REVENUE AND EXPENDITURE ACCOUNT AND BALANCE SHEET RELATING TO OPERATIONS UNDER THE 1997 BUDGET (Articles 78 and 81 of the Financial Regulation of 21 December 1977) VOLUME IV CONSOLIDATED REVENUE AND EXPENDITURE ACCOUNT AND BALANCE SHEET EXPLANATORY NOTES (98/C 350/01)

FOREWORD

STRUCTURE

1. The revenue and expenditure account and the balance sheet of the European Union institutions are drawn up in accordance with Articles 78, 80 and 81 of the Financial Regulation of 21 December 1977 applicable to the general budget of the European Communities, as last amended by Council Regulation No 2335/95 of 18 September 1995.

2. The accounts are set out in four volumes:

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3. Volume I sets out the salient features of budgetary implementation in the year.

Volumes II and III describe the implementation of revenue and expenditure in each of the institutions, following the budgetary nomenclature, and contain tables showing the capital operations of borrowing and lending.

This volume (IV) contains the consolidated revenue and expenditure account and balance sheet, accompanied by explanatory notes. The consolidated revenue and expenditure account and balance sheet give the corresponding figures for the previous year.

1. ACCOUNTING PRINCIPLES

1.1. According to international standards (1) the aims of a financial statement must be to describe the nature and range of an institution's activities, explain how it is financed and supply definitive information on its operations.

These are certainly the objectives of the revenue and expenditure account produced annually by the European Commission. The manner in which financial operations were conducted in the course of the financial year are described in Volume I, Part 2 (Analysis of financial management).

If they are to present a fair and reliable picture, financial statements must not only supply relevant information, 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.

1.2. The accounting system of the European institutions comprises general accounts and budget accounts. These accounts are kept by calendar year in ecus.

1.2.1. Using the 'double-entry method` the general accounts show all expenditure and revenue over the financial year and are designed to establish the financial position of the institutions in the form of a balance sheet of assets and liabilities at 31 December the previous year.

The general accounts are based on the following principles:

- the principle of the continuity of activities;

- the principle of prudence, whereby assets are not overvalued and liabilities are not undervalued;

- the principle of consistent accounting methods;

- the principle of no-netting between assets and liabilities.

For the future the Commission is studying the possibility of presenting a broader accounting result to ensure that balance sheet entries are transferred from one year to the next via the revenue and expenditure account. The chart of accounts will maintain the distinction between the revenue and expenditure accounts and the balance sheet. To do so it must contain:

a) the revenue and expenditure accounts, subdivided as follows:

- the budgetary revenue and expenditure accounts, providing an overall view of budget implementation, and accounts showing exchange rate differences; these accounts will serve to determine the year's balance;

- the additional revenue and expenditure accounts, which can be used to determine the broader accounting result;

b) the balance sheet accounts, which can be used to establish the institution's financial position, and will show the estimated effect of liabilities and entitlements.

1.2.2. The budget accounts give a detailed picture of the implementation of the budget. They are designed to establish:

- the consolidated revenue and expenditure account referred to in Title VI of the Financial Regulation;

- the figures showing the implementation of the budget referred to in Article 34 of the Financial Regulation.

2. ACCOUNTING RULES AND METHODS

2.1. The accounts are kept in accordance with the Financial Regulation of 21 December 1977 (last amended on 18 September 1995) and a Regulation laying down certain implementing rules.

2.2. Conversion into ecus

2.2.1. Accounts are kept in ecus.

2.2.2. The ecu conversion rates used to prepare the balance sheet were the rates applying on 31 December 1997, except for the following:

- tangible assets (furniture and equipment), which are valued at their purchase value in ecus at the accounting rate that applied when they were purchased;

- appropriations carried over, some of which are to cover commitments in national currencies converted into ecus at the monthly accounting rates for December; the total amount in ecus of appropriations carried over cannot be subsequently revalued.

- Advances paid under the Guarantee Section of the European Agricultural Guidance and Guarantee Fund are converted at the exchanges rates applying on the 10th day of the second month preceding the month for which they are paid.

- Some operations relating to staff are converted at special rates. Other operations are converted at the monthly accounting rates in force when they are carried out.

2.3. Revenue

2.3.1. The amounts of own resources and financial contributions entered in the accounts are those credited in the course of the year to the accounts opened in the Commission's name by the governments of the Member States.

The difference between the amount of VAT own resources, GNP-based resources and financial contributions entered in the budget and the amount actually due is calculated by 1 July of the following year and entered in an amending budget for that year.

2.3.2. The amounts of other revenue entered in the accounts are sums actually received in the course of the year.

2.4. Expenditure

2.4.1. For the purpose of calculating the balance for the year, expenditure covers payments made against the year's appropriations for payments plus any of those same appropriations that are carried over.

2.4.2. Payments made against the year's appropriations for payments means payments for which authorisation reaches the Financial Controller by 31 December and which are paid by the accounting officer by 15 January of the following year.

In the case of the Guarantee Section of the European Agricultural Guidance and Guarantee Fund, the payments are those effected by the Member States between 16 October 1996 and 15 October 1997, provided that the accounting officer was notified of the commitment and authorisation by 31 January 1998.

