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

Consolidated annual accounts of the European Union for the financial year 2021

(2022/C 399/01)

CONTENTS

FOREWORD 2

FINANCIAL HIGHLIGHTS OF THE YEAR 3

NOTE ACCOMPANYING THE CONSOLIDATED ACCOUNTS 31

CONSOLIDATED FINANCIAL STATEMENTS AND EXPLANATORY NOTES 32

BALANCE SHEET 33

STATEMENT OF FINANCIAL PERFORMANCE 34

CASHFLOW STATEMENT 35

STATEMENT OF CHANGES IN NET ASSETS 37

NOTES TO THE FINANCIAL STATEMENTS 38

BUDGETARY IMPLEMENTATION REPORTS AND EXPLANATORY NOTES 146

GLOSSARY 232

LIST OF ABBREVIATIONS 236

FOREWORD

In 2021, Europe defied the ongoing pandemic. Solidarity was key to contain the COVID-19 challenge and to mitigate its economic and social impact. The European budget mobilised all available means to support citizens, businesses and Member States whilst making Europe fit for the future: greener, more digital and more resilient.

The European Union launched the dedicated recovery instrument NextGenerationEU to support Europe’s recovery and to tackle current and future challenges. With extraordinary amounts of funding raised on the financial markets as from June 2021 the EU budget proved one more time to be an important tool the Union has at its disposal to tackle crisis situations and provide clear added value to people’s lives.

In addition the SURE programme (Support to mitigate Unemployment Risks in an Emergency), continued to support Member States both to maintain people in work and help jobs affected by the pandemic.

On top of tackling the crisis with rapid responses and ongoing adjustments to the political and financial situation, the European Union kept its promise and delivered on its policy objectives. Therefore, it has made best use of the 2021 budget — the first of the current multiannual financial framework, with budget implementation amounting to EUR 268,3 billion in commitments made.

It is my pleasure to present the 2021 annual accounts of the European Union. They provide a complete overview of EU finances and the implementation of the EU budget for the past year, including information on contingent liabilities, financial commitments and other obligations of the Union. The consolidated annual accounts of the European Union are part of the Commission’s integrated financial and accountability reporting package and form an essential part of our highly developed system of fiscal transparency and accountability.

Johannes HAHN Commissioner for Budget and Human Resources

FINANCIAL HIGHLIGHTS OF THE YEAR

The objective of this Financial Highlights section, which has been prepared on the basis of the principles outlined in the IPSASB Recommended Practice Guideline (RPG) 2 ‘Financial Statement Discussion and Analysis’ is to assist readers to understand how the operational, financial and investment activities of the EU are reflected in the different elements of the consolidated financial statements of the EU. The information presented in this section has not been audited It should be noted that due to the rounding of figures into millions of euros, some financial data in the tables below may appear not to add up.

CONTENTS

1. KEY FIGURES AND HIGHLIGHTS OF THE YEAR 4

2. THE 2021–2027 MULTIANNUAL FINANCIAL FRAMEWORK AND NextGenerationEU 6

2.1. MFF 2021–2027 and NextGenerationEU — Key Figures 6

2.2. NextGenerationEU — overview 7

2.3. Financial situation of NGEU at 31 December 2021 8

3. SUMMARY OF BUDGET IMPLEMENTATION 13

3.1. Revenue 13

3.2. Expenditure 15

4. FINANCIAL INSTRUMENTS AND BUDGETARY GUARANTEES 16

4.1. Financial instruments financed by the EU budget 16

4.2. Budgetary guarantees: Financial assets held in guarantee funds 17

4.3. Loans and related borrowings for financial assistance programmes 17

4.4. Budgetary contingent liabilities for financial assistance programmes 21

5. FINANCIAL STATEMENTS ANALYSIS 21

5.1. REVENUE 21

5.2. EXPENSES 23

5.3. ASSETS 23

5.4. LIABILITIES 26

6. EU POLITICAL AND FINANCIAL FRAMEWORK, GOVERNANCE AND ACCOUNTABILITY 27

6.1. POLITICAL AND FINANCIAL FRAMEWORK 27

6.2. GOVERNANCE AND ACCOUNTABILITY 29

1. KEY FIGURES AND HIGHLIGHTS OF THE YEAR

Consolidated financial statements

The consolidated ﬁnancial statements of the EU comprise more than 50 entities (including the European Parliament, the Council, the Commission and EU agencies) and are prepared according to the highest available standards, the International Public Sector Accounting Standards (IPSAS).

The year 2021, which was the first year of the EU’s 2021–2027 MFF, was exceptional in many aspects. As can be seen on the balance sheet below and further detailed in the Financial Statements Analysis (Section 5), the 2021 EU consolidated financial statements were particularly impacted by the successful launch of NextGenerationEU in 2021 (EUR 71,6 billion disbursed to Member States) and the additional borrowing and lending activities under the SURE instrument (EUR 50 billion):

(EUR billion) 2021 2020 ASSETS Financial Assets 188,6 113,1 Pre-financing 93,4 62,7 Receivables 72,4 74,5 Cash and cash equivalents 44,9 16,7 Property, Plant and Equipment and other assets 14,7 13,0 Total 414,1 280,0 LIABILITIES Post-employment benefits 122,5 116,0 Financial liabilities 246,1 95,0 Payables 46,4 32,4 Accruals 78,1 64,6 Other liabilities 3,3 5,4 Total 496,4 313,5 NET ASSETS Reserves 1,3 5,1 Amounts to be called from Member States (83,6 ) (38,5 ) Total (82,3 ) (33,4 ) ⇨ see Financial Statement Analysis, Section 5

Successful launch of NextGenerationEU

Disbursements under NextGenerationEU — EUR 71,6 billion split between:

⇨ see Financial situation of NGEU at 31 December 2021, Section 2.3

2. THE 2021–2027 MULTIANNUAL FINANCIAL FRAMEWORK AND NextGenerationEU

2.1. MFF 2021–2027 AND NextGenerationEU — KEY FIGURES

The EU’s 2021–2027 long-term budget, together with the NextGenerationEU (‘NGEU’) recovery instrument, amounts to EUR 2,018 trillion in current prices (EUR 1,8 trillion in 2018 prices). This unprecedented financial response to the crisis will help repair the economic and social damage caused by the coronavirus pandemic and support the transition towards a greener, more digital and more sustainable Europe.

The package consists of the long-term budget, the 2021–2027 multiannual financial framework (‘MFF’), made up of EUR 1,211 trillion in current prices (EUR 1,074 trillion in 2018 prices), combined with the temporary recovery instrument, NGEU of up to EUR 806,9 billion in current prices (EUR 750 billion in 2018 prices).

This is a truly modernised budget:

— More than 50 % of the total amount of the next long-term budget and NGEU will support the modernisation of the European Union through research and innovation, fair climate and digital transitions, preparedness, and recovery and resilience actions,

— 30 % of the EU budget will be spent to fight climate change — the highest share of the largest EU budget ever,

— 20 % of the Recovery and Resilience Facility (RRF) — which accounts for 90 % of NGEU — will be invested in digital transformation,

— In 2026 and 2027, 10 % of the annual spending under the long-term budget will contribute to halting and reversing the decline of biodiversity, and

— For the first time ever, new and reinforced priorities have the highest share within the long-term budget, 32 %.

Political priorities underlying the 2021–2027 MFF

The political priorities of the Commission are defined in the political guidelines set by the President of the Commission. Under President von der Leyen, the Commission which took office on 1 December 2019 focuses on the following six headline ambitions:

SIX HEADLINE AMBITIONS

A European Green Deal

— Striving to be the first climate-neutral continent

A Europe fit for the digital age

— Empowering people with a new generation of technologies

An economy that works for people

— Working for social fairness and prosperity

A stronger Europe in the world

— Europe to strive for more by strengthening our unique brand of responsible global leadership

Promoting our European way of life

— Building a Union of equality in which we all have the same access to opportunities

A new push for European democracy

— Nurturing, protecting and strengthening our democracy

2.2. NextGenerationEU — OVERVIEW

With a budget of EUR 806,9 billion, NGEU is designed to help repair the immediate economic and social damage brought about by the coronavirus pandemic, thus building a post-COVID-19 Europe that is greener, more digital, more resilient and better fit for the current and forthcoming challenges.

Part of the funds, up to EUR 338,0 billion, are provided in the form of non-repayable support, or grants. The other part, up to EUR 385,8 billion, is used to provide loans from the Union to individual Member States. These loans will be repaid by those Member States starting only after the current MFF period and extending over a long time period, with current loans for example maturing only in 2051 (see Section 2.3.3).

In addition, NGEU reinforces several existing EU programmes and policies, as follows:

— The Cohesion policy under the recovery assistance for cohesion and the territories of Europe (REACT-EU), to help address the economic consequences of COVID-19 in the first years of the recovery,

— The Just Transition Fund, to guarantee that the transition to climate neutrality works for all,

— The European Agricultural Fund for Rural Development, to further support farmers,

— InvestEU, to support the investment efforts of our businesses,

— Horizon Europe, to make sure the EU has the capacity to fund more excellence in research, and

— RescEU, safeguards that the EU Civil Protection Mechanism has the capacity to respond to large scale emergencies.

2.3. FINANCIAL SITUATION OF NGEU AT 31 DECEMBER 2021

2.3.1. Overview

From the launch of the NGEU funding operations on 15 June 2021 to the end of 2021, the Commission has raised EUR 71,0 billion of long-term funding, mainly by issuing bonds in syndicated transactions. In addition, as of December 2021, the Commission has EUR 20 billion of short-term EU-Bills outstanding. Up to year-end 2021, the Commission had disbursed a total of EUR 71,6 billion of financial support. The majority of this amount, EUR 64,3 billion, was disbursed to 20 Member States under the RRF (thereof EUR 46,4 billion as non-repayable support and EUR 18,0 billion as loans). A further EUR 7,2 billion was disbursed as MFF payments under existing programmes. The remaining liquidity of EUR 19,4 billion is held in the NGEU bank account with the ECB and in the Commission’s central treasury account, pending disbursement to the budget for MFF programmes.

NGEU — Outstanding borrowings and disbursements at 31 December 2021

2.3.2. Borrowings

To meet the NGEU funding needs, the Commission issues securities on the international capital markets. Based on a diversified funding strategy, the Commission combines the use of different funding instruments and funding techniques with an open and transparent communication to market participants.

