EUROPEAN COMMISSION Brussels, 11.7.2016 COM(2016) 475 final COMMUNICATION FROM THE COMMISSION CONSOLIDATED ANNUAL ACCOUNTS OF THE EUROPEAN UNION 2015



CONTENTS PART I FINANCIAL STATEMENT DISCUSSION AND ANALYSIS NOTE ACCOMPANYING THE CONSOLIDATED ACCOUNTS CONSOLIDATED FINANCIAL STATEMENTS AND EXPLANATORY NOTES BALANCE SHEET STATEMENT OF FINANCIAL PERFORMANCE CASHFLOW STATEMENT STATEMENT OF CHANGES IN NET ASSETS NOTES TO THE FINANCIAL STATEMENTS

AGGREGATED REPORTS ON THE IMPLEMENTATION OF THE BUDGET AND

EXPLANATORY NOTES PART II FINANCIAL STATEMENT DISCUSSION AND ANALYSIS FINANCIAL YEAR 2015

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.

1.EU: Institutional governance and operations The EU is based on the rule of law. This means that every action taken by the EU is founded on treaties that have been approved voluntarily and democratically by all EU Member States. It has a unique institutional set-up: European citizens elect directly the Members of the European Parliament (EP); The EU's broad priorities are set by the European Council, which brings together national and EU-level leaders; Member States governments are represented in the Council of the European Union (the 'Council');

The interests of the EU as a whole are promoted by the European Commission (the 'Commission'), whose President is elected by the EP and whose members are suggested for appointment by national governments by common accord with the President-elect and are subject, as a body, to a vote of consent by the EP. The EU has its own legal order which is separate from international law and forms an integral part of the legal systems of the Member States. The legal order of the EU is based on its own sources of law. Given the varied nature of these sources, a hierarchy had to be established among them. Primary legislation is at the top of the hierarchy and is represented by the Treaty on European Union (TEU); Treaty on the Functioning of the European Union (TFEU); Charter of Fundamental Rights of the European Union; other Treaties and Protocols. This is followed by international agreements concluded by the EU, general legal principles and secondary legislation, which is based on the Treaties. The organisational governance of the EU consists of institutions, agencies and other EU bodies which are listed in note 9 of the notes to the financial statements. The main institutions in the sense of being responsible for drafting policies and taking decisions are the EP, the European Council, the Council and the Commission. 2.Main political objectives of the EU The Commission proposed on 3 March 2010 the Europe 2020 strategy which is a 10-year strategy for reviving the economy of the EU. It aims at "smart, sustainable, inclusive growth" with greater coordination of national and European policy. A number of headline targets have been agreed for the EU to achieve by the end of 2020. These cover employment, research and development, climate/energy, education, social inclusion and poverty reduction. This limited set of EU-level targets is translated into national targets in each EU country, reflecting different situations and circumstances. Europe has identified new engines to boost growth and jobs. These areas are addressed by 7 flagship initiatives:  Digital agenda for Europe ;  Innovation Union ;  Youth on the move ;  Resource efficient Europe ;  An industrial policy for the globalisation era ;  An agenda for new skills and jobs ; and  European platform against poverty . Within each initiative, both the EU and national authorities have to coordinate their efforts so that they are mutually reinforcing. The Commission that came into office in November 2014 has defined the following 10 initiatives (up to 2019) which represent a continuation of the Europe 2020 strategy: A new boost for jobs, growth and investment: The main initiative of the EU under this heading is the European Fund for Strategic Investments (EFSI), which was launched together with the EIB Group. It is intended to help overcome the current investment gap in the EU by mobilising private financing for strategic investments in key areas such as infrastructure, education, research and innovation, renewable energy as well as risk finance for small businesses. It is expected that additional funding of Member States, national promotional banks and private investors would bring the investments in the EU to a total of EUR 315 billion. A resilient energy union with a forward looking climate change policy: The EU has long been committed to international efforts to tackle climate change and felt the duty to set an example through robust policy-making at home. At European level a comprehensive package of policy measures to reduce greenhouse gas emissions has been initiated through the European Climate Change Programme (ECCP). The EU has set itself targets for reducing its greenhouse gas emissions progressively up to 2050. Key climate and energy targets are set in the 2020 climate and energy package and in the 2030 climate and energy framework. These targets are defined so as to put the EU on the way to achieve the transformation towards a low-carbon economy as detailed in the 2050 low-carbon roadmap. The EU tracks its progress on cutting emissions through regular monitoring and reporting. The EU has been at the forefront of international efforts towards a global climate deal. Following limited participation in the Kyoto Protocol and the lack of agreement in Copenhagen in 2009, the EU has been building a broad coalition of developed and developing countries in favour of high ambition that shaped the successful outcome of the Paris climate conference (COP21) in December 2015. At this conference 195 countries adopted the first-ever universal, legally binding global climate deal. The EU was the first major economy to submit its intended contribution to the new agreement in March 2015. It is already taking steps to implement its target to reduce emissions by at least 40 % by 2030.

A new policy on migration: Migration has been one of the political priorities of the current Commission. The main objective of this European Agenda on Migration is to approach the issue of migration in a comprehensive way. The first part of this Agenda defines immediate measures to prevent human tragedies and to reinforce mechanisms to deal with emergencies. This will be done by strengthening the presence at sea to save lives, targeting criminal smuggling networks, responding to high volumes of arrivals within the EU and using the EU's operational and financial tools to help frontline Member States. As a first step in 2015, through amending budgets, the Commission made available additional funding – see section 6 below. Furthermore, the long-term policy on migration needs to be redefined based on four pillars: 1) reducing the incentives for irregular migration; 2) saving lives and securing the external borders; 3) a strong common asylum policy; and 4) a new policy on legal migration. A deeper and fairer internal market: The Single Market is one of Europe’s major achievements and its best asset in times of increasing globalisation. It is an engine for building a stronger and fairer EU economy. By allowing people, goods, services and capital to move more freely it opens up new opportunities for citizens, workers, businesses and consumers, creating the jobs and growth Europe so urgently needs. More integrated and deeper capital markets will channel more funding to companies, especially SMEs, and infrastructure projects. Better worker mobility will let people move more freely where their skills are needed. And combatting tax evasion and tax fraud will ensure that all contribute their fair share. Digital Single Market package: The internet and digital technologies are transforming our world. But existing barriers online mean citizens miss out on goods and services, internet companies and start-ups have their horizons limited, and businesses and governments cannot fully benefit from digital tools. It is thus necessary to make the EU's single market fit for the digital age – tearing down regulatory walls and moving from 28 national markets to a single one. This could contribute EUR 415 billion per year to the EU economy and create hundreds of thousands of new jobs. An area of justice and fundamental rights: The EU is not simply a common market for goods and services. Europeans share values that are spelled out in the EU Treaties and the Charter of Fundamental Rights. The EU must never lose sight of those values in its efforts to fight terrorism, human trafficking, smuggling and cybercrime. It is intended to make life easier for Europeans who study, work or get married in other EU countries. One of the main goals is therefore to build bridges between the different national legal systems across the EU. A borderless and seamless European justice area will ensure that citizens can rely on a set of rights all across the continent. A stronger global actor: The EU needs a strong common foreign policy to respond efficiently to global challenges, including the crises in its neighbourhood, project its values, and contribute to peace and prosperity in the world. A balanced EU-US free trade agreement: The EU is negotiating an ambitious and balanced trade and investment deal with the US. The Transatlantic Trade and Investment Partnership (TTIP) will create new trade and investment opportunities for companies, big and small, and new jobs. For consumers, it will cut prices and widen choice, while keeping the EU's high standards for consumer protection, social rights and environmental rules. It will also boost Europe's influence in the world – by shaping global trade, projecting its values and attracting more investment. A Union of democratic change: For the first time, in 2014, EU countries had to take the results of the elections into account when proposing a candidate for President of the Commission. Albeit an important step, this is only the first of many in making the EU more democratic and bringing it closer to its citizens. Europeans have the right to know who Commissioners and Commission staff, Members of the European Parliament and representatives of the Council meet in the context of the legislative process. The Commission is committed to bringing a new lease of life to the relationship with the European Parliament, as well as to working more closely with national parliaments. Deeper Economic and Monetary Union: Continued efforts to promote economic stability and attract investors to Europe: The Commission's work on completing the Economic and Monetary Union builds on the Five Presidents' Report , which set out four areas where work is needed. The Five Presidents' Report is the result of numerous consultations between the Member States, the EU institutions involved and the 5 Presidents. 3.EU Budget: From preparation to discharge 4.Budget and Funding

