----

FINAL ANNUAL ACCOUNTS OF THE EUROPEAN COMMUNITIES

FINANCIAL YEAR 2003

VOLUME I

CONSOLIDATED REPORTS ON IMPLEMENTATION OF THE BUDGET AND CONSOLIDATED FINANCIAL STATEMENTS

(2004/C 294/01)

CONTENTS

Development of the European Communities' accounting system

Presentation of the accounts

Chapter I:Consolidated reports on implementation of the budget of the European Communities:

Chapter II: Consolidated financial statements of the European Communities: BALANCE SHEET

Chapter III:Consolidated financial statements of the European Communities: ANNEXES

DEVELOPMENT OF THE EUROPEAN COMMUNITIES' ACCOUNTING SYSTEM

As an information system, public-sector accounting has substantially broadened its objectives from a mere record of budget execution to be more dynamic and complete by setting out the economic, financial and asset/liability implications that arise. In recent years, it has become apparent that the European Communities' accounts needed to be modernised to change from a system of accounts focusing on a mere cash-based description of budget expenditure and revenue operations to a system based on assets and liabilities with the objective of presenting the Communities' financial situation in a more comprehensive form, showing all its assets, entitlements and debts as well as the expenditure and revenue for the financial year. The Commission has therefore undertaken to gradually fall into line with the approach adopted by a large number of States and supported by international bodies such as IFAC (1) and OECD. This work started in earnest in 2003 with the commencement of the ‘modernisation of the accounting system’ project, which has the aim of placing the European Communities in the forefront of the international movement towards the modernisation of public sector accounting from 2005 onwards.

The Financial Regulation (2) lays down the broad outlines of the new accounting framework for the European Communities from 2005. The transitional provisions of the Financial Regulation include the general rule that the provisions of Title VII of part one — Accounting — shall apply gradually depending on technical possibilities in order to be fully effective for the budgetary year 2005. This gradual application relates in particular to the new principles governing the Institutions' accounts. While the budget accounts will still be subject to the cash principle, the general accounts will be accrual-based accounts from 2005.

The Commission communication of 17 December 2002 on the modernisation of the accounting system set out the measures, timetable and resources needed for the reform of the accounts. A new accounting framework will be drawn up. The rules and methods applicable will be based on internationally accepted standards for the public sector — the IPSAS — and, for accounting transactions that are not yet covered by IPSAS, on the relevant IAS/IFRS. They will be subject to the opinion of an Accounting Standards Committee providing independent professional guidance — at this time 16 exposure drafts for new accounting rules derived from these standards have been already presented to the Committee for discussion. The critical event for each transaction has been defined and the IT architecture is being reviewed to ensure that each accounting event may be fully registered at source. The financial statements can then be produced automatically. Directorates-General's internal control procedures will be extended to cover accrual accounting aspects. Finally, the scope of consolidation will be extended.

However, the Commission has anticipated this reform and already introduced elements of accrual accounting in the presentation of the financial statements in recent years, without yet being able to apply the corresponding standards in full. At present, some information does not come from an integrated system of accounts so the Accounting Officer's departments use non-accounting information from the Commission's services to complete the financial balance sheet and draw up the annexes to this balance sheet.

Since 2000 the reliability of the information has been improved on fixed assets, inventories, the list of financial intermediaries, the valuation of entitlements and official's pension rights. This approach has continued more intensely in 2002 and 2003. The presentation of the annual accounts and the explanatory notes continue to be supplemented, new balance-sheet and off-balance-sheet items have been included, the valuation of the shareholdings have been brought into line with IPSAS standards and the consolidation procedures have been improved and the scope increased.

PRESENTATION OF THE ACCOUNTS

CHAPTER I

CONSOLIDATED REPORTS ON THE IMPLEMENTATION OF THE BUDGET OF THE EUROPEAN COMMUNITIES

1.   BUDGET OUTTURN 2003

The budget outturn for the European Communities is included under heading I.A.1 on the liabilities side of the consolidated balance sheet.

The budget outturn for EFTA-EEA is included under heading IV.C.1 on the liabilities side of the consolidated balance sheet.

The functioning of the EFTA-EEA system is detailed in the explanatory notes, Annex 2.

CONSOLIDATED REPORTS ON IMPLEMENTATION OF THE BUDGET REVENUE

2.   CONSOLIDATED SUMMARY OF THE IMPLEMENTATION OF GENERAL BUDGET REVENUE 2003

Detail Title 1 :   Own ressources

Detail Title 3 :   Surpluses available

3.   CORRECTION OF BUDGETARY IMBALANCES (CHAPTER 15)

4.   CONSOLIDATED SUMMARY OF THE IMPLEMENTATION OF BUDGET REVENUE 2003 BY INSTITUTION

5.   COMPARISON OF THE IMPLEMENTATION OF BUDGET REVENUE 2003 AND 2002

Detail Title 1 :   Own ressources

Detail Title 3 :   Surpluses available

6.   CONSOLIDATED SUMMARY OF THE IMPLEMENTATION OF BUDGET EXPENDITURE

7.   CONSOLIDATED SUMMARY OF BUDGET IMPLEMENTATION - EXPENDITURE

8.   CONSOLIDATED SUMMARY OF COMMITMENTS OUTSTANDING

9.   IMPLEMENTATION OF COMMITMENT

AND PAYMENT APPROPRIATIONS BY INSTITUTION

Appropriations for institutions other than the Commission are consolidated in heading 5 of the financial perspectives.

Commitment

appropriations

Payment

appropriations

10.   COMPARISON OF BUDGET IMPLEMENTATION 2003

AND 2002 BY BUDGET SUB-SECTION

Commitment

Appropriations

Payment

Appropriations

11.   BREAKDOWN AND CHANGES IN COMMITMENT

AND PAYMENT APPROPRIATIONS BY BUDGET SUB-SECTION

12.   IMPLEMENTATION OF COMMITMENT APPROPRIATIONS

BY BUDGET SUB-SECTION

13.   IMPLEMENTATION OF PAYMENT APPROPRIATIONS

BY BUDGET SUB-SECTION

14.   COMPARISON OF BUDGET IMPLEMENTATION 2003

AND 2002 BY FINANCIAL PERSPECTIVE

Commitment

appropriations

Payment

appropriations

15.   BREAKDOWN AND CHANGES IN COMMITMENT

AND PAYMENT APPROPRIATIONS BY FINANCIAL PERSPECTIVE

16.   IMPLEMENTATION OF COMMITMENT APPROPRIATIONS

BY FINANCIAL PERSPECTIVE

17.   IMPLEMENTATION OF PAYMENT APPROPRIATIONS

BY FINANCIAL PERSPECTIVE

18.   BREAKDOWN OF COMMITMENTS OUTSTANDING BY THE COMMITMENT'S YEAR OF ORIGIN

CHAPTER II

CONSOLIDATED FINANCIAL STATEMENTS OF THE EUROPEAN COMMUNITIES

BALANCE SHEET

ASSETS

LIABILITIES

CHAPTER III

CONSOLIDATED FINANCIAL STATEMENTS OF THE EUROPEAN COMMUNITIES

----

(1)  International Federation of Accountants.

(2)OJ L 248, 16.9.2002.

----

ANNEX 1

ACCOUNTING PRINCIPLES, RULES AND METHODS

A.   ACCOUNTING PRINCIPLES

1.   LEGAL PROVISIONS

The accounts are kept in accordance with Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities and Commission Regulation (EC, Euratom) No 2342/2002 of 23 December 2002 laying down detailed rules for the implementation of this Financial Regulation. The annual accounts for 2003 are the second drawn up in accordance with this Financial Regulation, on the basis of the transitional provisions mentioned below.

The same rules of valuation and accounting methods are applied in all the European Institutions currently falling within the scope of consolidation (Commission, Parliament, Council, Court of Justice, Court of Auditors, Economic and Social Committee, Committee of the Regions and the Ombudsman), in order to guarantee harmonisation of the accounts and consistency of data. The exception to this rule is the European Coal & Steel Community (‘ECSC’) in liquidation which is being consolidated for the first time in 2003. There are some differences in certain accounting treatments between the ECSC in liquidation and the other Institutions since the ECSC in liquidation currently applies certain accrual accounting principles more extensively than the Communities' Institutions. Given the current transition to accrual accounting and the immateriality of the differences in question it was not considered useful or appropriate to make corrections for the amounts.

2.   THE FINANCIAL REGULATION

The Financial Regulation adopted by the Council on 25 June 2002 (OJ L 248 of 16 September 2002, p. 1, with a corrigendum in OJ L 25 of 30 January 2003, p. 43) brings together the provisions on the presentation of accounts and accounting in Title VII of Part One.

While this Financial Regulation is applicable from 1 January 2003, Article 181 contains a number of transitional provisions, some of which relate to the presentation of the accounts.

This is particularly the case with regards to the timetable for the presentation of accounts which will be shifted forward by about one month from 2005 onwards to give the discharge authority the same amount of time for its deliberations. Article 128 thus stipulates that, starting with the accounts for 2005, the Commission's accounting officer must submit the consolidated provisional accounts by 31 March of the following year, on the basis of the provisional accounts that each Institution and other consolidated bodies have sent by 1 March. These accounts are sent to the Court of Auditors, who must make its observations by 15 June (Article 129). On the basis of these observations, the Commission adopts the final consolidated accounts by 31 July and they are then published by 31 October together with the Court of Auditors' statement of assurance.

The transitional provisions lay down the general rule that the provisions of Title VII of Part One shall apply gradually depending on technical possibilities in order to be fully effective for the budgetary year 2005. This gradual application relates in particular to the new principles governing the Institutions' accounts.

Under the transitional provisions of the new Financial Regulation, for accounts relating to financial years prior to 2005, the Accounting Officer of the Commission must, in accordance with Article 128(2) and Article 181(2) of the Financial Regulation, consolidate the provisional accounts and send them no later than 1 May to the Court of Auditors. This includes both the individual provisional accounts for each Institution (and other consolidated body) and the provisional consolidated accounts.

Both the provisional and definitive accounts for 2003 are presented as follows: Volume I contains the consolidated accounts, Volume II the Commission's accounts and Volume III the individual accounts of the other Institutions and bodies.

3.   ACCOUNTING PRINCIPLES

The objectives of financial statements are to provide information about the financial position, performance and cashflows of an entity that is useful to a wide range of users. For a public sector entity such as the European Communities, the objectives are more specifically to provide information useful for decision making, and to demonstrate the accountability of the entity for the resources entrusted to it.

If they are to present a true and fair view, financial statements must not only supply relevant information to describe the nature and range of an Institution's activities, explain how it is financed and supply definitive information on its operations, but do so in a clear and comprehensible manner which allows comparisons between financial years. It is with these goals in mind that the present document has been drawn up.

The accounting system of the European Institutions comprises general accounts and budget accounts. These accounts shall be kept in euro on the basis of the calendar year.

The budget accounts give a detailed picture of the implementation of the budget. They are based on the modified cash accounting principle. (1)

The general accounts show all charges and income for the financial year and are designed to establish the financial position in the form of a balance sheet at 31 December.

Article 124 of the Financial Regulation sets out the accounting principles to be applied in drawing up the financial statements:

However, the transitional provisions of the Financial Regulation indicate that these principles will apply gradually depending on technical possibilities in order to be fully effective for the budgetary year 2005.

For example, the financial statements for 2003 take account of certain elements of the principle of prudence and accrual accounting, such as value adjustments for entitlements, depreciation and the entry of carryovers in the accounts as charges for the financial year. The financial statements will gradually evolve so that the principle of accrual-based accounting will take full effect from 2005 onwards.

B.   ACCOUNTING RULES AND METHODS

1.   CURRENCY AND BASIS FOR CONVERSION

2.   REVENUE

3.   EXPENDITURE

4.   ECONOMIC OUTTURN FOR THE YEAR

The economic outturn shows the result of the Communities' activities by applying a number of elements of the accrual accounting principle. The explanatory notes specify which elements have been taken into account.