In 2021, the annual Borrowing Decision (1) allowed the Commission to issue up to a maximum amount of EUR 125 billion in long-term funding and to have up to a maximum outstanding amount of EUR 60 billion in short-term funding.

Long-term funding — Syndicated transactions and auctioning of EU bonds

As of 31 December 2021, the Commission borrowed EUR 66,0 billion through five bond issuances via syndicated transactions (including one dual-tranche transaction) as well as EUR 5,0 billion through the auctioning of EU bonds:

(EUR billion) Long-term funding transactions (including taps) Maturity Issued/Raised Total repaid at year-end Outstanding at year-end NGEU#1 4.7.2031 20,0 0,0 20,0 NGEU#2a (including taps) 6.7.2026 11,5 0,0 11,5 NGEU#2b 6.7.2051 6,0 0,0 6,0 NGEU#3 4.7.2041 10,0 0,0 10,0 NGEU#4 (including taps) 4.10.2028 11,5 0,0 11,5 NGEU Green bond #1 4.2.2037 12,0 0,0 12,0 Total 71,0 0,0 71,0

The first syndicated transaction in June 2021 raised EUR 20,0 billion. It was the largest-ever institutional bond issuance in Europe, the largest ever institutional single tranche transaction and the largest amount the EU has ever raised in a single transaction.

In October 2021 the Commission issued the first NGEU green bond, raising EUR 12,0 billion to be used exclusively for green and sustainable investments across the EU. This issuance, which represented the world’s largest green bond issuance ever, created visibility for the green policies financed by green bonds and supported the European Green Deal and the green transition. The issuance of green bonds requires the implementation of reporting on the precise use of green bond proceeds and on the impact of investments that are financed through green bonds.

Short-term funding — Auctioning of EU-Bills

As of 31 December 2021, the outstanding amount of short-term funding, raised via the auctioning of EU-bills with a maturity of three or six months, amounted to EUR 20,0 billion:

(EUR billion) Auctioning of EU-bills Outstanding at year-end Maturity of 3 months 8,5 Maturity of 6 months 11,5 Total 20,0

While syndicated transactions will remain the mainstay of the NGEU issuance programme, at least in the initial phases, the capacity to raise money quickly and cheaply via auctioning significantly enhances the Commission’s ability to service its NGEU payment needs on the most advantageous terms for the Union budget and/or beneficiary Member States.

Furthermore, short-term financing of EUR 16 billion was raised via money-market transactions, all of which was repaid at year-end.

2.3.3. Disbursements

By year-end 2021, the Commission had received 26 Member States’ recovery and resilience plans, of which 22 were positively assessed and subsequently approved by the Council (Belgium, Croatia, Cyprus, Czechia, Denmark, Germany, Greece, Spain, Portugal, France, Ireland, Italy, Latvia, Luxembourg, Austria, Slovakia, Lithuania, Malta, Slovenia, Romania, Estonia and Finland). Four further Member States (Bulgaria, Hungary, Poland and Sweden) submitted plans for which the assessments were still ongoing at year-end. The submission of one further plan (the Netherlands) was pending. The total financial support approved under the 22 endorsed plans amounted to EUR 291,2 billion of non-repayable support (of which the financing agreements signed by year-end covered EUR 195,4 billion) and EUR 153,9 billion of financial loan support (of which the loan agreements signed by year-end covered EUR 153,2 billion).

Non-repayable support

In 2021 the Commission disbursed a total of EUR 46,4 billion of non-repayable support to 20 of the 22 Member States with submitted and approved recovery and resilience plans. Out of this amount, EUR 36,4 billion had been paid as pre-financing. Following the fulfilment of milestones by Spain, a further EUR 10 billion was paid out before year-end, with EUR 1,5 billion of the original pre-financing being cleared. A further EUR 0,3 billion in pre-financing, relating to the non-repayable support to Finland, had not yet been disbursed at year-end. In the case of Ireland, non-repayable support of EUR 1,0 billion had been approved, but no financing agreement was signed at year-end.

(EUR billion) Member State Maximum non-repayable support (2) Total signed at 31.12.2021 Budgetary Commitments in 2021 Total disbursed at 31.12.2021 Austria 3,5 2,2 1,1 0,4 Belgium 5,9 3,6 1,8 0,8 Croatia 6,3 4,6 2,3 0,8 Cyprus 1,0 0,8 0,4 0,1 Czechia 7,0 3,5 1,8 0,9 Denmark 1,6 1,3 0,6 0,2 Estonia 1,0 0,8 0,4 0,1 Finland 2,1 — (†) 0,8 — (†) France 39,4 24,3 12,0 5,1 Germany 25,6 16,3 8,1 2,3 Greece 17,8 13,5 6,7 2,3 Ireland 1,0 — (‡) 0,5 — Italy 68,9 47,9 23,7 9,0 Latvia 1,8 1,6 0,8 0,2 Lithuania 2,2 2,1 1,0 0,3 Luxembourg 0,1 0,1 0,0 0,0 Malta 0,3 0,2 0,1 0,0 Portugal 13,9 9,8 4,8 1,8 Romania 14,2 10,2 5,1 1,9 Slovakia 6,3 4,6 2,3 0,8 Slovenia 1,8 1,3 0,6 0,2 Spain 69,5 46,6 23,1 19,0 Approved 291,2 195,4 98,0 46,4 Bulgaria 6,3 — — — Hungary 7,2 — — — Netherlands 6,0 — — — Poland 23,9 — — — Sweden 3,3 — — — Not yet approved 46,6 — — — Total 338,0 195,4 98,0 46,4

Loans

In 2021 the Commission disbursed a total of EUR 18,0 billion in the form of a pre-financing to four Member States (Cyprus, Greece, Italy and Portugal), equivalent to 13 % of their respective loan allocations. A further EUR 1,9 billion in pre-financing, relating to the financial loan support to Romania, had not yet been disbursed at year-end. In the case of Slovenia, financial loan support of EUR 0,7 billion had been approved, but no loan agreement was signed at year-end:

(EUR billion) Member State Maximum financial loan support Total signed at 31.12.2021 Total disbursed at 31.12.2021 Total repaid at 31.12.2021 Total outstanding at 31.12.2021 Cyprus 0,2 0,2 0,0 — 0,0 Greece 12,7 12,7 1,7 — 1,7 Italy 122,6 122,6 15,9 — 15,9 Portugal 2,7 2,7 0,4 — 0,4 Romania 14,9 14,9 — (1) — — Slovenia 0,7 — (†) — — — Approved 153,9 153,2 18,0 — 18,0 Reserve 231,9 — — — — Total 385,8 153,2 18,0 — 18,0

According to the loan agreements, Member States will make annual repayments of 5 % of the disbursed amounts starting 10 years after the disbursement date. Thus Portugal, Greece, Italy and Cyprus will start repaying the loans as from 2032, with the loans maturing in 2051. The repayment schedule for the nominal amounts outstanding at year-end is as follows:

(EUR million) Member State Repayment period Annual repayment Total repayment Cyprus 2032–2051 1 26 Greece 2032–2051 83 1 655 Italy 2032–2051 797 15 938 Portugal 2032–2051 18 351 Total 899 17 970

NGEU contribution to other programmes under the EU budget

At year-end 2021, the Commission had disbursed a total of EUR 7,2 billion as payments to other programmes under the MFF, mainly relating to REACT-EU which finances the European Regional Development Fund (ERDF) and the European Social Fund (ESF):

(EUR billion) MFF-Programme Total approved MFF contributions Budgetary Commitments in 2021 Total disbursed at 31.12.2021 REACT-EU 50,6 39,5 7,0 — of which ERDF 31,5 24,0 4,9 — of which ESF 19,2 15,4 2,1 Just Transition Fund 10,9 0,0 0,0 Rural development (EAFRD) 8,1 2,4 0,1 InvestEU 6,1 1,7 0,2 Horizon Europe 5,4 1,8 0,0 RescEU 2,1 0,1 0,0 Total 83,1 45,5 7,2

2.3.4. Liquidity

Loans provided under NGEU do not follow the strict back-to-back principle of other financial assistance instruments. Instead, a diversified and pooled funding strategy has been developed for the NGEU that has required the implementation of an efficient liquidity management. The objective of the NGEU liquidity management is to ensure that the amounts held on the NGEU bank account are sufficient to meet all upcoming disbursement needs and to maintain a defined safety buffer, while avoiding any excess balances. For the liquidity management, the Commission has developed an IT tool that allows for the monitoring of the NGEU account on a daily basis. At year-end 2021 the total funds held in the NGEU off-budget account amounted to EUR 18,0 billion. In addition, EUR 1,4 billion of funds were held in the Commission’s central treasury account pending disbursement to the budget for MFF-programmes.

3. SUMMARY OF BUDGET IMPLEMENTATION

3.1. REVENUE

In the initial adopted EU budget, signed by the President of the European Parliament on 18 December 2020, the total amount of payment appropriations for 2021 was EUR 166 060 million and the total amount to be financed by own resources totalled EUR 156 867 million. The revenue and expenditure estimates in the initial budget are typically adjusted during the budgetary year by way of amending budgets. Adjustments in the GNI-based own resources ensure that budgeted revenue matches exactly budgeted expenditure. By doing so, the principle of budget equilibrium is respected, and budget revenue and expenditure (payment appropriations) amounts are equal.

During 2021, six amending budgets were adopted. Taking them into account, the final adopted revenue for 2021 amounted to EUR 168 011 million and the total to be financed by own resources was EUR 156 993 million. Member States’ contributions in 2021 remained stable. The increase of payment appropriations (EUR 1 950 million) was mainly financed by the surplus from the previous year.

Revenue comes from six sources (titles):

Title 1: Own resources

The collection of Traditional own resources (EUR 158 632 million) was 1,0 % above the amounts in the budget (EUR 156 993 million). This was due mainly to a higher amount collected than expected in the last two months of the year.

The final Member States’ VAT, GNI and Plastics payments correspond closely to the final budgetary estimate. The differences between the forecasted amounts and the amounts actually paid are due to the differences between the euro rates used for budgetary purposes and the rates in force at the time when the Member States outside the euro area actually made their payments.

Title 2: Surpluses, balances and adjustments

The surplus of the previous financial year amounted to EUR 1 769 million. This amount was inscribed in the budget 2021 through an amending budget and the own resources contribution from the Member States was reduced accordingly.

