EN Official Journal of the European Union C 264/1

FINAL ANNUAL ACCOUNTS OF THE EUROPEAN COMMUNITIES

FINANCIAL YEAR 2005

Volume I

CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED REPORTS ON IMPLEMENTATION OF THE BUDGET

(2006/C 264/01)

CONTENTS

Principal events and key points

Part I: Consolidated financial statements of the European Communities and explanatory notes

A. Balance Sheet

B. Economic Outturn Account (incl. Segment reporting)

C. Cashflow Table

D. Statement of changes in Net Assets

E. Notes to the financial statements

Part II: Consolidated reports on implementation of the budget of the European Communities and explanatory notes

A. Consolidated reports on implementation of the budget

B. Explanatory notes to the consolidated reports on implementation of the budget

PRINCIPAL EVENTS AND KEY POINTS

THE CHANGE TO ACCRUAL ACCOUNTING AND ITS IMPACT

Why change?

The European Communities undertook to fall into line with the approach adopted by many States, and supported by international bodies such as IFAC (1) and OECD, by modernising their accounts. This entailed a change from a system of accounts focusing on a cash-based description of budget expenditure and revenue operations to an accrual accounting system.

The objective was to provide better information to management for their decision making and to improve the transparency and quality of the accounting information presented annually. The new system should ensure that both the internal users of the system and the external readers of the accounts have more reliable and relevant information.

The work done

The work started in earnest in 2003 with the commencement of the ‘modernisation of the accounting system’ project, which had the aim of placing the European Communities at the forefront of the international movement towards the modernisation of public sector accounting.

As planned, in January 2005 the new accounting system came into use, together with a new set of accounting rules and a new chart of accounts. Thus these are the first set of financial statements prepared under the new accrual accounting rules (the budget accounts are still based on movements of cash.) These new rules and methods are inspired by internationally accepted standards for the public sector — the IPSAS — and, for accounting transactions that are not yet covered by IPSAS, on the relevant International Accounting Standards (‘IAS’)/International Financial Reporting Standards (‘IFRS’.) These rules have been adopted by the Accounting Officer of the Commission after receiving the opinion of an Advisory Expert Group for Accounting Standards that provided independent professional guidance. The IT architecture was updated to ensure that each accounting event, and not just cash movement, would be fully registered when it occurs. Improvements will continue to be made to the IT systems to further the integration of systems and to provide better management reporting. Finally, the scope of consolidation was extended in 2005 to include the various Communities' agencies for the first time.

The end result was the preparation of a balance sheet at 31.12.2004 based on the new accounting rules.

The main impact of the changes

The first impact to be noted is that the balance sheet and off-balance sheet presented here in relation to the prior year (2004) will differ from those published in the 2004 annual accounts, since they are prepared under different rules. The Communities have thus taken the original 2004 figures, as prepared under the old rules and made adjustments to bring them into line with the new rules.

The application of accrual accounting principles essentially means that income and expenditure is recorded in the accounts when it is earned/incurred and not just if cash is received/paid. The four biggest impacts on the financial statements of this change of accounting rules were as follows:

1. Pre-financing: An asset called pre-financing is now recognised on the Communities' balance sheet representing advances paid to beneficiaries with the intention to provide them with a float. The amount on the balance sheet represents money that the beneficiary has not yet used or for which (s)he has not yet submitted reports/claims detailing how this money was spent. Total pre-financing at 31.12.2004 was EUR 28 billion, which is a significant addition to the balance sheet (see PART I, Section E, notes 3.5 & 3.9).

2. Current Payables: Amounts are now recognised in the accounting system as costs and payables as soon as they are deemed incurred and eligible by the authorising services. Because of the new IT tools and rules, the restated balance sheet at 3./12.2004 shows a figure of EUR 9,4 billion recorded as current payables (see PART I, Section E, note 3.18.2).