2.4.3. Appropriations for payments may be carried over to the following financial year only. The procedure is as follows:

- Non-differentiated appropriations: carryover is generally automatic if it is to cover outstanding commitments; otherwise the budgetary authority has to give prior authorisation;

- Differentiated appropriations: unused payment appropriations usually lapse; however, the Commission may decide to carry them over if the payment appropriations for the following year are not sufficient to meet previous commitments or commitments made against commitment appropriations which have themselves been carried over.

2.5. Rules on valuation

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

2.5.1. Tangible and intangible fixed assets are valued at their historic value converted into ecus at the rate applying when they were purchased. The Commission's fixed assets must also be subject to depreciation for each full year, according to the linear method (Section 8 of the Commission's Inventory Regulation).

2.5.2. Stocks are valued at the price of the last supplies received, converted at the ecu rate applying on 31 December.

2.5.3. Financial assets are valued at their purchase price. If denominated in foreign currency, they are converted at the ecu rate applying on 31 December. In line with the principle of prudence, an adjustment must be made where there is a probable loss.

2.5.4. Entitlements are entered in the accounts at their face value, converted at the ecu rate applying on 31 December, with the exception of entitlements denominated at a fixed rate. Save in exceptional cases, no adjustments are made to entitlements. The Commission is considering this possibility for the future. Where this is the case, a special indication is given in the notes on the balance sheet.

2.5.5. Cash investments and disposable assets are valued at their face value converted into ecus at the rate applying on 31 December. For the sake of prudence, an adjustment must be made where there is a probable loss.

2.5.6. Debts are valued at their face value in ecus at the rate applying on 31 December if they are denominated in a foreign currency.

2.6. Payments on account and accelerated payments

Payments on account for operational purposes, other than the advances paid under the common agricultural policy, are included in the year's expenditure and do not appear as assets in the balance sheet.

2.7. EFTA involvement in the 1997 general budget

The figures in the accompanying tables include the appropriations entered to cover the involvement in the Community budget of the EFTA countries belonging to the European Economic Area. A detailed breakdown of the utilisation of these appropriations is given in Table 15.

2.8. Balance for the year

The balance for the year consists of two components (the result of the European Union and the result of the involvement of the EFTA countries belonging to the EEA)

- total revenue received for that year;

- total payments made against that year's appropriations plus the total amount of that year's appropriations carried over (definition of expenditure at 2.4.2) (2).

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

- the net balance of lapsing carryovers from previous years and any payments which, because of fluctuations in the ecu rate, exceed non-differentiated appropriations carried over from the previous year;

- the balance of exchange-rate gains and losses recorded during the year. Unrealised exchange differences at the JRC are not entered in the accounts as exchange-rate losses and gains but entered in suspense accounts.

2.9. Consolidation

The consolidated accounts cover the accounts of the European Parliament (including the Ombudsman), the Council, the Commission (including the Publications Office and the Joint Research Centre), the Court of Justice, the Court of Auditors, the Economic and Social Committee and the Committee of the Regions.

The method used is that of full consolidation.

CHAPTER I BASIC DATA ON THE EXECUTION OF THE BUDGET OF THE EUROPEAN COMMISSION FOR 1997

1997 BUDGET OUTTURN

The 1997 budget outturn is shown under heading I.B (liabilities) of the consolidated balance sheet.

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CHAPTER II CONSOLIDATED REVENUE AND EXPENDITURE ACCOUNT FOR 1997

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Table 13 COMMITMENTS OUTSTANDING AT 31 DECEMBER 1997 MOVEMENTS SINCE INITIAL COMMITMENT (including commitments cleared in 1997)

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CHAPTER III CONSOLIDATED BALANCE SHEET OF THE EUROPEAN COMMISSION AT 31 DECEMBER 1997

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NOTE FOR THE READER

1. The following improvements have been made to the structure of the balance sheet at 31 December 1997.

- The balance sheet is more succinct and its structure follows the pattern laid down in the 4th Council Directive, while making allowances for the special accounting circumstances of a public institution like the European Community. Details are given in the explanatory notes.

- The 1996 figures included for comparison have been classified in the same way as those for 1997.

- Payments outstanding on the capital subscribed to the EBRD and the EIF which has not been called up are now entered as a potential liability in the off-balance-sheet commitments rather than a long-term liability. As a result, the final total in the 1996 balance sheet is ECU 690 million lower than that given in the 1996 financial statements.

- Intangible fixed assets are included in the accounts.

2. Pursuant to Article 7 of the Inventory Regulation, rented property is included in the intangible assets for the first time, provided that it meets three conditions (see point III.E of the explanatory notes to the balance sheet).

3. In accordance with Section 8 of the Inventory Regulation (3), the Commission must allow for the depreciation of every asset except land. Depreciation is calculated for each full year (not pro rata temporis), using the linear method. The annual depreciation rates applicable from 1 January 1987 are given in Annex 6 to the Inventory Regulation.

Since no calculation could be made for four of the Management Centres and the other institutions are not required to allow for depreciation (4), the Commission has not included any depreciations in the accounts in order to produce a consistent balance sheet. However, the cumulative amounts (at 31 December 1997) are given in the explanatory notes.

EXPLANATORY NOTES TO THE CONSOLIDATED BALANCE SHEET

ASSETS

I. INITIAL COSTS

This heading includes the issuing costs for Euratom borrowings - an item that has been reclassified in this balance sheet. In previous years it was included under prepayments.