For the VAT and GNI balances the rules are set out in Article 10b of the Making Available Regulation (Council Regulation (EU, Euratom) No 609/2014) (3). According to these rules the total sum of the balances are calculated in order that the impact on the EU budget be zero (‘netting system’) and the procedure does not entail a budgetary amendment. The Commission therefore directly requests the Member States to pay the net amounts.

Title 3: Administrative revenue

This title comprises revenue from taxes and levies on the remuneration of staff, amounting to EUR 2 230 million.

Title 4: Financial revenue, default interest and fines

In Title 4 the difference between budgeted amount (EUR 515 million) and outturn (EUR 1 633 million) refers mainly to fines in the field of competition.

Title 5: Budgetary guarantees, borrowing and lending operations

This title has increased significantly with the advent of the NGEU. NGEU funds within this title are assigned revenue. Title 5 covers revenue related to guarantees and interest and repayments of loans granted. It also channels funds (for the NGEU non-repayable support under the Recovery and Resilience Facility and for reinforcement of MFF programmes) from earmarked revenue that Member States receive under the European Union Recovery Instrument (EURI). See Financial Highlights of the Year, Sections 2.2 and 2.3 for a comprehensive overview of the NGEU.

Title 6: Revenue, contributions and refunds related to Union policies

This title mainly concerns revenue from financial corrections related to structural and agricultural funds (ESIF, EAGF and EAFRD). It also includes the participation of third countries in research programmes, the clearance of accounts in agricultural funds and other contributions and refunds to EU programmes/activities. A substantial part of this total is made up of assigned revenue, which gives rise to the entering of additional appropriations on the expenditure side.

Total 2021 budget revenue amounted to EUR 239 596 million

3.2. EXPENDITURE

3.2.1. Budget implementation

In 2021, the first year of the new MFF 2021–2027, the final adopted budget amounted to EUR 166,8 billion of commitment appropriations and EUR 168,0 billion of payment appropriations. NGEU reinforced the key programmes by an additional EUR 421,1 billion of commitment appropriations and EUR 55,5 billion of payment appropriations inscribed in the EU budget as external assigned revenue (4).

The implementation of the 2021 budget was significantly impacted by the delays in the adoption of new legal bases and the new rules for structural funds. The majority of the 2021 commitment appropriations for structural funds (with a net value of EUR 49 billion) were re-programmed to 2022–2025 according to Article 7 of the MFF Regulation. In cases allowed by the Financial Regulation and/or new legal bases, the appropriations not implemented were carried over to 2022: EUR 4,1 billion of commitment and EUR 4,2 billion of payment appropriations. In 2021 for the first time the possibility to carry over unused adopted budget appropriations to the subsequent year was used by the Neighbourhood, Development and International Cooperation Instrument — Global Europe (NDICI — Global Europe) (5), (6). Similar provisions apply and were used for the Brexit Adjustment Reserve and Solidarity and Emergency Aid Reserve (SEAR).

The implementation of the total commitment appropriations in 2021 totalled EUR 268,3 billion:

— EUR 113,4 billion from the final adopted budget,

— EUR 0,6 billion from appropriations carried-over from 2020,

— EUR 154,3 billion from appropriations stemming from assigned revenue, — of which EUR 143,5 billion from NGEU.

Total payments made in 2021 totalled EUR 228,0 billion:

— EUR 163,6 billion from the final adopted budget,

— EUR 1,8 billion from appropriations carried-over from 2020,

— EUR 62,6 billion from appropriations stemming from assigned revenue, — of which EUR 53,6 billion from NGEU.

Total 2021 commitment appropriations implementation per EU policy objectives

The 2021 implementation for all types of appropriations (budget, carry-overs from previous year and assigned revenue) was 44 % for commitments and 92 % for payments. Implementation rates 2021 excluding assigned revenue showed 68 % for commitment appropriations and 97 % for payment appropriations. An important share of the payments made in 2021 related to the completion of MFF 2014–2020.

Taking into account in addition the carry overs and the commitments under shared management which were reprogrammed in accordance with MFFR Article 7, the implementation of the voted budget would have reached nearly 100 % for both commitment and payment approprations.

The implementation of the NGEU appropriations reached 34 % for the total commitment and 97 % for the total payment appropriations inscribed in the EU budget. The NGEU committed amount represented 87 % of the amount authorised (7) for commitment in 2021, which stood at EUR 164,6 billion.

3.2.2. Outstanding commitments

Outstanding commitments (commonly referred to as RAL — reste à liquider), which are committed amounts not yet paid, stood at EUR 341,6 billion at the end of 2021. The outstanding commitments increased as compared to 2020 (by EUR 38,4 billion) but this increase was smaller than initially forecast, as most of the commitments for programmes under shared management (with net value of EUR 49 billion) planned for 2021, were postponed to 2022 and following years, in accordance with Article 7 of the MFF Regulation. The reprogramming of the shared management implementation will contribute to a further RAL increase in the coming years.

The main driver of the 2021 increase of the RAL was the start of the NGEU (non-repayable part) implementation — contributing EUR 89,9 billion (26 %) to the total RAL at the end of 2021. The NGEU assigned revenue will lead to the increase of the RAL in the coming years as all commitments will be entered by the 31 December 2023 and will be honoured by payments up to 31 December 2026, in accordance with Articles 3(4) and 3(9) of the EURI Regulation (8).

3.2.3. Budget result

The budget result (surplus) increased from EUR 1,8 billion in 2020 to EUR 3,2 billion in 2021, due to the higher than expected revenue from customs duties and fines.

4. FINANCIAL INSTRUMENTS AND BUDGETARY GUARANTEES

4.1. FINANCIAL INSTRUMENTS FINANCED BY THE EU BUDGET

Financial instruments financed by the EU budget exist in the form of guarantee instruments, equity instruments and loan instruments. Under the 2021–2027 MFF the use of budgetary guarantees is expected to increase in comparison to the use of financial instruments fully financed or provisioned from the EU budget. In particular, under the InvestEU programme, EUR 26,2 billion of EU guarantees will be provided to the EIB group and other financial institutions, to support various policy objectives of the Union by means of financing and investment operations. The basic concept behind this approach, in contrast to the traditional method of budget implementation of giving grants and subsidies, is that for each euro spent from the budget via financial instruments, the final beneficiary receives more than EUR 1 as financial support due to the leverage effect.

Under this type of budget implementation, funds are either already disbursed to the fiduciary accounts managed by the entrusted entities and stay available (as cash and cash equivalents, debt securities or investments in money market funds or pooled portfolios of assets) to cover future guarantee calls or have been invested in equity. The significance and volume of financial instruments financed by the EU budget under direct and indirect management has been increasing in recent years.

4.2. BUDGETARY GUARANTEES: FINANCIAL ASSETS HELD IN GUARANTEE FUNDS

Under this type of budget implementation the EU provides guarantees to counterparts for which the funding is only partially provisioned via guarantee funds set up by the Commission, thus creating contingent liabilities for the EU budget, in case the provisioning is not sufficient to cover the calls. The EU has given guarantees on loans granted outside of the EU (the so-called External Lending Mandate, or ELM, of the EIB) and on debt and equity operations covered by the EFSI guarantee to the EIB Group, as well as guarantees on operations covered by the EFSD and NDICI-External Action Guarantee, given to the EIB Group and other financial institutions.

As of 2021, the provisioning via guarantee funds is held in the Common Provisioning Fund (CPF). The CPF is established by the Financial Regulation (9) to hold the provisions made (i.e. funds held) to cover the financial liabilities arising from financial instruments, budgetary guarantees and financial assistance loans as of the 2021–2027 MFF. It also includes some assets of provisioning covering financial liabilities from previous MFFs.

The CPF is created and functions as a single portfolio, currently combining provisions for different EU budgetary guarantees and financial assistance programmes. The resources of the CPF are allocated into compartments for the purpose of tracing the amounts relating to the various CPF contributing instruments (budgetary guarantees and financial assistance programmes).

Following the entry into force of the 2021–2027 MFF, the net assets of the EFSI Guarantee Fund were transferred as from 1 January 2021 into the CPF. The net assets of the EFSD Guarantee Fund and the Guarantee Fund for external actions were transferred to the CPF in the course of 2021.

At 31 December 2021, the Commission holds financial assets in the CPF for the following compartments:

— Guarantee Fund for external actions — EUR 2,7 billion,

— EFSI Guarantee Fund — EUR 8,5 billion,

— EFSD Guarantee Fund — EUR 0,8 billion, and

— InvestEU Guarantee Fund — EUR 0,3 billion.

In addition, EUR 92 million is held in the Commission central treasury as a liquidity buffer to cover for immediate guarantee calls.

4.3. LOANS AND RELATED BORROWINGS FOR FINANCIAL ASSISTANCE PROGRAMMES

The EU borrowing and lending activities for financial assistance programmes are non-budget operations. In general and except for NGEU, funds raised are on-lent back-to-back to the beneficiary country, i.e. with the same coupon, maturity and amount. Notwithstanding the back-to-back methodology, the debt service of the funding instruments is a legal obligation of the EU, which will ensure that all payments are made fully and in a timely manner. The Commission has put procedures in place to ensure the repayment of borrowings even in case of a loan default.

The financial support for Member States and third countries in the form of bilateral loans financed from the capital markets with the guarantee of the EU budget is provided by the Commission under decisions of the European Parliament and of the Council. In 2021 the Commission, acting on behalf of the EU, operated five main programmes under which it may grant loans:

— Balance of Payments (BOP) assistance,

— European Financial Stabilisation Mechanism (EFSM) assistance,

— Macro-financial assistance (MFA),

— SURE assistance, and

— NGEU — for further information on NGEU see Section 2.

