector, he became
Corporate Secretary of Dasa AG in 1995. From 1996 he wasin charge of Corporate Strategy & Technology and since 2000,
he has been the Head of Defence and Security Systems
Division. Mr. Enders holds degrees from the University ofBonn and UCLA, California.
Francisco Fernandez Sáinz, Head of Military Transport
Aircraft Division
Previously General Manager of Airbus España. Mr. FernandezSáinz joined CASA in 1971 as a design engineer, and occupied
various positions as Product Engineering Manager (1975),
Project Manager (1979), Engineering Development Director of
the Technical Directorate (1982), Vice President of Engineering(1984) and Executive Vice President Programs (1997).
Mr. Fernandez Sáinz is a graduate of ICADE (Master inBusiness Administration) and is a Senior
Aeronautical Engineer.
Noel Forgeard, Airbus President and Chief
Executive Officer
See ‘‘2.1.1 Board of Directors, Chairmen and Chief Executive
Officers – Curriculum Vitae and other Mandates and Duties
Performed in any Company of the Members of the Boardof Directors’’.

Security and Defence. Then he joined the private sector,
holding senior strategic positions at Matra, Lagardère andAerospatiale Matra. He graduated from Ecole Polytechnique andEcole Nationale d’Administration (ENA) in Paris and is analumnus of the Stanford Executive Program.
Jean-Paul Gut, Head of EADS International
Prior to July 2000, Mr. Gut was Executive Chairman of
Aerospatiale Matra Lagardère International and GroupManaging Director of Defence and Space Transport at
Aerospatiale Matra. In March 1998, Jean-Paul Gut was named
Director of the Lagardère Group Management Board,
responsible for International Operations and the HighTechnology sector. He graduated from the Institut d’Etudes
Politiques of Paris (IEP), with a master’s degree in Economics.
Gustav Humbert, Airbus Chief Operating Officer
Previously a member of the Dasa AG Management Board
responsible for the Commercial Aircraft Division,
Mr. Humbert joined Messerschmitt-Bölkow-Blohm (MBB) in
1980, and became President and chief executive officer ofDaimler Benz Aerospace Airbus GmbH in 1994. He holds a
degree in mechanical engineering and production technology
from Hanover Technical University as well as a PhD inengineering from the University of Hanover, Schoolof Machinery.
Jussi Itävuori, Head of Human Resources
Mr. Itävuori joined EADS in September 2001. Previously, heworked for KONE Corporation since 1982 and was appointed
in 1989 as Head of Human Resources and member of
Executive Committee of KONE Elevators. In 1995 he wasappointed member of the Executive Committee and Head of
Human Resources of KONE Corporation. He served in the
Finnish Air Force as a pilot and officer. He has a Master’s
degree from the Vaasa School of Economics, Finland.
Hans Peter Ring, Chief Financial Officer
See ‘‘2.1.1 Board of Directors, Chairmen and Chief Executive
Officers – Curriculum Vitae and other Mandates and Duties
Performed in any Company of the Members of the Boardof Directors’’.

Jean-Louis Gergorin, Head of Strategic Coordination
Mr. Gergorin started his career with the French Government,
becoming Head of Policy Planning of the French Foreign
Ministry and member of the French German Committee on

EADS Financial Statements and Corporate Governance 2004109

2.1 Management and Control (continued)

2.1.5 Internal Control and Risk Management Systems
2.1.5.1 Overview

One of Management’s fundamental missions is to foster apositive internal control (‘‘IC’’) and risk management (‘‘RM’’)
environment at EADS, in line with corporate governance bestpractices. Recognizing that recent developments in the multijurisdictional (Netherlands, France, Germany, Spain) legal andregulatory provisions relevant to EADS require a strategic
approach to IC and RM, EADS launched an IC/RM project atthe beginning of 2004. The project, coordinated by the EADS
finance department, and supported by other Headquartersfunctions and external consultants, is intended to:– ensure the Group’s compliance with current and expected
future regulations;– enable EADS to manage and minimize business and control
risks throughout the Group; and– identify weaknesses in the Group’s existing IC and RM
procedures and propose improvements thereto.
Set out below is a description of the Group’s IC andRM systems, reflecting the results of the ongoing IC/RM
project. No matter how well designed, IC and RM systems
have inherent limitations, such as vulnerability tocircumvention or management overrides of the controls inplace. Consequently, no absolute assurance can be given that
EADS’ IC and RM procedures are, despite all care and effort,
entirely effective.
The Board of Directors has approved this section as part oftheir overall approval of this document.
Interaction with the EADS Management Process

The Board of Directors has overall responsibility for theGroup’s IC and RM environment. EADS’ Chief Executive
Officers (the ‘‘CEOs’’ for the purpose of section 2.1.5) and
EADS’ Chief Financial Officer (the ‘‘CFO’’ for the purpose of
section 2.1.5) are responsible for ensuring that IC andRM procedures are implemented throughout the Group. In
addition, the Audit Committee oversees the Group-wide
functioning of IC and RM procedures.
A general management principle of EADS is the delegation ofentrepreneurial responsibility and powers to the operational
units. Consequently, the day-to-day IC and RM functions aredelegated to EADS’ Divisions (Airbus, MTA, DS, Aeronautics,
Space) and their respective business units (‘‘BUs’’ for the
purpose of section 2.1.5), whose management is responsible for
operating and monitoring the IC and RM systems.

110

EADS Financial Statements and Corporate Governance 2004

This principle of subsidiarity entails a clear separation of
responsibilities between EADS headquarters and the Divisions
or BUs. EADS headquarters sets the overall strategic andoperational targets for EADS and assumes the ultimate
responsibility for EADS’ guidance. The Divisions and BUsretain responsibility for all operational matters and activities
within their scope.
2.1.5.2 Risk Management System

Risk is an inherent aspect of all entrepreneurial activity. To
fulfil the expectations of its shareholders, EADS must pursue
opportunities that involve the acceptance of a certain degree ofrisk. See ‘‘1.4.1 Risk Factors’’ and ‘‘1.1.8 Management ofMarket Risks’’ for information on certain risks to which theGroup is exposed.
Early identification and professional management of these risks
is fundamental to business success. EADS recognises this fact
and has always managed risks at all levels within
the organisation.
In response to recent developments in corporate governancelegislation, EADS is currently harmonising existing RM
processes at the Group level to ensure that risks arecontinuously and consistently (i) identified, (ii) analysed,(iii) controlled, (iv) monitored and (v) reported.
Through the RM system, risks are identified and theirlikelihood of occurrence and possible extent of damage isassessed, usually measured in terms of their effect on
operating profit.
Division and BU management are responsible for developing
and initiating appropriate measures to avoid, reduce, or hedge
the probability and/or impact of the identified risks.
Information on risks is gathered and updated regularly toprovide Division and BU management with an up-to-date
analysis of the significant risks within the Group, as well aswith information on the activities initiated to mitigate or avoid
such risks.
The evolution of major risks and the development of thecountermeasures taken in response are monitored on a regularbasis by Division and BU management, who in turn report to
the CEOs and CFO.
The RM system encompasses all risks to which EADS is
exposed, including risks inherent in the day-to-day businessprocesses of the Group. EADS’ IC system, described below, isdesigned to manage these process-inherent risks. The relevantrisks are subject to a management discussion process onGroup level.