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II. INTANGIBLE FIXED ASSETS

This heading includes computer software with a purchase value of at least ECU 400, in accordance with Article 130 of Commission Regulation (Euratom, ECSC, EC) No 3418/93 laying down detailed rules for implementing the Financial Regulation. These assets have been entered in the Commission's balance sheet for the first time to take account of the rules laid down in the Regulation on Inventories and Management of the property of the European Commission, which came into effect on 1 January 1997. Although the other institutions are not required to include such assets in their accounts (5). The Court of Justice has in fact done so.

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The cumulative depreciation calculated from 31 December 1997 for the Commission alone on an amount of ECU 3 121 532 comes to ECU 1 251 731,79.

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III. TANGIBLE FIXED ASSETS

The costs of purchasing tangible fixed assets are included in budget expenditure for the year of purchase. They continue to appear in the balance sheet until they are no longer the property of the Commission.

Tangible fixed assets include all property with a purchase value of at least ECU 400, in accordance with Article 130 of Commission Regulation (Euratom, ECSC, EC) No 3418/93 laying down detailed rules for implementing the Financial Regulation. The balance sheet also takes account of the rules laid down in the Regulation on Inventories and Management of the property of the European Commission, which came into effect on 1 January 1997.

The Commission considers that the volume of fixed assets in the balance sheet is correct, subject to adjustments which might be made later if a physical inventory is carried out at the JRC. Two points are worth noting here: first, an inventory exercise is under way on the buildings and land belonging to the JRC, the results of which should be available in the course of 1998; and second, the figures for tangible fixed assets do not include the computer equipment, movable property and vehicle fleet at the Seville Research Centre.

The Commission has tried to explain the differences between the figures entered in the 1996 and 1997 balance sheets.

At 31 December 1997, depreciation, for the Commission alone, was calculated as follows:

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These figures do not take into account the depreciation of assets in the delegations and offices or the assets of certain research centres for which the calculation will be made for the 1998 balance sheet as the computer software used for inventories is not suited to calculating depreciation.

A. Land and buildings

Land and buildings acquired after 1992 in Brussels and at sites where the Commission has offices and delegations are entered in the balance sheet at their purchase value, converted into ECUS at the rate applying when they were purchased. Buildings in Brussels purchased before 1981 have been entered using the ECU conversion rate for January 1981.

Land and buildings purchased before 1992 at delegation sites have been revalued in the light of market prices. Revaluation was carried out by independent experts and the resulting figures incorporated in the balance sheet as at 31 December 1997.

The building of the delegation to the OECD is a special case. It was acquired from the ECSC free of charge in December 1994 and the figure entered in the balance sheet is the market value assessed by independent experts.

In 1984 the JRC buildings were revalued by 14 % and other infrastructures by 20 %. Added to these revaluations is the value of investments, which have increased the value of the buildings and/or their lifetime.

B. Fixtures and fittings, machinery and tools

Some assets previously entered under movable and immovable property have been reclassified in this year's balance sheet.

E. Leasing, financing and similar entitlements

In accordance with Article 7 of the Commission's Inventory Regulation, leasing, long-term rental operations and property held under a long lease conferring a right in rem are entered in the inventory if the following three conditions are met:

- the risks and advantages are transferred to the lessee;

- the rental is terminable only on payment by the lessee of an indemnity of a deterrent amount;

- the rental enables the lessor to recover the cost of the investment plus remuneration.

If one of the above conditions is not met, the assets are entered in the off-balance-sheet commitments. Since the other institutions are not required to enter these assets in the accounts, the amounts due for leasing/financing and similar entitlements are entered in the off-balance-sheet commitments.

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

The buildings for some Commission offices or delegations which were originally financed by the ECSC have been included under this heading in the balance sheet. Although the ECSC had been repaid in full for them at the end of 1995, they are still included in the ECSC's balance sheet since the deeds of transfer have not been signed.

IV. INVESTMENTS

This heading covers, first, capital investments made with a view to establishing permanent links and which are seen as supporting the activities of the European Union, and, second, investments made to help beneficiaries develop their business activities but with no long-term participation.

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

A. Investments in related organisations:

A.1. Subscriptions and participations

EBRD subscription

The European Bank for Reconstruction and Development was given initial capital of ECU 10 billion, of which 3 % was subscribed by the Community. The proportion of this capital called-up; 30 % has been paid in full.

This item covers the full amount of the Commission's subscription to the EBRD's capital which has been called up and paid.

On 15 April 1996, at their annual meeting, the Bank's governors decided to double the amount of authorised capital. Under this decision, the Community is to subscribe for 30 000 additional shares with a face value of ECU 10 000 each. This operation will involve paid-in shares and callable shares in the following proportions: 22,5 % of the subscribed shares will be a full number of paid-in shares and the remainder will be callable shares.

The presentation in the Commission's balance sheet at 31 December 1997 is different from that adopted in the balance sheet at 31 December 1996. Payments outstanding on non-called-up capital, amounting to ECU 210 million, are now included in the off-balance-sheet commitments and not in long-term liabilities as was the case in previous years. The corresponding figures for the 1996 financial year have been presented in the same way. As a result the 1996 balance-sheet total appearing in the 1996 financial statements differs from that presented in the 1997 financial statements.

European Investment Fund subscription

Under the Council Decision of 6 June 1994 the European Community, represented by the Commission, is to subscribe a total of ECU 600 million to the EIF's capital. This represents 30 % of the EIF's capital. The Commission has paid all the called-up capital, which amounts to 20 %.