The Financial Regulation states that the accrual accounting principle will be gradually introduced by 2005. One of the objectives of the ongoing project to modernise the accounting system is the transition from the current system based on the modified cash principle to an accounting system based on the accrual principle.

The economic outturn consists of the budget outturn, the economic outturn of the ECSC in liquidation, the result of the adjustments and the result of borrowing and lending activities.

4.1.   Budget outturn

The budget outturn comprises two elements: the result of the European Communities and the result of the participation of the EFTA countries belonging to the EEA. In accordance with Article 15 of Regulation No 1150/2000 on own resources, this outturn represents the difference between:

The following are added to or deducted from the resulting figure:

The budget outturn is paid back to the Member States the following year.

4.2.   Result of adjustments

In the course of the year, the accounting is based on the cash principle. In order to give a more accurate picture of assets and liabilities, the financial situation and the result, a number of adjustments are necessary at year-end. These adjustments correct the items of capital spending and receipts charged to expenditure and revenue in accordance with the cash-based principle and allow non-budget expenditure and revenue to be entered in the accounts.

As a result of these adjustments, the annual accounts can be presented in accordance with the principle of modified accrual accounting, based on modified cash budget accounting.

4.3.   Result of borrowing and lending activities

Borrowing and lending activities are off-budget operations provided for in the Treaties. Pursuant to the principle of budgetary equilibrium, the Communities may not finance its activities by borrowing.

However, a number of provisions of the Treaties establishing the Communities have led to the creation of various instruments authorising the Commission, on behalf of the Communities, to borrow on the financial markets to make loans in order to enable the final recipients to benefit from the advantageous conditions that the Communities can secure on these markets.

The result of ‘borrowing and lending activities’ is mentioned separately as part of the economic outturn. The result is paid back to the general budget of the Communities. A reserve has also been set up for future risks.

4.4.   Economic outturn of the ecsc in liquidation

The economic outturn of the ECSC in liquidation represents the difference between its revenues and expenses for the year arising from the liquidation of its financial operations, investment movements and its contributions to the Research Fund for Coal & Steel. This result is not paid back to the Communities but kept within the ECSC in liquidation to finance its future activities.

5.   RULES ON VALUATION

Except where indicated in the explanatory notes to the balance sheet, the various headings are valued as follows:

6.   PRE-FINANCING

Pre-financing amounts for operational purposes are included in the year's expenditure and do not appear as assets in the balance sheet.

Pre-financing amounts to public or private intermediaries which had not been received by the final beneficiary at 31 December 2003 and which are included in the year's budget expenditure are entered on the assets side of the balance sheet as short-term assets, under sundry debtors.

7.   CONSOLIDATION

The consolidated accounts cover the accounts of the European Parliament, the Council, the Commission, the Court of Justice, the Court of Auditors, the Economic and Social Committee, the Committee of the Regions and the Ombudsman. Following the entry in force of the Treaty of Nice on 1 February 2003, the Member States have entrusted the European Commission with the management of the ECSC in liquidation. As a result, the financial statements of the ECSC in liquidation were consolidated in the European Communities accounts of 2003, with adjustment made to the 2002 comparative figures to reflect the consolidation of the ECSC in liquidation from 24 July 2002 onwards. The method used is that of full consolidation, in line with IPSAS 6.

Also consolidated for the first time in 2003 is the joint undertaking with the European Space Agency, Galileo. Reflecting the nature of this investment, and in compliance with IPSAS 8, the equity method of consolidation is used. Since 2002 the Communities' investment in the European Investment Fund has also been consolidated in Volume I using the equity method, in accordance with IPSAS 7.

Article 121 of the Financial Regulation provides for the consolidation of the Institutions and certain agencies set up in the Member States of the European Union. The scope of consolidation will be extended in 2005 to the bodies mentioned in Article 185 of the Financial Regulation. An analysis being conducted as part of the modernisation of the Communities' accounting system, in particular in accordance with the gradual introduction of IPSAS standards between now and 2005, will determine whether other bodies and entities are to be consolidated. The issue of whether or not certain other entities are to be consolidated will be referred, for an opinion, to the Accounting Standards Committee, a forum of experts in public-sector accounts set up as part of the modernisation project.

Not included on the balance sheet of the European Communities are the funds managed by the Commission on behalf of both the Sickness Insurance Scheme for staff of the Communities and the European Development Fund. At 31 December 2003 the total assets of both were EUR 224 million and EUR 18 billion respectively.

----

(1)  This differs from cash-based accounting because of elements such as carryovers.

(2)  In the case of the EFTA-EEA countries, the volume of appropriations carried over from year n to year n+1 is known after the accounts have been closed. As a result the calculation of the balance includes carryovers of appropriations from year n-1 to year n.

----

ANNEX 2

EXPLANATORY NOTES TO THE REPORTS ON IMPLEMENTATION OF THE BUDGET

A.   GENERAL BUDGET AND TYPES OF APPROPRIATION

The general budget, the main instrument of the Communities' financial policy, is the instrument which provides for and authorises the Communities' revenue and expenditure every year.

The budgetary procedure is set out in Article 272 of the EC Treaty which stipulates the sequence of stages and the time-limits which must be respected by the two arms of the budgetary authority: the Council and Parliament. Every year, the Commission estimates all the European Institutions' revenue and expenditure for the coming year and draws up a preliminary draft budget which it sends to the budgetary authority. On the basis of this preliminary draft budget, the Council draws up a draft budget which is then the subject of negotiations between the two arms of the budgetary authority.

The President of Parliament declares that the budget has been finally adopted making the budget enforceable. The task of executing the budget is mainly the responsibility of the Commission.

Unless otherwise stated, the following budgetary provisions refer to the Financial Regulation adopted by the Council on 25 June 2002 (OJ L 248, 16 September 2002, p. 1 and corrigendum OJ L 25, 30 January 2003, p. 43) which applies with effect from 1 January 2003.

1.   BUDGETARY PRINCIPLES

The general budget of the Communities is governed by a number of basic principles:

2.   BUDGET STRUCTURE

The budget consists of:

Each Institution's items of revenue and expenditure are classified according to their type or the use to which they are assigned under titles, chapters, articles and items.

A part of the funds of the ECSC in liquidation were placed at the disposal of the operational budget of the ECSC in liquidation. This operational budget was adopted annually by the Commission, after consultation with the Council and the European Parliament. The last budget was drawn up for the period of 1st January to 23 July 2002. As from 24 July 2002, the revenue and charges connected with the operational budget are included in the revenue and expenditure account of the ECSC in liquidation. The remaining commitments to be fulfilled are shown on the liability side of the balance sheet.

3.   STRUCTURE OF THE ACCOUNTS

Only the Commission budget contains administrative appropriations and operating appropriations. The other Institutions have only administrative appropriations.

The budget distinguishes between two types of appropriation: non-differentiated appropriations and differentiated appropriations.

Non-differentiated appropriations are used to finance operations of an annual nature (which comply with the principle of annuality). Differentiated appropriations were introduced in order to reconcile the principle of annuality with the need to manage multi-annual operations.

4.   ORIGIN OF APPROPRIATIONS

The main source of appropriations is the Communities' budget for the current year. However, there are other types of appropriations resulting from the provisions of the Financial Regulation. They come from previous financial years or outside sources.

4.1.   Final Budget Appropriations

—   Initial budget appropriations adopted

—   Transfers

Appropriations may be transferred between lines in accordance with the rules laid down in Articles 22 to 24 of the Financial Regulation. (3)

—   Amending budgets

The budget adopted may be amended or increased by an amending budget. The rules are set out in Articles 37 and 38 of the Financial Regulation.

—   EFTA appropriations

The agreement on the European Economic Area provides for financial contribution by its members to certain activities in the Communities' budget. The budget lines concerned and the amounts projected are published in Annex III of the Communities' budget. The lines concerned are increased by the EFTA contribution. Appropriations not used at the end of the year are cancelled and returned to the EEA countries.

4.2.   Appropriations carried over from previous year

—   Appropriations automatically carried over

These are non-differentiated payment appropriations which may be carried over automatically for one financial year only (no limits for the ECSC in liquidation) in accordance with Article 9(4) of the Financial Regulation.

—   Appropriations carried over by decision of the Institutions

An Institution may decide to carry over appropriations from the previous budget in one of two cases: if the preparatory stages have been completed (Article 9(2)(a) of the Financial Regulation) or if the legal base is adopted late (Article 9(2)(b)). Both commitment and payment appropriations may be carried over (Article 9(3) of the Financial Regulation).

4.3.   Revenue from third parties and work for third parties

—   Revenue from third parties

As with the EFTA appropriations, other countries have concluded agreements with the European Union involving a financial contribution to Communities' activities. The amounts received are considered to be revenue from third parties which is allocated to the budget lines concerned (often in the field of research) and may be carried over without limit (Article 10 and Article 18(a) and (d) of the Financial Regulation).

—   Work for third parties

As part of their research activities, the Communities' research centres may work for outside bodies, (Article 161(2) of the Financial Regulation). Like the revenue from third parties, the work for third parties is assigned to specific budget lines and may be carried over without limit (Article 10 and Article 18(d) of the Financial Regulation).

4.4.   Appropriations for re-use

These appropriations arose from the refund of amounts paid in error, proceeds from the supply of goods/services to other Communities' bodies, insurance payments received and revenue from lettings and publication sales — the amounts were assigned to the budget line which incurred the initial expenditure. Previously, these appropriations could be carried over for a period of one year only (under Article 27(2) of the 1977 Financial Regulation), (4) but from 2003, the new Financial Regulation converted them into assigned revenue (Article 10 and Article 18(e), (f), (g), (h), (i), and (j) of the Financial Regulation), which may be carried over without limit.

4.5.   Appropriations made available again as a result of repayment of payments on account

These were Communities' funds which had been repaid by the beneficiaries. These amounts were re-entered by a Commission decision (Art 7(7) of the 1977 Financial Regulation, Article 18(2) of the new Financial Regulation.) The amounts entered had to be used in the course of the financial year. Now and since 1 January 2003, repayments of payments on account are entered as assigned revenue (Article 10 and Article 18(2) of the Financial Regulation), which may be carried over without limit.

4.6.   Commitment appropriations made available again as a result of decommitments

This involves the re-entry of commitment appropriations concerning structural funds which have been decommitted. Amounts can be re-entered by way of exception in the event of error by the Commission or if they are indispensable for completion of the programme (Article 157 of the Financial Regulation).

5.   COMPOSITION OF APPROPRIATIONS AVAILABLE:

6.   BUDGET IMPLEMENTATION

Article 48(1) of the Financial Regulation states: ‘The Commission shall implement... the budget in accordance with this Regulation, on its own responsibility and within the limits of the appropriations authorised.’

Article 50 states that the Commission shall confer on the Institutions the requisite powers for the implementation of the sections of the budget relating to them.

6.1.   Execution of revenue

The budget takes over the revenue forecasts subject to any changes resulting from the adoption of amending budgets which adjust the forecasts in the initial budget in line with the reductions or increases in revenue established during implementation. The budget revenue covers appropriations for payment.

The revenue outturn comprises established entitlements, revenue actually collected against these established entitlements and the balance to be recovered.

The actual revenue for a financial year corresponds to the revenue collected against entitlements established in the course of the year and amounts collected against entitlements still to be recovered from previous years.

6.2.   Execution of expenditure

As with revenue, expenditure is forecast in the initial budget. The execution of expenditure shows how appropriations for commitments (5) and appropriations for payments (6) are changed, used, carried over and lapse during the year.

6.2.1.   Utilisation of appropriations

6.2.2.   Carryovers to the following year

Appropriations for commitments:

Some types of appropriation which are not committed may be carried over automatically. This is the case with revenue from third parties and assigned revenue (Article 10 of the Financial Regulation).

Carryovers may be authorised by the Institutions:

The budgetary authority must be notified of this decision (Article 9(5) of the Financial Regulation).