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2.1 Management and Control (continued)

23

2.1.5.3 Internal Control Framework

EADS historically maintained a variety of IC procedures withthe purpose of providing reasonable assurance to the Board of
Directors, the CEOs and the CFO that process-inherent risks
arising from the Group’s activities were being effectively
managed. Following a comprehensive review and evaluation
process, the existing EADS IC procedures have been further
developed into an integrated Group-wide IC framework. The
framework embodies the systems of policies and procedures
within EADS designed to:– enable the Group to identify and respond to significant
operational, financial and compliance risks
throughout EADS;– ensure the quality of financial reporting, including design
and implementation of processes to generate a flow oftimely, relevant and reliable information; and– ensure compliance with laws and regulations applicable to
the Group, as well as with internal Group policies.
Sources and Standards for IC Procedures and Framework

The core policies, procedures and thresholds that define
EADS’ IC environment are communicated throughout theGroup through:– handbooks (e.g., ‘‘EADS Corporate Management Principles
and Responsibilities’’, the ‘‘Financial Control Handbook’’);– manuals (e.g., Treasury Procedures, ‘‘Accounting Manual’’,‘‘Reporting Manual’’); and– guidelines (e.g., ‘‘Funding Policy’’).
Written internal rules govern the operations of key elementsof the EADS IC framework; that is the Board of Directors
and its Audit Committee. IC procedures at certain subsidiaries
and joint ventures are derived from the relevant shareholders’agreements applicable thereto.
External standards influencing the EADS IC framework
include the ‘‘Internal Control – Integrated Framework’’ definedby the Committee of Sponsoring Organisations of theTreadway Commission (COSO), as well as industry-specificstandards as defined by the International
Standards Organisation.
Development of the IC Framework

Based on an analysis of EADS’ activities, sixteen high-levelbusiness processes were selected and categorized into core
processes (research and development, production, sales, after
sales and program management), support processes

EADS Financial Statements and Corporate Governance 2004

(procurement, human resources, accounting, fixed assets,treasury, information technology, mergers & acquisitions andlegal) and management processes (internal audit, controllingand management controls).
For each of these processes, a specific IC template wasdeveloped, describing the relevant control objectives derived
from the EADS IC framework. In the preparation of thetemplates, particular emphasis was given to control objectives
related to financial reporting.
To ensure a comprehensive IC approach throughout theGroup, the IC templates were deployed to the Group’s
headquarters, Divisions and BUs. Based on centrally definedmateriality thresholds, the Divisions and BUs have been tasked
with identifying and selecting the specific lines of businesswithin their control that will apply the templates as part oftheir regular operations. Certain subsidiaries, such as Airbus,
and joint ventures, such as MBDA, possess IC procedures thatare customized to their specific businesses – these procedures
conform to the overall EADS IC framework. Continuity with
the IC framework is ensured, inter alia, through EADS’
presence on such affiliates’ supervisory and management bodies(e.g., Airbus Shareholders’ Committee, MBDA Boardof Directors).
Monitoring of Internal Controls
Responsibility for the operation of the IC system lies with the
management of the Divisions and the BUs, as well as withthe relevant EADS headquarters functions. They ensure thatthe appropriate controls to meet the control objectives definedin the IC templates are in place and operate effectively on an
ongoing basis.

As part of the development of the IC framework, EADS has
instituted a formalized self-assessment mechanism, to be
applied by each business process owner on a regular basis.
Based on the results of these detailed self-evaluations,management of each Division, BU and headquarters function
will prepare formal statements as to the adequacy andeffectiveness of the internal controls within their scopeof responsibility.
In addition to the self-assessment process, the IC framework
relies upon objective reviews by EADS’ Internal Audit
department. Commencing in 2005, the joint results of theInternal Audit department’s and of external auditors’ riskbased reviews of Group operations will provide the Audit
Committee and Board of Directors with an independent viewon effectiveness of the Group’s IC system.

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2.1 Management and Control (continued)

Management Sign-Off Process

Starting with the current reporting cycle, a formalized sign-off
process is in place whereby EADS’ CEOs and CFO will
confirm to the Board of Directors that, to the best of
their knowledge:– the IC system is adequately structured to ensure thereliability of financial reporting within EADS;– the control activities in place are completely and accurately
described in the IC templates and/or other relevant process
documentation and guidelines;– the owner of each control activity is clearly identified; and– the controls in place are appropriate for EADS’ business andmeet the defined control objectives.
The CEOs’ and the CFO’s IC statements, submitted to theBoard of Directors through the Audit Committee, will bebased on the self-assessment and review processes describedabove, and will be founded upon similar statements provided
to the CEOs and CFO by Division and BU management.
Beginning with the 2005 reporting cycle, it is intended thatthe sign-off process will include an assessment by the CEOs
and CFO of the effectiveness of the Group’s internal controls.
2.1.5.4 Business Processes Covered by Internal Control
Framework

One of the initial objectives of the IC review project was the
documentation and assessment of the IC procedures in placefor each of the sixteen high-level business processes identified
within EADS. Set out below is a description of certain of
these business processes, and the correlating IC procedures,covering risks that have a significant potential of affecting theGroup’s financial condition and results of operations.2
Accounting

At the core of EADS’ IC framework are accounting processes
and controls designed to ensure the reliability of the financial
statements and other financial information used by
Management and disclosed to EADS’ investors and otherstakeholders. These processes and controls are part of an
overall financial control model integrating strategic planning,
operative planning, measurement and reporting, decisions/actions and financial market communication. This integrated