Presentation of this subscription in the Commission's balance sheet at 31 December 1997 differs from that in the balance sheet at 31 December 1996. As for subscriptions to the EBRD, the payments outstanding on non-called-up capital (80 %), amounting to ECU 480 million, are now included in the off-balance-sheet commitments.

B. Other investments

B.1. Subscriptions and participations

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

ECIP programme equity

This heading covers Community participation in the provision of equity and subordinated loan capital for joint ventures set up under the European Community Investment Partners Programme (ECIP). The ECIP balance sheet is included in the annexes to the Commission's balance sheet (Volume II).

Eurotech capital and Venture consort

The entry for Eurotech capital covers payments since 1990, in the form of advances repayable in certain circumstances when contracts run out. The Venture consort instrument covers contributions since 1985 for investments in SMEs engaging in innovatory projects.

Since both of these are risk capital operations for transnational high-technology start-up projects, it is very difficult to assess the real current value of the contributions.

In line with the principle of prudence, a 100 % adjustment has been made for the value of these contributions.

However, two summary tables showing the contributions made to these two instruments are set out in the annexes to the balance sheet (Volume II).

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B.3. Guarantees and advances granted

This heading incorporates fixed assets not included under tangible assets, such as deposits and guarantees paid, permanent advances for building charges, the operating funds advanced to a transport firm and the Guarantee Fund.

Guarantee Fund

This Fund is designed to cover the risks associated with loans and loan guarantees for non-member countries or projects carried out in those countries.

It was set up by Council Regulation (Euratom, EC) No 2728/94 of 31 October 1994.

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

The Fund is managed by the European Investment Bank (EIB) under a mandate from the Community.

The revenue and expenditure account and balance sheet of the Fund at 31 December 1997 appear in the annexes to the balance sheet (Volume II).

The first payments to the Fund from the Community budget were made in December 1994.

The entry in the assets side of the Commission's balance sheet represents the Fund's net assets at 31 December 1997.

Since the Fund may be called on to cover defaulting debtors at any time, a provision has been created for risks and liabilities corresponding to the total net assets of the Fund in line with the principle of prudence.

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V. LONG-TERM ASSETS

This heading includes amounts owed to the European Union by Member States and non-member countries on loans granted either from borrowed funds or from budget appropriations.

A. Loans granted from the budget

This item principally covers loans granted under the heading of cooperation with non-member countries. It also covers loans granted under the ECIP programme to promote the setting-up of investment joint ventures in Asia, Latin America, the Mediterranean region and South Africa. In 1991 Turkey was granted a loan of ECU 175 million as part of the effort to assist the countries most affected by the Gulf crisis.

Loans granted under the MEDIA I-programme to promote the development of the audiovisual industry in Europe were also included under this item at 31 December 1996. Since the contracts were not concluded directly between the Commission and the final recipients, the loans have been reclassified in the balance sheet and are now entered under sundry debtors. The corresponding figures for 1996 have been classified in the same way.

Amounts owed under the MEDIA II-programme are included under the heading 'Loans granted from the budget` as the Commission concluded the contracts directly with the recipients.

The item also includes other, much smaller loans granted from the budget: loans for migrant workers and building loans for Community officials.

Detailed tables on these loans appear later on in this volume.

B. Loans granted from borrowed funds

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

As these loans are financial assets covered by borrowings, in order to give a true and fair view of the Union's assets and liabilities, financial position and results, all the operations are now set out in the form of a balance sheet and revenue and expenditure account.

The balance sheets of these financial operations have been incorporated in the combined balance sheet by means of full consolidation.

For the borrowing and lending operations, the yield on loans and costs of borrowings in 1997 are as follows:

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Under an agreement with the EIB, the latter bears the risks of the NCI treasury instrument. Consequently, the surplus of loan proceeds over borrowing costs is charged to the EIB.

The balance sheets and revenue and expenditure accounts for the loans under this heading are shown in tabular form in the annexes to the Commission's balance sheet (Volume II).

The overall changes in the volume of loans granted from the budget are as follows:

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The amounts outstanding on ECIP loans and loans granted from borrowed funds at 31 December 1997 are entered under long-term assets in the case of loans due in more than a year and under short-term assets in the case of loans due in less than one year. No such distinction could be made at 31 December for other loans granted from the budget. They are therefore included under long-term assets.

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VI. STOCKS

This item covers the stocks of office supplies and consumables at 31 December 1997, valued at the price of the last supplies received and converted to ECUS at the closing rate, in line with the interinstitutional method for valuing stocks.

It also includes the stocks of publications held by the Publications Office, valued according to special valuation rules (6).

The heading also covers supplies of scientific and technical equipment, fissile material and heavy water for the Joint Research Centre. In line with the principle of prudence, the stocks of heavy water, fissile material and samples for industrial and scientific use are valued every year and entered in the balance sheet at their commercial value, which is less than the real historic cost.

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VII. SHORT-TERM ASSETS

A. Financial assets

This heading contains the amounts owed in respect of loans which are due in less than one year.

B. Current assets

B.1. Advances paid to Member States

This item contains the amounts to be recovered in respect of advances paid to certain Member States.

B.2. Amounts owed by Member States

- EAGGF: amounts payable by the Member States mainly in relation to the clearance of EAGGF-Guarantee Section accounts. A total of ECU 6 489 794,61 has been entered twice in the Commission's balance sheet for amounts payable by the Member States. As the error was discovered after the Commission's accounts had been closed, the correction has been made on the consolidated balance sheet.