Appropriations for payments:

6.2.3.   Cancellation of appropriations

Any appropriations for commitment and for payment not used and not carried over are cancelled at year-end (Article 9(1) of the Financial Regulation).

7.   OUTSTANDING COMMITMENTS

With the introduction of differentiated appropriations, a gap developed between commitments entered into and payments made: this gap, corresponding to outstanding commitments, represents the time-lag between when the commitments are entered into and when the corresponding payments are made.

B.   FINANCIAL PERSPECTIVE

The 2003 financial year was the fourth covered by the financial perspective 2000-2006, concluded on 6 May 1999 between the European Parliament, the Council and the Commission, on the basis of the conclusions of the Berlin European Council of 24 and 25 March 1999 which called for tighter budgetary discipline and improvement of the budgetary procedure.

In concluding an agreement of this type, the Institutions agreed in advance on the main budgetary priorities for the following period and established a framework for Communities' expenditure in the shape of the financial perspective. The financial perspective shows the maximum amount and the composition of foreseeable Communities' expenditure.

As the initial financial perspective was drawn up in constant 1999 prices, point 15 of the Agreement states that each year the Commission will make a technical adjustment to the financial perspective in line with movements in the Gross National Income (GNI) of the European Union and prices.

However, it was agreed that a deflator of 2 % would be used for agriculture and the Structural Funds.

The overall ceiling on appropriations for commitments for 2003 comes to EUR 102,145 million, equivalent to 1.07 % of GNI.

The corresponding ceiling on the appropriations for payments for EU-15 comes to EUR 102,767 million, i.e. around 1.08 % of GNI.

The following table shows the adjusted financial perspective for EU-15 at 2003 prices and the adjusted financial perspective for EU-25 at 2005 prices.

C.   STRUCTURAL ACTIONS: THE PROGRAMMING PERIOD 2000-2006

The Communities' Structural Funds consist of the ERDF, the ESF, the EAGGF Guidance Section and the FIFG. (7) The Structural Funds come under heading 2 ‘Structural operations’ of the financial perspective, which also covers the Cohesion Fund. In the budget the Structural Funds are grouped together under Title B2-1.

This programming period is based on the new Structural Funds Regulation, the main elements of which are as follows:

1.   STRUCTURAL ACTIONS

The Structural Funds are the main instrument for attaining increased economic and social cohesion in the Communities. The Union supports three specific objectives with appropriations from the Structural Funds:

There is a special scheme covering restructuring in the fisheries sector outside Objective 1 regions. Rural development projects are implemented across the EU, financed by either the Structural Funds or the Common Agricultural Policy.

Other structural actions are Communities' initiatives covering the following fields:

2.   FINANCIAL PERSPECTIVE AND PROGRAMMING

The financial perspective for 2000-2006 sets out the overall and annual totals for all the Structural Funds. It was drawn up at constant 1999 prices and is thus adjusted every year by an index of 2 % (with a technical revision, if necessary, in 2003 for 2004-2006) in line with Communities' inflation.

The initial financial programming was based on the annual allocations in the financial perspective for all the Funds and corresponds to the financing plans in the programming documents initially adopted.

3.   COMMITMENT AND PAYMENT PROCEDURES

3.1.   Commitment procedure

The budget commitments, made in annual tranches, are based on the initial or revised financial plans in the programming documents. The first annual tranche is committed when the Commission approves the decision relating to the operation.

The Commission then commits the annual tranches by 30 April of each year and automatically decommits any commitments not used within two years.

3.2.   Payment procedure

The Commission makes a payment on account amounting to 7 % of the total contribution from the Structural Funds once the programme is adopted. This payment may be subdivided over two budget years. The payment on account will have to be reimbursed if no expenditure is declared within 18 months. The Commission then makes interim payments to reimburse actual expenditure certified by the Member State. The balance of 5 % is paid on the closure of the programme once all the documents required are submitted and approved by the Commission.

Payments are posted to the earliest open commitment.

D.   COMMENTS ON THE CONSOLIDATED REPORTS ON THE IMPLEMENTATION OF THE BUDGET FOR THE FINANCIAL YEAR 2003

REVENUE

The revenue of the general budget of the European Communities can be divided into two main categories: own resources and other revenue. This is laid down in Article 269 of the Treaty establishing the European Communities, which states that: ‘Without prejudice to other revenue, the budget shall be financed wholly from own resources.’ The main bulk of budgetary expenditure is financed by own resources. Other revenue represents only a minor part of total financing.

There are three categories of own resources: traditional own resources, the VAT resource and the GNI resource. Traditional own resources, in turn, comprise agricultural duties, sugar levies and customs duties. A correction mechanism in respect of budgetary imbalances is also part of the own resources system.

1.   Traditional own resources, Title 1 of the statement of revenue

Traditional own resources: All established amounts of traditional own resources must be entered in one or other of the accounts kept by the competent authorities.

For the separate account, the Member States send the Commission a quarterly statement that includes:

The information sent in by the Member States does not allow the amounts recovered during the year to be assigned to the year in which the entitlements arose. Hence the column for amounts received against carryovers in the table ‘Summary of the implementation of general budget revenue, 2003’ includes amounts received during the year and the amount of entitlements cancelled and replaced by the new amount of entitlements declared by the Member States when making their new statement. A value reduction is applied to own resources entitlements (see explanatory note to asset item VII.B.2 in the balance sheet).

When the traditional own resources from the separate account are recovered, they must be entered in the Commission's account with the treasury or the body appointed at the latest on the first working day following the 19th day of the second month following the month during which the entitlement was recovered.

2.   VAT resources and GNI resources

VAT own resources derive from the application of a uniform rate, for all countries, to the harmonised VAT base determined in accordance with the rules of Article 2(1)(c) of the Council Decision of 29 September 2000. The VAT base is capped at 50 % of GNI for all Member States.

The GNI resource is a variable resource intended to supply the revenue required, in any given year, to cover expenditure exceeding the amount collected from traditional own resources, VAT resources and miscellaneous revenue. The revenue derives from the application of a uniform rate to the aggregate GNI of all the Member States.

VAT and GNI resources are determined on the basis of forecasts of VAT and GNI bases made when the preliminary draft budget is being prepared. These forecasts are subsequently revised; the figures are updated during the budget year in question by means of an amending budget.

The final figures for the VAT and GNI bases are available in the course of the year following the budget year in question. The Commission calculates the differences between the amounts due by the Member States by reference to the final bases and the sums actually paid on the basis of the (revised) forecasts. These VAT and GNI balances, either positive or negative, are called in by the Commission from the Member States for 1 December of the year following the budget year in question. Corrections may still be made to the final VAT and GNI bases in subsequent years. The balances calculated earlier are adjusted and the difference is called in at the same time as the VAT and GNI balances for the previous budget year.

3.   UK correction

This mechanism reduces the own resources payments of the UK in proportion to what is known as its ‘budgetary imbalance’ and increases the own resources payments of the other Member States correspondingly. The budgetary imbalance correction mechanism in favour of the United Kingdom was instituted by the European Council in Fontainebleau (June 1984) and the resulting Own Resources Decision of 7 May 1985. The purpose of the mechanism was to reduce the budgetary imbalance of the UK through a reduction in its payments to the Communities.

The explanatory table for Chapter 15 in the consolidated summary of the implementation of the revenue budget shows each Member State's contribution to the UK correction.

4.   Adjustment of the European Communities' system of own resources

The Council Decision of 29 September 2000 on the system of the European Communities' own resources (8) was adopted following the Berlin European Council of 24-25 March 1999. Article 2(3) of this Decision states that Member States shall retain, by way of collection costs, 25 % of traditional own resources instead of 10 %. However the rate of 10 % remains applicable for the amounts of traditional own resources that should have been made available before 28 February 2001. This Decision entered into force on 1 March 2002, backdated to 1 January 2001.

In accordance with Article 42 of the Financial Regulation 1605/2002 (9), the 2003 budget, contrary to the budgets of the previous years, indicates only the net amounts of the traditional own resources. From this year on, the amount of the costs incurred by the Member States in the collection of own resources will no longer appear separately in the budget.

EXPENDITURE

This section describes the main categories of Communities' expenditure, classified by heading of the financial perspective.

Heading 1 —   Agriculture

Expenditure under heading 1 is financed by the Guarantee Section of the European Agricultural Guidance and Guarantee Fund (EAGGF).

Heading 2 —   Structural operations: the objective of economic and social cohesion

This expenditure is for structural aid measures, designed to promote better economic and social cohesion within the Communities. The Communities' contribution must be accompanied by national funding and so involves cooperation between the Commission and Member States' authorities.

Heading 3 —   Internal policies

It is primarily since the adoption of the Single European Act and with a view to speeding up the completion of the internal market that the Communities has broadened some of its existing policies — in the field of research, for example — or launched new policies. Since 1993 these internal policies have been brought together under a single heading of the financial perspective, forming an extremely diversified group.

Heading 4 —   External action

This heading of the financial perspective covers all Communities' expenditure in favour of third countries, except for enlargement-related expenditure on the candidate countries and expenditure under the European Development Fund (EDF). Enlargement-related aid has been given a specific heading in the financial perspective for 2000-06 (see ‘Heading 7: Pre-accession aid’). Some of these measures are of a horizontal nature (thematic), whereas others are defined by geographical areas.

The Communities' contribution of EUR 120 million to the Global Health Fund to combat AIDS, tuberculosis and malaria was paid in two instalments of EUR 60 million each, one paid in 2002 from general budget appropriations and the other in 2003 from the European Development Fund (EDF) budget. The EDF is not included in the Communities' budget.

Heading 5 —   Administrative expenditure

This heading of the financial perspective covers all the expenditure on the running of the Communities' Institutions. For the Institutions other than the Commission, these costs make up the bulk of their expenditure.

Heading 6 —   Reserves

This heading covers three types of reserve designed to leave the necessary margins available, beneath the total ceiling on expenditure of the financial perspective, to meet expenditure which could not be foreseen when the budget was drawn up. Each reserve has a clearly identified object in a specific field.

Heading 7 —   Pre-accession aid

As regards enlargement-related expenditure for the ten candidate countries from Central and Eastern Europe, a new heading, 7, has been created to cover the three pre-accession instruments established in the financial perspective for 2000-06: the agricultural instrument (SAPARD), the structural instrument (ISPA) and the Phare programme.

UTILISATION OF EXPENDITURE BY THE EUROPEAN COMMUNITIES

1.   Pre-financing payments and payments of balances

The new Financial Regulation draws a distinction between four different types of payment:

A distinction must be made in the accounts between these different types of payment at the time they are made; this will have the advantage of removing any uncertainty about the payment. The Accounting Officer will lay down accounting rules for the entry of pre-financing on the assets side of the balance sheet on the basis of Article 3(5) of the Regulation laying down detailed rules for the implementation of the Financial Regulation. The Commission will adapt its accounting system when these rules are adopted. Until then, it has presented the information as in the annual accounts for the previous financial year.

Pre-financing paid from the budget but not used at 31.12.2003

2.   Appropriations carried over relating to contributions by and work for third parties

Appropriations carried over from the previous financial year in respect of contributions by and work for third parties, which by definition never lapse, are included with the additional appropriations for the financial year. This explains the difference between carryovers from the previous year in the 2003 budget implementation statements and those carried over to the following year in the budget implementation statements.

3.   2003 budget outturn

The payment appropriations for re-use and appropriations made available again following the repayment of payments on account are disregarded when calculating the outturn for the year.

The EFTA-EEA part of the payment appropriations carried over by the Communities from 2003 to 2004 could not be included in the 2003 balance as this is subject to the approval by EFTA of the amounts in question, and this will not be given until mid-2004.