At 31 December 2021, the nominal amount of the loans granted for financial assistance, excluding NGEU (see Section 2), were:

(EUR billion) Total granted Total disbursed at year-end Total repaid at year-end Outstanding at year-end SURE Belgium 8,2 8,2 — 8,2 Bulgaria 0,5 0,5 — 0,5 Croatia 1,0 1,0 — 1,0 Cyprus 0,6 0,6 — 0,6 Czechia 2,0 2,0 — 2,0 Estonia 0,2 0,2 — 0,2 Greece 5,3 5,3 — 5,3 Hungary 0,5 0,5 — 0,5 Ireland 2,5 2,5 — 2,5 Italy 27,4 27,4 — 27,4 Latvia 0,3 0,3 — 0,3 Lithuania 1,0 1,0 — 1,0 Malta 0,4 0,4 — 0,4 Poland 11,2 8,2 — 8,2 Portugal 5,9 5,4 — 5,4 Romania 4,1 3,0 — 3,0 Slovakia 0,6 0,6 — 0,6 Slovenia 1,1 1,1 — 1,1 Spain 21,3 21,3 — 21,3 94,3 89,6 — 89,6 EFSM Ireland 22,5 22,5 — 22,5 Portugal 24,3 24,3 — 24,3 46,8 46,8 — 46,8 MFA Ukraine 5,0 5,0 (0,6 ) 4,4 Tunisia 1,4 1,1 — 1,1 Jordan 1,1 0,9 — 0,9 Other 1,5 1,2 (0,2 ) 1,0 9,0 8,2 (0,8 ) 7,4 BOP Latvia 2,9 2,9 (2,7 ) 0,2 2,9 2,9 (2,7 ) 0,2 Total 153,0 147,5 (3,5 ) 144,0

The repayment schedule for the amounts outstanding at year-end is as follows:

(EUR billion) SURE EFSM MFA BOP TOTAL 2022 — 2,7 — — 2,7 2023 — 3,5 0,1 — 3,6 2024 — 2,6 0,6 — 3,2 2025 8,0 2,4 — 0,2 10,6 2026 8,0 4,0 0,1 12,1 2027 — 3,0 0,2 3,2 2028 10,0 2,3 0,2 12,5 2029 8,1 1,4 0,9 10,4 2030 10,0 — 0,1 10,1 2031 — 7,3 1,2 8,5 2032 — 3,0 0,1 3,1 2033 — 2,1 0,5 2,6 2034 — — 0,1 0,1 2035 8,5 2,0 2,0 12,5 2036 9,0 5,7 1,3 16,0 2037 — — — — 2038 — 1,8 — 1,8 2039 — 2040 7,0 — — 7,0 2041 — 2042 — 3,0 — 3,0 2043 — 2044 — 2045 — 2046 5,0 5,0 2047 6,0 6,0 2048 — 2049 — 2050 10,0 — 10,0 2051 — — Total 89,6 46,8 7,4 0,2 144,0

SURE

SURE was established in 2020 to provide financial assistance to Member States who are experiencing, or are seriously threatened with, a severe economic disturbance caused by the COVID-19 pandemic in their territory. The instrument complements the national measures taken by affected Member States. The maximum amount of financial assistance shall not exceed EUR 100 billion for all Member States.

At the end of 2021, Member States signed loan facility agreements amounting to EUR 94,3 billion and out of this amount EUR 89,6 billion were disbursed by year-end 2021. The amount of new loans disbursed in 2021 amounted to EUR 50,1 billion. The maturity of loans varies between 5, 10, 15, 20 and 30 years.

EFSM

EFSM was created to provide financial assistance to all Member States experiencing or seriously threatened by a severe economic financial disturbance caused by exceptional occurrences beyond their control. The EFSM was used to provide financial assistance, conditional on the implementation of reforms, to Ireland and Portugal between 2011 and 2014. This programme has expired and no additional loans can be drawn, though it remains in place for specific tasks such as the lengthening of maturities for loans to Ireland and Portugal and providing bridging loans. In 2021, an amount of EUR 9,8 billion maturing during the year was extended until 2036 (EUR 3 billion for Ireland and EUR 1,8 billion for Portugal) and until 2031 (EUR 5 billion for Portugal).

The amount granted to Portugal was reduced from EUR 26 billion to EUR 24,3 billion as an amount of EUR 1,7 billion expired and no further disbursements were possible. In December 2021, Portugal requested the maturity lengthening for EUR 2,2 billion of the total EUR 2,7 billion loan due in April 2022. In February 2022, the Commission has borrowed EUR 2,2 billion to roll-over the loan, which has been extended by 4,5 years.

MFA

The MFA programme is a form of financial assistance extended by the EU to partner countries outside the EU experiencing a balance of payments crisis (including EUR 4,4 billion outstanding to Ukraine). It takes the form of medium-/long-term loans or grants, or a combination of these, and is only available to countries benefiting from a disbursing International Monetary Fund (IMF) programme.

In 2020, the Commission adopted a proposal for a EUR 3 billion MFA package to 10 enlargement and neighbourhood partners to help them limit the economic fallout of the coronavirus pandemic. The decision was adopted by the European Parliament and the Council on 25 May 2020. Under this decision, in 2021, the Commission disbursed 10 new loans of a total nominal amount of EUR 1,7 billion to nine MFA beneficiaries. The maturity of the new loans varies between 10 and 15 years.

BOP

The BOP is an assistance programme designed for countries outside the euro area that are experiencing or are threatened by difficulties regarding their balance of payments. BOP assistance takes the form of medium-term loans that are conditional on the implementation of policies designed to address underlying economic problems. Typically, BOP assistance from the EU is offered in cooperation with the IMF and other international institutions or countries.

The amount granted to Latvia under BOP was reduced from EUR 3,1 billion to EUR 2,9 billion as the available amount of EUR 0,2 billion lapsed and could no longer be disbursed. No new operations or loan repayments occurred in 2021.

4.4. BUDGETARY CONTINGENT LIABILITIES FOR FINANCIAL ASSISTANCE PROGRAMMES

Borrowings of the EU constitute direct and unconditional obligations of the EU and are guaranteed by the EU Member States (budgetary contingent liabilities). Borrowings undertaken to fund loans to countries outside the EU are covered by the Guarantee Fund for external actions. Should a beneficiary Member State default, the debt service will be drawn from the available treasury balance of the Commission, if possible. If that is not possible at that time, the Commission would draw the necessary funds from the Member States. EU Member States are legally obliged, according to the EU own resources legislation (Article 14 of Council Regulation (EU, Euratom) No 609/2014), to make available sufficient funds to meet the EU’s obligations. Thus investors are only exposed to the credit risk of the EU, not to that of the beneficiary of loans funded. ‘Back-to-back’ lending ensures that the EU budget does not assume any interest rate or foreign exchange risk.

Loans provided to Member States under the SURE instrument are underpinned by a system of voluntary guarantees from Member States amounting to 25 % of the maximum amount of financial assistance. Each Member State’s contribution to the overall amount of the guarantee corresponds to its relative share in the total gross national income (GNI) of the European Union, based on the 2020 EU budget.

For each country programme, the European Parliament, the Council and the Commission decisions determine the overall granted amount, the number of instalments to be disbursed, and the maximum (average) maturity of the loan package. Subsequently, the Commission and the Member State concerned, agree the loan/funding parameters, in particular the maturity of instalments. In addition, except for the first one, all instalments of the loan depend on compliance with policy conditions, in the context of a joint EU/IMF financial assistance, which is another factor influencing the timing of funding operations. This implies that the timing and maturities of issuances are dependent on the related EU lending activity. Funding is exclusively denominated in euro and the maturity spectrum is from 3 to 30 years.

5. FINANCIAL STATEMENTS ANALYSIS

5.1. REVENUE

The consolidated revenue of the EU incorporates amounts related to exchange transactions and non-exchange transactions, the latter being the most significant. The five-year trend of the main non-exchange revenue categories (comprising GNI resources, Traditional own resources, VAT resources, the new Plastics own resources, Fines and Recovery of expenses) is as follows:

Five-year trend of revenue from main non-exchange transactions (10)

As budget revenue should equal (or exceed) budget expenditure, the main driver in the revenue trend shown above is the payments made each year.

Consolidated revenue — main developments in 2021

In 2021, the consolidated revenue, comprising all revenue categories, amounted to EUR 178,9 billion, compared to EUR 224,0 billion the previous year. The main reason for the decrease of EUR 45,1 billion or 20,1 % was the decreasing impact of the UK’s withdrawal from the European Union, which had increased the 2020 revenues by EUR 47,5 billion, but contributed only EUR 1,1 billion to the 2021 revenues. Excluding this specific revenue, the consolidated revenue of 2021 amounts to EUR 177,8 EUR billlion, which is comparable to the adjusted consolidated revenue of the previous year (EUR 176,5 billion).

As regards the remaining revenue categories, the main developments were the introduction of the new plastics own resources, an increase in revenues from fines and a decrease in the revenues from GNI:

— Revenue from the new plastics own resource, which was introduced in 2021 with the entry into force of the new Own Resources Council Decision (EU, Euratom) 2020/2053 (11), amounted to EUR 5,8 billion. A uniform call rate of EUR 0,80 per kilogram applies to the weight of plastic packaging waste generated in each Member State that is not recycled. The plastic packaging waste that is not recycled in a given year is calculated as the difference between the plastic packaging waste generated and the plastic packaging waste recycled in that year in a Member State. Bulgaria, Czechia, Estonia, Greece, Spain, Croatia, Italy, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Portugal, Romania, Slovenia and Slovakia are entitled to specific annual lump sum reductions in their respective plastics own resource contributions,

— Fines revenue increased from EUR 0,5 billion in 2020 to EUR 2,0 billion in 2021. The increase of EUR 1,5 billion is due to both the higher number and the higher amounts of fines issued in 2021. In 2021 the main fines issued were: EUR 875 million imposed on BMW and the Volkswagen group (Volkswagen, Audi and Porsche) for colluding on technical development in the area of nitrogen oxide cleaning and EUR 371 million imposed on Nomura, UBS and UniCredit for the participation of a group of traders in a cartel in the primary and secondary market for European Government Bonds,

— Revenue from GNI (gross national income), the primary element of the EU’s operating revenue, decreased from EUR 125,4 billion in 2020 to EUR 116,0 billion in 2021. The decrease of EUR 9,4 billion or 7,5 % is linked to the increase of the other revenue categories (and the new plastics own resource revenues), as the revenue from GNI funds the part of the budget which is not covered by other sources of income.

5.2. EXPENSES

The main component of expenses recognised in the consolidated financial statements are expenses under the shared management mode, which includes the following funds: (i) European Agricultural Guarantee Fund (EAGF); (ii) European Agricultural Fund for Rural Development (EAFRD) and other rural development instruments; (iii) European Regional Development Fund (ERDF) and Cohesion Fund (CF); and (iv) European Social Fund (ESF). These funds made up EUR 119,9 billion or 54,3 % of the total expenses of EUR 221,0 billion incurred in 2021 (2020: EUR 109,7 billion, 65,9 % of the total expenses). The split of expenses under the shared management mode and their relative weights are presented below:

Main expenses under the shared management mode for the financial year 2021

The increase of expenses under the shared management mode is mainly due to increased expenses relating to the ERDF and Cohesion Fund (EUR 5,8 billion) and the ESF (EUR 3,0 billion). This reflects the increased implementation towards the end of the programming period of the 2014–2020 MFF as well as the temporary increase of the co-financing rate following the implementation of the CRII+ measures. Expenses relating to the EAFRD and other rural development instruments and the EAGF increased by EUR 1,0 billion and EUR 0,3 billion, respectively.