- VAT paid by the Community and recoverable from the Member States: this item covers the amounts due in respect of taxes paid by the Community and recoverable from the Member States.

- Other receivables: this item mainly concerns amounts due in respect of own resources still to be recovered.

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The figure of ECU 1 798,423 million represents the total amount owed by the Member States in respect of entitlements that have been duly established.

Forward estimates have been made for other entitlements where no tangible and valid obligation to pay has yet been identified, and a token entry has been included in the Commission's accounts. They are shown in Table 3 (Forward estimates).

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B.3. Amounts owed by Community institutions and bodies

This heading contains various amounts owed to the European Community by Community bodies not covered by the scope of consolidation, for which the institutions pay certain expenditure, which will subsequently be repaid.

B.4. Sundry debtors

This item covers amounts owed as a result of the Commission's activities plus, for example, the recovery orders entered in the revenue accounts as established entitlements outstanding. It also contains outstanding fines and fines which have been suspended and for which a bank guarantee has been lodged. The volume of bank guarantees received to cover fines comes to ECU 420 695 411.

This item includes all debtors owing sums resulting from loans paid from borrowed funds. It also covers all amounts owed as a result of Guarantee Fund operations, which break down as follows:

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In view of the risk of non-recovery and in accordance with the principle of prudence, a 100 % adjustment was made for all Guarantee Fund operations which had not been repaid by debtors at 31 December 1997. This was deducted from the value of these entitlements on the assets side of the balance sheet.

C. Sundry receivables

This item covers mainly amounts owed to the Commission by its staff.

VIII. CASH INVESTMENTS

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IX. DISPOSABLE ASSETS

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This heading covers all the funds which the Commission keeps in its accounts in each Member State and EFTA country (Treasury or central bank), in current accounts and imprest accounts, petty cash and the proceeds of loans made from borrowed funds and loans granted to improve housing conditions for migrant workers.

It also includes the financial operations under the imprest accounts of Community delegations which had not been reconciled with the accounts at headquarters on the date for closure of the accounts.

Funds totalling ECU 1 288 513,83 kept in current accounts with three banks outside the Community which have gone bankrupt will probably prove irrecoverable. As a result, and in accordance with the principle of prudence, an adjustment has been made for these accounts and entered on the assets side (reducing the value of the 'Imprest accounts` heading).

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X. SUSPENSE ACCOUNTS

This heading includes interest receivable, mainly accrued interest on loans, investments and swaps; miscellaneous expenditure still to be booked, which could not be finally booked before the closing date, and prepaid expenses.

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LIABILITIES

I. OWN CAPITAL

A. Net capital resulting from economic adjustments

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B. Balance for the year

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C. Surpluses of loan proceeds over borrowing/lending costs

This heading covers outturns carried over and the outturn for the year of loans granted from borrowed funds. These surpluses are not available even though they have not yet been allocated.

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II. PROVISIONS FOR RISKS AND LIABILITIES

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III. LONG-TERM LIABILITIES

This heading includes liabilities due in more than one year.

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The detailed movements in borrowing operations in 1997 are as follows:

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The amounts outstanding on borrowings at 31 December 1997 are entered under long-term liabilities in the case of loans due in more than a year and under short-term liabilities in the case of loans due in less than one year.

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IV. SHORT-TERM LIABILITIES

A. Debts on borrowings

This heading includes borrowings which fall due for payment in less than one year's time. See the above table. Detailed tables on these loans appear later on in this volume.

B. Other financial liabilities

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C. Current liabilities

C.1. Member States and EFTA countries

This heading covers amounts owed by the Commission to Member States. In this case it is an advance by the Netherlands for joint financing of aid operations for Bangladesh.

This heading also includes the 1996 balance of contributions from the EFTA States belonging to the EEA which has not yet been regularised.

C.2. Community institutions and bodies

This item covers amounts owed by the Community to certain Community bodies which do not come under the scope of consolidation.

C.3. Appropriations to be carried over

At 31 December 1997 the breakdown of appropriations to be carried over, taking all the institutions together, was as follows:

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C.4. Sundry creditors

This item covers debts arising from the Commission's activities.

D. Other liabilities

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

V. SUSPENSE ACCOUNTS

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This item relates to loans granted from borrowed funds for which the balance sheets and profit and loss accounts are contained in Volume II. It covers accrued interest on borrowings and swaps and swap operations.

It also includes revenue not booked, i.e. revenue which could not be definitively booked to the budget before the close of the year and revenue available for re-use.

Revenue from fines for infringements of the competition rules (ECU 50 611 348,95) is now entered in an unbooked revenue account if an appeal is made to the Court of Justice by a third party. If the Court finds in favour of the appellant, the sum in question has to be refunded at once. Until the Court has given judgement, such revenue cannot be booked to the budget immediately on receipt.

CHAPTER IV COMMITMENTS NOT INCLUDED IN THE BALANCE SHEET POTENTIAL OBLIGATIONS, LIABILITIES AND ASSETS OF THE EUROPEAN COMMISSION AT 31 DECEMBER 1997

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EXPLANATORY NOTES

OFF-BALANCE-SHEET COMMITMENTS - POTENTIAL LIABILITIES AND ASSETS

1. Commitments against differentiated appropriations still outstanding at 31 December totalled ECU 52 524 096 369,13 of which ECU 233 388 859,97 is covered by carryovers of payment appropriations.