Total budget revenue for the year comes to EUR 93,469 million (2002: EUR 95,434 million.) Total budget expenditure comes to EUR 88,395 million (2002: EUR 83,770 million), when the negative expenditure under EAGGF Guarantee EUR 659 million (2002: EUR 597 million) is taken into account. This negative expenditure comprises: amounts recovered as a result of fraud and irregularities, correction of advances made on the basis of Article 7(4) of Regulation (EC) No 1258/1999, any profit deriving from sales from public stocks, the additional levy on surplus milk production and the financial consequences of clearance of accounts decisions.

The payment appropriations carried over which the Communities have cancelled include the appropriations corresponding to contributions by and work for third parties carried over from 2002 to 2003 (EUR 691 million) as these appropriations are included with the appropriations for the financial year (see also Point A, paragraph 4.3 Revenue from third parties and work for third parties).

Budget Outturn 2003 (including EFTA)

----

(1)  Appropriations for commitment = commitment appropriations + non-differentiated appropriations.

(2)  Appropriations for payment = payment appropriations + non-differentiated appropriations.

(3)  Regulation No 1605/2002 of 25 June 2002.

(4)  Financial Regulation of 21 December 1977

(5)  Commitment appropriations + non-differentiated appropriations.

(6)  Payment appropriations + non-differentiated appropriations.

(7)  ERDF: European Regional Development Fund.

ESF: European Social Fund.

EAGGF: European Agricultural Guidance and Guarantee Fund.

FIFG: Financial Instrument for Fisheries Guidance.

(8)OJ L 105, 7.10.2000.

(9)OJ L 248, 16.9.2002

(10)  Includes EUR 129 million paid to pre-accession countries.

----

ANNEX 3

EXPLANATORY NOTES TO THE BALANCE SHEET

COMMENTS ON THE CONSOLIDATED BALANCE SHEET FOR THE FINANCIAL YEAR 2003

Establishment of the balance-sheet

The balance sheet is drawn up in accordance with:

In connection with the modernisation of the Communities' accounting system and the shift towards application of the IPSAS standards for 2005, gradual changes in accounting methods are both inevitable and necessary. Some changes have already been made to the methods applied to produce the 2003 annual accounts. These changes are explained in the notes and comparative figures are provided.

Re-statement of the balance-sheet figures for 2002

Due to the consolidation of the ECSC in liquidation for the first time in 2003, the 2002 comparative figures for the balance sheet have been reclassified to include the relevant figures of the ECSC in liquidation at 31 December 2002. The adjustments to the headings were as follows:

ASSETS

LIABILITIES

A.   ASSETS

II.   INTANGIBLE FIXED ASSETS

Intangible fixed assets are identifiable non-monetary assets without physical substance. To be entered on the assets side of the balance sheet, they must be controlled by the Institution and generate future economic benefits for the European Communities.

Computer software developed within the Institutions does not constitute an intangible fixed asset, whereas a computer licence, governed by an inter-institutional framework contract for database management does, and so is included here.

Depreciation of intangible fixed assets (computer software) for the Publications Office is spread over three years (33 %), the standard practice for the Office's software — the rate applied by the other Institutions is 25 %.

The transfer between headings reflects a transfer from tangible to intangible assets made by the Committee of Regions — this is also reflected in the table for tangible fixed assets.

III.   TANGIBLE FIXED ASSETS

A.   Land and buildings:

Commission: In the absence of historical data on the costs of acquisition and the costs of annual improvements before 1998 in the Joint Research Centre, acquisition values are based on a valuation conducted by an outside firm at 31 December 1997. It has been possible to calculate the changes that occurred during the period 1998-2003.

The method of depreciation is as follows:

This method of valuation and depreciation, applied by Ispra in 2000, was used to value land and buildings of the JRC at Geel at end-2001.

In some countries the value of the land occupied by Delegations cannot be distinguished from the value of the building.

In May 1998 the Parliament invoked its purchase option in respect of a complex in Brussels (consisting of three buildings) for which the final investment cost (not including land) came to EUR 1,097 million. In two memoranda of understanding with the European Communities dated 23 July 1998, Belgium made a contribution to the purchase of the land and the development and construction costs for the third building. A clause stipulates that if Parliament were to relocate, either the land would be returned to the Belgian State for a payment of EUR 0.025, or the land and buildings would be put up for sale so that the market value of the land could be paid to the Belgian State. An adjustment has therefore been made for the value of the land, which is now entered in the balance sheet at EUR 0.025.

In December 2003 the Parliament invoked its purchase option for the Louis Weiss building in Strasbourg and the purchase agreement was signed in February 2004 — see below, under E. Finance Leases and similar entitlements.

There was an increase in the amount relating to the Parliament's buildings in 2003 of EUR 60.4 million relating to the purchase of the Kondrad Adenauer building in Luxembourg. The land is rented for the symbolic amount of EUR 1 per year.

The Council building in Brussels was definitively accepted as fully completed on 17 December 2003.

As regards the land of this building, the Council's General Secretariat based itself on Article 24 of Commission Regulation No 2909/2000, which lays down the principle that there is no need to value a plot of land or a building which has been transferred subject to conditions precedent.

The transfer conditions are that should the Council relocate, either:

B. C. D.   Plant, machinery and tools

The depreciation figure recorded by DG Press in 2002 included some of the adjustments for earlier years. Shelving had been entered under ‘Furniture and vehicles’, but in 2003 it was reclassified as ‘Other tangible fixed assets’.

As in 2002, computer hardware acquired on the DG Taxud budget, used for specific purposes and located outside Commission premises appears under tangible fixed assets. The net book value at 31 December 2003 is EUR 463,475 (at 31 December 2002 EUR 433,898.)

Following the physical stocktaking already carried out in the Delegations, there is a correction under ‘Other changes’ for items acquired before 2003 which had not been entered in the inventories of the Delegations concerned at 31 December 2002.

For approximately 20 % of the Delegations, there is no information about tangible fixed assets at 31 December 2003. An initiative is underway since January 2003 to improve the quality and exhaustiveness of information provided by Delegations and this, as well as a specific inventories project in 2004, should help to resolve this problem in the future. The total amount of tangible fixed assets included for the Delegations at 31 December 2003 is EUR 57.7 million.

E.   Finance leases and similar entitlements

The criterion for the classification of property covered by leases as fixed assets is based on the extent to which the risks and rewards incident to ownership of the leased asset lie with the lessor or the lessee and depends on the transaction rather than the form of the contract (1).

Assets covered by a finance lease which does not transfer substantially the risks and rewards incident to their ownership to the lessee and assets covered by a lease of over five years are entered in the off-balance-sheet commitments annex to the financial statements.

A correction was made to the closing balance at 31 December 2002 of certain Commission buildings held under finance leases. This was required as it had been observed that the method of calculation of the outstanding liability relating to these leases had been incorrect. The result had been that the total finance lease liability had been understated at 31 December 2002 by EUR 188.6 million. This correction has been made to the results carried forward from 2002.

As shown in the ‘Tangible fixed assets’ table below, the acquisition value at year-end is EUR 2,052.9 million. The table concerning charges still to be paid in respect of finance leases and similar entitlements below gives the details: the total is made up of EUR 1,970.3 million ‘Land and buildings’, EUR 78.9 million ‘Plant, machinery and tools’, EUR 0.2 million ‘Furniture and vehicles’ and EUR 3.5 million ‘Computer hardware’.

A new lease for a Commission building in Brussels signed in 2003, with a discounted value of minimum payments due of EUR 37.2 million, is included under this heading. The contract was signed in February 2003 for 27 years, with a purchase option for the value of EUR 1.

The Charlemagne case was resolved in September 2003 by negotiation of the main terms of a settlement agreement between the Commission, the owner of the building and the general contractor. The settlement was formalised in May 2004 (see also Annex 4 point 11.2).

The main building occupied by the Publications Office is not included in the balance sheet but in the ‘Off-balance-sheet commitments — contingent liabilities’ annex to the financial statements. Although the Office has two purchase options (in 2006 and in 2010) with values based on the market value, it is not considered that the risks and rewards incident to ownership of the asset are substantially transferred to the Office. The classification will be reviewed in 2006, when the first purchase option may be taken up.

In March 1994 the European Parliament signed a long-term leasing contract with a purchase option for a complex in Strasbourg. In accordance with Commission Regulation No 2909/2000 of 29 December 2000 on the management in the accounts of the non-financial fixed assets of the European Institutions (OJ L 336, 30.12.2000 p. 75), this complex has been entered in the balance sheet as the risks and rewards incident to ownership of the asset are substantially transferred to the lessee. The asset was valued on the date on which the lease entered into force at the discounted value of the minimum lease payments due. On the balance sheet date, Parliament and the developer had not managed to agree on a final cost for the complex. The value entered in the balance sheet is an estimate of the cost. This value was calculated in the light of the actual payments made and payment forecasts based on documents from banks and of a rate of discount deriving either from the interest rate charged by the banks or an estimate.

As stated above, the costs for the building and the specific fittings of the complex in Strasbourg are estimates. According to the data available in 2002, a distribution of values of EUR 2.5 million was transferred from specific fittings to the building. Up to 31 December 2001 an annual depreciation rate of 25 % was applied to specific fittings; hence the net value of these fittings at 31 December 2001 was zero. On the basis of additional information obtained, the depreciation of the specific fittings was recalculated using the rates of 25 %, 12,5 % and 10 % depending on the category of equipment, and these were entered in the balance sheet at 31 December 2003 at a net value of EUR 10 million.

As stated above, in December 2003 the Parliament invoked its purchase option for the Louis Weiss building in Strasbourg; however since the purchase agreement was signed in February 2004 the building remains under this heading at 31 December 2003, although with a reduction in value of EUR 10.8 million to reflect the agreed purchase price.

On 15 November 1994 the Court of Justice signed a lease/purchase contract with the Luxembourg Government for three annexes of the Palais building. The Court will rent the buildings for the whole term of the agreement and will be able to exercise the purchase option once the selling price has been paid in full, and no later than 31 December 2015. The selling price is determined by an independent expert.

These buildings have been entered on the assets side of the balance sheet and the charges to be paid, recorded on the liabilities side, are estimated at EUR 32.57 millions on the basis of a valuation by the independent expert.

The Economic and Social Committee (ESC) and the Committee of the Regions (CoR) have entered the finance leasing contracts for their Belliard and Montoyer buildings on the assets side of the balance-sheet. They are co-financed on the following scale:

There will be no depreciation on the Belliard building until the work in progress is accepted.

On 17 December 2003, the ESC and the CoR jointly signed a 27 year finance lease contract with total lease payments of EUR 48 million and a purchase option, commencing 1 January 2004 for a new building in Brussels.

F.   Other tangible fixed assets

The Council has an operational lease for a building in Brussels. Alteration work on this building in 2003 totalling EUR 3.8 million was included under this heading at year-end.

G.   Fixed assets under construction and advances in respect of tangible fixed assets

The Commission has paid an advance of EUR 8.2 million for the construction of the new offices of the delegation in Abuja. This building will be shared with other Member States and their part of the advance already paid by the Commission will be reimbursed.

On 26 March 2003 the Council signed a convention for the construction of a building in Brussels and the finance lease covering this building. The estimated cost is EUR 233 million (including land) and an advance of EUR 8.5 million has been paid and included under this heading.

The Court of Auditors has entered EUR 28.5 million under this item for the funds required for the planned extension of the Court's building. The bulk of the funds have been placed at the disposal of the project manager by means of a transfer to a bank account opened for this purpose. The interest yielded by this account will be recorded as budget revenue.

The Economic and Social Committee has paid an advance of EUR 26 million to finance renovation of the Belliard building. This figure is included with the fees provided for in the finance lease contract mentioned in Item E ‘Finance leases and similar entitlements’.

Charges still to be paid in respect of finance leases and similar entitlements are shown in long-term and short-term liabilities in the balance sheet. They break down as follows:

FINANCE LEASES & SIMILAR ENTITLEMENTS

ASSETS AND LIABILITIES

IV.   FINANCIAL FIXED ASSETS

This heading covers investments made with a view to establishing permanent links and/or seen as supporting the activities of the European Communities.

