EN Official Journal of the European Union C 273/1

ANNUAL ACCOUNTS OF THE EUROPEAN COMMUNITIES

FINANCIAL YEAR 2008

CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED REPORTS ON IMPLEMENTATION OF THE BUDGET

(2009/C 273/01)

CONTENTS

Note accompanying the consolidated accounts

Implementing and accounting for the EU budget

PART I — Consolidated financial statements of the European Communities and explanatory notes

A. Balance Sheet

B. Economic Outturn Account

C. Cashflow Table

D. Statement of changes in Net Assets

E. Notes to the financial statements

PART II — Consolidated reports on the implementation of the budget of the European Communities and explanatory notes

SECTION A — Consolidated reports on implementation of the budget

SECTION B — Explanatory notes to the consolidated reports on implementation of the budget

NOTE ACCOMPANYING THE CONSOLIDATED ACCOUNTS

The consolidated annual accounts of the European Communities for the year 2008 have been prepared on the basis of the information presented by the other institutions and bodies under Article 129.2 of the Financial Regulation applicable to the general budget of the European Communities. I hereby declare that they were prepared in accordance with Title VII of this Financial Regulation and with the accounting principles, rules and methods set out in annex to the financial statements.

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

I hereby certify that based on this information, and on such checks as I deemed necessary to sign off the accounts of the European Commission, I have a reasonable assurance that the accounts present a true and fair view of the financial position of the European Communities in all material aspects.

Ph. TAVERNE Accounting Officer of the European Commission

IMPLEMENTING AND ACCOUNTING FOR THE EU BUDGET

1. ANNUAL BUDGET PREPARATION

The EU Budget finances a wide range of policies and programmes throughout the Union. In accordance with the priorities set by the Member States, the Commission carries out specific programmes, activities and projects in the field. These could range from supporting education projects for the mobility of students and teachers, to projects aimed at supporting better work environment for workers in the EU, to enhance the control of the external borders.

Nearly 94 % of the EU budget goes to funding such EU policies and activities, which have been agreed by all the Member States. The direct link between the annual budget and the EU policies is ensured through activity-based budgeting (ABB). The activity-based budget nomenclature, first introduced in the 2004 budget, allows for clear identification of the policy areas of the European Union and the total amount of resources allocated to each of these areas.

The 31 policy areas are subdivided into some 200 activities of which over 110 include operating budget headings and are thus reflected in the budget nomenclature as budget chapters. These policy areas are predominantly operational, since their core activities are aimed at benefiting a third-party beneficiary, each within their respective domains of activity. Other policy areas, however, are horizontal and assure the proper functioning of the Commission, such as ‘Coordination and legal advice’, and ‘Budget’. The activity structure provides the common conceptual framework for priority setting, planning, budgeting, monitoring and reporting, with the principal aim of enhancing the efficient, economic and effective use of resources.

The internal procedure for the adoption of the draft budget starts with its preparation by the Commission before it is passed to the Council who can make amendments if considered necessary. The updated budget then goes to the European Parliament, which may propose amendments or accept or reject the current draft. Once all amendments and updates are agreed (including, if necessary, an entirely new draft proposed by the Commission) the budget is adopted in mid-December by the Parliament. The President of Parliament declares the budget adopted and it can then be implemented.

2. HOW IS THE EC FUNDED?

The EC has two main categories of funding: Own resources revenues and sundry revenues.

2.1. Own resource revenues and receivables

Own resource revenue accrues automatically to the EU to enable it to finance its budget without the need for a subsequent decision by national authorities (in 2008 it is 92 % of total revenue). The overall amount of own resources needed to finance the budget is determined by total expenditure less other revenue. The total amount of own resources cannot exceed 1,24 % of the gross national income (GNI) of the EU. Own resources can be divided into the following categories:

1. Traditional own resources (TOR) consist of customs duties, agricultural duties and sugar levies. These own resources are levied on economic operators and collected by Member States on behalf of the EU. However, Member States keep 25 % as a compensation for their collection costs. Customs duties and agricultural duties are levied on imports of products coming from third countries, at rates based on the Common Customs Tariff. Sugar levies are paid by sugar producers to finance the export refunds for sugar. TOR usually account for around 15 % of total own resource revenue.

2. The own resource based on value added tax (VAT) is levied on Member States’ VAT bases, which are harmonised for this purpose in accordance with Community rules. The same percentage is levied on the harmonised base of each Member State. However, the VAT base to take into account is capped at 50 % of each Member State's GNI. The VAT-based resource usually accounts for around 15 % of own resource revenue.

3. The resource based on gross national income (GNI) is used to balance budget revenue and expenditure, i.e. to finance the part of the budget not covered by any other sources of revenue. The same percentage rate is levied on each Member States’ GNI, which is established in accordance with Community rules. The GNI-based resource usually accounts for around 70 % of own resource revenue.

With regard to payment of these amounts, separate accounts contain traditional own resources which, under Article 6(3)(b) of Regulation No 1150/2000, have been established by the Member States but not made available to the Communities as they have not yet been recovered or guaranteed or because they have been challenged. Each Member State sends the Commission a quarterly statement of these accounts, with the following particulars for each type of resource:

— the previous quarter's outstanding balance,

— the amounts recovered during the quarter in question,

— rectifications of the base (corrections/cancellations) during the quarter in question,

— amounts written off,

— the balance to be recovered at the end of the quarter in question.

When the traditional own resources from the separate account are recovered, they must be made available to the Commission 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.

A write-down of the entitlements in the separate account must be made to reflect the situations when actual recovery is unlikely. This write-down is based on estimations made by Member States themselves in accordance with Article 6(4)(b) of Council Regulation (EC, Euratom) No 1150/2000 which states ‘Together with the final quarterly statement for a given year, Member States shall forward an estimate of the total amount of entitlements contained in the separate account at 31 December of that year for which recovery has become unlikely.’

Based on the estimations sent by Member States, a write-down is deducted from the item for receivables from Member States on the asset side of the balance sheet. However, this does not mean that the Commission is waiving recovery of the amounts covered by this value adjustment. Even where recovery looks very unlikely, if not virtually impossible, this does not necessarily mean that the amounts in question are lost to the Community budget as traditional own resources. This is because non-recovered entitlements are lost only if the Member State has exhausted all the avenues it is required to pursue in order to secure recovery. Where the Member State fails to do this, it is held financially liable and required to pay the amount into the Community budget in accordance with Article 17(2) of Regulation (EC, Euratom) No 1150/2000.

2.2. Sundry revenues

Sundry revenues arising from the activities of the European Communities are approximately 8 % of total revenue. These are, for instance, competition fines and recovery orders to private and public debtors with regard to the management of Community projects (as in the example above.) Penalty payments imposed by the Court of Justice on Member States that fail to comply with a given judgment also fall into this category. The Commission manages hundreds of thousands of projects each year and needs to establish about 12 000 recovery orders per year. Any debt not paid at the due date is subject to default interest. Where debts of Community third parties other than Member States remain unpaid, Commission (and Council) decisions imposing the obligation to pay are directly enforceable in accordance with the rules of civil procedure in force in the territory where enforcement is to be carried out. Defaulting debtors are subject to debt collecting procedures launched by the Legal Service with the help of external law firms.

3. HOW THE COMMUNITY BUDGET IS MANAGED AND SPENT

3.1. Primary operational expenditure

The European Communities’ operational expenditure covers the various headings of the financial framework and takes different forms, depending on how the money is paid out and managed. In accordance with the Financial Regulation, the Commission implements the general budget using the following methods:

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

Indirect centralised management: this refers to cases where the Commission confers tasks of implementation of the budget to bodies of Community law or national law, such as the Community agencies of public law or with public service missions.

Decentralised management: these are the cases where the Commission delegates certain tasks for implementation of the budget to third countries.

Shared management: under this method of management budget implementation tasks are delegated to Member States. The majority of the expenditure, this year EUR 82 billion (2007: EUR 90 billion), falls under this mode ‘Shared Management’ involving the delegation of tasks to Member States, covering such areas as agricultural spending and Structural Actions

Joint management: under this method, the Commission entrusts certain implementation tasks to an international organisation.