3. Cut-off: A key element of accrual accounting is ensuring that income and expenses are recorded in the accounting period to which they relate. Therefore, a significant exercise was performed by the European Communities to estimate the accounting entries that needed to be made at year-end to ensure that the correct split of income and expenses between the two years was made. These types of transactions are known as ‘cut-off’ transactions and a common example is that electricity costs for December 2004 should be included in the accounts of 2004 even if no invoice is received until 2005 and no payment is made until 2005. The inclusion of these amounts has meant an inclusion of accrued expenses at 31.12.2004 of EUR 64,2 billion (see PART I, Section E, note 3.18.4)

4. Pension receivable from Member States: As part of the application the new accounting rules, it was decided by the Commission's Accounting Officer, following advice from and discussions with the Advisory Expert Group for Accounting Standards, that the guarantee given by Member States to fund the pensions does not meet the criteria necessary for it to be recognised as a receivable on the balance sheet. The removal of this asset from the balance sheet at 31.12.2004 has reduced total assets by EUR 26 billion — (see PART I, Section E, note 3.12).

A full explanation of the impact of the changes is given in PART I, Section E2.

Amounts to be called up from Members States

Based on new rules, the Communities must evaluate and recognise in its financial statements the expenditure to be financed by the general budget but which has not yet been declared by the year-end. Thus very many expenses are recognised under accrual accounting rules in the year N although they may be actually paid in year N+1 using the budget of year N+1. Nevertheless, the Communities only call up resources from the Member States when they need money to pay an amount due, so as to give Member States maximum flexibility in managing their public finances. This inclusion in the accounts of the Communities' liabilities, coupled with the fact that the corresponding amounts needed to fund these are only recognised in future years, results in liabilities greatly exceeding assets at the year-end.

To present the facts of this situation in the most comprehensible way for the reader of the accounts, a vertical balance sheet showing the Communities' assets first, then its liabilities was adopted. The difference represents principally the amounts to be called up from Member States. The existence of negative net assets simply reflects the difference between cash-based accounting and accrual accounting for an entity which is financed according to its cash-flow needs. It does not take into account the obligation of Member States to provide the necessary resources in the future to pay for the expenditure incurred when it falls due. It should be remembered that the Communities cannot make a payment unless it was foreseen in the budget and all budgeted expenditure is covered by budgeted revenue from the Member States (see PART I, Section E, note 3.20).

A new structure

While the budgetary reporting was unaffected by the move to accrual accounting, the new financial statements include much more information than before. Most significantly there are now an economic outturn account, a cashflow table and a statement of changes in net assets to add to the restructured balance sheet and off-balance sheet.

MAIN POINTS OF NOTE IN THE 2005 ANNUAL ACCOUNTS

— The budget surplus has continued to decrease from EUR 2,7 billion to EUR 2,4 billion

— The economic outturn (loss) for the year was EUR 7,8 billion

— Total assets increased from EUR 53,6 billion in 2004 to EUR 58,7 billion, with total liabilities increasing from EUR 105,2 billion to EUR 120,9 billion.