2 This report is therefore not an exhaustive description of all of the Group’s
IC procedures.

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approach to planning and reporting aims to improve internal
communication and transparency across departments andorganisational units within EADS, which are essential to the
preparation of accurate and reliable financial statements.
Consolidation Procedures – External Financial Reporting
The EADS financial control model defines the planning andreporting procedures that apply to all operational units of theGroup, as well as the responsibilities of the CFO, who ischarged with developing, implementing and monitoring theseprocedures. Among the CFO’s primary tasks is overseeing thegeneration of consolidated financial statements for EADS,
which are prepared under the direct supervision of the Chief
Accounting Officer (‘‘CAO’’ for the purpose of section 2.1.5).
The CAO is responsible for the operation of the Group’s
consolidation systems and rules and for the definition ofGroup-wide accounting policies, reporting rules and financial
guidelines that ensure the consistency and quality of financial
information reported by the BUs and Divisions. EADS’
accounting policies are set out in a written accounting manual,
which is agreed with the Company’s external auditors.
Changes to the EADS accounting manual require approval by
the CAO, and, where significant changes are involved, the
CFO or the Board of Directors (based upon the advice of the
Audit Committee).
Control of the financial reporting process is effected not only
through the elaboration of Group-wide accounting systems andpolicies, but also through an organized process for extracting
quality information from the reporting units on a timely basis.
The EADS reporting process is briefly summarized below.
BU accounting departments record information using the
EADS accounting consolidation software, following centrally
defined EADS accounting policies which conform with IFRS,
the Group-wide applied accounting standards. Accountants at
EADS headquarters, who are responsible for each Division,monitor and verify the work of the relevant BU accounting
departments. The Division accountants also provide direct
support to the BUs to ensure the correct application of the
EADS accounting policies.
During the course of each reporting cycle, BU CFOs
frequently meet with the EADS CAO to discuss the financial
information generated by the BUs.

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2.1 Management and Control (continued)

2
3

Prior to being disclosed to the public and subsequently
submitted for approval to the shareholders, the consolidated
financial statements are audited by the Company’s external
auditors, reviewed by the Audit Committee and submitted forapproval by the Board of Directors.
Controlling

The controlling function has developed a value-driven
economic and financial corporate measurement system andmethodology on an industry benchmark level. The coreplanning, tracking and reporting tasks of the controlling
department provide it with a global overview of the Group.
As a result, the controlling department is also called on tointeract with other headquarters functions to ensure that
corporate activities, such as M&A and sourcing, are carried out
in accordance with the Group-level policies and strategies. This
global overview also makes controlling an integral element of
the risk assessment process.
The EADS financial reporting policies and procedures,
described above, are also designed to provide Managementwith updated (at least monthly) decision-oriented management
information to control the operational performance of theGroup. This information includes regular cash and treasury
reports, as well as other financial information used for future
strategic and operative planning and control and supervision of
economic risks arising from the Group’s operations.
Treasury

Treasury management procedures, defined by EADS’ central
treasury department at Group headquarters, enhanceManagement’s ability to identify and assess risks relating toliquidity, foreign exchange rates and interest rates. Controlledsubsidiaries fall within the scope of the centralized treasury
management procedures. For instance, besides daily operational
interface, Airbus Treasury Committee meetings, comprising
the Group treasurer, the Airbus CFO or treasurer, and BAE’s
treasurer (and/or its nominee), are held on a regular basis tooversee Airbus’ foreign exchange and interest rate exposuresand hedging activities, funding, and sales and project financeactivities. Similar monitoring procedures exist for jointlycontrolled affiliates, such as MBDA.
Cash Management
Maintenance of liquidity to support operations is one of the
primary missions of the EADS central treasury department.
Monthly cash planning and reporting by the central treasury
department, in conjunction with the controlling department,

EADS Financial Statements and Corporate Governance 2004

provides Management with the information required tooversee the Group’s cash profile and to initiate necessary
corrective action in order to ensure overall liquidity.
To maintain targeted liquidity levels, and to safeguard cash,
EADS has implemented a cash pooling system with daily cash
sweeps from the controlled subsidiaries to centrally managed
accounts. Payment fraud prevention procedures have beenstandardized throughout the Group.
Hedge Management
Commercial operations generate material foreign exchange andinterest rate exposures. A Group hedging policy is defined andupdated regularly by the Board of Directors. In order toensure that all hedging activity is undertaken in line with theGroup hedging policy, the central treasury department
executes all hedging transactions. The central treasury
department conducts ongoing risk analysis and proposesappropriate measures to the Divisions and BUs with respect toforeign exchange and interest rate risk. Subsidiaries are
required to calculate, update and monitor their foreignexchange and interest rate exposure with the EADS central
treasury department on a monthly basis, in accordance withdefined treasury procedures.
A significant portion of the Group’s foreign exchange exposure
relates to the activities of Airbus, the implementation of
whose hedging policy is overseen by the Airbus Shareholders’Committee. The Airbus Treasury Committee monitors foreign
currency exposure and decides on the detailed implementationof the Airbus hedging policy. However, actual hedging
transactions are executed by the EADS Central
Treasury department.
Sales Financing
In connection with certain commercial contracts, EADS may
agree to enter into sales financing arrangements. In respect ofsales financing at Airbus, an annual sales financing budget,
defined in the EADS operative planning process, is agreed by
the Airbus Shareholders’ Committee. The Airbus Treasury
Committee approves sales financing transactions on a case-bycase basis, in line with its risk assessment guidelines.
Procedures for Monitoring Off-Balance Sheet Liabilities
Within EADS, off-balance sheet liabilities mainly arise inconnection with lease arrangements, extensions of guarantees
and pending or threatened litigation. Divisions and BUs are
required to record, or to provide information on all financial
guarantees in a tracking system. Guarantees for amounts inexcess of a certain threshold must be approved by the CFO,
the CEOs or the Board of Directors, as the case may be.

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2.1 Management and Control (continued)
Management has instituted procedures to monitor the level ofcertain off-balance sheet liabilities throughout the Group. In
particular, a specialized guarantee tracking system has beenrolled out to monitor exposure arising from guarantees
throughout the Group.

chaired by the Head of Strategic Coordination, and includes
the CFO and the directors of Group headquarters level M&A
and controlling departments. Legal Affairs is permanently
represented on the M&A Committee, and representatives ofother departments are also invited to attend meetings.