3.2. The different financial actors

The College of Commissioners assumes collective political responsibility but in practice does not exercise itself the budget implementation powers vested in it. It delegates these tasks each year to individual civil servants accountable to the College and subject to the Financial Regulation and the Staff Regulations. The staff concerned – generally Directors-General and Heads of Service – are known as ‘Authorising Officers by delegation’. They in turn may further delegate budget implementation tasks to ‘Authorising Officers by sub-delegation’.

The responsibility of the Authorising Officers covers the entire management process, from determining what needs to be done to achieve the policy objectives set by the institution to managing the activities launched from both an operational and budgetary standpoint, including signing legal commitments, monitoring performance, making payments and even recovering funds, if necessary. Authorising officers must also arrange for evaluations to be carried out to analyse the viability of their proposals (ex ante evaluation) and to gauge the success and cost-effectiveness of programmes already underway (interim and ex post evaluations). The results of these evaluations are used to help improve the decision-making process and increase the transparency, accountability and cost-effectiveness of Community intervention.

Sound financial management and proper accountability are assured within each DG by the separation of management control (in the hands of the authorising officers) from internal audit and compliance control with clear internal control standards (inspired by COSO international standards), ex-ante and ex-post controls, independent internal auditing on the basis of risk assessments, and regular reporting on activities to the individual Commissioners.

The Accounting Officer executes payment and recovery orders drawn up by authorising officers and is responsible for managing the treasury, laying down accounting rules and methods, validating accounting systems, keeping the accounts and drawing up the institution's annual accounts and consolidating them with those of the other consolidated entities. Furthermore, the Accounting Officer is required to sign the accounts declaring that they provide a true and fair view of the financial position.

The Internal Auditor, who is not a financial actor in the strict sense of the term, is appointed by an institution or body to verify the proper operation of budgetary implementation systems and procedures and to advise the institution on risk management issues. The Internal Auditor issues independent opinions on the quality of management and control systems and provides recommendations on how to improve operational procedures and promote sound financial management.

3.3. Committing to spend the EU budget

Once the budget is approved, DG Budget makes funding available, via the Commission's accounting system, to the different Commission departments and the Institutions and other bodies in accordance with their policy responsibilities under a system called activity based budgeting. For example, the responsibility for managing budget lines to do with the environment would be delegated by the Commission to the head – or Director-General – of DG Environment (who in this context becomes known as the Authorising Officer by Delegation for the budget lines in question).

Before a legal commitment (for example a contract or grant agreement) can be entered into with a third party, there must be a budget line authorising the activity in question in the annual budget. There must also be sufficient funds on the budget-line in question to cover the expenditure. If these conditions are met, the funds required must be reserved in the budget by means of a budgetary commitment made in the accounting system.

Once the budgetary commitment is launched by the person responsible for the project, known as the ‘initiating agent’, it must follow a pre-set procedure – or ‘financial circuit’ – which is a paper and electronic trail involving a minimum of two people (the so-called ‘four eyes principle’), the initiator and the verifier. The financial circuits in place provide for financial and operational checks before the commitment is approved by the Authorising Officer responsible.

No money can be spent from the Community budget unless and until the Commission or another EC body and the possible recipient of Community money have entered into a written legal commitment. Under centralised direct management, this legal commitment takes the form of either a contract with a contractor or a grant agreement with a beneficiary.

Once approved, the budgetary commitment is recorded in the budgetary accounting system and the appropriations are consumed accordingly. This, however, has no effect on the general accounts (or general ledger) since no charge has yet been incurred. This is because the accounting system of the European Communities comprises two separate but linked elements:

(a) budget accounts, which provide a detailed record of budget implementation; and

(b) general accounts, used to prepare the balance sheet and economic outturn.

The budget accounts chart the commitments and payments made on the 1 150 or so budget lines day by day. They are based on the modified cash accounting principle, whereby an item of expense or income is only recorded in the accounts when cash is committed, paid out or received. This type of accounting is typical of the public sector whose focus has, historically, tended to be on the budget and its implementation. Each month the Commission publishes figures detailing the current state of budget implementation (spending) on the Europa website. The figures are given by financial framework heading and by policy area.

The general accounts (or general ledger) use the double-entry method of bookkeeping to show all expenditure and revenue over the financial year (and thus the economic outturn) and to establish the financial position of the EC in the form of a balance sheet of assets and liabilities at 31 December of a given year.

3.4. Making a payment

3.4.1. General rules

No payment can be made unless a budgetary commitment has already been approved by the Authorising Officer dealing with the operation in question. When a payment needs to be made a compulsory workflow similar to that for a budgetary commitment has to be followed. This is done in the accounting system and with a parallel paper/electronic trail. Again the process is launched by the initiating agent and ultimately approved by the authorising officer by sub-delegation. Once the payment is approved, both the budgetary and the general accounts are automatically updated.

Once a payment is approved in the accounting system, the next step is for the transfer to be made to the beneficiary's account. The Commission, for example, through the treasury department of DG Budget, makes almost all of its payments by bank transfer. It has bank accounts with Member State Treasuries, Central Banks and commercial banks.

The Commission makes over one million payments a year. The Commission is a participant in SWIFT (Society for Worldwide Interbank Financial Telecommunication). Each day at least one payment run, launched under the control of the treasury department of Directorate-General for Budget, translates the approved payment orders into payment instructions that are sent automatically to the Commission banks, in order to pay the designated beneficiaries.

3.4.2. Pre-financing

Pre-financing is a payment intended to provide the beneficiary with a cash advance, i.e. a float. It may be split into a number of payments over a period defined in the particular pre-financing agreement. The float or advance is either used for the purpose for which it was provided during the period defined in the agreement or it is repaid – if the beneficiary does not incur eligible expenditures he has the obligation to return the pre-financing advance to the European Communities. Thus pre-financing paid is not a definitive expense until the relevant contractual conditions are met and so is recorded as an asset on the balance sheet when the initial payment is made. The amount of the pre-financing asset is reduced (wholly or partially) by the acceptance of eligible costs and amounts returned. When a pre-financing amount is fully or partially accepted by the Communities, following analysis of the eligibility of a cost claim received (see below), then the accepted amount of eligible expenditure is removed from the balance sheet and taken as an expense in the economic outturn account. This may clear the pre-financing amount in whole or in part.

Pre-financing is valued at its estimated recoverable amount, taking into consideration the existence of a related guarantee attached to the pre-financing. The expected irrecoverable pre-financing is recognised as a charge in the economic outturn account and a decrease in the pre-financing carrying value in the balance sheet. Interest is generally earned on pre-financing paid out (notable exceptions include amounts paid to Member States or as pre-accession aid). The ownership of this interest designates the two categories of pre-financing existing – European Communities and Third Party. The difference between the two categories is that the interest generated by ‘European Communities’ pre-financing amounts remains the property of the Communities and so must be returned to the Communities, while that earned on ‘Third Party’ pre-financing is the property of the beneficiary.

3.4.3. Cost claims and eligibility of expenditure

Some time after the payment of the pre-financing, a cost claim will be received by the relevant EC body so as to justify how the pre-financing amount was spent by the beneficiary in accordance with the contract. The rhythm of these cost claims sent during the year is variable depending on the type of action being funded and the contractual conditions, and they are not necessarily received at year-end.

Cost statements received should be registered immediately in the accounting system as a current payable with ‘Eligibility to be checked’ and a ‘Step 1 invoice’. At this stage, no expense is yet recognised. An expense is only recognised in the general accounts once the ‘generating event’ has occurred – namely when the cost claim is validated. The time limit for paying the received invoice starts as from the date of registration of the received admissible payment request: once satisfied that the claim is eligible, an accounting entry is made that transfers the eligible amounts to the economic outturn account as an expense (‘Step 2 invoice’). The open pre-financing and creditor balances are then reduced by the validated amount. There is no impact on the budgetary accounts since the initial payment has already been recorded.

3.4.4. Payment of further amounts

If an amount in excess of the initial payment is claimed and verified or if a second or final payment is required to be paid in accordance with the contract, then a new payment request is launched following the same rules as before. It is the authorising officer by delegation who gives final approval before the payment can be made. Eligibility criteria are defined in the basic act, in the calls for proposal, in other information documents for grant beneficiaries and/or in the contractual clauses of the grant agreements. After analysis, the eligible expenses are taken into charges and the beneficiary is informed about any non eligible amounts. ‘Eligibility to be checked’ amounts thus represent received cost claims for which the eligibility has not yet been checked and therefore where the event giving rise to the expense has not yet occurred.