The multiannual financial framework (MFF) forms the EU's political objectives and sets annual maximum amounts (ceilings) 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 of commitment appropriations. The EU Budget finances a wide range of policies and programmes throughout the EU. In accordance with the priorities set by the EP and the Council in the MFF, the Commission carries out specific programmes, activities and projects in the field. The budget is prepared by the Commission and usually agreed in mid-December by the EP and the Council, based on the procedure of Art. 314 TFEU. According to the principle of budget equilibrium, the total revenue must equal total expenditure (payment appropriations) for a given financial year. The EU has two main categories of funding: Own resources revenues and sundry revenues. Own resources can be divided into traditional own resources (such as custom levies), the own resource based on value added tax (VAT) and the resource based on gross national income (GNI). Sundry revenues arising from the activities of the EU (e.g. competition fines) normally represent less than 10 % of total revenue. Own resources revenue make up the vast majority of EU funding and accrue automatically to the EU to enable it to finance its budget without the need for a subsequent decision by national authorities. The overall amount of own resources needed to finance the budget is determined by total expenditure less sundry revenue. The total amount of own resources cannot exceed 1.23 % of the gross national income (GNI) of the EU. As a general principle the EU is not allowed to borrow money on capital markets or from financial institutions to finance its budget. 5.How the EU budget is managed and spent Primary operational expenditure The EU's operational expenditure covers the various headings of the MFF and takes different forms, depending on how the money is paid out and managed. From 2014 onwards, the Commission classifies its expenditure as follows: Direct management: this is where the budget is implemented directly by the Commission services. Indirect management: this refers to cases where the Commission confers tasks of implementation of the budget to bodies of EU law or national law, such as the EU agencies. Shared management: under this method of budget implementation tasks are delegated to Member States. About 80 % of the expenditure falls under this management mode covering such areas as agricultural spending and structural actions. The different financial actors within the Commission The College of Commissioners assumes collective political responsibility but in practice does not itself exercise the budget implementation powers vested in it. It delegates these tasks each year to individual civil servants accountable to the College via the Financial Regulation (FR) and the Staff Regulations (SR). The staff concerned – generally Directors-General and Heads of Service - are known as “Authorising Officers by delegation” or "AODs". They in turn may further delegate budget implementation tasks to “Authorising Officers by sub-delegation”. The responsibility of the Authorising Officers covers the entire management process, from determining what needs to be done to achieve the policy objectives set by the institution to managing the activities launched from both an operational and budgetary standpoint. Each Authorising Officer is required to prepare an Annual Activity Report (AAR) on the activities under their responsibility where they report on policy results and on the reasonable assurance they may have that the resources assigned to the activities described in their report have been used for their intended purpose and in accordance with the principles of sound financial management, and that the control procedures put in place give the necessary guarantees concerning the legality and regularity of the underlying transactions. On the basis of Art. 66 FR, the Commission transmits a summary report (synthesis report) on the individual AARs to the EP and the Council, by which the Commission takes overall political responsibility for the management of the EU budget in line with Art. 317 TFEU. This report and the AAR are available at: http://ec.europa.eu/atwork/planning-and-preparing/synthesis-report/index_en.htm. According to Art. 318 TFEU, the Commission issues an evaluation report on the progress and performance of Commission programmes based on the AARs of the Authorising Officers. As from the financial year 2015, the synthesis report and the evaluation report are merged with the information presented in a new report called "Annual Management and Performance Report for the budget." The Accounting Officer executes payment and recovery orders drawn up by Authorising Officers and is responsible for managing the treasury, laying down accounting rules and methods, validating accounting systems, keeping the accounts and drawing up the institution's annual accounts. 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 cashflows.

6.Financial reporting and accountability The consolidated annual accounts of the EU provide financial information on the activities of the institutions, agencies and other bodies of the EU from an accrual accounting and budgetary perspective. These accounts do not comprise the annual accounts of Member States. The annual accounts of the EU consist of two separate but linked parts: a) the financial statements; and b) the reports on implementation of the budget, which provide a detailed record of budget implementation. It is the responsibility of the Commission's Accounting Officer to prepare the EU's consolidated annual accounts and ensure that they present fairly, in all material aspects, the financial position, the result of the operations and the cashflows of the EU. In addition to the above annual accounts, ad-hoc reports on specific areas such as the report on budgetary and financial management, on financial instruments, on guarantees given and on financial corrections are also prepared. Reporting and Accountability in the Commission: 7.Audit and discharge Audit The EU’s annual accounts and resource management are audited by the European Court of Auditors (Court), its external auditor, which as part of its activities draws up for the EP and the Council: (1) an annual report on the activities financed from the general budget, detailing its observations on the annual accounts and underlying transactions; (2) an opinion, based on its audits and given in the annual report in the form of a statement of assurance, on (i) the reliability of the accounts and (ii) the legality and regularity of the underlying transactions involving both revenue collected from taxable persons and payments to final beneficiaries; and (3) special reports giving the findings of audits covering specific areas. Discharge The final step of a budget lifecycle is the discharge of the budget for a given financial year. The discharge represents the political aspect of the external control of budget implementation and is the decision by which the EP, acting on a Council recommendation, "releases" the Commission (and other EU bodies) from its responsibility for management of a given budget by marking the end of that budget's existence. The EP is the discharge authority within the EU. This means that following the audit and finalisation of the annual accounts it falls to the Council to recommend and then to the EP to give a discharge to the Commission and other EU bodies for implementing the EU budget for a given financial year. This decision is based on an examination of the annual accounts, the Commission's annual management and performance report for the budget (former synthesis report and annual evaluation report), the annual report, the audit opinion and special reports of the Court, and replies of the Commission to questions and further information requests. This discharge procedure may produce three outcomes: the granting, postponement or the refusal of the discharge. Integral to the annual budgetary discharge procedure in the EP are the hearings with Commissioners who are questioned by the Members of the EP's Budgetary Control Committee regarding the policy areas under their responsibility. The final discharge report including specific recommendations to the Commission for action is adopted in Plenary of the EP. The Council discharge recommendations are adopted by ECOFIN. Both, the EP's discharge report as well as the Council discharge recommendations are subject to an annual follow up report in which the Commission outlines the concrete actions it has taken to implement the recommendations made.

8.Consolidated financial statements of the EU: Financial situation 2015 9.Revenue The majority of revenue of the EU institutions and bodies are revenues from non-exchange transactions. The table below provides an overview of the main categories of these revenues. Five year trend of revenue from non-exchange transactions in EUR millions: The GNI resource in 2014 included major revisions for the GNI dating back to 2002. The adjustment of contributions was thus unprecedented in size totalling almost EUR 10 billion across all EU Member States. This explains most of the decrease in 2015 compared to the previous year. Recovery of expenses represent recovery orders issued by the Commission that are cashed or offset against subsequent payments recorded in the Commissions accounting system made so as to recover expenditure previously paid out from the EU budget. 10.Expenses Expenses were, of EUR 155.9 billion, at a lower level than last year (2014: EUR 165.3 billion). A decrease of EUR 4.6 billion was noted for the European Regional Development Fund (ERDF) and Cohesion Fund (CF), which was due to the slow start of the implementation of the programming period 2014-2020. Expenses under the European Social Fund (ESF) fell by EUR 2.8 billion due to fewer cost claims submitted for the 2007-2013 multiannual financial framework period. The main expense items (EUR 112.4 billion) are transfer payments under the shared management mode. The main funds are: the European Agricultural Guarantee Fund (EAGF), the European Agricultural Fund for Rural Development (EAFRD) and other rural development instruments, ERDF and CF and the ESF. In the financial year 2015 these made up almost 71 % of total expenses. Expenses incurred under direct management mainly represent the budget implementation by the Commission, executive agencies and, new from 2015 onwards, by trust funds. Also included under direct management are administrative expenses of all EU institutions and agencies. Under indirect management the budget is implemented by EU agencies, EU bodies, third countries, international organisations and other entities. Overall, the expenses incurred under direct and indirect management made up about 14 % of total expenses (EUR 22 billion). The EU also recognises future payment obligations as expenses that are not yet shown in the cash-based budgetary accounts. They are in particular shown under payables and accrued charges for agriculture and rural development and under pension and employee benefits liabilities relating to pension rights acquired by Commissioners, MEPs and staff and lead to a negative economic result (these payments will be financed by future budgets and are not included yet in revenue). 11.Economic result The economic result of the period (i.e. the deficit) of EUR (13 033) million remained at a similar level as last year. 12.Assets EUR 154 billion assets on the consolidated balance sheet of the EU The most significant items on the asset side of the balance sheet are financial assets (loans, available for sale financial assets, cash) and pre-financing amounts, which make up almost 83 % of the assets of the EU. The amount of loans fell by EUR 1.6 billion to EUR 57 billion whereas the amount of available for sale financial instruments financed from the EU budget (budgetary instruments) increased by about EUR 460 million. Included on the asset side under Property, Plant and Equipment are assets concerning the Copernicus programme (EUR 1.7 billion) and Galileo assets under construction (EUR 2.1 billion). In previous years, the EU institutions & bodies managed to keep the amounts held as cash and cash equivalents at year end at a low level. The high cash balance of EUR 21.7 billion at 31 December 2015 is mainly due to:

the delayed payment of GNI and VAT balances of 2014 (EUR 5.4 billion) which were spread throughout 2015, with a very large part paid in September 2015. The Member States’ contribution to the EU budget based on VAT and GNI is subject to an annual adjustment, which is performed every year on the first working day of December. The adjustment in 2014 included major revisions for GNI dating back to 2002, thus resulting in an unprecedented EUR 9.5 billion across all EU Member States. the GNI and VAT balance of 2015 (EUR 1.4 billion). the 2016 GNI paid in advance (EUR 0.7 billion) by two Member States. fines and other revenue (EUR 1.5 billion). Based on the own resources regulation, these balances could only be returned to the Member States in 2016 via an amending budget. Pre-financing It should be noted that the level of pre-financing is significantly influenced by the MFF cycle – for example at the beginning of an MFF period one can expect large advances to be paid to Member States under cohesion policy. The Commission makes every effort to ensure that the levels of pre-financing are maintained at an appropriate level. A balance has to be struck between ensuring sufficient funding for the projects and the timely recognition of expenditure. The total pre-financing (excluding other advances to Member States and contributions to trust funds) on the EU balance sheet amounts to EUR 40 billion (2014: EUR 45 billion), almost all of which relates to Commission activities. Some 70 % of the Commission's pre-financing concerns shared management, which means that the implementation of the budget is delegated to Member States (the Commission retains a supervisory role). Commission pre-financing by management mode The most significant pre-financing amount under shared management mode relates to ERDF & CF. Long-term pre-financing has increased by EUR 12.6 billion related to the new MFF while short-term pre-financing fell by EUR 17.7 billion. The increase in long-term pre-financing is mainly due to the new pre-financing payments made under shared management for the 2014-2020 MFF (EUR 10 billion in total of which EUR 7 billion is for the cohesion policy). The decrease in the short term amounts is also mainly due to shared management – as the 2007-2013 MFF is at the closure stage, the related pre-financing is gradually being cleared. Financial instruments under direct and indirect management The following items are shown as financial instruments in the EU annual accounts: Loans granted from the budget; Loans granted from borrowed funds; Equity instruments; Guarantee instruments; and Guarantee funds: guarantees given to external entities (mainly the EIB Group) for instruments not created by the EU budget. The significance and volume of financial instruments financed by the EU budget under direct and indirect management increases from year to year. The basic concept behind this approach, in contrast to the traditional method of budget implementation by 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. This intelligent use of the EU budget aims at maximising the impact of the funds available. Equity instruments and investments (i.e. equity instruments and debt securities) held in guarantee instruments and the guarantee funds are shown as available for sale financial assets in the annual accounts of the EU.

Available for sale financial assets of budgetary financial instruments Guarantee Funds Guarantee funds created by the EU have been set-up for specific purposes and are provisioned by payments from the EU budget so as to provide a liquidity cushion against potential losses from guaranteed operations on guarantees given by the EU budget to the EIB Group. The main new guarantee fund created in 2015 is the EFSI Guarantee Fund. EFSI is an initiative in order to increase the risk bearing capacity of the EIB Group which enables the EIB to invest up to EUR 61 billion in the EU. EFSI is not a separate legal entity or an investment fund in the strict sense. The EFSI risk reserve offers protection to the EIB against potential losses for underlying operations. It is composed of an allocation of EUR 5 billion of EIB's own capital and an EU budget guarantee of up to EUR 16 billion (cap amount). It is the objective that additional funding of Member States, national promotional banks and private investors would bring the investments in the EU to a total of EUR 315 billion. The EFSI operations are conducted within two windows: the Infrastructure and Innovation Window (IIW) implemented by the EIB and the SME Window (SMEW) implemented by the EIF, both of which will have a debt portfolio (EU guarantee of EUR 12.25 billion) and an equity portfolio (EU guarantee of EUR 3.75 billion). The EIF acts under an agreement with the EIB on the basis of an EIB guarantee which itself is counter-guaranteed by the EU. The EU and the EIB have distinct roles within EFSI. EFSI is established within the EIB who finance the operations (debt and equity investments) and, to do this, borrow the necessary funds on the capital markets. Regarding the IIW, the EIB takes the investment decisions independently and manages the operations in accordance with its rules and procedures, the same as applied to its own (risk) operations. In order to ensure that investments made under EFSI remain focused on the specific objective of addressing the market failures which hinder investment in the EU and that they are eligible for the protection of the EU guarantee, a dedicated governance structure has been put in place. The investment committee of independent experts examines each project proposed by the EIB regarding its eligibility for the EU guarantee coverage. Once an operation is confirmed to be eligible, as EFSI guaranteed operation, the decision to continue with the project and its management is then subject to the normal EIB project cycle and governance process. The role of the EU relates to the provision of the EU guarantee for part of the potential losses that the EIB may suffer from its investments in debt and equity instruments. Consequently, the EU does not intervene in the final selection and management of EFSI operations, does not invest money in the EFSI operations and it is not a direct contractual party to the underlying instruments. As the control criteria and accounting requirements for consolidation of the EU accounting rules (and IPSAS) are not met, the related assets are not accounted for in the consolidated annual accounts of the EU – see also note 5.2 of the consolidated financial statements. At all times, the EU guarantee is capped at EUR 16 billion and the aggregate net payments from the EU budget shall not exceed this amount. EU guarantee payments would be made by a newly created guarantee fund which provides a liquidity cushion against potential net losses (expected losses not covered by expected revenues) on the EFSI guaranteed operations. The EFSI Guarantee Fund will be financed from the EU Budget as from 2016 onwards and will gradually reach EUR 8 billion by 2022, thus provisioning 50 % of the maximum EU guarantee. At 31 December 2015 EUR 1 350 million has been committed to and will be paid into the guarantee fund in 2016 (EUR 500 million) and 2017 (EUR 850 million) and is included in the amount disclosed as RAL in note 5.3.1 of the consolidated financial statements. The following tables provide an overview of financial instruments used by the EU per MFF EUR millions MFF 2014-2020 Assets Liabilities Guarantees Equity instruments: COSME – Equity Facility for Growth 39 (2) Horizon 2020 InnovFin Equity Facility for R&I 108 (2) 146 (4) Guarantee instruments: COSME Loan Guarantee Facility 125 (43) * Employment and Social Innovation 10 (3) * Student Loan Guarantee Facility 16 (1) * Horizon 2020 – InnovFin Loan & Guarantee Service for R&I 638 (97) (442) Horizon 2020 – InnovFin SME Guarantee 294 (22) (17) Natural Capital Financing Facility 12 - Private Finance for Energy Efficiency Instrument (PF4EE) 12 - 1 107 (166) (459) Total 1 253 (170) (459) MFF Prior to 2014 Assets Liabilities Guarantees Loan / Equity / Technical assistance instruments: Instrument of economic and financial cooperation under the Euro-Mediterranean partnership (MEDA) 251 (2) European Neighbourhood and Partnership Instrument (ENPI) 153 (4) 404 (6) Loan instruments: SME Support Loan 19 Equity instruments: High Growth and Innovative SME Facility under Competitiveness & Innovation Framework Programme 413 - European Technology Start up Facility 1998 (ETF) 11 - Global Energy Efficiency and Renewable Energy Fund (GEEREF) 76 - Multi Annual Framework Programme Equity Facility 192 - Marguerite Fund 50 - European Progress Microfinance Facility (PMF) for employment and social inclusion 71 - European Energy Efficiency Fund 128 (22) Technology Transfer Pilot projects 1 943 (22) Guarantee instruments: SME Guarantee Facility under Competitiveness and Innovation Framework Programme (CIP SMEG) 108 (215) * Loan Guarantee instrument for Ten-T Projects (LGTT) 238 (3) (209) Multi Annual Program (MAP) for Enterprises 23 (35) * Project Bond Initiative (PBI) 236 (1) (220) European Progress Microfinance Mandate 13 (11) * Risk Sharing Finance Facility (RSFF) 927 (94) (845) SME Guarantee Facility 16 (16) * 1 561 (375) (1 274) Total 2 927 (403) (1 274) * The risk taken by the EU is fully provisioned (i.e. included in liabilities).