It also includes permanent guarantees and advances granted and the net assets of the Guarantee Fund. A distinction should be drawn between guarantees granted by the European Communities to third parties and the Guarantee Fund, which is designed to cover risks associated with loans granted to non-member countries.

A.   Investments in related organisations

—   European Bank for Reconstruction and Development (EBRD) subscription

The EBRD was given initial capital of EUR 10 billion, of which 3 % was subscribed by the Communities. The proportion of this capital called up is 30 %.

On 15 April 1996, at their annual meeting, the Bank's governors decided to double the amount of authorised capital. Under this decision, the Communities have subscribed for 30,000 additional shares with a face value of EUR 10,000 each. This operation involves called-in shares and callable shares in the following proportions: 22.5 % of the subscribed shares represent the number of called-in shares and the remainder will be callable shares.

This item covers the full amount of the Commission's subscription (EUR 157.5 million) to the EBRD's capital which has been called up and partially paid (EUR 130.5 million). Payments outstanding on the proportion of capital called up of EUR 27 million are recorded under short-term liabilities (EUR 8.4 million) and long-term liabilities (EUR 18.6 million). Payments outstanding on non-called up capital amount to EUR 442.5 million and are included as contingent liabilities in the off balance sheet.

The 3 % shareholding in the EBRD is valued at cost, as it represents a financial instrument under IPSAS 15 and IAS 39.

—   European Investment Fund (EIF) subscription

The EIF is the European Union's financial Institution specialising in risk capital and guarantees to SMEs. Under the Council Decision of 6 June 1994 the European Communities, represented by the Commission, subscribed for a total of ECU 600 million to the EIF's capital. This represents 30 % of the EIF's capital. The Commission has paid all the called-up capital, which amounts to 20 %.

Under an agreement between the Commission and the EIB signed in 2000, the European Communities have a ‘put option’ on its shares in the EIF. On 30 June 2005 the Commission will be entitled to sell its shares at a unit price of EUR 315,000, which is 57.5 % above the purchase price.

Payments outstanding on non-called up capital (80 %) amount to EUR 480 million.

The equity method is used to value the Communities' share in the EIF, in accordance with IPSAS 7. Under the equity method the shareholding is initially recorded at cost and is then adjusted to take into account changes subsequent to the investor's acquisition of a share of the net assets of the controlled entity. The result of adjustments reflects the investor's share of the results of the controlled entity.

Under the equity method, the shareholding is valued at 30 % of the EIF's own capital. The EIF's balance sheet for 2003 shows a total of EUR 567.3 million of own capital, including profits of EUR 19.7 million for the year. The Communities' share is 30 % of this amount (EUR 170.2 million), of which EUR 5.9 million concerns the result for 2003. A dividend of EUR 2.25 million relating to the financial year 2002 was received in 2003.

—   Galileo Programme

For the implementation of the development phase of the Galileo programme, a joint undertaking, within the meaning of Article 171 of the Treaty, was set-up by the Council Regulation 876/2002 for a period of 4 years (2002 to 2006.) The aim of this legal entity is to ensure the unity of the administration and the financial control of the Galileo programme for its development, and to this end to mobilise the funds assigned to that programme. The founding members are the European Communities, represented by the Commission, and the European Space Agency (ESA). The Commission, through grants given under the trans-European networks (TEN) budget, makes available to the Galileo undertaking the requested funds to co-finance the related activities of the development phase.

The Communities have subscribed for EUR 520 million of the capital of this entity and at 31 December 2003 EUR 122.3 million had been paid, with the balance, EUR 397.7 million uncalled. In the 2002 annual accounts the EC's initial investment of EUR 120 million in the project had been treated as an advance as the operations were not yet started.

As with the EIF, it is accounted for using the equity method of consolidation. For 2003 the Communities' share of the loss of the joint undertaking was EUR 49.1 million. Thus the value of the investment at 31 December 2003 was EUR 73.2 million being the initial investment of EUR 120 million plus interest earned on the investment converted into capital (EUR 2.3 million) less the share of the loss.

B.   Other financial fixed assets

B.1.   Subscriptions and participations

This heading includes subscriptions and participations purchased to help beneficiaries develop their business activities.

—   ECIP programme

This heading covers Communities' contributions to the provision of equity and subordinated loan capital for joint ventures set up under the European Community Investment Partners Programme (ECIP). The ECIP programme was halted early, the only extension being its winding-up. The programme cannot be definitively wound up until the last joint venture has been completed. Most of the operations have already been wound up, recovered or converted into definitive grants and work on the remaining open files is ongoing.

As part of this review of open files it has been observed that many of the amounts previously shown as participations do not fully meet the criteria to be treated as such. In most cases the amounts forwarded to beneficiaries were in fact interest-free advances. Thus in 2003 EUR 24.8 million of amounts that had been previously classed under this heading in 2002 were transferred to budgetary loans (see assets V.A.) and a correction of EUR 4.1 million had to be made. For the remaining investments, it has proved extremely difficult to calculate reliably the real value of ECIP equity contributions, and in accordance with the principle of prudence, a 100 % write down has been applied.

—   Eurotech Capital, Venture Consort and JOP

The purpose of the Eurotech Capital instrument is to encourage the private funding of trans-national high-technology projects developed by small and medium-sized undertakings through a network of risk-capital investors. It covers payments made since 1990 in the form of pre-financing repayable under certain circumstances when contracts run out. The Communities' contributions do not constitute equity stakes in the relevant venture capital companies. Rather they represent a fixed proportion of certain investments of these venture capital companies in third companies. These contributions are reimbursable according to conditions specified in the contracts between the Communities and these venture capital companies. Amounts that are held by the venture capital companies (EUR 3.7 million) are shown under ‘Sundry Debtors,’ see VII.B.4.

The purpose of the Venture Consort instrument is to promote the trans-national syndication of risk-capital operators in small and medium-sized enterprises. It covers contributions since 1985 for investments in small and medium-sized enterprises (SMEs) engaging in innovatory projects.

The purpose of the Phare-Tacis Joint Venture programme (JOP) is to foster the creation and development of joint ventures in the countries of Central/Eastern Europe and former Soviet states.

Since all three are risk capital operations, it is very difficult to assess the real present value of the contributions. In accordance with the principle of prudence, a 100 % write down has been made for the value of these contributions, which are therefore entered in the balance sheet at zero.

—   Other financial instruments

The ‘SME Finance Facility / SME financing mechanism’ under the trusteeship of the EBRD is designed to encourage investment funds to grow and to retain over the long term the capital investments they make in SMEs in the Phare candidate countries. The programme is financed jointly by the Commission, the European Bank for Reconstruction and Development (EBRD), the Council of Europe Development Bank (CEB), in association with the Kreditanstalt für Wiederaufbau (KfW) and the European Investment Bank (EIB).

The ‘Growth & Employment — ETF Start up facility’ (1998-2000 programme) and ‘MAP Equity — ETF Start up facility’ (2001-2005 programme), under the trusteeship of the EIF support the creation and financing of start-up SMEs by investing in suitable specialised venture capital funds.

The participation in Eurotunnel is held by the ECSC in liquidation.

B.2.   Other securities

This heading comprises two GBP commercial papers issued by the EIB and held by the ECSC in liquidation to hedge the payments to be made on GBP borrowings of the same amounts. The papers have settlement dates of 2017 and 2019 respectively.

INVESTMENTS

B.3.   Guarantees and advances granted

GUARANTEES AND ADVANCES GRANTED

—   Guarantees and advances granted

This covers fixed assets such as deposits and guarantees paid and permanent advances for building charges.

—   Guarantee Fund

Council Regulation (EC, Euratom) No 2728/94 of 31 October 1994 set up a Guarantee Fund for external actions to repay the Communities' creditors in the event of default by beneficiaries of loans granted or guaranteed by the Communities.

This facility covers loans guaranteed by the Communities as a result of a Council Decision, in particular EIB lending operations outside the European Union and loans under macro-financial assistance (MTA loans) and Euratom financial assistance outside the European Union.

In accordance with Article 6 of the Regulation the Commission entrusted financial management of the Fund to the European Investment Bank (EIB) under an agreement signed between the Communities and the EIB on 23 November 1994 in Brussels and on 25 November 1994 in Luxembourg.

Regulation (EC, Euratom) No 2728/94 on the Guarantee Fund, as amended by Council Regulation (EC, Euratom) No 1149/1999 of 25 May states that with effect from 1 January 2000 the Fund is endowed by payments from the general budget equivalent to 9 % of the capital value of the operations. The same Regulation sets the target amount at 9 %. In accordance with the Regulation, ‘if, at the end of a year, the target amount is exceeded, the surplus shall be paid back to a special heading in the statement of revenue in the general budget of the European Communities’.

The Inter-institutional Agreement of 6 May 1999 on budgetary discipline and improvement of the budgetary procedure provided that the general budget of the European Communities should include a guarantee reserve to cover loans to non-member countries. This reserve is intended to cover the requirements of the Guarantee Fund and, where necessary, activated guarantees exceeding the amount available in the Fund, so that these amounts may be charged to the budget.

The Fund is endowed by payments from the Communities' budget, the proceeds from interest on investments made from the Fund's assets, and sums recovered from defaulting debtors for whom the Fund has had to activate its guarantee.

The entry on the assets side of the Commission's balance sheet of EUR 1,592 million (2002: EUR 1,645 million) represents the Fund's net assets at 31 December 2003. This amount comprises the repayable surplus in excess of the target amount at 31 December 2003, being EUR 223 million (2002: EUR 263 million).

Since the Fund may be called on to cover defaulting debtors at any time, a provision has been created for risks and charges in line with the principle of prudence. This provision of EUR 1,369 million (2002: EUR 1,382 million) corresponds to the target amount (2) for the Guarantee Fund calculated on the basis of the amount outstanding at 31 December 2003. The difference between the amount of the Fund shown on the assets side and the amount of the provision corresponds to the surplus to be repaid to the budget (EUR 223 million); it is entered under own capital.

V.   LONG-TERM ASSETS

This heading covers amounts owed to the European Communities and maturing in over one year.

A.   Loans granted from the budget

SPLIT OF LONG-TERM & SHORT-TERM LOANS

This item principally covers risk capital loans on special terms granted as part of cooperation with non-member countries. (3) It also covers loans granted under the ECIP programme to promote the setting-up of investment joint ventures in Asia, Latin America, the Mediterranean region and South Africa.

The ECIP programme was halted early, the only extension being its winding-up. The programme cannot be definitively wound up until the last joint venture has been completed. Most of the operations have already been wound up, recovered or converted into definitive grants and work on the remaining open files is ongoing.

As part of this review of files it has been observed that many of the amounts previously shown as loans do not fully meet the criteria to be treated as such. In most cases the amounts forwarded to beneficiaries were in fact interest-free advances. Thus in 2003 EUR 67.6 million of amounts that had been previously classed under this heading in 2002 were transferred to the heading ‘Sundry Debtors’, see VII.B.4. Similarly EUR 24.8 million of amounts previously classed as investments are now shown under this heading.

It has proved extremely difficult to calculate the real value, i.e. the recoverability, of these ECIP loans before the review is complete and so, in accordance with the principle of prudence, a 100 % write-down has been applied.

Also included here in 2002 were amounts granted under the MEDIA I, MEDIA II and MEDIA Plus (third phase of the MEDIA programme) programmes for measures to promote the development of the audiovisual industry. Following a legal and financial review of MEDIA programmes, for amounts of EUR 26.7 million relating to MEDIA I it was considered that these do not fully meet the criteria to be treated as loans as the contracts stipulate that repayments depend on the always uncertain success of the projects. Therefore, an adjustment has been made for these loans which have been written off and thus removed from this heading. Similarly, for MEDIA II and Plus it has become apparent that EUR 50 million (with a value write-down of EUR 34.2 million) of the amounts concerned do not meet the criteria to be classed as loans, and so are shown under ‘Sundry Debtors’, see VII.B.4. A further EUR 22.4 million concerning recovery orders raised was also transferred to Sundry debtors.