3.4.5. Accounting treatment at year-end (cut-off)

With regard to open pre-financing amounts at year-end, these are valued at the original amount(s) paid less: amounts returned, eligible amounts cleared, estimated eligible amounts not yet cleared at year-end, and value reductions.

Cost claims not yet received at year-end are taken into account in the year-end accounting cut-off procedures. In particular an assessment has to be made concerning eligible expenses incurred by beneficiaries of Community funds but not yet reported to the EC. Different methods are used depending on the type of activities and information available so as to arrive at the best estimate of these amounts. Following these cut-off entries, estimated eligible amounts are recorded as accrued charges, while the estimated non-eligible parts remain open on the ‘eligibility to be checked’ accounts. These amounts are shown under current liabilities so as not to overestimate assets and liabilities.

3.5. Recovering undue payments

The eligibility of expenditure charged to the budget is verified by the relevant EC services, or in the case of shared management, by the Member States, on the basis of the supporting documents stipulated in the applicable rules or in the conditions of each grant. With the aim of optimising the relationship between the costs and the benefits of control systems, checks on the supporting documents for final claims tend to be more intense than those on interim claims, and thus may detect errors in interim payments which are corrected by adjustment of the final payment. Furthermore, the EC and/or the Member State has the right to verify the probity of the supporting documents by making checks on the claimant’s premises, during the implementation of the action financed and/or afterwards (ex-post). Errors found during the implementation period may be corrected by adjustment of subsequent claims. Errors found ex-post will be the subject of a recovery order. See also note 6 for further information on this area.

4. YEAR-END REPORTING

4.1. Annual accounts

It is the Accounting Officer's responsibility to prepare the annual accounts and ensure that they present a true and fair view of the financial position of the EU. The annual accounts comprise the financial statements and the reports on implementation of the budget. They are adopted by the Commission and presented to the Court of Auditors for audit and finally to the Council and Parliament for discharge.

4.2. Annual Activity reports

Each Authorising Officer is required to prepare an Annual Activity Report (AAR) on the activities under his responsibility. In this AAR, he reports on policy results and on the reasonable assurance he may have that the resources assigned to the activities described in his report have been used for their intended purpose and in accordance with the principles of sound financial management, and that the control procedures put in place give the necessary guarantees concerning the legality and regularity of the underlying transactions.

5. AUDIT AND DISCHARGE

5.1. Audit

The EU's annual accounts and resource management are overseen by its external auditor, the European Court of Auditors, which draws up an annual report for the Council and the European Parliament. The Court’s main task is to conduct an external, independent audit of the European Communities’ annual accounts. As part of its activities, the Court of Auditors produces:

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

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

3. special reports giving the findings of audits covering specific areas of management.

The Court of Auditors is entitled to access all documents required during the course of its audit. The Court audits all areas of EC activities, right down to examining the legality and regularity of individual transactions and payments. It also audits the annual accounts themselves, reviewing individual balance sheet and economic outturn accounts where necessary as well as the overall presentation of the financial statements. Thus the Court can offer its opinion not only on the figures presented, but also on the system and controls in place.

5.2. Discharge

The final control is the discharge of the budget for a given financial year. The European Parliament is the discharge authority within the EC. This means that following the audit and finalisation of the annual accounts it falls to the Council to recommend and then to the Parliament to decide whether to grant discharge to the Commission and other EC bodies for executing the Communities’ budget for the preceding financial year. This decision is based on a review of the accounts and the annual report of the Court of Auditors (which includes an official statement of assurance) and replies of the Commission, and also following questions and further information requests to the Commission.

The discharge represents the political aspect of the external control of budget implementation and is the decision by which the European Parliament, acting on a Council recommendation, ‘releases’ the Commission from its responsibility for management of a given budget by marking the end of that budget’s existence. This discharge procedure may produce one of three outcomes: the granting, postponement or refusal of the discharge. When granting discharge the Parliament may highlight observations they consider important, often recommending actions that the Commission should take concerning these matters. The Commission sets out the measures taken in a follow-up report and an action plan which it sends to both the Parliament and the Council.

PART I

CONSOLIDATED FINANCIAL STATEMENTS OF THE EUROPEAN COMMUNITIES AND EXPLANATORY NOTES

CONTENTS

A. Balance Sheet

B. Economic Outturn Account

C. Cashflow Table

D. Statement of changes in Net Assets

E. Notes to the financial statements

1. Significant accounting policies

2. Notes to the Balance Sheet

3. Notes to the Economic Outturn Account

4. Notes to the Cashflow table

5. Off-Balance Sheet disclosures

6. Recovery of undue payments

7. Financial risk management

8. Related party disclosures

9. Events after the balance sheet date

10. Consolidated entities

11. Non-consolidated entities

A. BALANCE SHEET

EUR millions Note 31.12.2008 31.12.2007 NON-CURRENT ASSETS: Intangible assets 2.1 56 44 Property, plant and equipment 2.2 4 881 4 523 Long-term investments 2.3 2 078 1 973 Loans 2.4 3 565 1 806 Long-term pre-financing 2.5 29 023 14 015 Long-term receivables 2.6 45 127 39 648 22 488 CURRENT ASSETS: Inventories 2.7 85 88 Short-term investments 2.8 1 553 1 420 Short-term pre-financing 2.9 10 262 20 583 Short-term receivables 2.10 11 920 12 051 Cash and cash equivalents 2.11 23 724 18 756 47 544 52 898 Total assets 87 192 75 386 NON-CURRENT LIABILITIES: Employee benefits 2.12 (37 556) (33 480) Long-term provisions 2.13 (1 341) (1 079) Long-term financial liabilities 2.14 (3 349) (1 574) Other long-term liabilities 2.15 (2 226) (1 989) (44 472) (38 122) CURRENT LIABILITIES: Short-term provisions 2.16 (348) (369) Short-term financial liabilities 2.17 (119) (135) Accounts payable 2.18 (89 677) (95 380) (90 144) (95 884) Total liabilities (134 616) (134 006) NET ASSETS (47 424) (58 620) Reserves 2.19 3 115 2 806 Amounts to be called from Member States: 2.20 Employee benefits (1) (37 556) (33 480) Other amounts (2) (12 983) (27 946) NET ASSETS (47 424) (58 620)

B. ECONOMIC OUTTURN ACCOUNT

EUR millions Note 2008 2007 OPERATING REVENUE Own resource and contributions revenue 3.1 112 713 112 084 Other operating revenue 3.2 9 731 9 080 122 444 121 164 OPERATING EXPENSES Administrative expenses 3.3 (7 720) (7 120) Operating expenses 3.4 (97 214) (104 682) (104 934) (111 802) SURPLUS FROM OPERATING ACTIVITIES 17 510 9 362 Financial revenue 3.5 698 674 Financial expenses 3.6 (467) (354) Movement in employee benefits liability 2.12 (5 009) (2 207) Share of net deficit of associates & joint ventures 3.7 (46) (13) ECONOMIC OUTTURN FOR THE YEAR 12 686 7 462

C. CASHFLOW TABLE

EUR millions Note 2008 2007 Economic outturn for the year 12 686 7 462 Operating activities 4.2 Amortisation 19 11 Depreciation 302 329 (Reversal of) impairment losses on investments 3 (3) (Increase)/decrease in loans (1 759) 217 (Increase)/decrease in long-term pre-financing (15 008) 8 410 (Increase)/decrease in long-term receivables 82 201 (Increase)/decrease in inventories 3 27 (Increase)/decrease in short-term pre-financing 10 321 (12 528) (Increase)/decrease in short-term receivables 131 (2 255) Increase/(decrease) in long-term provisions 262 90 Increase/(decrease) in long-term financial liabilities 1 775 (288) Increase/(decrease) in other long-term liabilities 237 (31) Increase/(decrease) in short-term provisions (21) (10) Increase/(decrease) in short-term financial liabilities (16) 115 Increase/(decrease) in accounts payable (5 703) 1 300 Prior year budgetary surplus taken as non cash revenue (1 529) (1 848) Other non-cash movements 37 (15) Increase/(decrease) in employee benefits liability 4 076 1 280 Investing activities 4.3 (Increase)/decrease in intangible assets and property, plant and equipment (689) (284) (Increase)/decrease in long-term investments (152) (5) (Increase)/decrease in short-term investments (133) 6 NET CASHFLOW 4 924 2 181 NET INCREASE IN CASH AND CASH EQUIVALENTS (3) 4 924 2 181 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR (3) 2.11 19 005 16 824 CASH AND CASH EQUIVALENTS AT YEAR-END (3) 2.11 23 929 19 005