2. Some aid remained uncommitted because the Commission decided to enter into commitments in respect of amounts that were not covered by commitment appropriations in the budget.

2.1. + 2.2. The Commission regards the overall budget allocation agreed at Edinburgh as a spending commitment by the Community vis-à-vis the Member States. This allocation will have to be respected in establishing the 1999 budget. As a consequence, the amount of aid earmarked but not committed under the Structural Funds and the Cohesion Fund is calculated by subtracting the budget commitments made for the period 1994-1997 from the Edinburgh allocation. The difference represents total commitments vis-à-vis the Member States after 31 December 1997 for Community Support Frameworks, Community Initiatives and the Cohesion Fund (except appropriations for combating fraud, evaluating the environment, and transitional and innovatory measures) for the programming period 1994-1999. In accordance with the principle of prudence, it reflects the maximum potential liabilities for these two Funds.

3. EAGGF-Guarantee:

3.1. The payments taken into account for the Guarantee Section of the European Agricultural Guidance and Guarantee Fund are those made by the Member States between 16 October and 15 October of the following year, provided that the Accounting Officer was notified of the commitment and authorisation by the following 31 January. Payments made by Member States between 16 October and 31 December 1997 are included in the off-balance-sheet commitments.

Following Decision 97/608/EC on the clearance of the EAGGF-Guarantee Section accounts, a total of ECU 107 646 127,42 (7) was offset by declared expenditure in November 1997, which is payable on 2 January 1998.

3.2. The determination of the final amount of the liability and the year in which it will be charged to the budget will depend on the length of the procedure before the Court of Justice.

4.1. As formulated, the guarantee legally covers the loans signed by the EIB at 31 December 1997 (including loans granted to three Member States before accession). However, it should be noted that these loans have not been fully paid out. At 31 December 1997 the amount paid out totalled ECU 5 746,2 million (ECU 5 534,3 million when the countries which have become Member States are excluded) and this, therefore, is the amount of the risk incurred by the Union. Of the ECU 7 040,43 million paid out up to 31 December 1997, ECU 1 294,23 million has already been repaid.

The following table shows the annual forecasts of amounts outstanding on these EIB loans guaranteed under the general budget (with the exception of those for third countries which have joined the Community) on the basis of the amounts paid out at 31 December 1997.

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For the loans granted by the EIB covered by the Community budget guarantee (ECU 13 003 987 780), the third-country guarantees break down as follows:

- 85 % sovereign guarantees or similar;

- 1 % guarantees by public or semi-public institutions;

- 14 % guarantees by private financial institutions.

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

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The Community has not received third-party guarantees for loans granted under the financial assistance scheme. However, these loans, totalling ECU 1 905 000 000, are guaranteed by the Guarantee Fund.

4.3. At 31 December 1997 the EIF had signed guarantees totalling ECU 2 171,8 million; as 89,3 % of EIF capital has been subscribed, this represents a maximum potential risk of ECU 729,6 million for the European Community. As the Community contributes a total of ECU 600 million to the capital of the EIF, the latter might, in the worst possible scenario, repay ECU 129,6 million. The proportion of the capital subscribed by the European Community which has not been called up (80 %, amounting to ECU 480 million) is also included in the off-balance-sheet commitments as a potential liability (point 9).

5.1. As these assets come from outside the accounts, the figures shown for this item are not exhaustive. This item also covers buildings occupied under a leasing contract with purchase option.

5.1.1. Parliament

In January 1992 Parliament concluded a framework long-term leasing contract with a purchase option for a complex in Brussels comprising three buildings for which the estimated cost of the original investment (1992 figure) came to around ECU 1 030 million (BEF/ECU exchange rate at 31 December 1997). Under this contract, the lease will be taken over in stages as the buildings in question are provided.

At 31 December 1997 the three buildings had been handed over to Parliament at a final investment cost of ECU 1 127 million (BEF/ECU exchange rate at 31 December 1997), of which ECU 477 million had already been paid by the date on which the balance sheet was drawn up. The last amount covers the entire final investment cost of two buildings and part of the final investment cost of the third. The Belgian Government has undertaken to cover the cost of the land occupied by the third building plus part of the development costs, thus reducing the total final investment cost for the three buildings to ECU 954 million (FRF/ECU exchange rate at 31 December 1997).

In March 1994 Parliament signed a long-term leasing contract with a purchase option for a complex in Strasbourg for which the estimated provisional investment cost (figure updated in September 1996) is ECU 454 million (BEF/ECU exchange rate at 31 December 1997). No fee had been paid when the balance sheet was drawn up.

All the estimates of investment costs are net of the long-term financing cost.

Parliament has also concluded contracts to hire computer equipment under which it is committed to pay around ECU 1,3 million.

5.1.2. Court of Justice

On 15 November 1994 the Court signed a lease-purchase contract with the Luxembourg Government for Annexes A, B and C of the Palais building with a total surface area of 26 635 m², 24 505 m² and 14 809 m² respectively.

The Court will rent the buildings for the whole term of the agreement and will not be able to exercise the purchase option until the selling price has been paid in full (Article 8(4)); at the latest this will be on 31 December 2015. Under supplementary agreement No 1 to the main agreement, the annual charge payable by the Court was reduced to LUF 405 million from 1 January 1997.