For Airbus and jointly controlled affiliates, such as MBDA,
summary information on guarantee-related off-balance sheet
exposure is captured by EADS headquarters based on regular
reports of this exposure and discussed in the Airbus andMBDA Treasury Committee.

Projects that are considered non-strategic and fall under adefined value threshold are reviewed and approved by the
M&A Committee. Strategic and high-value projects require
additional approval by the CEOs or the Board of Directors.
This review and approval procedure is carried out at four
critical stages of the M&A process, beginning with an analysisof the strategic fit and definition of the legal framework andconcluding with a final review of the overall transaction.

Sales

Commercial contracts entered into by EADS’ operating
subsidiaries have the potential to expose the Group tosignificant financial, operational and legal risks. To control
these risks, Management has implemented contract proposal
review procedures to ensure that EADS does not enter intomaterial commercial contracts that expose it to unacceptablerisk or are not in line with the Group’s overall objectives.
These procedures include (i) Board of Directors-approved
thresholds and criteria for determining the risk andprofitability profile of proposed contracts and (ii) a mandated
pre-approval process for contracts defined as high-risk.
Contracts falling below the defined thresholds require approvalby the CFO. Contracts that are deemed high-risk must be
submitted to a standing Commercial Committee (with the
CFO and the Head of EADS International serving aspermanent members). This Committee is responsible forreviewing the proposal and submitting a decision-leading
recommendation to the CEOs. Its specific role andresponsibilities are defined in a set of internal rules adopted by
the EADS Executive Committee.
In the case of Airbus, contracts are approved in accordancewith Airbus’ own corporate governance policy, which is basedon EADS guidelines. Nonetheless, the EADS Commercial
Committee reviews certain Airbus contracts if they exceed
specified thresholds. In general, where EADS shares control ofa subsidiary with a third party, the Commercial Committee is
responsible for forming the EADS position on proposedcommercial contracts.
Mergers and Acquisitions
With respect to merger, acquisition and divestiture activities of
the Group, Management has implemented transaction review
and approval procedures centralized at EADS headquarters.
The IC procedures require all M&A transactions to bereviewed by an M&A Committee. The M&A Committee is

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Legal

EADS is subject to a myriad of legal regimes in eachjurisdiction in which it conducts business. The EADS Legal
Affairs directorate, in coordination with the Division and BU
legal departments, is responsible for implementing andoverseeing the procedures designed to ensure that EADS’
activities comply with all applicable laws, regulations andrequirements. It is also responsible for overseeing all litigation
affecting the Group, as well as for the legal safeguarding of
the Group’s assets, including intellectual property.
Legal Affairs, together with the Corporate Secretary, also plays
an essential role in the design and administration of (i) the
EADS corporate governance procedures and (ii) the legal
documentation underlying the delegation of powers andresponsibilities and defining the EADS management andIC environment.
Internal Audit

The EADS Internal Audit department, under the direction of
the Corporate Secretary, provides Management with a riskbased evaluation of the effectiveness of the Group’s IC
procedures. Based upon an approved annual audit plan and a
global risk assessment of the Group’s activities, the Internal
Audit department (i) reviews operational processes for risk
management and operating efficiency improvement
opportunities and (ii) monitors compliance with legal
requirements and internal policies, process guidelines andprocedures (e.g., compliance with EADS’ accounting policies).
Internal Audit also involves ad hoc reviews, performed at therequest of management, focusing on current (e.g., suspectedfraudulent activities) and future (e.g., contract
management) risks.

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2.1 Management and Control (continued)

2
3

Procurement

A group with the size and complexity of EADS requires acommon sourcing policy to maximize market effort andminimize inefficiencies in the procurement process. To ensurethat corporate sourcing is carried out in an efficient and ethicalmanner, a set of common purchasing processes, in line with acommon sourcing strategy, is defined and implemented by the
Head of Corporate Sourcing and the Procurement
Directors Board.
2.1.5.5 Outlook for Evolution of EADS’ Internal Control and Risk
Management Systems

Building on the results of the comprehensive IC and RM
review and evaluation process commenced in 2004, EADS will
critically assess the roll-out of the IC framework and RM
system over the course of 2005. In response to ongoing
monitoring of the efficacy and workability of the IC and RM
systems, based on the 2004 self-assessments and the results ofInternal Audit’s review, further enhancements andmodifications to the IC and RM systems throughout 2005 arelikely. These enhancements and modifications will be aimed atensuring that EADS continues to operate in accordance with
global best IC and RM practices.

EADS Financial Statements and Corporate Governance 2004115

2.2 Interests of Directors and Principal Executive Officers

2.2.1 Compensation Granted to Directors and Principal
Executive Officers

EADS’ remuneration policy aims at attracting and retaining
talents that will contribute to the Group’s business success.
The compensation policy is therefore designed to focus efforts
on what the Group wants to value and reward.
The Board of Directors is composed of Non-Executive
Directors and Executive Directors (who are also members of
the Executive Committee).
Compensation of the Directors

The Non-Executive Directors are entitled to receive an
accumulated total target compensation as a group of NonExecutive Directors on a full year basis of 4900,000. Thistarget compensation includes (i) a fixed part of 430,000 per
director and 460,000 per chairman, (ii) a fee for participationin Board of Directors’ meetings and Committee meetings (ifsuch Committee meetings take place on a different date thanthe Board of Directors’ meetings) of 45,000 per director and
410,000 per chairman, per meeting and (iii) a variable partcomposed of a profit sharing calculated, starting 2004, on thebasis of EBIT* (75%) and cash (25%) results of the Group, of
450,000 per director and 4100,000 per chairman at 100%
target achievement. The rules for the profit sharing calculationon the basis of EBIT* (75%) and cash (25%) results of theGroup for the Non-Executive Directors are the same as for themembers of the Executive Committee (see below‘‘Compensation of the Members of the Executive
Committee’’). The Non-Executive Directors do not havetermination packages.
The Executive Directors receive neither fees for participationin Board of Directors’ meetings nor any dedicatedcompensation as members of the Board of Directors in
addition to their compensation as members of the Executive
Committee (see below ‘‘Compensation of the Members of the
Executive Committee’’). The Executive Directors are eligible
for benefits under stock option plans (see ‘‘2.3.3 Options
Granted to Employees’’) and under employee share ownershipplans in their capacity as qualifying employees (see also‘‘2.3.2 Employee Share Offering’’). Additionally, the Executive
Directors are entitled to pension benefits.
The amounts of the various components constituting thecompensation granted to Executive Directors and NonExecutive Directors during 2004 together with additional
information such as the number of stock options and detailsof the pension benefits entitlements of the Executive Directors
are set out in ‘‘Notes to the Statutory Financial Statements –Note 8: Remuneration’’.