PART I

CONSOLIDATED FINANCIAL STATEMENTS OF THE EUROPEAN COMMUNITIES AND EXPLANATORY NOTES

CONTENTS

A. Balance Sheet

B. Economic Outturn Account (incl. Segment reporting)

C. Cashflow Table

D. Statement of changes in Net Assets

E. Notes to the financial statements:

1. Accounting policies

2. Impact of the transition to accrual accounting

3. Notes to the Balance Sheet

4. Notes to the Economic Outturn Account

5. Notes to the Cashflow table

6. Off-Balance sheet and notes

7. Financial risk management

8. Related party disclosures

9. Events after the balance sheet date

10. Consolidated entities

11. Non-Consolidated entities

A. BALANCE SHEET

EUR Note 31.12.2005 31.12.2004 Restated I. NON-CURRENT ASSETS: 31 415 180 633,30 30 142 730 492,69 Intangible fixed assets 3.1 26 676 624,50 17 137 089,53 Tangible fixed assets 3.2 4 141 220 250,32 4 084 425 922,70 Investments 3.3 1 874 420 306,00 2 150 177 300,19 Loans 3.4 2 397 326 503,16 2 298 277 591,00 Long-term pre-financing 3.5 22 731 731 325,85 21 284 928 692,20 Long-term receivables 3.6 243 805 623,47 307 783 897,07 II. CURRENT ASSETS: 27 291 395 093,09 23 450 507 504,46 Stocks 3.7 126 470 335,92 63 255 048,68 Short-term investments 3.8 1 439 652 311,41 1 442 821 890,84 Short-term pre-financing 3.9 6 633 481 985,52 6 727 929 511,29 Short-term receivables 3.10 7 237 854 523,32 7 139 062 014,64 Cash & cash equivalents 3.11 11 853 935 936,92 8 077 439 039,01 Total Assets 58 706 575 726,39 53 593 237 997,15 III. NON-CURRENT LIABILITIES: 38 025 870 323,61 30 556 735 482,10 Employee benefits 3.12 33 155 884 938,00 26 012 130 886,00 Provisions for risks and charges 3.13 1 096 842 934,71 1 013 020 111,03 Financial liabilities 3.14 1 920 492 514,34 1 688 032 288,29 Other long-term liabilities 3.15 1 852 649 936,56 1 843 552 196,78 IV. CURRENT LIABILITIES: 82 825 446 775,06 74 633 599 508,87 Provisions for risks and charges 3.16 275 440 997,63 240 240 253,60 Financial liabilities 3.17 22 018 193,71 152 154 480,63 Accounts payable 3.18 82 527 987 583,72 74 241 204 774,64 Total Liabilities 120 851 317 098,67 105 190 334 990,97 NET ASSETS (62 144 741 372,28) (51 597 096 993,82) Reserves 3.19 2 808 609 579,99 2 567 532 141,28 Amounts to be called from Member States: 3.20 (64 953 350 952,27) (54 164 629 135,10) Staff Pensions (long-term) (2) (33 155 884 938,00) (26 012 130 886,00) Other amounts (3) (31 797 466 014,27) (28 152 498 249,10) V. NET ASSETS (4) (62 144 741 372,28) (51 597 096 993,82)

B. ECONOMIC OUTTURN ACCOUNT (including Segment Reporting)

EUR Note 2005 OPERATING REVENUE: 4.1 107 890 098 965,56 Own Resource and contributions revenue: 103 964 129 385,85 GNI resources 70 861 050 698,58 VAT resources 16 018 121 497,86 Traditional own resources 14 264 712 942,61 Budgetary adjustments 2 606 103 308,82 Contributions of Third countries (including EFTA countries) 214 140 937,98 Operating revenue: 3 925 969 579,71 Fines 719 616 062,54 Recovery of expenses 1 385 693 507,89 Revenues from administrative operations 895 083 199,67 Other operating revenue 925 576 809,61 OPERATING EXPENSES 107 597 505 955,88 Administrative expenses: 4.2 6 127 531 024,91 Staff expenses 3 612 990 701,52 Fixed asset related expenses 320 308 630,81 Other administrative expenses 2 194 231 692,58 Operating expenses: 4.3 101 469 974 930,97 Direct centralised management 11 281 191 742,49 Indirect centralised management 350 673 116,96 Decentralised management 1 732 823 172,49 Shared management 86 925 465 101,27 Joint management 248 168 777,58 Other operating expenses 4.4 931 653 020,18 SURPLUS FROM OPERATING ACTIVITIES 292 593 009,68 Financial operations revenue 4.5 399 088 528,72 Financial operations expenses 4.6 (368 650 139,19) Increase in pension liability 3.12 (8 044 529 533,33) (DEFICIT) FROM NON-OPERATING ACTIVITIES (8 014 091 143,80) SHARE OF NET (DEFICIT) ASSOCIATES & JOINT VENTURES 4.7 (90 966 231,35) (DEFICIT) FROM ORDINARY ACTIVITIES (7 812 464 365,47) ECONOMIC RESULT FOR THE YEAR (7 812 464 365,47)

SEGMENT REPORTING

This report gives the split of the operating revenues and expenses by policy area, based on the Activity Based Budget structure, within the Commission. These policy areas can be grouped under three larger headings — Activities within the European Union, Activities outside the European Union and Services & other.

‘Activities within the European Union’ is the largest of these headings as it covers the many policy areas within the European Union. ‘Activities outside the European Union’ concerns the policies operated outside the Union, such as trade and aid. ‘Services & other’ are the internal and horizontal activities necessary for the functioning of the Communities' Institutions and bodies.