Following the successful launch of NGEU (see Section 2), expenses under the direct management mode, which represents budget implementation by the Commission, executive agencies and trust funds, increased from EUR 22,1 billion in 2020 to EUR 63,0 billion in 2021. The increase of EUR 40,9 billion is mainly due to the non-repayable support granted under the NGEU’s RRF, which amounted to EUR 42,9 billion. Direct management expenses relating to COVID-19 vaccination programmes decreased from EUR 1,6 billion in 2020 to EUR 0,7 billion in 2021.

Expenses under the indirect management mode represent the budget implementation by EU agencies, EU bodies, third countries, international organisations and other entities. In 2021 the expenses under the indirect management mode amounted to EUR 10,9 billion, similar to the previous year figure of EUR 11,0 billion.

5.3. ASSETS

As at 31 December 2021 total assets amounted to EUR 414,1 billion (2020: EUR 280,0 billion) — the significant increase is due to further lending from the SURE instrument and the lending and advances paid under the new NGEU instrument. The most significant items were financial assets other than cash and cash equivalents (EUR 188,6 billion), pre-financing (EUR 93,4 billion), receivables and recoverables (EUR 72,4 billon) and cash and cash equivalents (EUR 44,9 billion). Other assets, amounting to EUR 14,7 billion, mainly included property, plant and equipment and intangible assets.

Composition of assets at 31 December 2021

The significant increase in total assets of EUR 134,0 billion or 47,9 % from the previous year was mainly due to the following effects:

— Loans outstanding increased from EUR 93,3 billion in 2020 to EUR 163,6 billion in 2021. The increase of EUR 70,3 billion or 75,3 % mainly reflects the issuance of further loans for financial assistance under the SURE instrument (EUR 50,1 billion) and the issuance of loans under the new RRF (EUR 18,0 billion),

— Total pre-financing increased from EUR 62,7 billion in 2020 to EUR 93,4 billion in 2021. The increase of EUR 30,7 billion or 49,0 % reflects the non-repayable financial support granted under the RRF (EUR 30,8 billion),

— Cash and cash equivalents increased from EUR 16,7 billion in 2020 to EUR 44,9 billion in 2021. The increase of EUR 28,2 billion is mainly due to the liquidity relating to NGEU (EUR 18,0 billion held in the NGEU account, as well as EUR 1,4 billion of funds held in the Commission’s central treasury account pending disbursement to the budget for MFF programmes). The remaining increase was caused by the higher amount of non-implemented payment appropriations in 2021, fines becoming definitive at year-end and additional Traditional own resources cashed but not yet budgeted at year-end,

UK withdrawal from the EU

On 31 January 2020, the United Kingdom (UK) withdrew from the European Union. The terms of its departure are defined in an Agreement on the withdrawal of the UK from the EU and the European Atomic Energy Community, also known as the ‘Withdrawal Agreement’ or ‘WA’. As part of this deal, the UK agreed to honour all financial obligations undertaken while it was a member of the EU. The agreement entered into force on 31 January 2020. The UK will continue to contribute to the EU budget and to benefit from pre-2021 EU programmes and expenditure as if it were a Member State. The UK will also receive back certain defined monies it paid into the EU budget or monies received by the EU budget linked to its period of membership. The EU reports twice a year to the UK on the amounts due and the UK pays these on a monthly basis. The reporting is updated each year based on actual figures.

The obligations under the Withdrawal Agreement create liabilities and receivables for the EU which have to be calculated and reflected in the EU’s annual accounts and cover in particular the following areas:

— Own resources (Article 136)

— Outstanding commitments (Article 140)

— Competition fines (Article 141)

— Union Liabilities (Article 142)

— Contingent financial liabilities and financial instruments (Articles 143 & 144)

— Net assets of the European Coal & Steel Community (Article 145)

— EU investment in the European Investment Fund, EIF (Article 146)

— Contingent liabilities concerning legal cases (Article 147).

(EUR million) Article 140 Article 142 Other 31.12.2021 31.12.2020 Due from the UK 28 620 14 751 610 43 982 49 579 Due to the UK — — (2 229 ) (2 229 ) (2 122 ) Total 28 620 14 751 (1 618 ) 41 753 47 456 Non-current 17 064 14 486 (711) 30 839 40 629 Current 11 556 265 (908) 10 913 6 827

Pre-financing

In 2021, pre-financing, excluding other advances to Member States and contributions to the trust funds Bêkou and Africa, amounted to EUR 86,2 billion (2020: EUR 55,5 billion), almost all of which related to Commission activities. The increase of EUR 30,7 billion or 55,3 % is almost entirely related to the non-repayable support granted under the RRF, which resulted in an increase of pre-financing related to direct management from EUR 14,3 billion in 2020 to EUR 43,7 billion in 2021:

Commission pre-financing by management mode

The level of pre-financing granted under MFF programmes is significantly influenced by the respective MFF cycle — for example at the beginning of an MFF period large advances are expected to be paid to Member States under cohesion policy and these amounts remain available to Member States until the closure of the programmes. An annual pre-financing is also paid out, which must be used within the year or be recovered the following year as part of the annual closure of the accounts cycle. The Commission makes every effort to ensure that pre-financing is maintained at an appropriate level. A balance has to be struck between ensuring sufficient funding for projects and the timely recognition of expenditure.

5.4. LIABILITIES

As at 31 December 2021 the total liabilities were EUR 496,4 billion (2020: EUR 313,5 billion) — the huge increase is driven by the borrowings taken out in 2021 under the SURE and NGEU instruments. The most significant items were borrowings for NGEU and financial assistance (EUR 236,7 bíllion), pension obligations and other post-employment benefits liabilities (EUR 122,5 billion), accrued charges and deferred income (EUR 78,1 billion), and payables to third parties (EUR 46,4 billion):

Composition of liabilities at 31 December 2021

The significant increase of EUR 82,9 billion or 58,3 % over the previous year was mainly due to the following effects:

— Borrowings increased from EUR 93,2 billion in 2020 to EUR 236,7 billion in 2021. The increase of EUR 143,5 billion mainly relates to the RRF (EUR 91,0 billion) and to additional borrowings under SURE (EUR 50,1 billion),

— Accrued charges and deferred income increased from EUR 64,6 billion in 2020 to EUR 78,1 billion in 2021. The increase of EUR 13,5 billion or 20,9 % mainly relates to the new RRF (EUR 8,2 billion) and the implementation of the 2014–2020 MFF under the ERDF and the Cohesion Fund (EUR 1,9 billion),

— Payables increased from EUR 32,4 billion in 2020 to EUR 46,4 billion in 2021. The increase of EUR 14,0 billion or 43,2 % is primarily due to the RRF (EUR 19,1 billion) and a decrease in amounts payable in the area of cohesion, where the amount of cost claims that were received before the year-end was lower than in the previous year (EUR 5,3 billion).

Total cost claims and invoices received and recognised in the Balance Sheet under the heading ‘Payables’

Net assets

The excess of liabilities over assets at 31 December 2021 amounted to EUR 82,3 billion (2020: EUR 33,4 billion). The considerable increase of EUR 48,9 billion is mainly due to the borrowings in relation to non-repayable support taken out under NGEU in 2021 (resulting in an increase of direct management expenses of EUR 42,9 billion). It is noted that the excess of liabilities over assets does not mean that the EU institutions and bodies are in financial difficulties, rather it means that certain liabilities will be funded by future annual budgets. Many expenses are recognised under accrual accounting rules in the current year although they may be actually paid in following years and funded using future budgets; the related revenues will only be accounted for in future periods. Apart from the borrowings for NGEU, which are to be repaid between 2028 and 2051, and the employee benefits liability, which is to be paid over several decades, the most significant amounts to be highlighted are the activities relating to the EAGF, the bulk of which is usually paid in the first quarter of the following year.

6. EU POLITICAL AND FINANCIAL FRAMEWORK, GOVERNANCE AND ACCOUNTABILITY

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

6.1. POLITICAL AND FINANCIAL FRAMEWORK

EU Treaties

The overarching objectives and principles that guide the Union and the European institutions are defined in the Treaties. The Union and the EU institutions may only act within the limits of the competences conferred by the Treaties so as to attain the objectives set out therein and must do this in accordance with the principles (12) of subsidiarity and proportionality. In order to attain its objectives and carry out its policies, the Union provides itself with the necessary financial means. The Commission is responsible for promoting the general interest of the Union which includes executing the budget and managing programmes in cooperation with the Member States and in accordance with the principle of sound financial management.

The EU pursues the objectives established by the Treaty with a number of tools, one of which is the EU budget. Others are, for example, a common legislative framework or joint policy strategies.

Multiannual financial framework and spending programmes

The policies supported by the EU budget are implemented in accordance with the multiannual financial framework (MFF) and corresponding sectoral legislation defining spending programmes and instruments. These translate the EU’s political priorities into financial terms over a period long enough to be effective and to provide a coherent long-term perspective for beneficiaries of EU funds and co-financing national authorities. Maximum annual amounts (ceilings) are set for EU expenditure as a whole and for the main categories of expenditure (headings). The sum of the ceilings of all headings gives the total ceiling for commitment appropriations. The MFF is adopted by the Council by unanimity of all Member States, with the consent of the European Parliament. The current 2021–2027 multiannual financial framework was adopted on 17 December 2020. The 2021–2027 multiannual financial framework is complemented by the temporary recovery instrument NextGenerationEU.

Annual budget

The annual budget is prepared by the Commission. The European Parliament and the Council agree (usually by mid-December) on the budget for the following year, based on the procedure of Article 314 TFEU. According to the principle of budgetary equilibrium, total revenue must equal total expenditure (payment appropriations) for a given financial year.

The main sources of funding of the EU are own resources revenues which are complemented by other revenues. There are four types of own resources: Traditional own resources (mainly custom duties), the own resource based on value added tax (VAT), the own resource based on non-recycled plastic packaging waste (introduced in 2021) and the own resource based on gross national income (GNI). Other revenues arising from the activities of the EU (e.g. competition fines) normally represent less than 10 % of total revenue.