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EADS Financial Statements and Corporate Governance 2004

The Executive Directors are also entitled to a termination
package when they leave the Company as a result of adecision of the Company. Such termination package varies
according to the type of their contracts (either fixed term
contracts of five years with full pay until the end of thecontract period plus an indemnity of up to a maximum of
18 months of their target income or contracts for an indefinite
term with an indemnity of up to a maximum of 24 monthsof their target income).
Compensation of the Members of the Executive Committee

The members of the Executive Committee, including
Executive Directors but also members of the Executive
Committee who are not members of the Board of Directors,
are entitled to receive for the year 2004 an accumulated total
target compensation on a full year basis of 412,589,231. Thistarget compensation is divided into a 50% fixed part and a 50%
variable part (in practice, the variable part can exceed 50% of
the total compensation in case of overachievement of thetargets). The variable part, starting 2004, is calculated on thebasis of two equal components: (i) a profit sharing calculatedon the basis of EBIT* (75%) and cash (25%) results of theGroup and (ii) a bonus corresponding toindividual achievements.
The total compensation paid by EADS and all its Group
companies to the two Chief Executive Officers of theCompany, Mr. Philippe Camus and Mr. Rainer Hertrich,during the year 2004 was 42,010,251 each.
2.2.2 Options Granted to the Two Chief Executive Officers

See ‘‘2.3.3 Options Granted to Employees’’.
2.2.3 Related Party Transactions
EADS being a company incorporated under Dutch law,
Articles L.225-38 to L.225-43 and L.225-86 to L.225-91 of theFrench Code de Commerce on related party transactions are notapplicable to it.

Article 2:146 of the Dutch Civil Code provides as follows:‘‘Unless the articles of association provide otherwise, acompany (naamloze vennootschap) shall be represented by its
board of supervisory directors in all matters in which it has aconflict of interest with one or more of the members of its
board of directors. The shareholders’ meeting shall at all times
have powers to designate one or more persons for thispurpose.’’ In the case of EADS, the Articles of Association doprovide otherwise since they enable the Board of Directors to

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2.2 Interests of Directors and Principal Executive Officers (continued)

2
3

have power to represent the Company in matters where theCompany has a conflict of interest with one or more membersof the Board of Directors.
During the year 2004, no agreement was entered into by theCompany with one of its directors or principal officers or ashareholder holding more than 5% of the voting rights of theCompany outside the ordinary course of business and in
conditions other than arm’s length conditions.
For a description of the relationships between the Company
and its principal shareholders, see ‘‘Part 2/3.3.2 Relationships
with Principal Shareholders’’.
As indicated in ‘‘Part 2/3.1.3.1 Ongoing Disclosure
Obligations’’, pursuant to the financial law 44/2002, of25th November 2002, on Measures Reforming the Financial
System (Ley 44/2002, de 25 de noviembre, sobre Medidas deReforma del Sistema Financiero) (the ‘‘Financial Law’’), andthe Ministry of Economy Order dated 15th September 2003,
the Company is obliged to provide the Comisión Nacional del
Mercado de Valores (the ‘‘CNMV’’) with certain informationin relation to every transaction carried out with any related
party (in addition to the description of related party
transactions included in the corporate governance report to be
filed with the CNMV on an annual basis (the ‘‘Annual
Corporate Governace Report’’) pursuant to Ministry of
Economy Order 3722/2003 dated 26th December 2003 (the‘‘Ministerial Order’’)).
2.2.4 Loans and Guarantees Granted to Directors

EADS has not granted any loans to its Directors or membersof the Executive Committee.

EADS Financial Statements and Corporate Governance 2004

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2.3 Employee Profit Sharing and Incentive Plans

2.3.1 Employee Profit Sharing and Incentive Agreements

EADS’ remuneration policy is strongly linked to theachievement of individual and Company objectives, both foreach Division and for the overall Group. A stock option plan
has been established for the senior management of the Group(see ‘‘– Options Granted to Employees’’) and employees were
offered shares at favourable conditions at the time of the
public offering and listing of EADS (see ‘‘– Employee
Share Offering’’).
EADS France has profit sharing plans (accords de participation),in accordance with French law, and specific incentive plans(accords d’intéressement), which provide bonuses to employees
based on the achievement of productivity, technical oradministrative milestones.
EADS Deutschland GmbH’s remuneration policy is, to a large
extent, flexible and strongly linked to the EBIT* of thecompany, the increase in value of the company and theachievement of individual objectives.
EADS CASA, which does not have a profit sharing policy,
allows technicians and management to receive profit-related
pay, subject to the achievement of the general company
objectives and individual performance.
2.3.2 Employee Share Offering

As part of its initial public offering, EADS offered toqualifying employees approximately 1.5% of its total sharecapital after the global offering. This employee offering of up
to 12,222,385 shares included an option allowing qualifying
employees to leverage their investment in the shares theypurchased. Under this option, the investment consisted of theamount paid plus an amount resulting from a swap agreementof the investment management company for this option, that
equalled nine times such amount paid. Qualifying employees
were offered shares at a price of 415.30, being the price forthe retail offering, less a discount of 15%.
The employee offering was open only to employees who:
– had at least three months’ seniority;– had French, German or Spanish employment contracts; and– were employed by companies incorporated under French,
German or Spanish law in which EADS held (i) the
majority of the share capital or (ii) at least 10% of the sharecapital, provided such minority-owned companies were
designated as eligible by EADS.