EUR millions Related to more than one MFF Assets Liabilities Guarantees Equity instruments: European Fund for Southeast Europe (EFSE) 118 - Enterprise Expansion Fund under the Western Balkan Enterprise Development and Innovation Facility 10 - Enterprise Innovation Fund (EIF) under the Western Balkan Enterprise Development and Innovation Facility 21 - Green for Growth Fund to the Eastern Neighbourhood Region (SE4F) 52 - Microfinance Initiative for Asia Debt Fund 9 - MENA Fund for Micro-, Small and Medium Enterprises (SANAD) 10 - 220 - Guarantee Instruments: Guarantee Facility under the Western Balkan Enterprise Development and Innovation Facility 20 (14) * 20 (14) Guarantee Funds: Guarantee fund for external actions 2 108 (25) (19 450) European Fund for Strategic Investment (EFSI) 1 - (202) 2 109 (25) (19 652) Total 2 349 (39) (19 652) Overall Total 6 529 (612) (21 385) * The risk taken by the EU is fully provisioned (i.e. included in liabilities). Loans granted from borrowed funds The EU is empowered by the EU Treaty to undertake borrowing operations to mobilise the financial resources necessary to fulfil specific mandates. The Commission, acting on behalf of the EU, currently operates three main programmes, Macro-financial assistance (MFA), Balance of Payments (BOP) assistance and the European Financial Stabilisation Mechanism (EFSM), under which it may grant loans and the capital required to fund the EU lending is raised on the capital markets or with financial institutions. During 2015, Ireland officially requested an extension of its first EFSM loan repayment deadline. The EUR 5 billion instalment was divided into three new ones of EUR 2 billion, EUR 1 billion and EUR 2 billion, with maturities falling in 2023, 2029 and 2035, respectively. In January 2016, Portugal officially requested for the extension of its first EFSM loan repayment maturity due on 3 June 2016. The EUR 4.75 billion instalment was refinanced by three new tranches of EUR 1.5 billion, EUR 2.25 billion and EUR 1 billion, with maturities falling in 2023, 2031 and 2036, respectively. On 17 July 2015, a bridge loan was granted to Greece under the EFSM as a temporary loan prior to the loan agreement signed between Greece and the European Stability Mechanism (ESM). The first and sole disbursement occurred on 20 July 2015 and was fully repaid when the ESM agreement was ratified by national parliaments of the Euro area Member States. This reimbursement took place on 20 August 2015. Overview of loans granted from borrowed funds at nominal amounts EUR billions BOP EFSM Others* TOTAL Hungary Latvia Romania Total Ireland Portugal Greece Total Total Total granted 6.5 3.1 8.4** 18.0 22.5 26.0 7.2 55.7 5.1 78.8 Disbursed at 31.12.2014 5.5 2.9 5.0 13.4 22.5 24.3 - 46.8 2.4 62.6 Disbursed in 2015 - - - - 5.0 - 7.2 12.2 1.3 13.5 Total disbursed 31.12.2015 5.5 2.9 5.0 13.4 27.5 24.3 7.2 59.0 3.6 76.0 Loans repaid at 31.12.2015 (4.0) (2.2) (1.5) (7.7) (5.0) - (7.2) (12.2) (0.1) (20.0) Outstanding amount at 31.12.2015 1.5 0.7 3.5 5.7 22.5 24.3 0 46.8 3.5 56.0 * MFA, Euratom and ECSC in liquidation. ** Including precautionary assistance. 13.Liabilities EUR 226 billion liabilities on the 2015 consolidated balance sheet of the EU The liability side consists primarily of four key items: The pension and other employee benefits liabilities, borrowings, payables and accrued charges. The biggest change as compared to 2014 is the increase of accrued charges by almost EUR 12.4 billion due to the start of the implementation of the 2014-2020 MFF, where costs incurred are estimated since they have not yet been declared by the Member States. Another important change is the decrease in payables by about EUR 12.5 billion in cohesion due to a lower submission of cost statements by Member States for the programming period 2007-2013. Another reason is a lower level of submission of cost claims due to the slow start of the 2014-2020 MFF caused by delays in Member States designation of management and control authorities. Total cost claims and invoices received and recognised as payables 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 2015 although they may be actually paid in 2016 or later and funded using future budgets and the related revenues will only be accounted for in future periods. The most significant amounts to be highlighted are the EAGF activities (paid in 2016) and the employee benefits (to be paid over the next 30 plus years). 14.PROTECTION OF THE EU BUDGET Financial corrections and recoveries overview for 2015

An important consideration in implementing the EU budget is the need to ensure the proper prevention or detection and subsequent correction of system weaknesses leading to errors, irregularities and fraud. The Court provides in its annual report a statement of assurance on the legality and regularity of transactions underlying the annual accounts, as well as the material level of error in payments. The statement of assurance accompanies the EU annual accounts in its publication in the Official Journal. The Commission's protective actions mitigate the impact of these errors through two main mechanisms: (1) preventive mechanisms (e.g. ex-ante controls, interruptions and suspensions of payments); and (2) corrective mechanisms (primarily financial corrections imposed on or agreed with Member States and, to a lesser extent, recoveries from recipients of EU payments). Under the shared management mode (agricultural spending and structural actions), Member States are primarily responsible throughout the expenditure life cycle for ensuring that expenditure paid out from the EU budget is legal and regular. The corrective actions, i.e. financial corrections and recoveries, arise following the supervision and checks made by both the Commission and also, in the case of shared management expenditure, Member States on the eligibility of expenditure funded by the EU budget. When deciding on the amount of a financial correction or recovery, the Commission takes into account the nature and seriousness of the breach of applicable law and the financial implications for the EU budget, including cases of deficiencies in management and control systems. Most corrections are done after payment. Financial corrections and recoveries process: Financial corrections and recoveries are presented at two main stages of the process. Both stages may take place in the same year or in different years: (1) Financial corrections and recoveries at confirmation stage: These amounts have been either agreed by the Member State concerned or adopted by a Commission decision. In 2015, the total financial corrections and recoveries confirmed amounted to EUR 3 499 million (2014: EUR 4 728 million). Financial corrections and recoveries confirmed in 2015 - breakdown per policy areas (2) Financial corrections and recoveries at implementation stage: These amounts represent the final step of the process whereby the observed situation of undue expenditure is definitively corrected. Several implementation mechanisms are foreseen in the sector-based regulatory frameworks. In 2015, the total financial corrections and recoveries implemented amounted to EUR 3 853 million (2014: EUR 3 285 million). The implementation of financial corrections and recoveries may take a number of years mainly due to instalment or deferral decisions granted to Member States under the agricultural policy. Under the Cohesion policy the legal framework foresees the implementation at or after the closure of the programming period. Financial corrections and recoveries implemented in 2015 - breakdown per policy areas The above information is a supplementary disclosure that is not required by the accounting standards and includes data which is not always drawn directly from the accounting system. More details on these figures and on the preventive and corrective mechanisms can be found in the annual Communication on the protection of the EU budget prepared by the Commission and sent to the Discharge Authority and the Court – this is available on the Europa website of the Directorate-General for Budget. 15.Management of risks and uncertainties in EU budget implementation Risks and uncertainties of EU budget implementation can be divided into two main categories: General and expected risks and uncertainties; and