The consolidated agencies are integrated into the same policy area as the Commission activity from which they receive their main Communities' subsidy. Other Institutions, aside from the Commission are grouped in a specific policy area. The various policy areas represent gross figures before consolidation eliminations and the consolidation eliminations are done globally in one column.

Note that own resources and contributions are not split amongst the various activities as these are calculated, collected and managed by central Commission services. They are shown here so as to allow for comparison of the net result with the Economic Outturn Account.

SEGMENT REPORTING — SUMMARY

EUR Activities within the EU Activities outside the EU Services & Other ECSC in Liquidation Other Institutions Consolidation eliminations TOTAL OPERATING REVENUE: Fines 719 616 062,54 719 616 062,54 Recovery of expenses 1 353 084 760,41 36 722 410,81 1 290 942,71 (5 404 606,04) 1 385 693 507,89 Revenues from administrative operations 89 082 518,18 62 742 860,77 597 208 561,21 (53 875 000,00) 261 789 487,91 (61 865 228,40) 895 083 199,67 Other operating revenue 688 188 532,20 272 916 001,90 460 493 351,82 305 161,77 (496 326 238,08) 925 576 809,61 TOTAL OPERATING REVENUES 2 849 971 873,33 372 381 273,48 1 058 992 855,74 (53 875 000,00) 262 094 649,68 (563 596 072,52) 3 925 969 579,71 Administrative expenses: 1 809 140 421,50 890 182 701,55 1 382 452 884,00 5 648,00 2 120 615 781,21 (74 866 411,35) 6 127 531 024,91 Staff expenses 1 344 955 579,32 620 812 260,57 617 749 601,28 1 036 675 272,43 (7 202 012,08) 3 612 990 701,52 Fixed asset related expenses 59 471 934,18 52 618 748,62 98 316 368,04 5 648,00 109 895 931,97 320 308 630,81 Other administrative expenses 404 712 908,00 216 751 692,36 666 386 914,68 974 044 576,81 (67 664 399,27) 2 194 231 692,58 Operating expenses: 94 580 031 861,20 5 613 725 860,31 1 764 946 870,63 (488 729 661,17) 101 469 974 930,97 Direct centralised management 6 548 039 671,23 3 479 353 565,16 1 493 894 876,89 (240 096 370,79) 11 281 191 742,49 Indirect centralised management 293 199 308,89 298 361 244,31 1 886 514,00 (242 773 950,24) 350 673 116,96 Decentralised management 378 103 058,75 1 354 720 113,74 1 732 823 172,49 Shared management 86 925 465 101,27 86 925 465 101,27 Joint management 21 703 755,76 226 465 021,82 248 168 777,58 Other operating expenses 413 520 965,30 254 825 915,28 269 165 479,74 (5 859 340,14) 931 653 020,18 TOTAL OPERATING EXPENSES 96 389 172 282,70 6 503 908 561,86 3 147 399 754,63 5 648,00 2 120 615 781,21 (563 596 072,52) 107 597 505 955,88 NET OPERATING EXPENSES (93 539 200 409,37) (6 131 527 288,38) (2 088 406 898,89) (53 880 648,00) (1 858 521 131,53) - (103 671 536 376,17) Own resource and contributions revenue 103 964 129 385,85 Surplus from operating activities 292 593 009,68 Net financial revenue 30 438 389,53 Increase in pension liability (8 044 529 533,33) Share of associates/joint venture results (90 966 231,35) Economic result for the year (7 812 464 365,47)