The selling price is determined by an independent expert agreed upon by both parties (Article 9). The consultancy KPMG has been appointed.

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If the budgetary authority had decided to pay the balance due at 31 December 1997 instead of the annual charge laid down in the contract, the payment would thus have been LUF 2,92 billion (ECU 71,6 million). The reduction in this amount compared with the situation at 31 December 1996 is due to the early payment of ECU 3,19 million which the Court made in 1997 under Article 8(2) of the Agreement with the Luxembourg State.

The marked drop in expenditure (ECU 22,7 million in 1997 compared with ECU 70,6 million in 1996) is accounted for by the early payment of ECU 50 million in 1996 as part of the lease-purchase agreement for the Annexes to the Palais building. As a result of this one-off payment, the annual charge under Article 4 of the Agreement was reduced by a third with effect from 1 January 1997 under a supplementary agreement. The margins left in other chapters as a result of the ecu's rise in value against the Belgian and Luxembourg franc paved the way for a transfer of appropriations enabling the Court to make another early payment of ECU 3,2 million in 1997 under Article 8(2) of the Agreement.

5.2. As these assets come from outside the accounts, the figures shown for this item are not exhaustive. This heading covers buildings occupied under a long-term leasing contract (with an initial term of more than five years) without any purchase option. These contracts may take various forms such as a rental contract or long-term lease. The amounts indicated correspond to commitments still to be paid during the term of the contract, except for the Court of Justice's Palais building, which is occupied under an indefinite lease; here, the amounts correspond to the annual rent.

5.2.1. 2,29 ha of land held in Luxembourg under a 29-year lease.

5.2.2. This heading covers buildings occupied by the Commission under a long-term rental or leasing contract which do not meet the three conditions laid down in Article 7 of the Inventory Regulation (see point III.E of the explanatory notes to the balance sheet). The amounts entered correspond to the rents still to be paid in accordance with the conditions of the contract, plus tax on immovable property. The total amount breaks down as follows:

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5.2.3. Buildings occupied by the Commission in Luxembourg under leasing contracts. Note that these buildings should have been included in the Commission's off-balance-sheet commitments.

5.3. As these amounts come from outside the accounts, the figures shown for this item are not exhaustive. This heading covers buildings occupied under a long-term operational leasing contract (more than five years). The amounts entered correspond to the rents still to be paid in accordance with the conditions of the contract.

8. Commitments in respect of pensions

8.1. Introduction

The rules governing the Community pension scheme are laid down in the Staff Regulations of Officials of the European Communities, in particular Chapter 3 (Pensions) of Title V (Emoluments and social security benefits of officials) and Annex VIII (Pension scheme). They are directly applicable in all the Member States.

The scheme covers different types of pension (retirement, invalidity, survivor's) and the payment of family benefits.

8.2. Expenditure and financing of the scheme

Under Article 83 of the Staff Regulations, benefits paid under the pension scheme are charged to the budget of the Communities (Chapter A.19 'Pensions and severance grants` covering all the institutions). Member States jointly guarantee payment of such benefits in accordance with the scale laid down for financing such expenditure (first subparagraph of paragraph 1).

Officials contribute one third of the long-term cost of financing the scheme by means of a compulsory levy set at 8,25 % of the basic salary (second subparagraph of Article 83(1)).

Thus the scheme is covered both by the budget (it is booked to the Commission budget) and by contributions, while the payments are guaranteed collectively by the Member States.

8.3. Commitments under the scheme

Under the Staff Regulations, the institutions guarantee various pension entitlements to their officials and other servants in exchange for the payment of contributions. When given an actuarial value, the pension entitlements constitute budgetary commitments.

These commitments correspond to the actuarial value at 31 December 1997 of the benefits promised to staff still in employment and the benefits currently being paid to pensioners.

8.4. Monitoring the balance of the scheme

Under Article 83(4), 'should an actuarial assessment of the pension scheme, carried out by one of more qualified experts at the request of the Council, show the contributions of officials to be insufficient to finance one third of the benefits payable under the pension scheme, the budgetary authorities shall, acting in accordance with the budgetary procedure and after consulting the Staff Regulations Committee, determine what changes are to be made to the rates of contribution or to the retirement age`.

The actuarial assessments conducted in 1986 and 1989 revealed that, if it had been a real pension fund, the scheme would have been in balance over the long term.

Early in 1998 the Commission launched a new actuarial study to check that the balance is still guaranteed under present conditions. The results should be known at the end of September.

8.5. Entry in the off-balance-sheet commitments

An actuarial study has been made of future commitments in respect of pensions. It is based on the demographics of the regular staff of the Community institutions and agencies at 31 December 1997 (including staff in employment and those receiving pensions and allowances), with allowances made for the trends in this population since 1968.

The analysis, based on the Vested Pension Benefits Credits method, came up with a figure of ECU 14 billion, which must be regarded as provisional pending the actuarial study currently under way, which employs specific tools and more comprehensive ways of extracting statistics.

9. Potential liabilities due to contributions to related organisations.

This sum represents:

- Payments outstanding on non-called-up capital subscribed by the Commission to:

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- A subscription to the EBRD's capital of 30 000 shares each worth ECU 10 000. On 15 April 1996, at their annual meeting, the Bank's governors decided to double the amount of authorised capital. Accordingly, the Commission undertook to subscribe the above amount (Decision 97/135/EC of 17 February 1997). The operation will comprise whole paid-in shares and callable shares in the following proportions:

- 22,5 % whole paid-in shares at a total cost of ECU 67,5 million, to be committed and paid as follows:

- 1998: ECU 33 750 000,

- 1999: ECU 33 750 000.