Loans for migrant workers are also included under this heading.

B.   Loans granted from borrowed funds

SPLIT OF LONG-TERM & SHORT-TERM LOANS

Under the EC Treaty, the Council, acting unanimously, has the power to adopt guarantee or borrowing programmes if it considers this necessary to attain the objectives of the Communities. Communities borrowings are direct commitments by the Communities itself and not by any individual Member State.

Under an agreement with the EIB, the latter bears the risks of the NCI treasury instrument.

Changes in amounts of loans granted by the European Communities:

LOANS GRANTED

C.   Other long-term assets

SPLIT OF OTHER LONG-TERM & SHORT-TERM RECEIVABLES

1.   Communities' pensions

Under Article 83 of the Staff Regulations, benefits paid under the pension scheme are charged to the budget of the Communities (Chapter A-19 (Pensions and severance grants) covering all the Institutions). Officials contribute one third towards the long-term financing of the scheme by means of a compulsory levy set at 9.25 % of the basic salary. Member States jointly guarantee payment of such benefits in accordance with the scale laid down for financing such expenditure (first subparagraph of paragraph 1). For this reason a receivable from the Member States is shown on the balance sheet. Due to a new actuarial valuation of the scheme at 31 December 2003 the receivable has risen to EUR 22.8 billion (from EUR 19.5 billion in 2002) to reflect the increase in the scheme's estimated liabilities. Such a valuation is made every 5 years.

Thus, the method applied in 2003 to account for Communities' pensions is the same as in 2002: a provision on the liabilities side to cover the debt, and an entry on the assets side to reflect the undertaking given by Member States to the Communities to pay Communities' pensions. Under the plan for the modernisation of the accounting system, the method to be applied will be adopted by the Commission's Accounting Officer after obtaining the opinions of the Accounting Officers of the other Institutions and the Accounting Standards Committee.

2.   Other amounts

This is primarily the financial contribution by the Belgian State to the purchase and fitting-out of the D3 building for the Parliament, which came to EUR 176 million and is to be paid over ten years ending in 2008. At year-end EUR 80.8 million is due greater than one year (2002: EUR 98.6 million), while a further EUR 20.7 million (2002: EUR 20.4 million) falls due within one year.

VI.   STOCKS

STOCKS

The stock of vaccines and antigens held at the Food and Veterinary Office of DG SANCO has a net book value of EUR 6.9 million. It was valued in accordance with the implementing rules for the Commission's accounting and consolidation manual (valuation at most recent acquisition price) and incorporated into the balance sheet for the first time in 2002.

Apart from the above, the heading mainly covers the scientific and technical equipment of the Joint Research Centre. The fissile materials at Petten were valued at EUR 3.2 million (2002: EUR 2.08 million) using the purchase price, since they are consumed on a regular basis. Write-downs totalling EUR 41.8 million (2002: EUR 35.97 million) were made in respect of the Joint Research Centre in Geel in accordance with the rules in the Commission's accounting and consolidation manual.

The stock of publications held by the Publications Office is valued at zero following an analysis made in 2001. This relates to publications stock held and/or managed by the Office for which a charge is made (paying stock). Publications to be distributed free of charge are not taken into account.

VII.   SHORT-TERM ASSETS

A.   Long-term receivables falling due in less than one year

These amounts represent the portion of the long-term receivables that fall due during the following 12 months — see tables above for more details.

B.   Current assets

B.1   Advances paid to Member States

This amount represents an advance of EUR 4.9 million (2002: EUR 355 million) paid to various Member States' authorities in connection with the costs of the eradication of foot and mouth and other animal diseases — see also Point 8, off-balance-sheet commitments.

B.2   Amounts owed by member states

a.   EAGGF Guarantee receivables

This item covers:

B.3   Amounts owed by non-consolidated communities bodies

This heading contains various amounts owed to the European Communities by Communities' bodies not covered by the scope of consolidation, for which the Institutions pay certain expenditure, which will subsequently be repaid, totalling EUR 29.3 million (2002: EUR 11.2 million).

B.4   Sundry debtors

SUNDRY DEBTORS

This item covers receivables arising from the activities of the European Communities.

C.   Other receivables

This item basically comprises amounts owed to the European Institutions by their staff or by insurance bodies.

OTHER RECEIVABLES

VIII.   CASH INVESTMENTS

The breakdown by maturity date is as follows:

CASH INVESTMENTS

IX.   DISPOSABLE ASSETS

DISPOSABLE ASSETS

This heading covers all the funds which the Institutions keep in their accounts in each Member State and EFTA country (Treasury or central bank), as well as in current accounts, imprest accounts and petty cash. The proceeds of loans made from borrowed funds and loans granted to improve housing conditions for migrant workers are also included. Amounts received in connection with fines issued by the Commission for which the case is still open amount to EUR 1,708 million and are kept in specific current accounts.

Funds totalling EUR 1.4 million kept in imprest accounts with two banks outside the Communities which have gone bankrupt will probably prove irrecoverable. As a result, and in accordance with the principle of prudence, an adjustment has been made for these accounts and entered on the assets side (reducing the value of the 'Imprest accounts' heading).

B.   LIABILITIES

I.   OWN CAPITAL

The own capital heading consists of:

A.   The economic outturn for the year

The economic outturn breaks down as follows:

ECONOMIC OUTTURN OF THE EUROPEAN COMMUNITIES

The budget outturn is EUR 5,469.8 million and is set out in detail in the budget outturn 2003 table.

Exchange differences included in the economic outturn are the result of payments and financial assets in currencies other than the euro, in particular those of the three Member States which have not yet adopted the euro.

As regards financial assets, the value in euros of the national currencies varies each day in line with the market exchange rates. Financial assets are revalued for the purposes of the balance sheet at the exchange rates on 31 December.

The Commission enters payments at the monthly rates which are inevitably different from the market rates.

The result of adjustments breaks down as follows:

RESULT OF ADJUSTMENTS

The result of borrowing and lending activities breaks down as follows:

THE RESULT OF BORROWING AND LENDING ACTIVITIES

The allocation of the result of borrowing/lending operations for 2003 was not known at the date of closure.

The result of borrowing/lending operations for 2002 was allocated as follows for the various instruments:

ALLOCATION OF THE BORROWING & LENDING ACTIVITIES RESULT FROM THE PREVIOUS YEAR

A summary of the revenue and expenditure account of the ECSC in liquidation for 2003 is shown below (note that its result for 2002 relate to the period from 24 July to 31 December only, as it was only from 24 July that the assets were passed to the Communities):

ECSC IN LIQUIDATION REVENUE & EXPENDITURE ACCOUNT

B.   Outturn carried over from previous financial years

This covers only the cumulative outturn of economic adjustments given that the budget outturn is repaid to the Member States and that the result of borrowing and lending activities is transferred partly to the reserves and partly to budget revenue.

The result of adjustments carried over from previous years has been updated to correct for an error found in the lease liability amount at 31 December 2002.

MOVEMENT IN RESULTS CARRIED FORWARD FROM PRIOR YEARS

C.   Reserves

II.   PROVISIONS FOR RISKS AND CHARGES

PROVISIONS FOR RISKS AND CHARGES

Guarantee Fund

Since the Fund may be called on to cover defaulting debtors at any time, a provision has been created for liabilities and charges in line with the principle of prudence. This provision of EUR 1,369 million (2002: EUR 1,382 million) corresponds to the target amount (8) for the Guarantee Fund calculated on the basis of the amount of loans outstanding at 31 December 2003. The difference between the amount of the Fund shown on the assets side and the amount of the provision corresponds to the surplus to be repaid to the budget i.e. EUR 223 million (2002: EUR 263 million) is entered under own capital.

Decommissioning of JRC nuclear facilities

In 2002 a consortium of independent experts conducted a study into the estimated costs of the decommissioning of the JRC nuclear facilities and waste management programme — their report was received in mid-2003. For the 2002 annual accounts, the previous provision of EUR 570 million was amended to the expert's estimate of EUR 1,145 million recommended in this report. The updated provision also included EUR 76 million as an estimate of the cost required for the ‘green field’ option, i.e. total destruction of all the buildings. While the value of the provision at 31 December 2002 reflected this estimate less the EUR 11.4 million costs then incurred, i.e. EUR 1,133.6 million, for 2003 it was decided to fully apply IPSAS rules, which meant that the provision was indexed for inflation (at a rate of 2.5 %) and then discounted to its net present value (at 5 %). This resulted in a revised amount for the provision of EUR 833 million. Thus the value of the provision at 31 December 2003 is this amount of EUR 833 million less the costs incurred to date of EUR 43.5 million, giving EUR 789.5 million.

In view of the estimated duration of this programme (around 30 years), it should be pointed out that there is some uncertainty about this estimate, and the final cost could be different from the amounts currently entered.

Pensions

At 31 December 2003, the rules concerning the Communities' pension scheme are defined by the Staff Regulations of Officials of the European Communities, and in particular chapter 3 ‘Pensions’ of title V ‘Emoluments and officials' welfare benefits’ and Annex VIII ‘Rules of the pension scheme’. They are directly applicable in all Member States.

The arrangement covers the various types of pensions (seniority, disability, survival).

In accordance with Article 83 of the Statute, the payment of the benefits provided for in the pension scheme constitutes a charge to the Communities' budget (via the inter-institutional chapter A.19 ‘Pensions and grants severance’). Member States guarantee the payment of these benefits collectively according to the scale fixed for the financing of this expenditure (§ 1, first subparagraph). In addition, officials contribute one third to the long-term financing of this scheme via a compulsory contribution.

For 2001 and 2002, the provision in respect of the estimated amount of pension rights was based on the applicable rules of the old statute. As from 1 May 2004, new Staff Regulations of the officials, including in particular reform of the Communities' pension scheme, will be in force.

The liabilities under the Communities' pension scheme were the subject to an actuarial valuation by independent experts at 31 December 2003 also on the basis of the applicable rules of the old statute. This evaluation covered the benefits connected with seniority, disability and survival and was carried out in accordance with the methodology of IAS 19. This accounting standard requires the employer to determine his actuarial commitment on an ongoing basis, taking into account both the promised benefits during the active lifetime of employees, and foreseeable increases in salaries.

The actuarial valuation method used to calculate this liability is known as the projected unit credit method (or accumulated entitlements method). The results obtained within the framework of this study were compared with the estimates based on the previous actuarial valuation at 31 December 1997.

Liabilities cover the rights previously defined for the following persons:

The principal actuarial hypotheses used in the valuation were as follows:

The two principal impacts are:

The calculations of gross pensions and family allowances are based on the provisions of the Staff Regulations.

Other provisions

The other provisions concern mainly an estimate of the Communities' contribution to the Emergency Fund for foot and mouth and other animal diseases of EUR 102.1 million relating to various Member States (2002: EUR 418.6 million) — see also Annex 4, Off-balance-sheet commitments, Point 8. The balance relates to a provision for amounts to be paid back to Member States concerning the procedure for correcting EAGGF advances.

Provisions of the ECSC in liquidation

These provisions cover borrowings not covered by a guarantee from Member States (EUR 243 million), a provision for bank costs of EUR 0.3 million, a provision for the Research Fund for Coal & Steel of EUR 116.5 million and a provision for fines being appealed of EUR 3.8 million.

III.   LONG-TERM LIABILITIES

This heading includes liabilities due in more than one year.

LONG-TERM LIABILITIES

A.   Borrowings

This heading includes borrowings which fall due for payment in greater than one year's time. The detailed movements in borrowing operations in 2003 are as follows:

MOVEMENT IN BORROWING OPERATIONS

The amounts outstanding on borrowings at 31 December 2003 are entered under long-term liabilities in the case of loans due in more than a year and under short-term liabilities in the case of loans due in less than one year. Liabilities from borrowings are guaranteed by the Communities' budget.