Management modes

The EU budget is implemented in three management modes which determine how the money is paid out and managed:

— Shared management: the vast proportion of the budget (around 3/4 of the budget) is managed under a system of shared management by the Commission in cooperation with the Member States, notably in the areas of structural funds and agriculture.

— Direct management: the Commission also manages programmes itself and can delegate the implementation of specific programmes to executive agencies.

— Indirect management: Expenditure decisions can also be indirectly managed via other bodies within or outside the EU. The Financial Regulation and/or contribution agreements define the necessary control and reporting mechanisms by these entities and the supervision by the Commission where budget implementation tasks are entrusted to national agencies, the European Investment Bank Group, third countries, international organisations (e.g. the World Bank or the United Nations) and other entities (e.g. EU decentralised agencies, Joint Undertakings).

Financial Regulation

The Financial Regulation (FR) (13) applicable to the general budget is a central act in the regulatory architecture of the EU’s finances. It defines in detail the financial rules applicable to the execution of the EU budget and the roles of the different actors involved in ensuring that the money is used soundly and achieves the objectives set.

6.2. GOVERNANCE AND ACCOUNTABILITY

6.2.1. Institutional structure

The EU has an institutional framework through which it aims to promote its values, advance its objectives, serve its interests, those of its citizens and those of the Member States, and ensure the consistency, effectiveness and continuity of its policies and actions. The organisational structure consists of institutions, agencies and other EU bodies. The Financial Regulation, together with the applicable accounting rules, defines which of these entities are included in the EU consolidated accounts (please see note 9 of the EU consolidated annual accounts for the list of entities included in the scope of consolidation).

The European Parliament, jointly with the Council, exercises legislative and budgetary functions. The Commission is politically accountable to the European Parliament. The Council also carries out policymaking and coordinating functions within the general political direction and priorities of the Union set by the European Council.

The European Commission is the executive arm of the European Union. It promotes the Union’s general interest and takes appropriate initiatives to that end. It ensures the application of the Treaties and oversees the application of Union law by Member States under the control of the Court of Justice of the European Union. It exercises coordinating, executive and management functions, executes the budget and manages programmes.

The Commission implements the budget, in large part in cooperation with the Member States (14). Together, they ensure that the appropriations are used in accordance with the principles of sound financial management. Regulations lay down the control and audit obligations of the Member States when they share the implementation of the budget and the resulting responsibilities. They also lay down the responsibilities and detailed rules for each of the EU’s institutions as concerns their own expenditure.

6.2.2. The Commission’s governance structure

The Commission’s governance arrangements and how these ensure that the Commission functions as a modern, accountable and performance-oriented institution are described in the Communication (15) on Governance in the European Commission.

The Commission performs its functions under the leadership of the College of Commissioners, which sets priorities and takes overall political responsibility for the work of the Commission. As a College, the Commission works under the political guidance of its President, who presents, as part of his or her nomination to the European Parliament the objectives he or she intends to pursue in the form of political guidelines. The President decides on the internal organisation of the Commission, ensuring that it acts consistently, efficiently and as a collegiate body.

The College delegates the operational implementation of the budget and financial management to the Directors-General and Heads of Service who lead the administrative structure of the Commission. This decentralised approach creates an administrative culture that encourages civil servants to take responsibility for activities over which they have control and requires them to provide assurance as concerns the activities for which they are accountable.

Under the authority of the President and in close cooperation with the Member of the Commission in charge of budget, human resources and administration, and with the involvement of the Presidential and central services, the Corporate Management Board provides coordination, oversight, advice and strategic orientations.

The internal arrangements define a coherent set of robust controls and management tools which allow the College of Commissioners to assume political responsibility for the work of the Commission (16).

6.2.3. The Commission’s financial management

In the Commission, the roles and responsibilities in financial management are clearly defined (e.g. in the Financial Regulation and the Internal Rules (17)) and applied accordingly. As authorising officers by delegation, the Commission’s Directors-General and Heads of Service are responsible for the sound financial management of EU resources, compliance with the provisions of the Financial Regulation, risk management and establishing an appropriate internal control framework.

The responsibility of the Authorising Officers covers the entire management process, from determining what needs to be done to achieve the policy objectives set by the institution to managing the activities from both an operational and a sound financial management standpoint. Tasks can further be sub-delegated to Directors, Heads of Unit and others, who thereby become Authorising Officers by Sub-Delegation. Each authorising officer by delegation may rely on one or two directors in charge of risk management and internal control to oversee and monitor the implementation of internal control systems.

The Commission’s central services provide guidance and advice and promote best practices, including through the work of the Corporate Management Board.

The Financial Regulation requires each authorising officer to prepare an annual activity report (AAR) detailing achievements, internal control and financial management activities during the year. The AAR includes a declaration that resources have been used based on the principles of sound financial management and that control procedures are in place which provide the necessary guarantees concerning the legality and regularity of the underlying transactions. The Annual Management and Performance Report for the EU budget (18) is the main instrument through which the College of Commissioners assumes political responsibility for the financial management of the EU budget.

The Accounting Officer of the Commission is centrally responsible for treasury management, recovery procedures, laying down accounting rules based on International Public Sector Accounting Standards (IPSAS), validating accounting systems and the preparation of the Commission’s and consolidated annual accounts of the EU. Furthermore, the Accounting Officer is required to sign the annual accounts declaring that they present fairly, in all material aspects, the financial position, the results of the operations and the cash flows of the Union. The annual accounts are adopted by the College of Commissioners. The Accounting Officer is an independent function and bears a major responsibility as regards financial reporting in the Commission.

The Internal Auditor of the Commission is likewise a centralised and independent function and provides independent advice, opinions and recommendations on the quality and functioning of internal control systems inside the Commission, EU agencies and other autonomous bodies.

The Audit Progress Committee ensures the independence of the Internal Auditor and monitors the quality of internal audit work and the follow-up given by the Commission services to internal and external audit recommendations, as well as to the European Court of Auditors’ discharge related findings and recommendations on the reliability of the annual consolidated EU accounts. The advisory role of the committee contributes to the overall further improvement of the Commission’s effectiveness and efficiency in achieving its goals and facilitates the College’s oversight of the Commission’s governance, risk management, and internal control practices.

6.2.4. External audit and discharge procedure

In line with the principles of sound financial management, funds must be managed in an effective, efficient and economic manner. An accountability framework based on comprehensive reporting, external audit and political control exists to provide reasonable assurance that EU funds are spent in a proper manner.

The European Parliament decides, after a recommendation by the Council, on whether or not to provide its final approval, known as ‘granting discharge’, on the way the Commission implemented the EU budget in a given year. The annual discharge procedure ensures that the Commission is held politically accountable for the implementation of the EU budget.

Every year the European Court of Auditors examines the reliability of the accounts, whether all revenue has been received and all expenditure incurred in a lawful and regular manner and whether the financial management and the qualitative aspects of budgeting, including the performance dimension, have been sound. The publication of the annual report of the European Court of Auditors is the starting point for the discharge procedure. The auditors also prepare special reports on specific spending or policy areas, or on budgetary or management issues.

The decision on the discharge is also based on the Commission’s integrated financial and accountability reporting, on hearings of Commissioners in the European Parliament and on the replies provided to written questions addressed to the Commission.

NOTE ACCOMPANYING THE CONSOLIDATED ACCOUNTS

The consolidated annual accounts of the European Union for the year 2021 have been prepared on the basis of the information presented by the institutions and bodies under Article 246(2) of the Financial Regulation applicable to the general budget of the European Union. I hereby declare that they were prepared in accordance with Title XIII of this Financial Regulation and with the accounting principles, rules and methods set out in the notes to the financial statements.

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

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

Rosa ALDEA BUSQUETS Accounting Officer of the Commission 17 June 2022

CONSOLIDATED FINANCIAL STATEMENTS AND EXPLANATORY NOTES (2)

CONTENTS

BALANCE SHEET 33

STATEMENT OF FINANCIAL PERFORMANCE 34

CASHFLOW STATEMENT 35

STATEMENT OF CHANGES IN NET ASSETS 37

NOTES TO THE FINANCIAL STATEMENTS 38

1. SIGNIFICANT ACCOUNTING POLICIES 38

2. NOTES TO THE BALANCE SHEET 57

3. NOTES TO THE STATEMENT OF FINANCIAL PERFORMANCE 99

4. CONTINGENT LIABILITIES AND ASSETS 109

5. BUDGETARY AND LEGAL COMMITMENTS 116

6. FINANCIAL RISK MANAGEMENT 120

7. RELATED PARTY DISCLOSURES 141

8. EVENTS AFTER THE BALANCE SHEET DATE 143

9. SCOPE OF CONSOLIDATION 143

BALANCE SHEET

(EUR million) Note 31.12.2021 31.12.2020 NON-CURRENT ASSETS Intangible assets 2.1 769 620 Property, plant and equipment 2.2 12 669 11 682 Investments accounted for using the equity method 2.3 1 192 588 Financial assets 2.4 181 874 99 214 Pre-financing 2.5 60 792 34 519 Exchange receivables and non-exchange recoverables 2.6 40 642 45 813 297 938 192 434 CURRENT ASSETS Financial assets 2.4 6 744 13 881 Pre-financing 2.5 32 656 28 229 Exchange receivables and non-exchange recoverables 2.6 31 796 28 681 Inventories 2.7 84 80 Cash and cash equivalents 2.8 44 860 16 742 116 141 87 613 TOTAL ASSETS 414 078 280 047 NON-CURRENT LIABILITIES Pension and other employee benefits 2.9 (122 466 ) (116 020 ) Provisions 2.10 (2 950 ) (3 878 ) Financial liabilities 2.11 (214 974 ) (84 399 ) (340 391 ) (204 297 ) CURRENT LIABILITIES Provisions 2.10 (398) (1 527 ) Financial liabilities 2.11 (31 149 ) (10 649 ) Payables 2.12 (46 372 ) (32 408 ) Accrued charges and deferred income 2.13 (78 068 ) (64 584 ) (155 987 ) (109 167 ) TOTAL LIABILITIES (496 377 ) (313 464 ) NET ASSETS (82 299 ) (33 418 ) Reserves 2.14 1 325 5 062 Amounts to be called from Member States (3) 2.15 (83 624 ) (38 480 ) NET ASSETS (82 299 ) (33 418 )