D. STATEMENT OF CHANGES IN NET ASSETS

EUR millions Reserves (A) Amounts to be called from Member States (B) Net Assets = (A) + (B) Fair value reserve Other reserves Accumulated Surplus/(Deficit) Economic outturn of the year BALANCE AS AT 31 DECEMBER 2006 4 2 851 (67 270) 197 (64 218) Movement in Guarantee Fund reserve (135) 135 0 Fair value movements 3 (26) (23) Other 60 (53) 7 Allocation of the economic outturn 2006 23 174 (197) 0 Budget result 2006 credited to Member States (1 848) (1 848) Economic outturn for the year 7 462 7 462 BALANCE AS AT 31 DECEMBER 2007 7 2 799 (68 888) 7 462 (58 620) Movement in Guarantee Fund reserve 158 (158) 0 Fair value movements 34 34 Other 113 (108) 5 Allocation of the economic outturn 2007 4 7 458 (7 462) 0 Budget result 2007 credited to Member States (1 529) (1 529) Economic outturn for the year 12 686 12 686 BALANCE AS AT 31 DECEMBER 2008 41 3 074 (63 225) 12 686 (47 424)

E. NOTES TO THE FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

1.1. LEGAL PROVISIONS AND THE FINANCIAL REGULATION

The accounts are kept in accordance with Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 (OJ L 248, 16.9.2002, p. 1, last amended by Council Regulation (EC) No 1525/2007 of 17 December 2007, OJ L 343, 27.12.2007) 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, last modified on 23 April 2007.

Article 133 of the Financial Regulation states that the Accounting Officer of the Commission adopts the accounting rules and methods to be applied by all the institutions and bodies. These accrual-based accounting policies are derived from International Public Sector Accounting Standards (IPSAS) or by default, International Financial Reporting Standards (IFRS) as respectively issued by the International Public Sector Accounting Standards Board (IPSASB) and the International Accounting Standards Board (IASB). These rules have been adopted by the Accounting Officer of the Commission after receiving the opinion of an Advisory Expert Group for Accounting Standards that provided professional guidance. The accounting rules are regularly reviewed and updated when necessary.

The accounting rules adopted by the Accounting Officer of the Commission are applied in all the European Institutions and bodies falling within the scope of consolidation in order to establish a uniform set of rules for accounting, valuation and presentation of the accounts with a view to harmonising the process for drawing up the financial statements and consolidation.

The Commission's Accounting Officer must submit the consolidated provisional accounts to the Court of Auditors for audit by 31 March of the following year. The Commission must adopt the final consolidated accounts before 31 July and they are then published in the Official Journal by 15 November together with the Court of Auditors’ statement of assurance.

1.2. ACCOUNTING PRINCIPLES

The objective of the financial statements is to provide information about the financial position, performance and cashflows of an entity that is useful to a wide range of users. For 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 and Agencies’ 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 and Agencies comprises general accounts and budget accounts. These accounts are 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. The general accounts allow for the preparation of the financial statements as they show all charges and income for the financial year based on accrual accounting rules 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:

— going concern basis;

— prudence;

— consistent accounting methods;

— comparability of information;

— materiality;

— no netting;

— reality over appearance;

— accrual-based accounting.

1.3. CONSOLIDATION

The scope of consolidation of the European Communities comprises 39 controlled entities, one associate and three joint ventures. The complete list of consolidated entities can be found in note 10. In comparison with 2007, the scope of consolidation has been extended by three agencies. The impact of these additions on the consolidated financial statements is not material. End of 2008 one Community agency has been liquidated. The operations of this agency have been taken over by the European Commission. Income and expenses of this agency are part of the consolidated economic outturn account.

Controlled entities

Controlled entities are all entities over which the European Communities have, directly or indirectly, the power to govern the financial and operating policies so as to be able to benefit from these entities’ activities. This power must be presently exercisable. Controlled entities are fully consolidated. The consolidation begins at the first date on which control exists, and ends when such control no longer exists. The most common indicator of control, majority of voting rights, is in most of the cases not applicable for the European Communities.

The European Institutions falling within the scope of consolidation have been created through their founding treaties. They represent the basis of the organisational structure of the European Communities and contribute incontestably to the European Communities’ objectives. These Institutions can therefore be considered as being under the exclusive control of the European Communities.

Under the same approach, the Communities Agencies and Executive Agencies created through a secondary act of legislation are considered as under the exclusive control of the European Communities and therefore are also included in the consolidation scope. It should be noted that the Office for Harmonisation in the Internal Market (Alicante) and the Community Plant Variety Office (Angers) do not receive any subsidies from the General Budget of the Communities. Also included in the scope of consolidation are two agencies of the 3rd pillar of the European Union that have received a subsidy from the General Budget of the European Communities (see also note 10). Furthermore the European Coal and Steel Communities in Liquidation (ECSC) is also considered as a controlled entity. At the winding up of Fusion for Energy Agency, foreseen for 2041, any surplus or deficit shall be distributed amongst the remaining members at that time.

All inter-company transactions and balances between European Communities’ controlled entities are eliminated. Unrealised gains and losses on inter-entity transactions are not material and have therefore not been eliminated.

Associates

Associates are all entities over which the European Communities have, directly or indirectly, significant influence but not control over financial and operating policy decisions. It is presumed that significant influence is given if the European Commission holds directly or indirectly 20 % or more of the voting rights.

Investments in associates are accounted for using the equity method, initially recognised at cost. The European Communities’ share of their associates’ post-acquisition profits or losses is recognised in the economic outturn account, and their share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Distributions received from an associate reduce the carrying amount of the investment. Unrealised gains and losses on transactions between the European Communities and their associate are not material and have therefore not been eliminated.

The accounting policies of associates may differ from those adopted by the European Communities for like transactions and events in similar circumstances. For practicable reasons, no adjustments were made to the associates’ financial statements used in applying the equity method.

In cases where the European Communities hold 20 % or more of a venture capital fund, the Communities do not seek to exert significant influence. Such funds are therefore treated as financial instruments categorised as available-for-sale and the equity method is not applied.

Joint ventures

A joint venture is a contractual arrangement whereby the European Communities and one or more parties (the ‘venturers’) undertake an economic activity which is subject to joint control. Joint control is the contractually agreed sharing of control, directly or indirectly, over an economic activity.

Investments in joint ventures are accounted for using the equity method initially recognised at cost. The European Communities’ interest of the profits or losses of their jointly controlled entities is recognised in the economic outturn account, and their interest of movements in reserves is recognised in reserves. The cumulative movements are adjusted against the carrying amount of the interest.

Unrealised gains and losses on transactions between the European Communities and their jointly controlled entity are not material and have therefore not been eliminated.

The accounting policies of joint ventures may differ from those adopted by the European Communities for like transactions and events in similar circumstances.

Non-consolidated entities

Not controlled by the European Communities and thus not consolidated in its accounts are the funds managed by the Communities on behalf of both the Sickness Insurance Scheme for staff of the European Communities, and the European Development Fund. At 31 December 2008 the total assets of both were EUR 288 million and EUR 1 219 million respectively – see note 11.

1.4. BASIS OF PREPARATION

1.4.1. Currency and basis for conversion

Functional and reporting currency

The financial statements are presented in millions of euros, the euro being the European Communities’ functional and reporting currency.

Transactions and balances

Foreign currency transactions are translated into euros using the exchange rates prevailing at the dates of the transactions.

Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the economic outturn account.

Different conversion methods apply to the following headings:

— property, plant and equipment and intangible assets, which retain their value in euros at the rate that applied at the date when they were purchased; and

— pre-financing amounts paid under the European Agricultural Guarantee Fund, which are converted at the exchange rates applying on the 10th day of the month following the month in which they are granted.