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Depending on whether the employee purchased sharesthrough a French, German or Spanish plan, directly or via amutual fund, the employee is restricted from selling theshares for one of the following lock-up periods: 18 months,
three years, five years or six years.
A total number of 11,769,259 shares were subscribed for in
the employee offering. Shares were delivered on
21st September 2000.
In October 2001, EADS offered to qualifying employees amaximum of 0.25% of its total issued share capital before theoffering. This employee offering was for up to 2,017,894
shares of a nominal value of 41 each.
The employee offering (note d’opération préliminaire approvedby the COB (former name of the Autorité des marchésfinanciers (the ‘‘AMF’’)) on 8th October 2001 under
number 01-1200 and note d’opération définitive approved by the
COB on 13th October 2001 under number 01-1209) was open
only to employees who:
– had at least three months’ seniority;– were employed by (i) EADS or (ii) one of its subsidiaries or(iii) a company in which EADS holds at least 10% of theshare capital and over whose management it has adetermining influence and whose registered office is locatedin South Africa, Germany, Brazil, Canada, Spain, the UnitedStates, the United Kingdom, France, Italy, Morocco, Mexicoand Singapore.
The employee offering was divided into two tranches:– shares subscribed for by qualifying employees in Group
employee savings plan were offered for a price of 410.70
per share;– shares subscribed for by qualifying employees directly were
offered for a price of 410.70 per share.
The employees are generally restricted from selling the shares
offered in this employee offering for one year and sometimes
more in certain countries.
A total number of 2,017,894 shares were subscribed for in
the employee offering. Shares were delivered on
5th December 2001.
In October 2002, EADS offered to qualifying employees amaximum of 0.25% of its total issued share capital before theoffering. This employee offering was for up to 2,022,939
shares of a nominal value of 41 each.

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2.3 Employee Profit Sharing and Incentive Plans (continued)

2
3

The employee offering (note d’opération préliminaire approvedby the COB on 30th September 2002 under number 02-1062
and note d’opération définitive approved by the COB on
11th October 2002 under number 02-1081) was open only toemployees who:
– had at least three months’ seniority;– were employed by (i) EADS or (ii) one of its subsidiaries or(iii) a company in which EADS holds at least 10% of theshare capital and over whose management it has adetermining influence and whose registered office is locatedin Germany, Brazil, Canada, Spain, the United States, theUnited Kingdom, France, Italy, Mexico and Singapore.
The employee offering was divided into two tranches:– shares subscribed for by qualifying employees in Group
employee savings plan were offered for a price of 48.86
per share;– shares subscribed for by qualifying employees directly were
offered for a price of 47.93 per share.
The employees are generally restricted from selling the shares
offered in this employee offering for one year and sometimes
more in certain countries.
A total number of 2,022,939 shares were subscribed for in
the employee offering. Shares were delivered on
4th December 2002.
In October 2003, EADS offered to qualifying employees amaximum of 0.25% of its total issued share capital before theoffering. This employee offering was for up to 2,027,996
shares of a nominal value of 41 each.
The employee offering (note d’opération approved by the COB
on 25th September 2003 under number 03-836) was given
only to employees who:
– had at least three months’ seniority;– were employed by (i) EADS on (ii) one of its subsidiaries or(iii) a company in which EADS holds at least 10% of theshare capital and over whose management it has adetermining influence and whose registered office is locatedin Germany, Belgium, Canada, Spain, the United States, theUnited Kingdom, France, Ireland, Mexico, the Netherlands
and Singapore.

– shares subscribed for by qualifying employees directly were
offered for a price of 412.48 per share.
The employees are generally restricted from selling the shares
offered in this employee offering for one year and sometimes
more in certain countries.
A total number of 1,686,682 shares were subscribed for in
the employee offering. Shares were delivered on
5th December 2003.
In October 2004, EADS offered to qualifying employees amaximum of 0.25% of its total issued share capital before theoffering. This employee offering was for up to 2,018,000
shares of a nominal value of 41 each.
The employee offering (note d’opération approved by the AMF
on 10th September 2004 under number 04-755) was given
only to employees who:
– had at least three months’ seniority;– were employed by (i) EADS on (ii) one of its subsidiaries or(iii) a company in which EADS holds at least 10% of theshare capital and over whose management it has adetermining influence and whose registered office is locatedin Germany, Belgium, Canada, Spain, the United States, theUnited Kingdom, France, Ireland, Mexico, the Netherlands,
Singapore, Australia and Finland.
The employee offering was divided into two tranches:– shares subscribed for by qualifying employees in Group
employee savings plan were offered for a price of 418
per share;– shares subscribed for by qualifying employees directly were
offered for a price of 418 per share.
The employees are generally restricted from selling the shares
offered in this employee offering for one year and sometimes
more in certain countries.
A total number of 2,017,822 shares were subscribed for in
the employee offering. Shares were delivered on
3rd December 2004.

The employee offering was divided into two tranches:– shares subscribed for by qualifying employees in Group
employee savings plan were offered for a price of 412.48
per share;

EADS Financial Statements and Corporate Governance 2004

119

2.3 Employee Profit Sharing and Incentive Plans (continued)

2.3.3 Options Granted to Employees

At its 26th May 2000, 20th October 2000, 12th July 2001, 9th August 2002, 10th October 2003 and 8th October 2004
meetings, the Board of Directors of the Company, using the authorisation given to it by the shareholders’ meetings of
24th May 2000, 10th May 2001 and 6th May 2003 approved the granting of stock options for subscription of shares in the
Company. The principal characteristics of these options are summarised in the table below:
Date of general meeting
Date of board meeting
Number of options that were granted
Number of options outstanding
Of which: shares that may be subscribedby directors and officers
Total number of eligible employees
Date from which the options may be
exercised

Date of expiration
Exercise price
Number of options exercised

120First Tranche

Second Tranche

24th May 2000
26th May 2000
5,324,884
4,545,400
720,000

24th May 2000
20th October 2000
240,000
227,000
60,000Approximately 850
50% of options may be exercised after aperiod of two years and four weeks fromthe date of grant of the options; 50% of
options may be exercised as of the third
anniversary of the date of grant of theoptions (subject to specific provisions
contained in the Insider Trading Rules(see ‘‘Part 2/3.1.3 Governing Law –Dutch Regulations’’)).
Tenth anniversary of the date of grant of
the options
020.90123,000

34
50% of options may be exercised after aperiod of two years and four weeks fromthe date of grant of the options; 50% of
options may be exercised as of the third
anniversary of the date of grant of theoptions (subject to specific provisions
contained in the Insider Trading Rules(see ‘‘Part 2/3.1.3 Governing Law –Dutch Regulations’’)).
Tenth anniversary of the date of grant of
the options
020.906,000