STATEMENT OF FINANCIAL PERFORMANCE

(EUR million) Note 2021 2020 REVENUE Revenue from non-exchange transactions GNI resources 3.1 115 955 125 393 Traditional own resources 3.2 20 590 19 559 VAT resources 3.3 18 340 17 858 Plastics own resources 3.4 5 831 — Fines 3.5 1 990 452 Recovery of expenses 3.6 1 794 1 355 UK Withdrawal Agreement 3.7 1 122 47 456 Other 3.8 6 737 7 116 172 357 219 190 Revenue from exchange transactions Financial revenue 3.9 5 092 3 434 Other 3.10 1 497 1 404 6 589 4 838 Total revenue 178 946 224 028 EXPENSES Implemented by Member States 3.11 European Agricultural Guarantee Fund (40 829 ) (40 461 ) European Agricultural Fund for Rural Development and other rural development instruments (15 451 ) (14 467 ) European Regional Development Fund and Cohesion Fund (46 932 ) (41 118 ) European Social Fund (16 727 ) (13 677 ) Other (4 835 ) (2 701 ) Implemented by the Commission, executive agencies and trust funds 3.12 (63 000 ) (22 094 ) Implemented by other EU agencies and bodies 3.13 (3 154 ) (3 530 ) Implemented by third countries and international organisations 3.13 (4 512 ) (4 178 ) Implemented by other entities 3.13 (3 225 ) (3 257 ) Staff and pension costs 3.14 (12 417 ) (11 995 ) Finance costs 3.15 (4 201 ) (2 188 ) Other expenses 3.16 (5 762 ) (6 946 ) Total expenses (221 046 ) (166 612 ) ECONOMIC RESULT OF THE YEAR (42 100 ) 57 416

CASHFLOW STATEMENT

(EUR million) 2021 2020 Economic result of the year (42 100 ) 57 416 Operating activities Amortisation 116 113 Depreciation 1 054 1 047 (Reversal of) impairment losses on investments — — (Increase)/decrease in loans (70 259 ) (40 624 ) (Increase)/decrease in pre-financing (30 699 ) (11 301 ) (Increase)/decrease in exchange receivables and non-exchange recoverables 2 055 (50 519 ) (Increase)/decrease in inventories (4) (12) Increase/(decrease) in pension and other employee benefits 6 447 18 360 Increase/(decrease) in provisions (2 057 ) 581 Increase/(decrease) in financial liabilities (other than NGEU borrowings) 60 075 40 531 Increase/(decrease) in payables 13 964 5 166 Increase/(decrease) in accrued charges and deferred income 13 484 (2 645 ) Prior year budgetary surplus taken as non-cash revenue (1 769 ) (3 218 ) Remeasurements in employee benefits liabilities (non-cash movement not included in statement of financial performance) (3 257 ) (15 155 ) Other non-cash movements (1 757 ) 63 Investing activities (Increase)/decrease in intangible assets and property, plant and equipment (2 307 ) (1 566 ) (Increase)/decrease in investments accounted for using the equity method (604) 3 (Increase)/decrease in non-derivative financial assets at fair value through surplus or deficit (19) (4 636 ) (1 180 ) (Increase)/decrease in derivative financial assets at fair value through surplus or deficit (629) (62) Financing activities Increase/(decrease) in borrowings related to NGEU 91 000 NET CASHFLOW 28 118 (3 004 ) Net increase/(decrease) in cash and cash equivalents 28 118 (3 004 ) Cash and cash equivalents at the beginning of the year 16 742 19 745 Cash and cash equivalents at year-end 44 860 16 742

STATEMENT OF CHANGES IN NET ASSETS

(EUR million) Amounts to be called from Member States Accumulated Surplus/(Deficit) Other reserves Fair value reserve Net Assets BALANCE AS AT 31.12.2019 (77 560 ) 4 646 391 (72 523 ) Movement in Guarantee Fund reserve (173) 173 — — Fair value movements — — 105 105 Remeasurements in employee benefits liabilities (15 155 ) — — (15 155 ) Other 210 (252) — (42) 2019 budget result credited to Member States (3 218 ) — — (3 218 ) Economic result of the year 57 416 — — 57 416 BALANCE AS AT 31.12.2020 (38 480 ) 4 566 496 (33 418 ) Impact of revised EAR 11 (see Note 1) 1 719 (3 043 ) (496) (1 820 ) BALANCE AS AT 1.1.2021 (36 761 ) 1 523 — (35 238 ) Movement in Guarantee Fund reserve — — — — Fair value movements — — — — Remeasurements in employee benefits liabilities (3 257 ) — — (3 257 ) Other 262 (198) — 63 2020 budget result credited to Member States (1 769 ) — — (1 769 ) Economic result of the year (42 100 ) — — (42 100 ) BALANCE AS AT 31.12.2021 (83 624 ) 1 325 — (82 299 )

NOTES TO THE FINANCIAL STATEMENTS

Note that in the following tables amounts concerning the UK in relation to MFFs up to end 2020 are still shown under the heading Member States as although the UK withdrew from the Union on 1 February 2020, in accordance with the Withdrawal Agreement, it continues to have a financial relationship with the Union equivalent to that of a Member State for these periods.

1. SIGNIFICANT ACCOUNTING POLICIES

1.1. LEGAL BASIS AND ACCOUNTING RULES

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

In accordance with Article 80 of the Financial Regulation, the EU prepares its financial statements on the basis of accrual-based accounting rules that are based on International Public Sector Accounting Standards (IPSAS). These accounting rules, adopted by the Accounting Officer of the Commission, have to be applied by all the institutions and EU bodies falling within the scope of consolidation in order to ensure the internal consistency of the EU consolidated accounts.

Application of new and amended European Union Accounting Rules (EAR)

New EAR adopted but not yet effective at 31 December 2021

There are no new EAR adopted but not yet effective at 31 December 2021.

Revised EAR effective for annual periods beginning on or after 1 January 2021

On 17 December 2020, the Accounting Officer of the Commission adopted the revised EAR 11 ‘Financial instruments’, which establishes the financial reporting principles for financial assets and financial liabilities and is based on the new IPSAS 41 ‘Financial Instruments’, the amended IPSAS 28 ‘Financial Instruments: Presentation’ and the amended IPSAS 30 ‘Financial Instruments: Disclosures’ (issued in August 2018).

The revised EAR 11 is mandatorily effective as of 1 January 2021, with any changes from the initial application accounted for on that date, thus not requiring restatement of prior period amounts. As a result, the financial assets, financial liabilities, exchange receivables and interest revenue/expense as at 31 December 2020 presented in these accounts have been accounted for in accordance with the accounting policies as stated in the 2020 EU financial statements under notes 1.5.5, 1.5.8 (only for exchange transactions), 1.5.12 and 1.6.1 (only for exchange transactions).

The main changes and their impacts on the EU 2021 accounts are as follows:

New classification and measurement principles for financial assets

The revised EAR 11 introduces a principles-based approach to the classification of financial assets and requires the use of two criteria: the entity’s model for managing its financial assets and the contractual cash-flow characteristics of those assets. Depending on these criteria, financial assets are classified in the following categories: ‘financial assets at amortised cost’ (AC), ‘financial assets at fair value through net assets/equity’ (FVNA), or ‘financial assets at fair value through surplus or deficit’ (FVSD).

On 1 January 2021, the application of the new criteria led to the reclassification of all equity investments and debt securities from ‘available for sale’ to financial assets at FVSD. The related fair value reserve was reclassified — within Net Assets — to accumulated surplus or deficit.

New impairment model

Whereas the previous impairment model was based on incurred losses, the revised EAR 11 has introduced a forward-looking impairment model based on expected credit losses (ECL) over the lifetime of the financial asset. The ECL takes into account possible default events and the evolution of the credit quality of the financial assets. The new impairment model applies to all financial assets measured at AC or at FVNA as well as to loan commitments and financial guarantee contracts.

In particular, on 1 January 2021, the application of the new impairment model to the financial assets classified as AC, led to the recognition of impairment on the loans for financial assistance provided to partner countries under the MFA and Euratom programmes.

Financial guarantee accounting

Under the previous EAR 11, most financial guarantees — in particular those provided at no or nominal consideration — were accounted for in accordance with the principles of EAR 10 ‘Provisions, contingent liabilities and contingent assets’, hence either recognised as provisions or disclosed as contingent liabilities depending on the probability of a loss.

The revised EAR 11 requires the application of the financial guarantee accounting requirements to all financial guarantee contracts. The measurement of the financial guarantee liability relies on the fair value of the guarantee at initial recognition and the evolution of the expected credit losses from the guaranteed debts portfolio. See note 1.5.12.

As a consequence, on 1 January 2021 the existing financial guarantee contracts were reclassified from financial provisions to the financial guarantee liability category and re-measured in accordance with the requirements of the revised EAR 11. This change led to an increase in the financial liabilities, in particular in relation to the guarantees provided to the EIB Group under the External Lending Mandate. Following the accounting treatment change and the recognition of the financial guarantee contract liability for the ELM, the reserve for the Guarantee Fund for external actions — in Net Assets until 31 December 2020 — has been released to the accumulated surplus or deficit.