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

EURO Exchange Rates

Currency 31.12.2008 31.12.2007 BGN 1,9558 1,9558 CZK 26,8750 26,6280 DKK 7,4506 7,4583 EEK 15,6466 15,6466 GBP 0,9525 0,7333 HUF 266,7000 253,7300 LVL 0,7083 0,6964 LTL 3,4528 3,4528 PLN 4,1535 3,5935 RON 4,0225 3,6077 SKK 30,1260 33,5830 SEK 10,8700 9,4415 JPY 126,1400 164,9300 USD 1,3917 1,4721

Changes in the fair value of monetary securities denominated in a foreign currency and classified as available-for-sale that relate to a translation difference are recognised in the economic outturn account. Translation differences on non-monetary financial assets and liabilities held at fair value through profit or loss are recognised in the economic outturn account. Translation differences on non-monetary financial assets classified as available-for-sale are included in the fair value reserve.

1.4.2. Use of estimates

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

1.5. BALANCE SHEET

1.5.1. Intangible assets

Acquired computer software licences are stated at cost less accumulated amortisation and impairment losses. The assets are amortised on a straight-line basis over their estimated useful lives, being 4 years. Internally produced intangible assets are currently expensed in the economic outturn account. Costs associated with developing or maintaining computer software programmes are recognised as expenses as incurred, as are scientific research and development costs.

1.5.2. Property, plant and equipment

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

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits or service potential associated with the item will flow to the European Communities and its cost can be measured reliably. Repairs and maintenance are charged to the economic outturn account during the financial period in which they are incurred. As the European Communities do not borrow money to fund the acquisition of property, plant and equipment, there are no borrowing costs related to such purchases.

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

Depreciation rates

Type of asset Straight line depreciation rate Buildings 4 % Plant, machinery and equipment 10 % to 25 % Furniture 10 % to 25 % Fixtures and fittings 10 % to 33 % Vehicles 25 % Computer hardware 25 % Other tangible assets 10 % to 33 %

Gains and losses on disposals are determined by comparing proceeds less selling expenses with the carrying amount of the disposed asset. These are included in the economic outturn account.

Leases

Leases of tangible assets, where the European Communities have substantially all the risks and rewards of ownership, are classified as financial leases. Financial leases are capitalised at the inception of the lease at the lower of the fair value of the leased asset and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The rental obligations, net of finance charges, are included in other liabilities (long and short-term.) The interest element of the finance cost is charged to the economic outturn account over the lease period so as to produce a constant periodic interest rate on the remaining balance of the liability for each period. The assets acquired under financial leases are depreciated over the shorter of the assets’ useful life and the lease term.

Leases where the lessor retains a significant portion of the risks and rewards inherent to ownership are classified as operating leases. Payments made under operating leases are charged to the economic outturn account on a straight-line basis over the period of the lease.

1.5.3. Impairment of non-financial assets

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

Intangible assets and property, plant and equipment residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

1.5.4. Investments

Investments in Associates and interests in Joint Ventures

Investments in associates and interests in joint ventures are accounted for using the equity method. The investments are tested for impairment if there are indications of impairment and written down to the lower recoverable amount if necessary. The recoverable amount is determined as described under 1.5.3.

Investments in Venture Capital Funds

Classification and measurement

Investments in Venture Capital Funds are classified as available-for-sale assets and accordingly, are carried at fair value with gains and losses arising from changes in the fair value (including translation differences) recognised in the fair value reserve.

Fair value considerations

Since they do not have a quoted market price in an active market and in the absence of any other reliable valuation technique, investments in Venture Capital Funds are valued on a line-by-line basis at the lower of cost or attributable net asset value (‘NAV’) as reported by the fund manager up to the balance sheet date, thus excluding any attributable unrealised gain that may be prevailing in the underlying investment portfolio. Investments in Venture Capital Funds in existence for less than two years at balance sheet date are valued based on the same principles, except in the case of unrealised losses due only to administrative expenses where, in view of the early stage of the underlying investment portfolio, these unrealised losses are not taken into account.

Under this method, the fair value of investments in Venture Capital Funds is achieved by applying the aggregated Net Asset Value (‘NAV’) concept, which implicitly assumes that if the NAVs of the funds can be considered as compliant with IAS 39, then the aggregation of the NAVs of all funds will itself be compliant with IAS 39.

In accordance with this method, the funds are classified into three categories:

— Category I – funds that have adopted the fair value requirements of IAS 39.

— Category II – funds that have adopted other valuation guidelines (i.e. AFIC, BVCA & EVCA valuation guidelines) or standards that can be considered as in line with IAS 39.

— Category III – funds that have not adopted the fair value requirements of IAS 39 or any other valuation guidelines in line with IAS 39.

For Categories I & II, unrealised gains resulting from the fair value measurement are recognised through reserves and unrealised losses are assessed for impairment so as to determine whether they are recognised as impairment losses in the economic outturn account or as changes in the fair value reserve. The fair valued attributable NAV is determined through applying either the European Communities’ percentage ownership in the fund to the NAV reflected in the most recent report or, to the extent available, the precise share value at the same date, submitted by the respective Fund Manager.

Investments belonging to category III are valued at cost less impairment losses (although no investments of this type are currently held).

Financial instruments

Financial instruments are contracts that give rise to a financial asset of one entity and a financial liability or equity instrument of another.

Classification

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

(i) Financial assets at fair value through profit or loss

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

(ii) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the EC provides money, goods or services directly to a debtor with no intention of trading the receivable. They are included in non-current assets, except for maturities within 12 months of the balance sheet date.

(iii) Held-to-maturity investments

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

(iv) Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are classified as either current or non-current assets, depending on the time period in which the Communities intend to dispose of them. Investments in unconsolidated entities and other equity investments that are not accounted for using the equity method are also classified as available-for sale-financial assets.

Initial recognition and measurement

Purchases and sales of financial assets at fair value through profit or loss, held-to-maturity and available-for-sale are recognised on trade-date – the date on which the European Communities commit to purchase or sell the asset. Loans are recognised when cash is advanced to the borrowers. Financial instruments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the economic outturn account.

The fair value of a financial asset on initial recognition is normally the transaction price (i.e. the fair value of the consideration received). However, when a long-term loan that carries no interest or an interest below market conditions is granted, its fair value can be estimated as the present value of all future cash receipts discounted using the prevailing market rate of interest for a similar instrument with a similar credit rating.

Financial instruments are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the European Communities have transferred substantially all risks and rewards of ownership.

Subsequent measurement

Financial assets at fair value through profit or loss are subsequently carried at fair value. Gains and losses arising from changes in the fair value of the ‘financial instruments at fair value through profit or loss’ category are included in the economic outturn account in the period in which they arise.

Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. In the case of loans granted on borrowed funds, the effective interest method does not have to be applied separately to loans and borrowings. The reason for this is that these loans have the characteristics of ‘back-to-back operations’ and the differences between the loan and the borrowing conditions and amounts are not material. Thus, there is no relevant information missing that would affect the reader's understanding of the underlying transactions. The transaction costs incurred by the Communities and then recharged to the beneficiary of the loan are directly recognised in the economic outturn account.

Available-for-sale financial assets are subsequently carried at fair value. Gains and losses arising from changes in the fair value of available-for-sale assets are recognised in the fair value reserve. When assets classified as available-for-sale are sold or impaired, the cumulative fair value adjustments previously recognised in the fair value reserve are recognised in the economic outturn account. Interest on available-for-sale financial assets calculated using the effective interest method is recognised in the economic outturn account. Dividends on available-for-sale equity instruments are recognised when the Communities right to receive payment is established.

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

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

Impairment of financial assets

The European Communities assess at each balance sheet date whether there is objective evidence that a financial asset is impaired. A financial asset is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset and that loss event (or events) has an impact on the estimated future cash flows of the financial asset that can be reliably estimated.

(i) Assets carried at amortised cost

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

(ii) Assets carried at fair value

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

1.5.5. Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first-in, first-out (FIFO) method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses.

When inventories are held for distribution at no charge or for a nominal charge, they are measured at the lower of cost and current replacement cost. Current replacement cost is the cost the European Communities would incur to acquire the asset on the reporting date.