Exceptional risks and uncertainties. 16.General and expected risks and uncertainties Issues encountered during the financial year Macro-economic environment The macro-economic environment of the EU has an impact on the ability of EU Member states to meet their funding obligations towards the EU institutions and bodies and thus on the ability of the EU to continue implementing EU policies as highlighted in section 2 above. The European economy remains supported by a number of positive factors such as oil prices, the euro’s exchange rate and financing costs which have stimulated exports and private consumption. Investment, however, remains hampered by economic and policy uncertainty and in some countries, excessive debt. Now, as it enters its fourth year of recovery, the European economy is facing headwinds and substantial risks from the slowdown in emerging economies. Economic growth strong enough to reduce unemployment substantially has so far failed to materialise and evidence of a reinvigoration of investment, which is crucial for the sustainability of the recovery, remains limited. In addition, the pace of implementation of the EU budget under the 2014-2020 MFF is rather slow and the continued issues with Greece and the refugee crisis complements this overall picture. The euro area’s economic recovery remains moderate despite the substantial support from the positive factors described above that are now likely to be somewhat stronger and longer lasting than previously expected. In particular, driven mainly by abundant supply, the oil price has slipped again and is now assumed to remain markedly lower and to rebound later. Fiscal policy in the euro area is becoming slightly more supportive to growth, largely due to government expenditures associated with the inflow of asylum seekers in some Member States. Additionally, the combination of quantitative easing and credit easing by the European Central Bank (ECB) mean that financing costs in the euro area should remain low for a longer period of time than earlier expected and will further help to reduce financial fragmentation and differences among Member States. Meanwhile, the boost from these factors is increasingly being offset by a worsening global environment, and some legacy issues from the crisis (mainly high levels of policy uncertainty, debt and unemployment) continue to weigh on growth. Real GDP (forecast), inflation rate and unemployment rate in %, per EU average Real GDP Inflation Unemployment rate 2015 2016 2017 2015 2016 2017 2015 2016 2017 Belgium 1.3 1.3 1.7 0.6 1.4 1.7 8.3 8.0 7.4 Germany 1.7 1.8 1.8 0.1 0.5 1.5 4.8 4.9 5.2 Estonia 0.9 2.1 2.3 0.1 1.0 2.5 6.3 6.3 7.5 Ireland 6.9 4.5 3.5 0.0 0.6 1.4 9.4 8.5 7.8 Greece 0.0 (0.7) 2.7 (1.1) 0.5 0.8 25.1 24.0 22.8 Spain 3.2 2.8 2.5 (0.6) 0.1 1.5 22.3 20.4 18.9 France 1.1 1.3 1.7 0.1 0.6 1.3 10.5 10.5 10.3 Italy 0.8 1.4 1.3 0.1 0.3 1.8 11.9 11.4 11.3 Cyprus 1.4 1.5 2.0 (1.6) 0.2 1.3 15.5 14.5 13.2 Latvia 2.7 3.1 3.2 0.2 0.4 2.0 9.9 9.2 8.6 Lithuania 1.6 2.9 3.4 (0.7) (0.1) 2.1 9.0 8.0 7.2 Luxembourg 4.7 3.8 4.4 0.1 0.4 2.4 6.1 6.0 6.0 Malta 4.9 3.9 3.4 1.2 1.7 2.1 5.4 5.4 5.4 Netherlands 2.0 2.1 2.3 0.2 0.9 1.5 6.9 6.6 6.4 Austria 0.7 1.7 1.6 0.8 0.9 1.8 6.0 6.2 6.4 Portugal 1.5 1.6 1.8 0.5 0.7 1.1 12.6 11.7 10.8 Slovenia 2.5 1.8 2.3 (0.8) (0.3) 1.1 9.1 8.8 8.4 Slovakia 3.5 3.2 3.4 (0.3) 0.3 1.7 11.5 10.3 9.3 Finland 0.0 0.5 0.9 (0.2) 0.1 1.5 9.5 9.4 9.3 Euro area 1.6 1.7 1.9 0.0 0.5 1.5 11.0 10.5 10.2 Bulgaria 2.2 1.5 2.0 (1.1) (0.1) 0.9 10.1 9.4 8.8 Czech Republic 4.5 2.3 2.7 0.3 0.4 1.4 5.1 4.8 4.7 Denmark 1.2 1.7 1.9 0.2 0.9 1.7 6.0 5.8 5.6 Croatia 1.8 2.1 2.1 (0.3) 0.3 1.6 16.2 15.1 13.8 Hungary 2.7 2.1 2.5 0.1 1.7 2.5 6.7 6.0 5.2 Poland 3.5 3.5 3.5 (0.7) 0.6 1.7 7.5 7.0 6.5 Romania 3.6 4.2 3.7 (0.4) (0.2) 2.5 6.7 6.6 6.5 Sweden 3.6 3.2 2.9 0.7 1.1 1.4 7.4 6.9 6.7 United Kingdom 2.3 2.1 2.1 0.0 0.8 1.6 5.2 5.0 4.9 EU 1.9 1.9 2.0 0.0 0.5 1.6 9.5 9.0 8.7 GDP in the euro area is forecast to accelerate slightly from 1.6 % in 2015 to 1.7 % in 2016. Once global economic activity starts to rebound, positive effects should be felt later in 2016 and 2017. Also, some of the structural reforms implemented in Member States should continue to have a positive impact on growth. As legacies of the crisis recede, consumption and investment should benefit. Although debt levels remain high in some parts of the economy, easy financing conditions should limit acute deleveraging pressures. Overall, euro area GDP growth should pick up further to 1.9 % in 2017. In 2016, Member States should continue moving along a recovery path, including Greece, where growth is set to pick up again in the course of the year. The Investment Plan for Europe has been established to help overcome the current investment gap in the EU by mobilising private financing for strategic investments in key areas and should also start to have a positive impact on public and private investment. In 2017 economic activity should be on the rise in all Member States. In 2015, the general government deficit in the euro area is expected to have declined to 2.2 % of GDP and is set to decrease further to 1.9 % and 1.6 % in 2016 and 2017 respectively. Next year, under a no policy-change assumption, the structural balance is projected to remain broadly stable in both the euro area and the EU. The debt-to-GDP ratio of the euro area is forecast to decline from its peak of 94.5 % in 2014 to 91.3 % in 2017. The improvement in labour market conditions continues with the moderate economic recovery underpinning a modest rise in employment growth. Overall, employment is expected to have risen by 1.1 % in the euro area in 2015 and is projected to continue at about the same speed this year and next on the back of strengthening economic activity, improved business confidence and higher capital accumulation. The economic outlook for the euro area remains highly uncertain and overall risks are clearly tilted to the downside. Risks to the growth outlook from the global economy and global financial markets have clearly increased, in particular due to the slowing growth in China and other emerging markets, which could trigger stronger spillovers than envisaged or which could become worse than forecast. Combined with the uncertainty regarding the adjustment in China, the continuation of monetary policy normalisation in the US could have a more negative impact on vulnerable emerging market economies, especially those with high levels of foreign currency denominated debt, and could also affect the stability of financial markets. The materialisation of any of these downside risks would result in negative spillovers to the Member States via various transmission channels. In Europe, domestic risks have also increased lately. Any unexpected relapse into crisis in Greece could weigh more heavily on investment decisions and thus on economic growth. Moreover, if major political challenges were not successfully addressed at the EU level (e.g. handling of migration flows), that could trigger developments that become impediments to growth. Guarantee Funds for guarantees given The EU has given guarantees to the EIB Group on loans granted outside of the EU and on EFSI debt and equity operations. At 31 December 2015, the EU shows in the notes to the financial statements (see note 5.2.1) contingent liabilities for both guarantees of EUR 19.7 billion. In order to mitigate the risk guarantee calls by the EIB could have on the EU budget, the Commission has created separate guarantee funds, i.e. the Guarantee Fund for External Actions and the EFSI Guarantee Fund. The Guarantee Fund for external actions is provisioned by the EU budget so as to cover 9 % of the guaranteed loans outstanding at year-end. At 31 December 2015 the total asset value of EUR 2.1 billion covers a maximum exposure of the EU of EUR 19.45 billion. The EFSI Guarantee Fund will as from 2016 onwards gradually reach EUR 8 billion by 2022, thus provisioning 50 % of the maximum exposure of the EU guarantee of EUR 16 billion. Borrowing and lending operations The EU is empowered by the EU Treaty to undertake borrowing operations to mobilise the financial resources necessary to fulfil specific mandates. The Commission, acting on behalf of the EU, currently operates three main programmes, Macro-financial assistance (MFA), Balance of Payments (BOP) assistance and the European Financial Stabilisation Mechanism (EFSM), under which it may grant loans and the capital required to fund the EU lending is raised on the capital markets or with financial institutions. EU borrowing and lending activities are non-budget operations. In general, 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, so as to mitigate the risk of not being able to repay the borrowings, put procedures in place to ensure the repayment of borrowings even in case of a loan default. For each country programme, the EP, the Council and the Commission decisions determine the overall granted amount, the (maximum) number of instalments to be disbursed, and the maximum (average) maturity of the loan package. Subsequently, the Commission and the beneficiary country agree loan/funding parameters, including instalments and the payment of tranches. In addition, except for the first one, all instalments of the loan depend on compliance with strict conditions, with agreed terms and conditions similar to International Monetary Fund (IMF) support, in the context of a joint EU/IMF financial assistance, which is another factor influencing the timing of funding. 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. The following table provides an overview of the planned reimbursement schedule in nominal value for outstanding EFSM and BOP loan amounts at the date of signature of these accounts: EUR billions BOP EFSM TOTAL Hungary Latvia Romania Total Ireland Portugal Total 2017 1.15 1.15 1.15 2018 1.35 1.35 3.9 0.6 4.5 5.85 2019 0.5 1.0 1.5 1.5 2021 3.0 6.75 9.75 9.75 2022 2.7 2.7 2.7 2023 2.0 1.5 3.5 3.5 2024 0.8 1.8 2.6 2.6 2025 0.2 0.2 0.2 2026 2.0 2.0 4.0 4.0 2027 1.0 2.0 3.0 3.0 2028 2.3 2.3 2.3 2029 1.0 0.4 1.4 1.4 2031 2.25 2.25 2.25 2032 3.0 3.0 3.0 2035 2.0 2.0 2.0 2036 1.0 1.0 1.0 2038 1.8 1.8 1.8 2042 1.5 1.5 3.0 3.0 Total 0 0.7 3.5 4.2 22.5 24.3 46.8 51.0

Borrowings of the EU constitute direct and unconditional obligations of the EU and are guaranteed by the 28 Member States. 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 would not be possible, 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 12 of Council Regulation 1150/2000), 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. The Inter-governmental financial stability mechanisms European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM) are outside the EU Treaty framework and thus not included in the consolidated annual accounts of the EU. 17.Exceptional risks and uncertainties Every year the EU is exposed to unexpected risks and uncertainties and it is the objective of the EU institutions and bodies to find rapid solutions to issues encountered during the year. In the financial year 2015, the refugee crisis, the difficulties of European farmers and the situation as regards unpaid cost claims and invoices received at year-end were the most significant risks and uncertainties to be dealt with. Managing the refugee crisis Over the last six months, the European Commission has worked for a swift, coordinated European response to the risks and uncertainties related to the refugee crisis, tabling a series of proposals designed to equip Member States with the tools necessary to better manage the large number of arrivals. From tripling the presence at sea; through a new system of emergency solidarity to relocate asylum seekers from the most affected countries; via an unprecedented mobilisation of the EU budget of over EUR 10 billion to address the refugee crisis and assist the countries most affected; providing a new coordination and cooperation framework for the Western Balkan countries; starting a new partnership with Turkey; all the way to an ambitious proposal for a new European Border and Coast Guard, the European Union is bolstering Europe's asylum and migration policy to deal with the new challenges it is facing. Despite these measures taken, uncertainty surrounding the strong inflow of asylum seekers and its economic impact remains high. As a first and immediate step, the Commission reinforced funding for the years 2015 and 2016 of Frontex, Europol and EASO (EUR 170 million) and has increased financial contributions to the Asylum, Migration and Integration Fund (AMIF) and the Internal Security Fund (ISF) from initially EUR 2 billion to EUR 3.7 billion. Immediate financial support for activities related to the refugee crisis outside the EU led to an increase in Humanitarian aid (EUR 2.2 billion), the creation of the EU Trust Fund for Syria (EUR 500 million), the creation of the EU Emergency Trust Fund for Africa (EUR 1.8 billion), the creation of the refugee facility in Turkey (EUR 1 billion) and other measures relating to security and boarder control (EUR 300 million), counter terrorism (EUR 100 million) and to the return of displaced persons and refugees (EUR 280 million). Support package for European farmers The general political and market environment during the financial year 2015 led to difficulties for European farmers concerning their cashflow situation and linked to increasingly instable markets. These difficulties created risks not only to European farmers but also to the EU institutions as regards their successful implementation of the Common Agricultural Policy. The Commission has reacted to this situation by mobilising EUR 420 million of substantial aid to address problems in the coming years in the dairy and pigmeat sectors. In addition, other measures such as the introduction of new Private Storage Aid schemes for dairy and pigmeat and the possibility of advancing direct payments to farmers were introduced. In total, the measures taken in 2015 bring the overall package (future budgets) to European farmers to about EUR 500 million. This immediate response demonstrates that the Commission takes its responsibility towards farmers very seriously and is prepared to back it up with the appropriate funds. Cost claims and invoices to be paid The issue in 2015 as regards cost claims and invoices to be paid were: the unexpected pace of submission of cost claims and invoices which were not in line with forecasts and so the EU institutions had to adapt to the payment needs; and the lack of payment appropriations at year-end to pay cost claims and invoices received which needed to be financed via amending budgets. After several years of a persistent pressure on payment appropriations, the financial year 2015 saw a significant improvement with regard to payments. The amount of cost claims and invoices to be paid at year-end decreased from EUR 25.8 billion in 2014 to EUR 15.2 billion at the end of 2015. The major part of this decrease relates to the previous programming periods of cohesion policy since the amount of cost claims and invoices to be paid for the 2014-2020 programmes was negligible at the end of 2014 and 2015. Within the Commission, short-term cashflow forecasting is done weekly (sometimes daily) to ensure that the immediate payment obligations of the EU can be met, respecting the limits of the payment appropriations available in the budget. This short term forecast is the basis used to estimate the amount of own resources to be called monthly from Member States. On the first working day of each month Member States must credit to the Commission’s own resource accounts one-twelfth of the total amount of the VAT and GNI-based resource entered in the Union's budget. Depending on the Commission's cash position, Member States may be asked in the first quarter of the year to bring forward, by one or two months, the VAT and GNI based resources. Those advances have to be deducted from calls for funds in later months, depending on the forecasted cash needs.