The following table shows the original measurement categories under the EAR 11 as applied to the 2020 EU financial statements and the new measurement categories under the revised EAR 11 for the European Union's financial assets and liabilities as at 1 January 2021:

(EUR million) Measurement Category Prior EAR 11 Net carrying amount 31.12.2020 Measurement Category Revised EAR 11 Net carrying amount 1.1.2021 Financial assets Loans Loans and receivables 93 309 Amortised Cost 93 575 FVSD 2 Debt and equity investments Available for Sale 19 587 FVSD 19 587 Derivative assets FVSD 199 FVSD 199 Receivables Loans and receivables 3 450 Amortised Cost 3 485 FVSD 3 482 Cash and cash equivalents Available for Sale 16 742 Amortised Cost 16 742 Financial liabilities Financial guarantees Financial Guarantee Liability (90) Financial Guarantee Liability (7 889 ) Provisions (EAR10) (2 523 ) Borrowings Amortised Cost (93 192 ) Amortised Cost (93 521 ) Other financial liabilities Amortised Cost (1 761 ) Amortised Cost (1 761 ) Derivative liabilities FVSD (4) FVSD (4) Payables Amortised Cost (32 408 ) Amortised Cost (32 408 )

The following table analyses the impact of the transition to the revised EAR 11 on the European Union’s financial assets, receivables, financial provisions and financial liabilities. It reconciles the carrying amounts from their previous measurement category under the EAR 11 as applied to the 2020 EU financial statements, to their new measurement categories upon transition to the revised EAR 11 on 1 January 2021:

(EUR million) Balance at 31.12.2020 Reclassification Remeasurement Balance at 1.1.2021 Available for sale financial assets Opening balance brought forward 19 587 Transfer from AFS to FVSD (19 587 ) Adjusted opening balance — Financial assets at FVSD Opening balance brought forward 199 Transfer from AFS to FVSD 19 587 Transfer from loans to FVSD 2 Adjusted opening balance 19 788 Financial assets at amortised cost (in 2020 accounts: Loans) Opening balance brought forward 93 309 Remeasurement: Effective Interest Rate 329 Remeasurement: Expected Credit Loss (60) Reclassification to FVSD (2) Adjusted opening balance 93 575 Total Financial Assets (Note 2.4) 113 095 — 269 113 363 Receivables Opening balance brought forward 3 450 Remeasurement: Expected Credit Loss 33 FGC — receivable leg: remeasurement 3 484 Adjusted opening balance 6 967 Total Receivables (Note 2.6.2) 3 450 — 3 517 6 967 Financial Provisions Opening balance brought forward (2 523 ) Transfer to Financial Guarantee Liabilities 2 522 Adjusted opening balance (1) Total Financial provisions (Note 2.10) (2 523 ) 2 522 — (1) Financial guarantee liabilities Opening balance brought forward (90) Transfer from Financial Provisions (2 522 ) FGC — payable leg: remeasurement (5 277 ) Adjusted opening balance (7 889 ) Financial liabilities at Amortised cost Opening balance brought forward (94 954 ) Remeasurement: Effective Interest Rate (329) Adjusted opening balance (95 283 ) Financial liabilities at FVSD Opening balance brought forward (4) Adjusted opening balance (4) Total Financial liabilities (Note 2.11) (95 048 ) (2 522 ) (5 606 ) (103 175 ) Total impact of the EAR 11 revision (1 820 )

The following table analyses the impact of the transition to the revised EAR 11 on the European Union’s Net Assets as at 1 January 2021:

(EUR million) Balance at 31.12.2020 Release of reserves Other impacts on net assets Balance at 1.1.2021 Reserves Opening balance brought forward 5 062 Release of FV reserve (496) Release of GF reserve (3 043 ) Adjusted opening balance 1 523 Accumulated Surplus/(Deficit) Opening balance brought forward (38 480 ) Release of FV reserve 496 Release of GF reserve 3 043 Remeasurement of assets and liabilities (1 820 ) Adjusted opening balance (36 761 ) Total net assets (33 418 ) — (1 820 ) (35 238 )

The following table reconciles the prior period’s closing impairment allowance measured in accordance with the EAR 11 as applied to the 2020 EU financial statements and financial provisions measured in accordance with EAR 10 to the new impairment allowance measured in accordance with the revised EAR 11 at 1 January 2021:

(EUR million) 31.12.2020 1.1.2021 Impairment allowance/ Financial provisions 12-months Expected Credit Loss Life-time Expected Credit Loss Total impairment allowance Financial assets at amortised cost, of which: (739) (49) (25) (73) Subrogated loans (20) (726) — — — Other loans (13) (49) (25) (73) Receivables (190) (156) (156) Financial guarantee contracts (2 523 ) (859) (5 143 ) (6 002 )

1.2. ACCOUNTING PRINCIPLES

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

The overall considerations (or accounting principles) to be followed when preparing the financial statements are laid down in EU accounting rule 1 ‘Financial Statements’ and are the same as those described in IPSAS 1: fair presentation, accrual basis, going concern, consistency of presentation, materiality, aggregation, offsetting and comparative information.

The qualitative characteristics of financial reporting are relevance, faithful representation (reliability), understandability, timeliness, comparability and verifiability.

1.3. CONSOLIDATION

Scope of consolidation

The consolidated financial statements of the EU comprise all significant controlled entities, joint arrangements and associates. The complete list of entities falling under the scope of consolidation, which now comprises 55 controlled entities and one associate (2020: 52 controlled entities and one associate), can be found in note 9. Among the controlled entities are the EU institutions (including the Commission, but not the European Central Bank) and the EU agencies (except those of the Common and Foreign Security Policy). The European Coal and Steel Community in Liquidation (ECSC i.L.) is also considered as a controlled entity. The EU’s only associate is the European Investment Fund (EIF).

Entities falling under the scope of consolidation but immaterial to the EU consolidated financial statements as a whole need not be consolidated or accounted for using the equity method where to do so would result in excessive time or cost to the EU. These entities are referred to as ‘Minor entities’ and are separately listed in note 9. In 2021, 8 entities have been classified as such minor entities (2020: 8 entities).

Controlled entities

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

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

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

Joint Arrangements

A joint arrangement is an agreement of which the EU and one or more parties have joint control. Joint control is the agreed sharing of control of an arrangement by way of a binding arrangement, which exists only when decisions about the relevant activities require the unanimous consent of parties sharing control. Joint agreements can be either joint ventures or joint operations. A joint venture is a joint arrangement that is structured through a separate vehicle and whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Participations in joint ventures are accounted for using the equity method (see note 1.5.4). A joint operation is a joint arrangement whereby the parties that have joint control of the arrangements have rights to the assets, and obligations for the liabilities, related to the arrangement. Participations in joint operations are accounted for by recognising in the EU’s financial statements its assets and liabilities, revenues and expenses, as well as its share of assets, liabilities, revenues and expenses jointly held or incurred.

Associates

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

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

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

1.4. BASIS OF PREPARATION

Financial statements are presented annually in accordance with Article 243 of the Financial Regulation. The accounting year begins on 1 January and ends on 31 December.

1.4.1. Currency and basis for conversion

Functional and reporting currency

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

Transactions and balances

Foreign currency transactions are translated into euros using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the re-translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of financial performance.

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

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

Euro exchange rates

Currency 31.12.2021 31.12.2020 Currency 31.12.2021 31.12.2020 BGN 1,9558 1,9558 PLN 4,5969 4,5597 CZK 24,8580 26,2420 RON 4,949 4,8683 DKK 7,4364 7,4409 SEK 10,2503 10,0343 GBP 0,8403 0,8990 CHF 1,0331 1,0802 HRK 7,5156 7,5519 JPY 130,3800 126,4900 HUF 369,1900 363,8900 USD 1,1326 1,2271

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, financial risk of accounts receivable and the amounts disclosed in the notes concerning financial instruments, impairment allowance for financial assets at amortised cost and for financial guarantee contract liabilities, accrued revenue and charges, provisions, degree of impairment of intangible assets and property, plant and equipment, net realisable value of inventories, contingent assets and liabilities. Actual results could differ from those estimates. Changes in estimates are reflected in the period in which they become known, if the change affects that period only, or that period and future periods, if the change affects both.

1.5. BALANCE SHEET

1.5.1. Intangible assets

An intangible asset is an identifiable non-monetary asset without physical substance. An asset is identifiable if it is either separable (i.e. it is capable of being separated or divided from the entity, e.g. by being sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so), or arises from binding arrangements (including rights from contracts or other legal rights), regardless of whether those rights are transferable or separable from the entity or from other rights and obligations).

Acquired intangible assets are stated at historical cost less accumulated amortisation and impairment losses. Internally developed intangible assets are capitalised when the relevant criteria of the EU Accounting Rules are met and the expenses relate solely to the development phase of the asset. The capitalisable costs include all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management. Costs associated with research activities, non-capitalisable development costs and maintenance costs are recognised as expenses as incurred.

Intangible assets are amortised on a straight-line basis over their estimated useful lives (3 to 11 years). The estimated useful lives of intangible assets depend on their specific economic life time or legal life time determined by an agreement.

1.5.2. Property, plant and equipment

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

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

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

Type of asset Straight line depreciation rate Buildings 4 % to 10 % Space assets 8 % to 25 % Plant and equipment 10 % to 25 % Furniture and vehicles 10 % to 25 % Computer hardware 25 % to 33 % Other 10 % to 33 %

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

Leases

A lease is an agreement whereby the lessor conveys to the lessee, in return for a payment or series of payments, the right to use an asset for an agreed period of time. Leases are classified as either finance leases or operating leases.

Finance leases are leases where substantially all the risks and rewards incidental to ownership are transferred to the lessee. When entering a finance lease as a lessee, the assets acquired under the finance lease are recognised as assets and the associated lease obligations as liabilities as from the commencement of the lease term. The assets and liabilities are recognised at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. Over the period of the lease term, the assets held under finance leases are depreciated over the shorter of the asset’s useful life and the lease term. The minimum lease payments are apportioned between the finance charge (the interest element) and the reduction of the outstanding liability (the capital element). The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability, which is presented as current/non-current, as applicable. Contingent rents are charged as expenses in the period in which they are incurred.

An operating lease is a lease other than a finance lease, i.e. a lease where the lessor retains substantially all the risks and rewards incidental to ownership of an asset. When entering an operating lease as a lessee, the operating lease payments are recognised as an expense in the statement of financial performance on a straight-line basis over the lease term with neither a leased asset nor a leasing liability presented in the statement of financial position.

1.5.3. Impairment of non-financial assets

An impairment is a loss in the future economic benefits or service potential of an asset, over and above the systematic recognition of the loss of the asset's future economic benefits or service potential through amortisation or depreciation (as applicable). Assets that have an indefinite useful life are not subject to amortisation/depreciation and are tested annually for impairment. Assets that are subject to amortisation/depreciation are tested for impairment whenever there is an indication at the reporting date that an asset may be impaired. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable (service) amount. The recoverable (service) amount is the higher of an asset’s fair value less costs to sell and its value in use.

Intangible assets and property, plant and equipment residual values and useful lives are reviewed, and adjusted if appropriate, at least once per year. If the reasons for impairments recognised in previous years no longer apply, the impairment losses are reversed accordingly.

1.5.4. Investments accounted for using the equity method

Participations in associates and joint ventures

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

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

If there are indications of impairment, a write-down to the lower recoverable amount is necessary. The recoverable amount is determined as described under note 1.5.3. If the reason for impairment ceases to apply at a later date, the impairment loss is reversed to the carrying amount that would h