1.5.6. Pre-financing amounts

Pre-financing is a payment intended to provide the beneficiary with a cash advance, i.e. a float. It may be split into a number of payments over a period defined in the particular pre-financing agreement. The float or advance is repaid or used for the purpose for which it was provided during the period defined in the agreement. If the beneficiary does not incur eligible expenditures, he has the obligation to return the pre-financing advance to the European Communities. The amount of the pre-financing is reduced (wholly or partially) by the acceptance of eligible costs and amounts returned.

At year-end, outstanding pre-financing amounts are valued at the original amount(s) paid less: amounts returned, eligible amounts cleared, estimated eligible amounts not yet cleared at year-end, and value reductions.

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

1.5.7. Receivables

Receivables are carried at original amount less write-down for impairment. A write-down for impairment of receivables is established when there is objective evidence that the European Communities will not be able to collect all amounts due according to the original terms of receivables. The amount of the write-down is the difference between the asset’s carrying amount and the recoverable amount, being the present value of expected future cash flows, discounted at the market rate of interest for similar borrowers. The amount of the write-down is recognised in the economic outturn account. Also recognised is a general write-down in value of 20 % per year for outstanding recovery orders not already subject to a specific write-down. See note 1.5.13 below concerning the treatment of accrued income at year-end.

1.5.8. Cash and cash equivalents

Cash and cash equivalents are financial instruments and defined as short-term assets. They include cash at hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within financial liabilities under current liabilities on the balance sheet.

1.5.9. Employee benefits

Pension obligations

The European Communities operate defined benefit pension plans. A defined benefit plan is a pension plan that generally defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. Whilst staff contribute from their salaries one third of the expected cost of these benefits, the liability is not funded.

The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date. The defined benefit obligation is calculated by actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of government bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability.

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised immediately in the economic outturn account. Past-service costs are recognised immediately in economic outturn account, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortised on a straight-line basis over the vesting period.

Post-employment sickness benefits

The European Communities provide health benefits to its employees through the reimbursement of medical expenses. A separate fund (‘RCAM’) has been created for the day-to-day administration. Both current employees, pensioners, widowers and their beneficiaries benefit from the system.

The benefits granted to the ‘inactives’ (pensioners, orphans, etc.) are classified as ‘Post-Employment Employee Benefits’. Given the nature of these benefits, an actuarial calculation is required. The liability in the balance sheet is determined on a similar basis as that for the pension obligations (see above).

1.5.10. Provisions

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

Where the effect of the time value of money is material, the amount of the provision is the present value of the expenditures expected to be required to settle the obligation. The discount rate used is a rate that reflects current market assessments of the time value of money and the risks specific to the liability but not the risks for which future cash flows estimates have been adjusted.

1.5.11. Financial liabilities

Financial liabilities are classified as financial liabilities at fair value through profit or loss or as financial liabilities carried at amortised cost (Borrowings). Borrowings are composed of borrowings from credit institutions and debts evidenced by certificates. They are recognised initially at fair value, being their issue proceeds (fair value of consideration received) net of transaction costs incurred, then subsequently carried at amortised cost using the effective interest method; any difference between proceeds, net of transaction costs, and the redemption value is recognised in the economic outturn account over the period of the borrowings using the effective interest method. They are classified as non-current liabilities, except for maturities less than 12 months after the balance sheet date. In the case of loans granted on borrowed funds, the effective interest method may not be applied separately to loans and borrowings, based on materiality considerations. The transaction costs incurred by the European Communities and then recharged to the beneficiary of the loan are directly recognised in the economic outturn account.

Financial liabilities categorised at fair value through profit or loss include derivatives when their fair value is negative. They follow the same accounting treatment as financial assets at fair value through profit or loss, see note 1.5.4.

1.5.12. Payables

A significant amount of the payables of the Communities are not related to the purchase of goods or services – instead they are unpaid cost claims from beneficiaries of grants or other Communities funding. They are recorded as payables for the requested amount when the cost claim is received and, after verification, accepted as eligible by the relevant financial agents. At this stage they are valued at the accepted and eligible amount.

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

1.5.13. Accrued and deferred income and charges

A critical element in accrual accounting is the exercise of ensuring that transactions are recorded in the accounting year to which they relate. This exercise is referred to as the cut-off exercise. In particular an assessment has to be made concerning eligible expenses incurred by beneficiaries of Communities’ funds but not yet reported to the Communities (accrued charges). Different methods are used depending on the type of activities and information available so as to arrive at the best estimate of these amounts. Conversely, some payments made in current year relate to subsequent periods (deferred charges) and these have to be identified and included in the subsequent period(s).

According to the European Communities accounting rules, transactions and events are recognised in the financial statements in the period to which they relate. At the end of the accounting period, accrued expenses are recognised based on an estimated amount of the transfer obligation of the period. The calculation of the accrued expenses is done in accordance with detailed operational and practical guidelines issued by the Commission which aim at ensuring that the financial statements reflect a true and fair view.

Revenue is also accounted for in the period to which it relates. At year-end, if an invoice is not yet issued but the service has been rendered, the supplies have been delivered by the Communities or a contractual agreement exists (i.e. by reference to a treaty), an accrued income will be recognised in the financial statements.

In addition, at year-end, if an invoice is issued but the services have not yet been rendered or the goods supplied have not yet been delivered, the revenue will be deferred and recognised in the subsequent accounting period.

1.6. ECONOMIC OUTTURN ACCOUNT

1.6.1. Revenue

Non-exchange revenue

This makes up the vast majority of the Communities’ revenue and includes mainly direct and indirect taxes and own resource amounts. In addition to taxes the European Communities may also receive payments from other parties, such as duties, fines and donations.

GNI based resources and VAT resources

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

Traditional own resources

Receivables and related revenues are recognised when the relevant monthly A statements (including duties collected and amounts due that are guaranteed and not contested) are received from the Member States. At the reporting date, revenue collected by the Member States for the period but not yet paid to the European Communities is estimated and recognised as accrued revenue. The quarterly B statements (including duties neither collected nor guaranteed, as well as guaranteed amounts that have been contested by the debtor) received from the Member States are recognised as revenue less the collection costs to which they are entitled (25 %). In addition, a value reduction is recognised for the amount of the estimated recovery gap in the economic outturn account.

Fines

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

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

— or not to accept the decision, in which case they lodge an appeal under Communities’ law.

However, the principal of the fine must be paid within the time limit of three months laid down as the appeal does not have suspensory effect (Article 242 of the EC Treaty). The debtor must pay the fine provisionally but, under certain circumstances and subject to the agreement of the Commission's Accounting Officer, it may present a bank guarantee for the amount instead.

If the undertaking appeals against the decision, and has already provisionally paid the fine, the amount is disclosed as a contingent liability. However, since an appeal against a Communities’ decision by the addressee does not have suspensory effect, the cash received is used to clear the receivable. If a guarantee is received instead of payment, the fine remains as a receivable.

If it appears probable that the Court of First Instance may not rule in favour of the Communities, a provision is recognised to cover this risk. If a guarantee had been given instead, then the receivable outstanding is written-down as required. The accumulated interest received by the European Communities on the bank accounts where received payments are deposited is recognised as revenue, and any contingent liability is increased accordingly.

Recovery of expenses

For operations giving rise to reimbursement of expenditures previously paid by the European budget to a final beneficiary, third country or a Member State, recovery orders and deductions from subsequent payments are established and accounted for as follows:

— Recovery of expenses: For these types of recoveries the accounting rules require that if the recovery order is issued in the same year of the original payment it should result in a receivable from the recipient with a corresponding reduction in the expenses of that year. If, however, the recovery order is issued in another year, it results in a receivable with the corresponding entry being income in the economic outturn account (under the heading ‘recovery of expenses’) for that year; or

— Recovery of pre-financing amounts: in this case the amount is included under the pre-financing heading.

Exchange revenue

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

Interest income and expense

Interest income and expense are recognised in the economic outturn account using the effective interest method. This is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument (or, when appropriate, a shorter period) to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the European Communities estimate cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but do not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

In the case of loans granted on borrowed funds, the effective interest method may not be applied separately to loans and borrowings, based on materiality considerations. The transaction costs incurred by the European Communities and then recharged to the beneficiary of the loan are directly recognised in the economic outturn account.