B.   Other long-term liabilities

Staff funds: This heading covers the unemployment fund for temporary staff at all the Institutions and the welfare fund for Commission local staff in non-member countries.

Deposits and guarantees received: These are sums deducted as guarantees for the payment of construction work and the guarantee accounts for accounting officers, delegate accounting officers and imprest administrators.

Financial instruments: This item covers a liability relating to the MTA instrument.

Leasing: This item covers leasing liabilities due in greater than one year (see note III.E. Assets).

EBRD Subscriptions: This item covers the payments still to be made on the part of the capital subscribed by the Commission which has been called in (see note IV.A. Assets).

Other: As it has invoked its purchase option for a building, Parliament must repay the cost of investment (see note III.A. Assets). Also included here is a tax liability owed by the Commission to the Brussels Capital region of EUR 3.2 million (with a further EUR 3.5 million falling due in 2004.)

SPLIT OF LONG-TERM & SHORT-TERM LIABILITIES

IV.   SHORT-TERM LIABILITIES

A.   Long-term liabilities falling due in less than one year

This heading includes borrowings which fall due for payment in less than one year's time, long-term leasing debts falling due within the year, subscriptions to EBRD capital and the purchase of Parliament's building complex (see table above).

B.   Other short-term financial liabilities

Prior to 2003 this item covered payments booked to the budget in the current year but only effected by the Accounting Officer between the closure of the accounts and 15 January of the following year. However, the Financial Regulation that came into force from 1 January 2003 states that payments can only be made up to 31 December of the financial year. Thus this amount does not exist this year.

C.   Current liabilities

C.1   Member States and EFTA countries

AMOUNTS OWED TO MEMBER STATES & EFTA COUNTRIES

This item includes amounts owed to EFTA countries, which includes the budget outturn figures of the current year, EUR 14.1 million, and the previous years and the balance on the EFTA current account.

The amending budgets 6 and 7 of 2003 were adopted by the European Parliament on 4 December 2003. Together they resulted in a reduction of EUR 4.9 billion in the Member States' own resources contributions for 2003. This was due to a decrease of the credits for the structural funds of EUR 5 billion (AB 6/2003) and an increase of payment appropriations for administration expenditures of EUR 21.9 million (AB 7/2003). In accordance with Article 10(3)(10) of Regulation No 1150/2000, the readjustments related to these amending budgets took place in January 2004. To that end, at the end of December 2003, the Commission had authorised the Member States to make on the first working day of 2004 the corresponding negative entry in the own resources account kept by them for the Commission.

An amount of EUR 23.2 million to be paid to the UK relating to a claim made for reimbursement of certain costs in connection with the foot and mouth outbreak in 2001 is also included under this heading.

C. 2   Amounts due to non-consolidated Communities' bodies

This item covers amounts totalling EUR 15.8 million owed by the Institutions to certain Communities' bodies which do not come within the scope of consolidation (2002: EUR 13.6 million).

C.3   Payment appropriations to be carried over

In accordance with the Financial Regulation payment appropriations carried over to the following year are entered as budget expenditure. The contra-entry to these appropriations carried over and not yet used is to be found in the short-term liabilities in the balance sheet. This amount includes EUR 176.5 million (2002: EUR 3,254 million) in payment appropriations carried over for structural operations which is an overall sum as the appropriations have been calculated on the basis of expenditure estimated by the Member States.

It should be noted that this classification is being examined as part of the modernisation of the accounting system project and any changes deemed necessary will be made for the 2005 accounts.

At 31 December 2003 the breakdown of appropriations to be carried over, taking all the Institutions together was as follows:

PAYMENT APPROPRIATIONS TO BE CARRIED OVER

C.4   Sundry creditors

SUNDRY CREDITORS

This item covers debts arising from the activities of the European Communities as well as non-budget recovery orders.

This item includes revenue not booked, i.e. revenue that could not be definitively booked to the budget before the close of the year. Additionally it includes accrued interest on borrowings and swaps. In previous years these items had been included under the heading ‘Transitional Accounts’. This year it was considered more appropriate to include them here.

Under the Financial Regulation, amounts for re-use from 2003 onwards are recorded as assigned revenue, hence the zero balance above at 31 December 2003.

In previous years this item also covered conversion gains on currency items, but this year the gain is included in the result of adjustments.

D.   Other liabilities

These are mainly amounts owed to staff and revenue to be transferred to various organisations or other third parties.

----

(1)  This heading is based on standard IPSAS 13 — Leases.

(2)  The target amount corresponds to 9 % of the amount outstanding.

(3)  Including EUR 3.3 million granted to Greece before it joined the EU.

(4)  The write-off corresponds to commissions that the borrower does not have to repay.

(5)  In light of ongoing reviews of open files certain amounts have been transferred to ‘Sundry debtors’ to better reflect their nature

(6)  The reimbursement figure for MEDIA loans is the result of all operations made during the year

(7)  See point 4 of Annex 4 Off-balance-sheet contingent liabilities.

(8)  The target amount corresponds to 9 % of the amount outstanding.

----

ANNEX 4

OFF-BALANCE-SHEET COMMITMENTS

CONTINGENT ASSETS

CONTINGENT LIABILITIES

OFF-BALANCE-SHEET COMMITMENTS: Contingent assets and liabilities

Contingent assets and liabilities are included in the annex to the financial statements as off-balance-sheet commitments. These include commitments made or received that could be of considerable budgetary significance in the medium or long term. Whether or not these commitments are confirmed will depend on the materialisation (or not) of one or more future events that are currently uncertain and not entirely under the control of the Communities.

CONTINGENT ASSETS

POINT 1:   GUARANTEES RECEIVED

1.1.   Guarantees received under borrowing and lending activities

The Commission has received guarantees from third-party guarantors in respect of guarantees it has granted on loans under its borrowing and lending activities. The guarantees received may be classified as follows:

Guarantees received

The Commission has not received third-party guarantees for loans granted under the financial assistance (MTA) scheme. However, these loans, totalling EUR 1,356 million, are guaranteed by the Guarantee Fund.

1.2.   Other guarantees received

These are guarantees received by the Commission in connection with the operation of its various activities during the year. As part of the accounting modernisation project the Commission is producing a more exhaustive list of these guarantees for inclusion in future financial statements. Also included are guarantees totalling EUR 92.4 million (2002: EUR 111.2 million) received by the ECSC in liquidation and guarantees of EUR 8.1 million received by the Court of Auditors.

1.3.   Guarantees received in respect of fines' cases pending

See balance sheet heading VII.B.4 and Point 4 under Contingent Liabilities for further details of the treatment of the amounts received in relation to fines issued. In summary, the recipient of a fine wishing to appeal can either provide a bank guarantee for the amount (and interest) in question or make a provisional payment. EUR 1,187.8 million of such bank guarantees were received at 31 December 2003 and are shown as contingent assets.

POINT 2:   SWAPS TO BE RECEIVED

These are SWAPS entered into by the Commission and ECSC in liquidation outstanding at year-end.

Swaps to be received

POINT 3:   NET CONTINGENT GAIN ON DISPOSAL OF AGRICULTURAL STOCKS

The situation as regards stocks was established at 30 September 2003 and the additional depreciation of stocks was calculated at 30 September 2003 and entered. The expected selling prices for products from public stocks might change in line with the market situation. The situation update of market prices in February 2004 shows a contingent gain of EUR 259.2 million (2002: contingent loss of EUR 22.56 million) compared with the end of 2003.

AGRICULTURAL STOCKS AT 30 SEPTEMBER 2003

POINT 4:   FRAUD AND IRREGULARITIES

Structural operations

The table below is based on the formal reports submitted by the Member States in accordance with Commission Regulation No 1681/94, with amounts broken down by Member State. The tables show the difference between amounts identified by the Member States as still to be recovered (calculated on the basis of established entitlements or estimates) and amounts already recovered or declared irrecoverable.

Contingent assets linked to fraud & irregularities cases

The figures given in this table represent a theoretical maximum rather than the amounts that will actually be made available to the Communities' budget, for the following reasons:

The prospects of recovery in individual cases cannot be assessed with sufficient accuracy from the information forwarded by the Member States.

On the date when the consolidated statements on the implementation of the budget were drawn up, the annual report on the fight against fraud for 2003 had not yet been adopted.

POINT 5:   ESTIMATES OF AMOUNTS RECEIVABLE

An estimate of the amount receivable is first to be made by the authorising officer responsible in respect of any measure or situation that may give rise to or modify an amount owing to the Communities. Estimates of amounts receivable are to specify the type of revenue and the budget item to which they are to be booked and, as far as possible, the particulars of the debtor and the estimated amount. Subject to Article 161(2) of the Financial Regulation, an estimate of amounts receivable does not generate commitment appropriations. The estimate of amounts receivable is regularised, when the recovery order is drawn up, i.e. when the entitlement is certain, of a fixed amount and due.

The table below shows the breakdown by Member State of the estimated number of cases booked as memorandum items in respect of own resources:

Estimates of number of cases booked

CONTINGENT LIABILITIES

POINT 1:   GUARANTEES GIVEN

1.1.   Loans granted by the European Investment Bank (EIB) to third countries from its own resources

As formulated, the guarantee legally covers the loans signed by the EIB at 31 December 2003 (including loans granted to Member States before accession). However, the Communities' guarantee is limited to a percentage of the ceiling of the credit lines authorised: 65 %, 70 %, 75 % or 100 %. Where the ceiling is not reached, the Communities' guarantee covers the full amount.

At 31 December 2003 the amount outstanding totalled EUR 13,573 million (2002: EUR 13,757 million) and this, therefore, is the maximum risk faced by the Communities.

For loans covered by the Communities' budget guarantee, the EIB also obtains guarantees from third parties (States, public or private financial institutions); in these cases the Commission is a secondary guarantor. The Communities' budget guarantee covers only the political risk of guarantees provided under the title of ‘risk-sharing’. The other risks are covered by the EIB should the primary guarantor not honour the undertakings given.

For guarantees provided under the title of ‘non-risk sharing’, all the risks are covered by the Communities' budget should the primary guarantor not honour its undertakings given. If the primary guarantor is a public authority these risks are confined as a rule to the political risk, but when the guarantees are provided by an institution or a private company, the Communities' budget might also have to cover the commercial risk.

The loans granted by the EIB from its own resources to third countries and covered by the Communities' budget guarantee are as follows:

EIB LOANS GUARANTEED BY THE COMMUNITIES

1.2.   Guarantees signed by the European Investment Fund (EIF)

At 31 December 2003 the EIF had signed guarantees and commitments in venture capital operations totalling EUR 3,055.3 million, however of this amount EUR 1,357.4 million relates to the portfolio of guarantee operations for projects related to the development of Trans-European Networks (TEN) that has been transferred to EIB (the relevant Agreement was signed with the EIB on December 7, 2000.) The EIB bears the risk of the transactions (with the EIF remaining the guaranteeing party under the relevant Guarantee Agreements) and in return is entitled to receive the related fees (utilisation fee + commitment fee) from the intermediaries. Excluding these amounts since the EIF bears no risk, the total guarantees given and commitments in venture capital operations by the EIF at 31 December 2003 is EUR 1,697.9 million; this represents a maximum potential risk of EUR 509.4 million for the European Communities, as the Communities contribute 30 % of the capital of the EIF. The total capital subscribed by the Communities is EUR 600 million, of which 20 % has been called up.

In the 2002 financial statements the European Communities mistakenly included a contingent liability relating to these TEN guarantees. The comparative figures have now been adjusted accordingly — in fact the amount of guarantees outstanding and commitments in venture capital operations should have been EUR 1,562 million (Communities' share EUR 468.6 million.)

As the EIF is consolidated using the equity method, the calculation of the maximum commitment from the Communities' budget takes account of not only the capital, but also the European Communities' share of the EIF's total own resources. The Communities' share of the EIF's own resources totals EUR 170.2 million (2002: EUR 166.5 million), see also note IV.A Assets. The capital not called up totals EUR 480 million. Given these figures, in the worst possible scenario the European Communities would not have to repay any further amounts should all the guarantees be called in and thus no contingent liability is shown for 2003 or 2002.