EADS Financial Statements and Corporate Governance 2004

1

2.3 Employee Profit Sharing and Incentive Plans (continued)

2
3Date of general meeting
Date of board meeting
Number of options that were granted
Number of options outstanding
Of which: shares that may be subscribedby:– Mr. Philippe Camus*– Mr. Rainer Hertrich*– the 10 employees having being granted
the highest number of options during theyear 2001 (third tranche) and 2002
(fourth tranche)
Total number of eligible beneficiaries
Date from which the options may be
exercised

Date of expiration
Exercise price
Number of options exercised

Third Tranche

Fourth Tranche

10th May 2001
12th July 2001
8,524,250
7,421,725

10th May 2001
9th August 2002
7,276,700
6,676,216

135,000
135,000
738,000

135,000
135,000
808,000

Approximately 1,650
50% of options may be exercised after aperiod of two years and four weeks fromthe date of grant of the options; 50% of
options may be exercised as of the third
anniversary of the date of grant of theoptions (subject to specific provisions
contained in the Insider Trading Rules(see ‘‘Part 2/3.1.3 Governing Law –Dutch Regulations’’)).
Tenth anniversary of the date of grant of
the options
024.660

Approximately 1,562
50% of options may be exercised after aperiod of two years and four weeks fromthe date of grant of the options; 50% of
options may be exercised as of the third
anniversary of the date of grant of theoptions (subject to specific provisions
contained in the Insider Trading Rules(see ‘‘Part 2/3.1.3 Governing Law –Dutch Regulations’’)).
Tenth anniversary of the date of grant of
the options
016.96352,009

EADS Financial Statements and Corporate Governance 2004121

2.3 Employee Profit Sharing and Incentive Plans (continued)

Date of general meeting
Date of board meeting
Number of options that may be
subscribed
Number of options outstanding
Of which: shares that may be subscribedby:– Mr. Philippe Camus*– Mr. Rainer Hertrich*– the 10 employees having being granted
the highest number of options during theyear 2003 (fifth tranche) and 2004
(sixth tranche)
Total number of eligible beneficiaries
Date from which the options may be
exercised

Date of expiration
Exercise price
Number of options exercised
Number of options cancelled during theyear 2003 (fifth tranche) and 2004
(sixth tranche)

Fifth Tranche

Sixth Tranche

6th May 2003
10th October 2003
7,563,980

6th May 2003
8th October 2004
7,777,280

7,444,520

7,777,280

135,000
135,000
808,000

135,000
135,000
808,000

Approximately 1,491
50% of options may be exercised after aperiod of two years and four weeks fromthe date of grant of the options; 50% of
options may be exercised as of the third
anniversary of the date of grant of theoptions (subject to specific provisions
contained in the Insider Trading Rules(see ‘‘Part 2/3.1.3 Governing Law –Dutch Regulations’’)).

Approximately 1,495
50% of options may be exercised after aperiod of two years and four weeks fromthe date of grant of the options; 50% of
options may be exercised as of the third
anniversary of the date of grant of theoptions and when applicable, subject tocertain performance conditions (subject tospecific provisions contained in the Insider
Trading Rules – see ‘‘Part 2/3.1.3
Governing Law – Dutch Regulations‘‘).
Tenth anniversary of the date of grant ofTenth anniversary of the date of grant of
the options
the options
015.65024.329,600
0108,460
0* For more information in respect of options granted to the Executive Directors, see ‘‘Notes to the Statutory Financial Statements – Note 8: Remuneration’’.

122

EADS Financial Statements and Corporate Governance 2004

1

Chapter 3: Outlook

3.1 2005 Financial Outlook

2
3

Revenues

For 2005, EADS is targeting consolidated revenues ofapproximately 433 billion, as compared to 431.8 billion for2004. This target reflects the expected impact of a weaker
U.S. dollar exchange rate over the year (an assumed average
market rate of 41=U.S.$1.30 for 2005, as compared to theactual average of 41=U.S.$1.24 in 2004). Overall revenues ofthe defence businesses’ are expected to increase by 10%
over 2004.
EADS anticipates that Airbus will deliver 350 to 360 aircraftin 2005. Airbus revenues are expected to increase in line withhigher deliveries of single aisle aircraft. The 2005 aircraft mix
is likely to be less favourable than in 2004.
Revenues from the MTA Division are expected to growsignificantly in 2005, boosted mainly by the continued rampup of the A400M program. Other activities, including thestart-up of the A330 MRTT Australian contract, medium andlight aircraft deliveries, as well as the modernisation of theBrazilian P3 Orion, are expected to contribute overall revenues
slightly above 2004 levels.
In the Aeronautics Division, new military models such as the
NH90 transport and Tiger combat helicopters are expected toreach the market. Meanwhile, regional turboprop aircraft(ATR-42/ATR-72) and general aircraft (TBM), and activities
such as aircraft conversion, are facing competitive pressure in amarket that remains narrow. The Division’s aerostructure
activities are expected to continue benefiting from the civil
aerospace upturn. Overall, revenues should grow significantly
in 2005, mostly driven by Eurocopter.
The DS Division’s current order-book offers good visibility as
to future revenues of the Missiles and Military Aircraftbusinesses. Overall, 2005 revenues of the DS Division arelikely to be negatively impacted by the recent disposal ofMulticom and Enterprise Telephony activities.
The Space Division has adapted to the changing markets inwhich it operates. While restructuring its own operations, it
has also played a key role in the consolidation of the overall
European space industry, and has offered new services to its
customers in the field of secured communications. Despite adifficult environment (e.g., Euro/U.S. dollar exchange rate, a‘‘gloomy’’ telecommunication satellite market, severe
limitations of National and European agencies), a moderateincrease in 2005 revenues is anticipated in light of thecurrent order-book.