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

Dividend income

Dividend income is recognised when the right to receive payment is established.

1.6.2. Expenditure

Exchange expenses arising from the purchase of goods and services are recognised when the supplies are delivered and accepted by the European Communities. They are valued at original invoice cost.

Non-exchange expenses are specific to the European Communities and account for the majority of its expenditure. They relate to transfers to beneficiaries and can be of three types: entitlements, transfers under agreement and discretionary grants, contributions and donations.

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

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

1.7. CONTINGENT ASSETS AND LIABILITIES

Contingent assets

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

Contingent assets are assessed at each balance sheet date to ensure that developments are appropriately reflected in the financial statements. If it has become virtually certain that an inflow of economic benefits or service potential will arise and the asset’s value can be measured reliably, the asset and the related revenue are recognised in the financial statements of the period in which the change occurs.

Contingent liabilities

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

A contingent liability is disclosed unless the possibility of an outflow of resources embodying economic benefits or service potential is remote. While the EC is exposed to some risks due to the nature of its day-to-day activities (e.g. implementing and enforcing EU laws and standards), and like many public entities some of these risks are self-insured, no contingent liability is disclosed until a specific event has occurred, since until then the possibility of an outflow of resources is remote.

Contingent liabilities are assessed at each balance sheet date to determine whether an outflow of resources embodying economic benefits or service potential has become probable. If it becomes probable that an outflow of resources embodying economic benefits or service potential will be required for an item dealt with as contingent liability, a provision is recognised in the financial statements of the period in which the change of probability occurs.

Commitments for future funding

A commitment for future funding represents a legal or constructive commitment, usually contractual, that the Communities have entered into and which may require a future outflow of resources.

Guarantees

Guarantees are possible assets or obligations that arise from past events and whose existence will be confirmed by the occurrence or non-occurrence of the object of the guarantee. Guarantees can thus qualify as contingent assets or liabilities. A guarantee is settled when the object of the guarantee no longer exists. It is crystallised when the conditions are fulfilled for calling a payment from the guarantor.

2. NOTES TO THE BALANCE SHEET

NON CURRENT ASSETS

2.1. INTANGIBLE ASSETS

EUR millions Amount Gross carrying amount at 31 December 2007 105 Additions 30 Disposals (3) Transfers between asset categories 0 Other changes 2 Gross carrying amount at 31 December 2008 134 Accumulated amortisation at 31 December 2007 61 Amortisation charge for the year 19 Disposals (2) Transfers between asset categories 0 Other changes 0 Accumulated amortisation at 31 December 2008 78 NET CARRYING AMOUNT AT 31 DECEMBER 2008 56 Net carrying amount at 31 December 2007 44

The amounts relate primarily to computer software.

2.2. PROPERTY, PLANT AND EQUIPMENT

In some countries the value of the land cannot be distinguished from the value of the building since both were purchased as a whole. The value of the land, which is not subject to depreciation, will not be evaluated separately unless it becomes necessary, i.e. for subsequent expenditure such as construction of a new property or a partial sale.

PROPERTY, PLANT & EQUIPMENT

EUR millions Land and buildings Plant and equipment Furniture and vehicles Computer hardware Other tangible assets Finance leases Assets under construction Total Gross carrying amount at 31 December 2007 3 860 350 194 446 115 1 943 332 7 240 Additions 38 24 16 59 23 368 115 643 Disposals (16) (30) (14) (54) (9) 0 0 (123) Transfers between asset categories 3 3 1 0 13 310 (330) 0 Other changes 17 21 8 15 9 0 5 75 Gross carrying amount at 31 December 2008 3 902 368 205 466 151 2 621 122 7 835 Accumulated depreciation at 31 December 2007 1 506 281 142 333 81 374 2 717 Depreciation charge for the year 122 29 16 62 13 77 319 Depreciation written back (15) 0 (1) (1) 0 0 (17) Disposals (5) (30) (10) (50) (9) 0 (104) Transfers between asset categories 89 (1) 0 0 0 (88) 0 Other changes (81) 21 2 5 7 85 39 Accumulated depreciation at 31 December 2008 1 616 300 149 349 92 448 2 954 NET CARRYING AMOUNT AT 31 DECEMBER 2008 2 286 68 56 117 59 2 173 122 4 881 Net carrying amount at 31 december 2007 2 354 69 52 113 34 1 569 332 4 523

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 (see also notes 2.15 and 2.18.1). They break down as follows:

FINANCE LEASES

EUR millions Description Cumulative charges (A) Future amounts to be paid Total Value Subsequent expenditure on assets Asset value Depreciation Net carrying amount < 1 year > 1 year > 5 years Total Liability (B) A + B (C) A + B + C (E) A + B + C + E Land and buildings 732 47 239 1 520 1 806 2 538 61 2 599 (442) 2 157 Other tangible assets 6 5 11 0 16 22 0 22 (6) 16 Total at 31.12.2008 738 52 250 1 520 1 822 2 560 61 2 621 (448) 2 173 Total at 31.12.2007 331 32 170 1 349 1 551 1 882 61 1 943 (374) 1 569

2.3. LONG-TERM INVESTMENTS

EUR millions Note Balance at 31.12.2008 Balance at 31.12.2007 Investment in Associates 2.3.1 278 246 Interest in Joint Ventures 2.3.2 145 32 Guarantee Fund 2.3.3 1 091 1 149 Available-for-Sale assets 2.3.4 564 533 Held for trading assets 2.3.4 0 13 Total Investments 2 078 1 973

This heading covers investments made with a view to establishing permanent links and support of the activities of the European Communities. It also includes the net assets of the Guarantee Fund.

2.3.1. Investments in associates: European Investment Fund (EIF)

EUR millions Amount Amount at 31 December 2007 246 Acquisitions 33 Share of net surplus/(deficit) 10 Other equity movements (dividend) (11) Amount at 31 December 2008 278

The European Investment Fund (EIF) is the European Union's financial institution specialising in providing risk capital and guarantees to SMEs. Under the Council Decision of 6 June 1994 the European Communities, represented by the Commission, originally subscribed for a total of ECU 600 million of the EIF’s capital, being 600 shares or 30 % of the EIF’s capital. Following a capital increase during 2007 the Commission subscribed for further shares meaning that at 31 December 2008, it has subscribed for a total amount of EUR 786 million (out of EUR 2 865 million) of the share capital of the EIF. This represents 27,43 % of the total EIF share capital. The Commission has paid in 20 %, the balance being uncalled corresponding to an amount of EUR 629 million – see also note 5.13.2.

Under an agreement between the Commission and the European Investment Bank (EIB) signed in 2005, the Commission is entitled to sell its shares at any time to the EIB at the price corresponding to the EIF valuation divided by the total number of issued shares. The value of the put option is close to nil since the formula used for determining the sale price of the shares is similar to the one used to determine the net equity of the EIF.

The Communities’ investment in the EIF is accounted for using the equity method, in accordance with the EC accounting rules. The shareholding is thus valued at 27,43 % of the EIF’s net assets, which at 31 December 2008 amounted to EUR 278 million (2007: EUR 246 million), of which EUR 10 million concerns the result for 2008. A dividend of EUR 6 million relating to the financial year 2007 was received in 2008.

2.3.2. Interests in joint ventures

EUR millions Galileo SESAR ITER Int Total Amount at 31 December 2007 0 10 22 32 Acquisitions 0 100 69 169 Share of net surplus/(deficit) 0 (7) (49) (56) Amount at 31 December 2008 0 103 42 145

Galileo Programme

For the implementation of the In Orbit Validation (IOV) phase of the Galileo programme, a joint undertaking, within the meaning of Article 171 of the Treaty, was set-up by the Council Regulation (EC) No 876/2002 for a period of 4 years (2002 to 2006.) The aim of this legal entity was 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 were 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, made available to the Galileo Joint Undertaking (GJU) the funds to co-finance the activities of this IOV phase.