For the medium and long-term, the Commission monitors in detail the payment requirements of the EU as part of its regular activities. For example, this is required for the preparation of Commission proposals on the MFF, as part of the annual budget preparation and when preparing amending budgets. In the negotiation phase of the MFF, the models used and the assumptions underlying are monitored regularly and updated when necessary. The results of the models are channelled into the budgetary negotiations establishing the MFF payment ceiling. Event after the balance sheet date – Referendum in the United Kingdom On 23 June 2016, the citizens of the United Kingdom voted to leave the European Union. To give effect to this decision of the British people, Article 50 of the Treaty on European Union must be invoked. This article sets out the procedure to be followed if a Member State decides to leave the European Union, and only when this article is activated can the negotiations on the departure of the United Kingdom begin. In accordance with the guidelines provided by the European Council, the Union shall then negotiate and conclude an agreement with the United Kingdom, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union. At the time of the signing of these accounts, formal notification of the triggering of Article 50 has not been presented. NOTE ACCOMPANYING THE CONSOLIDATED ACCOUNTS The consolidated annual accounts of the European Union for the year 2015 have been prepared on the basis of the information presented by the institutions and bodies under Article 148(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 IX 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 the budgetary implementation. I hereby certify that based on this information, and on such checks as I deemed necessary to sign off the accounts of the European Commission, I have a reasonable assurance that the accounts present fairly, in all material aspects, the financial position, the results of the operations and the cashflows of the European Union. [signed] Manfred Kraff Accounting Officer of the Commission 8 July 2016 EUROPEAN UNION FINANCIAL YEAR 2015

CONSOLIDATED FINANCIAL STATEMENTS AND EXPLANATORY NOTES 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 BALANCE SHEET STATEMENT OF FINANCIAL PERFORMANCE CASHFLOW STATEMENT STATEMENT OF CHANGES IN NET ASSETS NOTES TO THE FINANCIAL STATEMENTS 1.SIGNIFICANT ACCOUNTING POLICIES 2.NOTES TO THE BALANCE SHEET

BALANCE SHEET EUR millions Note 31.12.2015 31.12.2014 NON-CURRENT ASSETS Intangible assets 2.1 337 282 Property, plant and equipment 2.2 8 700 7 937 Investments accounted for using the equity method 2.3 497 409 Financial assets 2.4 56 965 56 438 Pre-financing 2.5 29 879 18 358 Exchange receivables and non-exchange recoverables 2.6 870 1 198 97 248 84 623 CURRENT ASSETS Financial assets 2.4 9 907 11 811 Pre-financing 2.5 15 277 34 237 Exchange receivables and non-exchange recoverables 2.6 9 454 14 380 Inventories 2.7 138 128 Cash and cash equivalents 2.8 21 671 17 545 56 448 78 101 TOTAL ASSETS 153 696 162 724 NON-CURRENT LIABILITIES Pension and other employee benefits 2.9 (63 814) (58 616) Provisions 2.10 (1 716) (1 537) Financial liabilities 2.11 (51 764) (51 851) (117 293) (112 005) CURRENT LIABILITIES Provisions 2.10 (314) (745) Financial liabilities 2.11 (7 939) (8 828) Payables 2.12 (32 191) (43 180) Accrued charges and deferred income 2.13 (68 402) (55 973) (108 846) (108 726) TOTAL LIABILITIES (226 139) (220 730) NET ASSETS (72 442) (58 006) Reserves 2.14 4 682 4 435 Amounts to be called from Member States* 2.15 (77 124) (62 441) NET ASSETS (72 442) (58 006) * The European Parliament adopted a budget on 25 November 2015 which provides for the payment of the Union's short-term liabilities from own resources to be collected by, or called up from, the Member States in 2016. Additionally, under Article 83 of the Staff Regulations (Council Regulation 259/68 of 29 February 1968 as amended), the Member States shall jointly guarantee the liability for pensions. STATEMENT OF FINANCIAL PERFORMANCE EUR millions Note 2015 2014 REVENUE Revenue from non-exchange transactions GNI resources 3.1 95 355 104 688 Traditional own resources 3.2 18 649 17 137 VAT resources 3.3 18 328 17 462 Fines 3.4 531 2 297 Recovery of expenses 3.5 1 547 3 418 Other 3.6 5 067 5 623 Sub-total 139 478 150 625 Revenue from exchange transactions Financial income 3.7 1 846 2 298 Other 3.8 1 562 1 066 Sub-total 3 408 3 364 Total Revenue 142 886 153 989 EXPENSES* Implemented by Member States 3.9 European Agricultural Guarantee Fund (45 032) (44 465) European Agricultural Fund for Rural Development and other rural development instruments (16 376) (14 046) European Regional Development Fund and Cohesion Fund (38 745) (43 345) European Social Fund (9 849) (12 651) Other (2 380) (2 307) Implemented by the Commission, executive agencies and trust funds 3.10 (15 626) (15 311) Implemented by other EU agencies and bodies 3.11 (1 209) (1 025) Implemented by third countries and international organisations 3.11 (3 031) (2 770) Implemented by other entities 3.11 (2 107) (1 799) Staff and pension costs 3.12 (10 273) (9 662) Changes in employee benefits actuarial assumptions 3.13 (2 040) (9 170) Finance costs 3.14 (1 986) (2 926) Share of net deficit of joint ventures and associates 3.15 (641) (640) Other expenses 3.16 (6 623) (5 152) Total Expenses (155 919) (165 269) ECONOMIC RESULT OF THE YEAR (13 033) (11 280) * Implemented by Member States: Shared management Implemented by the Commission, executive agencies and trust funds: Direct Management Implemented by other EU agencies and bodies, third countries, international organisations and other entities: Indirect management. CASHFLOW STATEMENT EUR millions Note 2015 2014 Economic result of the year (13 033) (11 280) Operating activities 4.2 Amortisation 74 61 Depreciation 489 408 (Increase)/decrease in loans 1 591 (1 298) (Increase)/decrease in pre-financing 7 439 6 844 (Increase)/decrease in exchange receivables and non-exchange recoverables 5 253 (1 898) (Increase)/decrease in inventories (10) - Increase/(decrease) in pension and employee benefits liability 5 198 11 798 Increase/(decrease) in provisions (253) 414 Increase/(decrease) in financial liabilities (977) 1 146 Increase/(decrease) in payables (10 989) 6 967 Increase/(decrease) in accrued charges and deferred income 12 429 (309) Prior year budgetary surplus taken as non-cash revenue (1 435) (1 005) Other non-cash movements 32 130 Investing activities 4.3 (Increase)/decrease in intangible assets and property, plant and equipment (1 381) (2 347) (Increase)/decrease in investments accounted for using the equity method (87) (60) (Increase)/decrease in available for sale financial assets (213) (1 536) NET CASHFLOW 4 126 8 035 Net increase/(decrease) in cash and cash equivalents 4 126 8 035 Cash and cash equivalents at the beginning of the year 2.8 17 545 9 510 Cash and cash equivalents at year-end 2.8 21 671 17 545 STATEMENT OF CHANGES IN NET ASSETS