EADS Financial Statements and Corporate Governance 2004

EBIT*

EADS’ consolidated EBIT* is expected to exceed 42.6 billion(up 6%) for 2005, reflecting an increase in performance acrossthe group, partly offset by less favourable hedges, and by the
impact of the weak U.S. dollar on the naturally hedged
portion of the net exposure.
Airbus’ 2005 EBIT* is targeted to grow from 2004. It should
benefit mainly from an increase in deliveries and from theprogressive benefits of the Route 06 cost savings plan. These
factors are expected to significantly compensate for (i) the
negative impact of a slightly lower proportion of larger aircraft
deliveries and (ii) the effects of a weaker U.S. Dollar from the
few aircraft not yet hedged and from the maturing of lessfavourable hedges. Self-financed research and development is
expected to continue at around the same level, mostly due tothe continuing development of the A380 – the passenger andfreighter versions are due for entry into service in 2006 and2008 respectively. The new A350 project will only marginallyimpact the 2005 research and development budget, but is
expected to increase in following years. The positive
accounting impact from the Airbus GIE merger into Airbus
SAS is expected to diminish in 2005.
For the MTA Division, higher revenues and the early benefitsof restructuring will feed through to higher EBIT* in 2005.
2005 EBIT* at the Aeronautics Division is expected to reflect
the continuing improvement of Eurocopter performance, offset
by the impact of a weaker U.S. dollar and by ongoingrecovery programmes, namely in the Sogerma business.
The DS Division’s 2005 EBIT* will reflect continuing
improvement of recurring business’ profitability,
notwithstanding further investments in strategic projects andrestructuring plans to foster efficiencies. 2005 EBIT* will notbenefit from the non-recurring positive effect of 4106 million,
relating to the release of a litigation provision in 2004.
Moreover, the fully re-engineered and operational Space
Division is now poised for EBIT* margin progressive expansion
from 2005 onwards.
Cash
Free Cash Flow before customer financing and Paradigm
investment outflows is expected to be positive in 2005.
Earnings Per Share
Earnings per share are expected to increase by 5% in 2005, to41.36 per share, based on an average of 803 million
shares outstanding.

1233.2 2005 Calendar of Financial Communication

2004 Annual Results Release: 9th March 2005
First Quarter 2005 Results Release: 9th May 2005
Annual General Meeting: 11th May 2005
Global Investor Forum: June 2005
First Half 2005 Results Release: 27th July 2005
Third Quarter 2004 Results Release: 9th November 2005

124

EADS Financial Statements and Corporate Governance 2004

1

Reference Document Thematic Index

2
In order to simplify the reading of this document which is filed as part of the EADS Reference Document for the financial year
2004, the following thematic index permits the identification of the main information required by the Autorité des marchésfinanciers within the framework of its regulation.
Statements of Responsible Persons

Part 2

Information Concerning EADS’ Business
Activities

Part 2

Statement of the Persons Responsible for theReference Document

5.2

Presentation of the Group (relationships between
EADS and its subsidiaries)

1.1.1

Statement of the Persons Responsible for the
Financial Statements

5.3.2

Key Figures for the Group

1.1.1

Information by Divisions

Information Policy

5.4

1.1.1 to1.1.6

General Information on EADS and its Share
CapitalPart 2

EADS’ Markets and Competitive Positioning

1.1.2 to1.1.6

Investment Policy

1.1.7

Governing Law and Regulations Applicable toEADS

3.1.3 –
3.1.11 –3.1.12Analysis of EADS Risk Factors

Part 1

Share Capital

Risk Factors

Modification of Share Capital or Rights Attaching
to the Shares

3.2.1

Market Risks

1.1.8 –
1.4.1

Issued Share Capital

3.2.2

Specific Risks Linked to EADS Business

1.4.2

Authorised Share Capital

3.2.3

Legal Risks

1.4.3

Table Showing Changes in the Share Capital over
the Last Five Years

3.2.5

Industrial and Environmental Risks

1.4.4

Stock Exchange Information

Insurance and Risks Cover

1.4.5

Net Assets, Financial Position and Results

Part 1

Table Showing Changes in Prices and Volume
Since January 2003

3.4

Consolidated Financial Statements and Related
Notes

1.2.1

Dividends

3.5

Off Balance Sheet Commitments

1.1.8

Statutory Auditors’ Fees

1.3

Statutory Financial Statements and Related Notes

1.2.2

Share Capital, Voting Rights
Shareholding Structure and Voting Rights

3.3.1

Changes in the Shareholding of the Company
since its Incorporation

3.3.4

Relationships with Principal Shareholders

3.3.2

EADS Financial Statements and Corporate Governance 2004

1253

Reference Document Thematic Index (continued)

Corporate GovernancePart 1

Composition and Functioning of the Board of
Directors, Chairmen and Chief Executive Officers

2.1.1

Composition and Functioning of the Board
Committees

2.1.2 –
2.1.3

Compensation Granted to Directors and Principal
Executive Officers

2.2.1 –
2.3.3

The Ten Highest Granted Options Employees thatare not Corporate Officers

2.3.3

Related Party Transactions

2.2.3

Internal Control and Risk Management Systems

2.1.5

Corporate Social Responsibility

Part 2
Chapter 2

Recent Developments

Part 2
1.2

OutlookPart 1
3.1

126

EADS Financial Statements and Corporate Governance 2004

The complete EADS Annual Report Suite2004 consists of:

EADS Annual Review 2004 (1)EADS Financial Statements andCorporate Governance 2004 (2)EADS Business andLegal Description 2004 (3)(available upon request)
The online version of the EADSAnnual Report Suite 2004 is available
at the Investor Relations section ofwww.eads.com

This Reference Document was filed in French with the Autorité des marchés
financiers on 19th April 2005 pursuant to Articles 211–1 to 211–42 of the General
Regulations of the Autorité des marchés financiers. It may be used in support ofa financial transaction only if it is supplemented by a transaction note approvedby the Autorité des marchés financiers.
Warning
The AMF draws the attention of the public to the fact that:
European Aeronautic Defence and Space Company EADS N.V. (“EADS”
or the “Company”) is a Dutch company, which is listed in France, Germany
and Spain. Given this fact, the applicable regulations with respect to public
information and protection of investors, as well as the commitments madeby the Company to securities and market authorities, are described in thisReference Document.
This document contains information which forms an integral partof EADS’ Reference Document filed with the Autorité des marchés
financiers on 19th April 2005. When used as a Reference Document,
it must be read in conjunction with the document entitled Businessand Legal Description 2004 (Reference Document Part 2).

Designed by williams and phoa.
Typeset by Bowne.

2
European Aeronautic Defence and Space Company EADS N.V.

www.eads.com

This document
is also available at thefollowing addresses:
European Aeronautic Defence
and Space Company EADS N.V.
In France
37, boulevard de Montmorency
75781 Paris cedex 16 – France
In Germany
81663 Munich – Germany
In Spain
Avenida de Aragón 404
28022 Madrid – Spain

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Airbus A340-300

EADS Financial Statements and Corporate Governance 2004

European Aeronautic
Defence and Space
Company EADS N.V.
Le Carré, Beechavenue 130–132
1119 PR Schiphol-Rijk
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Financial Statements
and Corporate Governance2004