The GJU was put into liquidation at the end of 2006 and the process is still ongoing. The net assets of the GJU in liquidation at year-end amounted to EUR 0. The GJU is accounted for using the equity method. As the entity was inactive and still undergoing liquidation in 2008, there were no revenues or expenditures incurred. The value of the investment at 31 December 2008 was EUR 0, being the investment of EUR 585 million less the accumulated share of losses, EUR 585 million.

The European GNSS Supervisory Authority (GSA), a Community agency created in 2004 and consolidated in the Communities accounts, officially took over responsibility from the GJU on 1 January 2007, as the GJU was put into liquidation. While this new body was originally intended to operate the public private partnership, following a decision of the Council made in November 2007 the Galileo programme is now to be financed entirely from the EU budget. Furthermore, following Regulation 638/2008 of 25 July 2008, it is now the Commission who manages the programme on behalf of the EC. An agreement between the Commission and ESA is expected to be signed in 2009 that will clarify some of the practical issues, including the transfer of created assets to the Commission at the end of the IOV stage (expected at end 2010).

It should be noted that the Commission has, up to end 2008 and including the above investment in the GJU, paid EUR 795 million to the IOV phase of the Galileo programme. As this programme is currently still in the research phase, under the EC accounting rules, the money spent has been expensed and no intangible assets have been recognised. Only when the project moves to the development stage will it be possible to capitalise such expenditure. The total (indicative) Commission contribution foreseen for the next phase of the Galileo programme (from 2008 to 2013) is EUR 2 645 million.

SESAR

The aim of this Joint Undertaking is to ensure the modernisation of the European air traffic management system and the rapid implementation of the European air traffic management Master Plan by coordinating and concentrating all relevant research and development efforts in the Communities. The SESAR Joint Undertaking started its activities in mid-2007 and shall cease to exist eight years after an endorsement by the Council of the European air traffic management Master Plan. The European Communities, represented by the Commission, and the European Organisation for the Safety of Air Navigation (Eurocontrol), represented by its Agency, are the founding members of the SESAR Joint Undertaking. The members shall have votes in accordance with their respective contributions but, both founding members shall have as a minimum a voting right of 25 %. At 31 December 2008, the Commission has contributed 91,73 % of the total contribution of all venturers in SESAR. The total (indicative) Commission contribution foreseen for SESAR (from 2007 to 2016) is EUR 700 million. The European Communities’ equity investment in this Joint Undertaking is based on SESAR's financial statements covering the period from 10 August 2007 (start of its activities) until 31 December 2008, according to Article 5 of SESAR's Financial Regulation.

ITER International Fusion Energy Organisation (ITER)

ITER involves the European Communities and six other venturers from China, India, Russia, Korea, Japan and USA. ITER was created to manage the ITER facilities, to encourage the exploitation of the ITER facilities by the laboratories, other institutions and personnel in the fusion energy research and development programmes of the members, to promote public understanding and acceptance of fusion energy, and to undertake any other activities that are necessary to achieve its purpose. The members shall have voting rights in proportion of their respective contributions but in general all decisions shall be taken by unanimity. At 31 December 2008, the Commission has contributed 48,46 % of the total investment in ITER. The total (indicative) Commission contribution foreseen for ITER (from 2007 to 2041) is EUR 7 649 million.

2.3.3. Guarantee Fund

NET ASSETS OF THE GUARANTEE FUND (4)

EUR millions Balance at 31.12.2008 Balance at 31.12.2007 Available-for-sale assets 887 901 Cash and cash equivalents 205 249 Total assets 1 092 1 150 Total liabilities (1) (1) Net assets 1 091 1 149

The Guarantee Fund for external actions covers loans guaranteed by the Communities as a result of a Council Decision, in particular European Investment Bank (EIB) lending operations outside the European Union and loans under macro-financial assistance (MFA loans) and Euratom loans outside the European Union. It is a long-term instrument to cover any defaulting loans guaranteed by the Communities and can therefore be seen as a long-term investment. This is evidenced by the fact that nearly 88 % of the available-for-sale assets have a maturity of between 1 and 10 years (see also note 7.9). The Fund is endowed by payments from the Communities’ general budget equivalent to 9 % of the capital value of the operations, 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. Any yearly surplus arising shall be paid back to a special heading in the statement of revenue in the general budget of the European Communities.

The European Communities are required to include a guarantee reserve to cover loans to third 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. This reserve of EUR 1 276 million corresponds to the target amount of 9 % of the loans outstanding at 31 December 2008. The net assets of the Fund at 31 December 2008 total EUR 1 091 million. The difference between the net assets and the amount of the reserve corresponds to the amount to be paid by the EU budget to the Fund, i.e. EUR 185 million. Fair-value changes of the available-for-sale debt security portfolio have been recognised in equity in 2008 totalling EUR 15 million (2007: EUR (19) million.).

The financial risk management policies of the Guarantee Fund are described in note 7.

2.3.4. Other investments

2.3.4.1. Available-for-sale assets

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

LONG-TERM AVAILABLE-FOR-SALE ASSETS

EUR millions EBRD RCO ETF Start up EFSE Other Total Amounts at 31.12.2007 157 218 98 55 5 533 Acquisitions 0 17 51 7 1 76 Disposals/withdrawals 0 (27) (4) 0 (2) (33) Revaluation surplus/ (deficit) t/f to equity 0 1 (6) 5 (1) (1) Impairment loss 0 (5) (6) 0 0 (11) Amounts at 31.12.2008 157 204 133 67 3 564

European Bank for Reconstruction and Development (EBRD) investment

The Commission has subscribed to 3 % of the EBRD’s total capital of EUR 20 billion. At balance sheet date, the called up amount was EUR 157 million, of which EUR 156 million has been paid. Payments outstanding on called up capital (EUR 1 million) are recorded under short-term liabilities and accounted for at amortised cost. Payments outstanding on non-called up capital amount to EUR 443 million and are included as contingent liabilities in the off-balance sheet. As the EBRD is not quoted on any stock exchange and in view of the contractual restrictions included in the EBRD’s articles of incorporation relating, amongst others, to the sale of participating interests, capped at acquisition cost and only authorised to existing shareholders, the Commission's shareholding is valued at cost less any write-down for impairment.

Risk Capital Operations (RCO)

Under risk capital operations amounts are granted to financial intermediaries to finance equity investments. Although some of these contracts have the characteristics of loans, since the vast majority of these finance contracts do not have the basic and constituent characteristics of a loan (as there is no fixed reimbursement schedule or interest rate agreed for the principal consideration), the entire portfolio is treated as indirect equity investments. They are held at historic cost less any provisions for impairment, as there are no quoted market prices available in an active market and their fair value cannot currently be reliably measured.

Other investments

The most significant amounts concern the Growth & Employment programme, the MAP programme and the CIP programme, under the trusteeship of the EIF, supporting the creation and financing of start-up SMEs by investing in suitable specialised venture capital funds (EUR 133 million). Also included is EUR 67 million relating to the European Fund for South East Europe, an investment company with variable share capital (SICAV). The overall objective of EFSE is to foster economic development and prosperity in South East Europe through the sustainable provision of additional development finance via local financial intermediaries. The current voting rights of the Communities amount to 14,7 %.

2.3.4.2. Held for trading assets

See 2.8.2, these amounts now relate to the short-term.

2.4. LOANS

This heading covers loan amounts owed to the Communities maturing in over one year:

EUR millions Balance at 31.12.2008 Balance at 31.12.2007 Loans granted from the EC budget & ECSC 179 189 Loans granted from borrowed funds 3 386 1 617 Net assets 3 565 1 806

2.4.1. Loans granted from the European Communities budget and the ECSC in liquidation

EUR millions Loans with special conditions ECSC in Liquidation Total Total at 31.12.2007 155 34 189 Repayments (17) (8) (25) Changes in carrying amount 12 3 15 Total at 31.12.2008 150 29 179

Loans with Special Conditions

This item covers loans with special conditions granted at preferential rates as part of co-operation with non-member countries. All amounts fall due more than 12 months after year-end. The effective interest rates on these loans vary between 7,39 % and 12,36 %.

Housing loans of the ECSC in liquidation (ECSC)

Housing loans are loans granted by the ECSC from its own funds in accordance with articles 54 and 54.2 of the ECSC Treaty. These loans are granted at a fixed rate of 1 % and consequently, considered as loans at preferential rates. The effective interest rat