- 77,5 % callable shares, amounting to ECU 232,5 million.

10. The Brussels Capital Region has introduced a tax on office workers. The Commission asked the regional authorities about its exemption under the Protocol on privileges and immunities. The initial reply given was favourable.

However, the local authorities took the question to court, where the judge confirmed that the Commission qualified for exemption under the protocol.

A final ruling still has to be made. If the verdict goes against the Commission, this would cost about ECU 2 million a year.

11. The following table, classified by year of Commission decision, shows all the cases involving fines for infringement of the rules of competition which were still pending at 31 December 1997. It does not show cases completely settled by that date.

In view of the complicated nature of these cases, the number of companies involved and the possible options, this table cannot reflect historical developments over a number of years. It therefore merely gives the current situation for each case pending in relation to the Commission's initial decision.

A more detailed table is contained in Volume II.

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12. The first two tables are based on the formal reports submitted by the Member States in accordance with Regulations (EEC) No 595/91 (8), (EC) No 1681/94 (9) and (EC) No 1831/94 (10), with amounts being broken down by Member State. The tables show the difference between amounts identified by the Member States as still to be recovered (calculated on the basis of established entitlements or estimates) and amounts already recovered or declared irrecoverable. The third table is based on UCLAF's findings. The amounts it shows are therefore estimates which must be confirmed by a recovery order from the authorising department.

It is worth noting that the figures given in these tables represent a theoretical maximum rather than the amounts, which will actually be made available to the Community budget, for the following reasons:

- The Member States do not always report the results of their recovery operations (and certainly not promptly).

- Although Member States must inform the Commission of the likelihood of recovery, it is impossible to determine exactly what proportion of the amounts still to be recovered will actually be recovered. National laws sometimes provide for a 30-year limitation period, which may well make the national authorities think twice about formally giving up on recovery even if the chances of success are only theoretical. Nevertheless, the Commission regularly asks the Member States to revise the list of cases, which have been pending for a number of years in order to exclude amounts that should be written off as irrecoverable.

- If, for objective reasons, recovery proves impossible in a particular case, the Commission must decide whether the irrecoverable amount should be charged to the Community budget or to the Member State, which failed to fulfil its obligations. This decision may be taken after several years have elapsed (in the case of EAGGF-Guarantee Section expenditure, as part of the cleareance of accounts procedure). By way of example, the Commission is currently preparing the clearance of accounts for the 1994 financial year.

- Even if the Member State concerned launches recovery proceedings in time, a positive outcome is not guaranteed. This is particularly true where recovery orders are contested in the courts. (For this reason the tables contain a separate column identifying disputed amounts, where possible).

- In the field of structural operations, individual projects are cofinanced as part of multiannual programmes. As long as a multiannual programme has not been closed, it is impossible to put an exact figure on the amounts to be recovered because the sums involved in irregularities may, in certain circumstances, be reallocated to other, legitimate projects and because payment by instalments, in particular final payments, can sometimes be used as a means of adjusting expenditure.

On the date when the revenue and expenditure account was drawn up, the annual report on the fight against fraud for 1997 had not yet been adopted.

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13.1. Amounts payable to the EAGGF-Guarantee Section which have been entered in the register of debtors and declared by the Member States at the end of the financial year (15 October 1997). Since the information received is incomplete and a summary examination by the Commission departments suggests that the figures may be unreliable, these debts must be considered as not fulfilling the criteria of being a tangible and valid obligation to pay.

13.2. At 30 September 1997, with potential liabilities of ECU 1,5 million and potential gains of ECU 35,9 million, there was a net potential gain of ECU 34,4 million for the disposal of agricultural stocks, a much lower figure than in the previous year. These differences result from a number of factors:

- More than half the total potential gain is still accounted for by cereals (ECU 19,7 million), although this proportion has fallen. The reason is that the value of stocks is on the increase, both in quantitative terms and in book value, while the foreseeable sales value of the product is in decline because of falling world prices.

- The other sector for which a considerable gain is expected (ECU 9,1 million) is once again olive oil. As explained in the 1996 revenue and expenditure account, this is due to the fact that the depreciation at the end of 1993 for Italy (which accounts for half the Community's stocks) proved to be too high and cut the book value of all the stocks to a level far below the foreseeable sales value at the end of 1994. This excessive depreciation resulted from an over-evaluation of the book value of the stocks declared by Italy before the depreciation at the end of 1993. It is still continuing to produce a relatively substantial potential gain in 1997.

The value of new stocks is written down from the date on which they are formed. The 1998 budget contains ECU 644 million for the depreciation of these stocks (subsection B1), broken down as follows:

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(1) International Organisation of Supreme Audit Institutions (INTOSAI) Accounting Standard Framework - September 1995.

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

(3) Document E/96/280, adopted on 22 January 1997.

(4) The Interinstitutional Inventory Regulation has not yet been adopted.

(5) The Interinstitutional Inventory Regulation has not yet been adopted.

(6) See the Publications Office rules on valuing stocks.

(7) At the rate applicable on 31 December 1997.

(8) EAGGF-Guarantee Section.

(9) Structural operations.