EUR millions Reserves (A) Amounts to be called from Member States (B) Net Assets =(A)+(B) Fair value reserve Other reserves Accumulated Surplus/(Deficit) Economic result of the year BALANCE AS AT 31.12.2013 99 3 974 (45 560) (4 365) (45 852) Movement in Guarantee Fund reserve – 247 (247) – – Fair value movements 139 – – – 139 Other – (24) 16 – (8) Allocation of the 2013 economic result – (0) (4 365) 4 365 – 2013 budget result credited to Member States – – (1 005) – (1 005) Economic result of the year – – – (11 280) (11 280) BALANCE AS AT 31.12.2014 238 4 197 (51 161) (11 280) (58 006) Movement in Guarantee Fund reserve – 189 (189) – – Fair value movements 54 – – – 54 Other – 2 (24) – (22) Allocation of the 2014 economic result – 3 (11 283) 11 280 – 2014 budget result credited to Member States – – (1 435) – (1 435) Economic result of the year – – – (13 033) (13 033) BALANCE AS AT 31.12.2015 292 4 390 (64 091) (13 033) (72 442) NOTES TO THE FINANCIAL STATEMENTS 1.SIGNIFICANT ACCOUNTING POLICIES 1.1.LEGAL BASIS AND ACCOUNTING RULES The accounts of the EU are kept in accordance with Regulation (EU, Euratom) No 966/2012 of the European Parliament and of the Council of 25 October 2012 on the financial rules applicable to the general budget of the Union and repealing Council Regulation (EC, Euratom) No 1605/2002 (OJ L 298, 26.10.2012, p. 1) hereinafter referred to as the 'Financial Regulation' and Commission Delegated Regulation (EU) No 1268/2012 of 29 October 2012 (OJ L 362, 31.12.2012, p. 1) laying down detailed rules of application of this Financial Regulation. In accordance with article 143 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 establish a uniform set of rules for accounting, valuation and presentation of the accounts with a view to harmonising the process for drawing up the financial statements and consolidation. The accounts are kept in Euro on the basis of the calendar year. 1.2.ACCOUNTING PRINCIPLES The objective of the financial statements is to provide information about the financial position, performance and cashflows of an entity that is useful to a wide range of users. For 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, that is: fair presentation, accrual basis, going concern, consistency of presentation, aggregation, offsetting and comparative information. The qualitative characteristics of financial reporting according to article 144 of the Financial Regulation are relevance, reliability, understandability and comparability. Preparation of the financial statements in accordance with the above mentioned rules and principles requires management to make estimates that affect the reported amounts of certain items in the balance sheet and statement of financial performance, as well as the disclosures related to financial instruments and contingent assets and liabilities. 1.3.CONSOLIDATION

Scope of consolidation The consolidated financial statements of the EU comprise all significant controlled entities (i.e. the EU institutions (including the Commission) and the EU agencies), associates and joint ventures. The complete list of consolidated entities can be found in note 9 of the EU financial statements. It now comprises 52 controlled entities, 7 joint ventures and 1 associate. In comparison with 2014, the scope of consolidation remained unchanged except for one new joint venture included and one joint venture removed – see note 2.3. Controlled entities The decision to include an entity in the scope of consolidation is based on the control concept. Controlled entities are all entities over which the EU has, directly or indirectly, the power to govern the financial and operating policies so as to be able to benefit from these entities' activities. This power must be presently exercisable. Controlled entities are fully consolidated. The consolidation begins at the first date on which control exists, and ends when such control no longer exists. The most common indicators of control within the EU are: creation of the entity through founding treaties or secondary legislation, financing of the entity from the general budget, the existence of voting rights in the governing bodies, audit by the Court 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. Under this approach, the EU's institutions (except the ECB) and agencies (excluding the agencies of the former 2nd pillar) are considered as under the exclusive control of the EU and are therefore included in the consolidation scope. Furthermore the European Coal and Steel Community (ECSC) in Liquidation is also considered as a controlled entity. 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 Ventures A joint venture is a contractual arrangement whereby the EU and one or more parties (the "venturers") undertake an economic activity which is subject to joint control. Joint control is the contractually agreed sharing of control, directly or indirectly, over an activity embodying service potential. Participations in joint ventures are accounted for using the equity method (see 1.5.4 below). Associates Associates are entities over which the EU has, directly or indirectly, significant influence but not 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 1.5.4 below). 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 their behalf. However since these entities are not controlled by the EU they are not consolidated in its financial statements. 1.4.BASIS OF PREPARATION Currency and basis for conversion Functional and reporting currency The financial statements are presented in millions of euros, the euro being the EU's functional and reporting currency. Transactions and balances Foreign currency transactions are translated into euros using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the 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 exchange rates applying on 31 December: Euro exchange rates Currency 31.12.2015 31.12.2014 Currency 31.12.2015 31.12.2014 BGN 1.9558 1.9558 PLN 4.2639 4.2732 CZK 27.0230 27.7350 RON 4.5240 4.4828 DKK 7.4626 7.4453 SEK 9.1895 9.3930 GBP 0.7340 0.7789 CHF 1.0835 1.2024 HRK 7.6380 7.6580 JPY 131.0700 145.2300 HUF 315.9800 315.5400 USD 1.0887 1.2141 Changes in the fair value of monetary financial instruments denominated in a foreign currency and classified as available for sale that relate to a translation difference are recognised in the statement of financial performance. Translation differences on non-monetary financial assets and liabilities held at fair value through profit or loss are recognised in the statement of financial performance. Translation differences on non-monetary financial instruments classified as available for sale are included in the fair value reserve. Use of estimates In accordance with IPSAS and generally accepted accounting principles, the financial statements necessarily include amounts based on estimates and assumptions by management based on the most reliable information available. Significant estimates include, but are not limited to: amounts for employee benefit liabilities, provisions, financial risk on inventories and accounts receivable, accrued income and charges, contingent assets and liabilities, degree of impairment of intangible assets and property, plant and equipment and amounts disclosed in the notes concerning financial instruments. Actual results could differ from those estimates. Changes in estimates are reflected in the period in which they become known. 1.5.BALANCE SHEET Intangible assets Acquired computer software licences are stated at historical cost less accumulated amortisation and impairment losses. The assets are amortised on a straight-line basis over their estimated useful lives. The estimated useful lives of intangible assets depend on their specific economic lifetime or legal lifetime determined by an agreement. Internally developed intangible assets are capitalised when the relevant criteria of the EU accounting rules are met and relate solely to the development phase of the asset. The costs capitalisable 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. 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 and works of art are not depreciated as they are 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 % 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 Leases of tangible assets, where the EU has substantially all the risks and rewards of ownership, are classified as finance leases. Finance leases are capitalised at the lease’s commencement at the lower of the fair value of the leased asset and the present value of the minimum lease payments. The interest element of the finance lease payment is charged to expenditure over the period of the lease at a constant periodic rate in relation to the balance outstanding. The rental obligations, net of finance charges, are included in financial liabilities (non-current and current). The interest element of the finance cost is charged to the statement of financial performance over the lease period so as to produce a constant periodic interest rate on the remaining balance of the liability for each period. The assets held under finance leases are depreciated over the shorter of the asset's useful life and the lease term. Leases where the lessor retains a significant portion of the risks and rewards inherent to ownership are classified as operating leases. Operating lease payments are recognised as an expense in the statement of financial performance on a straight-line basis over the lease term. Impairment of non-financial assets 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 reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable (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. An asset’s carrying amount is written down immediately to its recoverable (service) amount if the asset’s carrying amount is greater than its estimated recoverable (service) amount. If the reasons for impairments recognised in previous years no longer apply, the impairment losses are reversed accordingly. Investments accounted for using the equity method Participations in associates and joint ventures Participations in associates and joint ventures are accounted for using the equity method and are initially recognised at cost. The EU's interest in the results of its associates and joint ventures is recognised in the statement of financial performance, and its share in the movements in reserves is recognised in the reserves. The initial cost together with all movements (further contributions, share of economic results and reserve movements, impairments, and dividends) give the book value of the associate or joint venture in the financial statements at the balance sheet date. Distributions received from an associate or joint venture reduce the carrying amount of the asset. If the EU's share of deficits of a joint venture equals or exceeds its interest in the joint venture, the EU discontinues recognising its share of further losses ("unrecognised losses"). The unrecognised share of losses is the result of a technical accounting exercise needed when using the equity method of accounting. These unrecognised losses do not represent losses for the EU and are due to the fact that the expense recognition normally takes place before the capital increase for the contribution in kind of the venturers other than the EU. Unrealised gains and losses on transactions between the EU and its associate or joint ventures are not material and have therefore not been eliminated. The accounting policies of associates or joint ventures may differ from those adopted by the EU for like transactions and events in similar circumstances. If there are indications of impairment, a write-down to the lower recoverable amount is necessary. The recoverable amount is determined as described under 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 have been determined had no impairment loss been recognised. In cases where the EU holds 20 % or more of an investment capital fund, it does not seek to exert significant influence. Such funds are therefore treated as financial instruments and categorised as available for sale financial assets. Financial assets Classification The EU classifies their financial assets in the following categories: financial assets at fair value through profit or loss; loans and receivables; held-to-maturity investments; and available for sale financial assets. The classification of financial instruments is determined at initial recognition and re-evaluated at each balance sheet date. (I)Financial assets at fair value through profit or loss A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by the EU. Derivatives are also categorised in this category. Assets in this category are classified as current assets if they are expected to be realised within 12 months of the balance sheet date. During this financial year, the EU did not hold any financial assets in this category. (II)Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the EU provides money, goods or services directly to a debtor with no intention of trading the receivable, or in case the EU is subrogated to the rights of the original lender following a payment made by the EU under a guarantee contract. Payments due within 12 months of the balance sheet date are classified as current assets. Payments due after 12 months from the balance sheet date are classified as non-current assets. Loans and receivables include term deposits with the original maturity above three months.