The proportion of the capital subscribed by the European Communities which has not been called up (80 %) is also included in the off-balance-sheet commitments as a contingent liability (Point 7).

1.3.   Guarantees in relation to financial activities

The amount relates to guarantees given by the Communities relating to JOP Facility 3. The Communities' risk is capped at the amounts shown.

POINT 2:   SWAPS TO BE DELIVERED

These are SWAPS entered into by the Commission and ECSC in liquidation outstanding at year-end.

Swaps to be delivered

POINT 3:   EAGGF GUARANTEE

3.1.   Expenditure between 16 October 2003 and 31 December 2003

In the case of the Guarantee Section of the European Agricultural Guidance and Guarantee Fund, the payments are those affected by the Member States between 16 October 2002 and 15 October 2003, provided that the accounting officer was notified of the commitment and authorisation by 31 January 2004. Payments made by Member States between 16 October and 31 December 2003 are included in the off-balance-sheet commitments.

3.2.   Clearance of accounts

Contingent liabilities towards the Member States connected with the clearance procedures. The determination of the final amount of the liability and the year in which it will be charged to the budget will depend on the length of the procedure before the Court of Justice.

3.3.   Contingent debt pending a judgement by the Court

Contingent debt towards a Member State as part of a procedure lodged with the Court of Justice concerning correction of advances.

3.4.   Contingent debts in respect of judgements pending execution

Contingent debts for which the Commission decision has not been taken by the date on which the accounts are closed and for which the compensation arrangements need to be agreed on between the parties concerned.

POINT 4:   FINES

As the fines imposed by the Commission for infringement of competition rules are entered in the result for the financial year, it has been decided that both fines for which an appeal has been lodged (2) and those where it is unknown if an appeal will be made should be included as a contingent liability in the off-balance-sheet commitments pending a decision by the Court of Justice. This contingent liability will be maintained until a decision that acquires the authority of a final decision (see explanatory note to the balance sheet — assets VII b.4).

Fines Outstanding

This table shows the state of play with fines imposed by the Commission that were still pending a legal decision when the accounts were closed. Once notified, debtors who do not accept the Commission decision fining them are entitled to lodge an appeal with the Court of Justice. However, the principal of the fine has to be paid within the prescribed time limit, since under Article 242 of the EC Treaty appeals do not have suspensory effect. Debtors have two options: they can either provide a bank guarantee or make a provisional payment.

Only once the final judgment is delivered, does the Accounting Officer either refund the full amount of the provisional payment plus the interest on the principal or irrevocably collect the amount of the fine, as fixed by the final judicial decision, refunding, if appropriate, the relevant portion of the provisional payment together with the related interest.

Interest earned on provisional payments (EUR 100.8 million) is included in the result of adjustments for the year and also as a contingent liability to reflect the uncertainty of the amounts.

POINT 5:   OUTSTANDING COMMITMENTS (RAL)

Commitments against differentiated appropriations still outstanding at 31 December 2003 totalled EUR 103.9 billion of which EUR 1,264.6 million is covered by carryovers of payment appropriations from 2003 to 2004. The latter already feature in the budget out turn for the year as budget liabilities, so they are not included in the potential liabilities. The outstanding commitment total of EUR 102.6 billion is the maximum potential commitment.

The overall amount of outstanding commitments has been growing over the last ten years, most of the increase being linked to the increase over the same period in commitment appropriations and corresponding to the deferred completion of the operations covered by the budget commitments. These normal outstanding commitments are the direct and legitimate consequence of the implementation of the Community budget. For 2003, the increase of commitments outstanding (before carry over) was 5 %, compared to 14 % in 2002, mainly due to the gradual stabilisation of the situation for the Structural Funds in 2003.

In a Joint Declaration of 25 November 2002, the Commission, Parliament and Council emphasised the need to contain the amounts still to be cleared and to eliminate ‘abnormal outstanding commitments’ in the medium term. Potentially abnormal outstanding commitments were defined in this Declaration, by common agreement, as consisting of dormant commitments for which no payment had been made for the past two financial years and old commitments that have been in the budget for at least five financial years.

As a result of this Declaration, the Commission undertook to present, along with the preliminary draft budget for 2004, the results of the Commission's endeavours to examine all potentially abnormal RAL cases, identified as at 31 December 2002, by the end of 2003. Furthermore, as required by the Joint Declaration, the Commission provided progress reports to the Budgetary Authority, in particular focusing on those budget lines identified in the annex to the Declaration, on the accounting situations as at 31 March and 31 July 2003. In these progress reports, the Budgetary Authority was informed of the findings of this examination, including the measures taken by the Commission to prevent abnormal commitments from re-emerging in the future.

By end of 2003 the results, covering 99.9 % of the PAR commitments of the Commission, were as follows:

The potentially abnormal RAL that has been retained is based on case-by-case examinations, with justifications supplied, that payments are still to be made on the basis of the outstanding commitments.

POINT 6:   LEGAL COMMITMENTS WITHOUT A BUDGET COMMITMENT

These contingent liabilities originated because the Commission decided to enter into legal commitments in respect of amounts that were not covered by commitment appropriations in the budget.

Under the Inter-institutional Agreement and, more generally, the rules relating to the budget, the following expenditure must be recorded as off-balance-sheet commitments in view of the volume of financial commitments which arises:

The other multi-annual programmes do not contain any commitments to be included under contingent liabilities: expenditure in future years is conditional on the annual decisions by the budgetary authority or changes in the rules concerned.

Commitments on Multi-Annual Programmes

Legal commitments not followed up by a budget commitment total EUR 84.2 billion (2002: EUR 114.7 billion) and correspond to the difference between the value of the programmes adopted by the Commission at 31 December 2003 and the amount of budget commitments entered into in respect of these programmes and implemented between 2000 and 2003.

Cohesion Fund

ISPA

POINT 7:   CONTRIBUTIONS TO RELATED ORGANISATIONS

This sum represents payments outstanding on non-called-up capital subscribed by the Commission.

7.1.   Uncalled share capital: EBRD

7.2.   Uncalled share capital: EIF

7.3.   Uncalled share capital: Galileo programme

Pursuant to Council Regulation (EC) No 876/2002 of 21 May 2002 the Commission's contribution to the Galileo programme is EUR 520 million. This commitment is for a period of four years ending on 20 May 2006. In 2002 budget commitments totalling EUR 240 million were entered in the accounts, against which grants of EUR 120 million were paid, the remaining EUR 120 million being included in the RAL. EUR 2 million of interest earned on the Commission contribution was treated as an increase in its subscription. A further 80 million was committed in 2003 without further payments and is also included in the RAL (above) and so deducted from the above uncalled amounts.

POINT 8:   EMERGENCY VETERINARY FUND

This heading covers amounts for foot-and-mouth primarily, but also other disease eradication costs that may have to be borne by the Communities' budget. The amounts entered represent the maximum possible liability minus the amounts already entered as provisions.

The largest amount relates to the foot-and-mouth crisis, primarily in the UK, which ran from February to September 2001. On-the-spot financial checks are ongoing for the only remaining UK claim of EUR 483 million, while a provision of EUR 40 million is recognised in the accounts at year-end. Thus the difference between the total claim and the amount provided for, in this case EUR 443 million, is included as a contingent liability here. The balance relates to similar claims from other Member States.

POINT 9:   RENOVATION OF THE BERLAYMONT BUILDING

An agreement was signed between the Commission, the Belgian State and S.A. Berlaymont 2002 on 13 November 2002. It fixes the maximum price the Commission will have to pay and a deadline for the building to be made available. The long-term lease (27 years) for the Berlaymont building has not yet been signed. The amount entered as a contingent liability is the value of the building before renovation (EUR 49,578,705) and a fixed amount (EUR 503,300,502) covering the cost of the renovation work and all other costs.

The Berlaymont building does not yet figure in the balance sheet of the Communities at 31 December 2003, since the finance leasing contract has not yet been signed and no payment was made in 2003.

POINT 10:   LONG-TERM LEASES

10.1.   Buildings

This heading covers buildings occupied under a long-term leasing contract (with an initial term of more than five years) that do not meet the conditions for entry on the assets side of the balance sheet. The amounts indicated correspond to commitments still to be paid during the term of the contract, except for the Court of Justice's Palais building, which is occupied under an indefinite lease; here, the amount of EUR 2.1 million corresponds to the annual rent.

The total for rented buildings breaks down as follows:

In accordance with the framework contract relating to the construction of one or more extensions to the building of the Court of Auditors, signed on 15 December 1999, the Luxembourg State undertakes to grant the Court a building lease on the land for the first extension at the price of EUR 1 (one) for a period not exceeding 49 years. Any further building leases on other land needed for the other extensions must not exceed the expiry date of the building lease granted for the first extension.

The Luxembourg State also undertakes to sell the land at any time at the market rate determined by a joint expert opinion. For its part, the Court undertakes to do all it can to purchase the land from the Luxembourg State. It will ask the budgetary authority for the necessary funds.

The Commission is in negotiations with the owner of a building for which rental payments have been made on a provisional basis since 1999. The purpose of the negotiations is to fix a rental value that does not exceed the advance provided for in the existing agreement protocol, while the building is being brought up to standard.

POINT 11:   AMOUNTS RELATED TO LEGAL CASES

11.1.   Brussels Capital Region tax

In 1992 the Brussels Capital Region introduced a tax on the occupants of real estate and the holders of certain real estate property rights. The Commission's arguments were rejected by a judgement of the Belgian Cour de Cassation of 1 March 2002. The Commission asked the regional authorities about its exemption under the Protocol on privileges and immunities. The initial reply given was favourable.

However, this position was reversed as a result of legal proceedings brought by the owners of some of the buildings occupied by the Commission. The Commission has subsequently concluded settlement agreements with certain owners representing a total amount of EUR 9.9 million to be paid over the period 2003-2005. An amount of EUR 3.3 million was paid in 2003 and the balance is included under long and short term liabilities on the balance sheet.

11.2.   Dispute concerning the acceptance of work done on the Charlemagne building

Legal action had been initiated in 1999 against the Commission and the owner of the Charlemagne building by the general contractor charged with renovation work. The main terms of a settlement were negotiated in September 2003, protecting the legal and financial interests of the Commission and settling both the question of the property of the building and the question of additional work. The agreement was finalised in May 2004 by signature of a formal settlement agreement and of the notary deed regarding the transfer of property.

11.3.   Actions for damages brought against the Commission

This heading relates to two actions for damages currently being brought against the Commission. The first action was brought against it in June 2003 in relation to a ruling made by the Commission. The claim is for EUR 735 million. The Commission submitted its defence in February 2004.

In the second case an action for damages was brought in October 2003, also in relation to a ruling made by the Commission. The claim is for an amount of EUR 1,664 million. The Commission submitted its defence in February 2004.

Neither case is likely to be decided before late 2005. It should be noted that in an action for damages under Article 288 EC the applicant must demonstrate a sufficiently serious breach by the institution of a rule of law intended to confer rights on individuals, real harm suffered by the applicant, and a direct causal link between the unlawful act and the harm. In both cases the Commission has vigorously denied any liability in damages.

----

(1)  Alcohol quantities are shown in hl

(2)  Even if the appeal against fines imposed in 2003 was made in 2004 before the closure of accounts.

(3)  Including appropriations cancelled and those which have not been carried over or transferred in 2000, 2001, 2002 and 2003.

(4)  Budget commitments in respect of the networks are not included unless they take the form of a programme with annual tranches

(5)  Commitments from Chapter B2-16 (Innovation measures and technical assistance) are not included in this list as they are not likely to have generated any off-balance-sheet commitments.

(6)  Under the ceiling for the Cohesion Fund in the financial perspective in force at 31 December 2003

----