(III)Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the EU has the positive intention and ability to hold to maturity. During this financial year, the EU did not hold any investments in this category. (IV)Available for sale financial assets Available for sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are classified as either current or non-current assets, depending on the period of time the EU expects to hold them, which is usually the maturity date. Investments in entities that are neither consolidated nor accounted for using the equity method and other equity-type investments (e.g. Risk Capital Operations) are also classified as available for sale financial assets. Initial recognition and measurement Purchases and sales of financial assets at fair value through profit or loss, held-to-maturity and available for sale (except cash and cash equivalents) are recognised on trade-date – the date on which the EU commits to purchase or sell the asset. Loans are recognised when cash is advanced to the borrowers. Financial instruments are initially recognised at fair value. For all financial assets not carried at fair value through profit or loss transactions costs are added to the fair value at initial recognition. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the statement of financial performance. The fair value of a financial asset on initial recognition is normally the transaction price (i.e. the fair value of the consideration received). However, when a long-term loan that carries no interest or an interest below market conditions is granted, its fair value can be estimated as the present value of all future cash receipts discounted using the prevailing market rate of interest for a similar instrument with a similar credit rating. Loans granted are measured at their nominal amount, which is considered to be the fair value of the loan. The reasoning for this is as follows: -The “market environment” for EU lending is very specific and different from the capital market used to issue commercial or government bonds. As lenders in these markets have the opportunity to choose alternative investments, the opportunity possibility is factored into market prices. However, this opportunity for alternative investments does not exist for the EU which is not allowed to invest money on the capital markets; it only borrows funds for the purpose of lending at the same rate. This means that there is no alternative lending or investment option available to the EU for the sums borrowed. Thus, there is no opportunity cost and therefore no basis of comparison with market rates. In fact, the EU lending operation itself represents the market. Essentially, since the opportunity cost "option" is not applicable, the market price does not fairly reflect the substance of the EU lending transactions. Therefore, it is not appropriate to determine the fair value of EU lending with reference to commercial or government bonds. -Furthermore as there is no active market or similar transactions to compare with, the interest rate to be used by the EU for fair valuing its lending operations under the EFSM, BOP and other such loans, should be the interest rate charged. -In addition, for these loans, there are compensating effects between loans and borrowings due to their back-to-back character. Thus, the effective interest for the loan equals the effective interest rate for the related borrowings. The transaction costs incurred by the EU and then recharged to the beneficiary of the loan are directly recognised in the statement of financial performance. Financial instruments are derecognised when the rights to receive cashflows from the investments have expired or the EU has transferred substantially all risks and rewards of ownership to another party. Subsequent measurement (I)Financial assets at fair value through profit or loss are subsequently carried at fair value. Gains and losses arising from changes in the fair value of the ‘financial instruments at fair value through profit or loss’ category are included in the statement of financial performance in the period in which they arise. The EU currently holds no investments in this category. (II)Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. In the case of loans granted on borrowed funds, the same effective interest rate is applied to both the loans and borrowings since these loans have the characteristics of 'back-to-back operations' and the differences between the loan and the borrowing conditions and amounts are not material. The transaction costs incurred by the EU and then recharged to the beneficiary of the loan are directly recognised in the statement of financial performance. (III)Held to maturity – the EU currently holds no held to maturity investments. (IV)Available for sale financial assets are subsequently carried at fair value. Gains and losses arising from changes in the fair value of available for sale financial assets are recognised in the fair value reserve, except for translation differences on monetary assets which are recognised in the statement of financial performance. When assets classified as available for sale financial assets are derecognised or impaired, the cumulative fair value adjustments previously recognised in the fair value reserve are recognised in the statement of financial performance. Interest on available for sale financial assets calculated using the effective interest method is recognised in the statement of financial performance. Dividends on available for sale equity instruments are recognised when the EU's right to receive payment is established. The fair values of quoted investments in active markets are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the EU establishes a fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cashflow analysis, option pricing models and other valuation techniques commonly used by market participants.

In cases where the fair value of investments in equity instruments that do not have a quoted market price in an active market cannot be reliably measured, these investments are valued at cost less impairment losses. Impairment of financial assets The EU assesses at each balance sheet date whether there is objective evidence that a financial asset is impaired. A financial asset is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset and that loss event (or events) has an impact on the estimated future cashflows of the financial asset that can be reliably estimated. (a)Assets carried at amortised cost If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cashflows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the statement of financial performance. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. The calculation of the present value of the estimated future cashflows of a collateralised financial asset reflects the cashflows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through the statement of financial performance. (b)Assets carried at fair value In the case of equity investments classified as available for sale financial assets, a significant or permanent (prolonged) decline in the fair value of the security below its cost is considered in determining whether the securities are impaired. If any such evidence exists for available for sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the statement of financial performance – is removed from reserves and recognised in the statement of financial performance. Impairment losses recognised in the statement of financial performance on equity instruments are not reversed through the statement of financial performance. If, in a subsequent period, the fair value of a debt instrument classified as available for sale financial asset increases and the increase can be objectively related to an event occurring after the impairment loss was recognised, the impairment loss is reversed through the statement of financial performance. Investments in venture capital funds Investments in Venture Capital Funds are classified as available for sale financial assets and, accordingly, are carried at fair value with gains and losses arising from changes in the fair value (including translation differences) recognised in the fair value reserve. Since they do not have a quoted market price in an active market, investments in Venture Capital Funds are valued on a line-by-line basis at the lower of cost or attributable net asset value. Unrealised gains resulting from the fair value measurement are recognised through reserves and unrealised losses are assessed for impairment so as to determine whether they are recognised as impairment losses in the statement of financial performance or as changes in the fair value reserve. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first-in, first-out (FIFO) method. The cost of finished goods and work in progress comprises raw materials, direct labour, other directly attributable costs and related production overheads (based on normal operating capacity). Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses. When inventories are held for distribution at no charge or for a nominal charge, they are measured at the lower of cost and current replacement cost. Current replacement cost is the cost the EU would incur to acquire the asset on the reporting date. Pre-financing amounts Pre-financing is a payment intended to provide the beneficiary with a cash advance, i.e. a float. It may be split into a number of payments over a period defined in the particular contract, decision, agreement or basic legal act. The float or advance is either used for the purpose for which it was provided during the period defined in the agreement or it is repaid. If the beneficiary does not incur eligible expenditure, they have the obligation to return the pre-financing advance to the EU. The amount of the pre-financing may be reduced (wholly or partially) by the acceptance of eligible costs (which are recognised as expenses). Pre-financing is, on subsequent balance sheet dates, measured at the amount initially recognised on the balance sheet less eligible expenses (including estimated amounts where necessary) incurred during the period. Interest on pre-financing is recognised as it is earned in accordance with the provisions of the relevant agreement. An estimate of the accrued interest revenue, based on the most reliable information, is made at the year-end and included on the balance sheet. Other advances to Member States which originate from reimbursement by the EU of amounts paid as advances by the Member States to their beneficiaries (including "financial instruments under shared management") are recognised as assets and presented under the pre-financing heading. Other advances to Member States are subsequently measured at the amount initially recognised on the balance sheet less a best estimate of the eligible expenses incurred by final beneficiaries, calculated on the basis of reasonable and supportable assumptions. The EU contributions to the trust funds of the European Development Fund or other unconsolidated entities are also classified as pre-financing since their purpose is to give a float to the trust fund to allow it to finance specific actions defined under the trust fund's objectives. The EU contributions to trust funds are measured at the initial amount of the EU contribution less eligible expenses, including estimated amounts where necessary, incurred by the trust fund during the reporting period and allocated to the EU contribution in accordance with the underlying agreement. Exchange receivables and non-exchange recoverables As the EU accounting rules require a separate presentation of exchange and non-exchange transactions, for the purpose of drawing up the accounts, receivables are defined as stemming from exchange transactions and recoverables are defined as stemming from non-exchange transactions (when the EU receives value from another entity without directly giving approximately equal value in exchange (for example recoverables from Member States related to own resources).

Receivables from exchange transactions meet the definition of financial instruments and are thus classified as loans and receivables and measured accordingly (see 1.5.5 above). The financial instruments notes disclosures concerning receivables from exchange transactions include accrued income and deferred charges from exchange transactions as they are not material. Recoverables from non-exchange transactions are carried at original amount (adjusted for interest and penalties) less write-down for impairment. A write-down for impairment of recoverables from

non-exchange transactions is established when there is objective evidence that the EU will not be able to collect all amounts due according to the original terms of recoverables from non-exchange transactions. The amount of the write-down is the difference between the asset’s carrying amount and the recoverable amount. The amount of the write-down is recognised in the statement of financial performance. A general write-down, based on past experience, is also made for outstanding recovery orders not already subject to a specific write-down. See note 1.5.14 below concerning the treatment of accrued income at

year-end. Amounts displayed and disclosed as recoverables from non-exchanges transactions are not financial instruments as they do not arise from a contract that would give rise to a financial liability or equity instrument. However, in the notes to the financial statements recoverables from non-exchange transactions are disclosed together with receivables from exchange transactions where appropriate. Cash and cash equivalents Cash and cash equivalents are financial instruments and classified as available for sale financial assets. They include cash at hand, deposits held at call or at short notice with banks and other shor