SEGMENT REPORTING — ACTIVITIES WITHIN THE EU

EUR Economic & Financial affairs Enterprise & Industry Competition Employment Agriculture Transport & Energy Environment Research Information Society OPERATING REVENUE: Fines 0,00 0,00 699 616 062,54 0,00 0,00 0,00 0,00 0,00 0,00 Recovery of expenses 268 064,24 1 411 811,20 0,00 69 163 331,89 1 095 501 773,52 2 827 282,13 204 297,96 (1 503 012,75) 3 613 410,74 Revenues from administrative operations 0,00 3 137 099,27 0,00 373 252,58 0,00 318 726,24 30 420,36 53 874 389,18 0,00 Other operating revenue 943 047,15 106 245 197,98 6 125 594,59 34 792 023,86 21 463 750,70 48 081 050,89 37 864 063,91 214 975 609,38 7 744 634,28 TOTAL OPERATING REVENUES 1 211 111,39 110 794 108,45 705 741 657,13 104 328 608,33 1 116 965 524,22 51 227 059,26 38 098 782,23 267 346 985,81 11 358 045,02 Administrative expenses: 46 199 829,19 153 298 881,17 64 600 631,78 92 340 382,46 104 677 605,13 126 763 660,30 85 759 340,45 192 972 695,88 111 446 861,32 Staff expenses 40 170 815,78 112 782 404,99 60 914 198,97 73 291 049,30 93 011 388,22 105 529 494,62 63 297 071,72 144 070 879,70 85 744 021,81 Fixed asset related expenses 0,00 5 333 212,01 0,00 562 643,68 0,00 492 141,91 620 795,93 0,00 31 272,69 Other administrative expenses 6 029 013,41 35 183 264,17 3 686 432,81 18 486 689,48 11 666 216,91 20 742 023,77 21 841 472,80 48 901 816,18 25 671 566,82 Operating expenses: 59 307 959,45 195 709 789,69 452 045,97 10 986 548 855,98 54 319 611 969,20 1 079 402 884,03 226 522 697,46 2 573 004 377,31 848 420 984,23 Centralised direct management 59 307 959,45 153 040 733,18 452 045,97 179 672 789,83 36 689 337,94 1 023 432 786,76 193 960 751,76 2 572 954 268,52 847 440 934,53 Centralised indirect management 0,00 0,00 0,00 1 525 090,20 0,00 5 677 018,73 16 882 600,85 0,00 0,00 Decentralised management 0,00 0,00 0,00 0,00 226 312 553,13 4 751 688,31 0,00 0,00 0,00 Shared management 0,00 0,00 0,00 10 788 124 831,35 54 040 432 329,95 0,00 0,00 0,00 0,00 Joint management 0,00 0,00 0,00 0,00 0,00 21 703 755,76 0,00 0,00 0,00 Other operating expenses 0,00 42 669 056,51 0,00 17 226 144,60 16 177 748,18 23 837 634,47 15 679 344,85 50 108,79 980 049,70 TOTAL OPERATING EXPENSES 105 507 788,64 349 008 670,86 65 052 677,75 11 078 889 238,44 54 424 289 574,33 1 206 166 544,33 312 282 037,91 2 765 977 073,19 959 867 845,55 NET OPERATING EXPENSES (104 296 677,25) (238 214 562,41) 640 688 979,38 (10 974 560 630,11) (53 307 324 050,11) (1 154 939 485,07) (274 183 255,68) (2 498 630 087,38) (948 509 800,53) Joint Research Centre Fisheries Internal Market Regional Policy Taxation & Customs Education & Culture Health & Consumer protection Justice, Freedom & Security Total Activities within the EU OPERATING REVENUE: Fines 0,00 20 000 000,00 0,00 0,00 0,00 0,00 0,00 0,00 719 616 062,54 Recovery of expenses 197 689,90 (577 716,70) 0,00 123 765 779,64 214 784,18 57 757 136,14 99 895,16 140 233,16 1 353 084 760,41 Revenues from administrative operations 26 916 536,65 0,00 0,00 0,00 3 706 530,65 674 748,67 0,00 50 814,58 89 082 518,18 Other operating revenue 12 811 935,20 776,79 7 153,49 2 432,19 461 868,81 131 777 307,45 34 783 584,53 30 108 501,00 688 188 532,20 TOTAL OPERATING REVENUES 39 926 161,75 19 423 060,09 7 153,49 123 768 211,83 4 383 183,64 190 209 192,26 34 883 479,69 30 299 548,74 2 849 971 873,33 Administrative expenses: 324 372 209,78 32 051 379,81 44 690 462,16 57 972 095,34 47 405 108,82 156 840 485,76 115 039 261,94 52 709 530,21 1 809 140 421,50 Staff expenses 191 769 343,19 25 946 002,86 41 167 654,18 49 647 357,38 39 143 285,61 89 648 655,85 82 770 631,38 46 051 323,76 1 344 955 579,32 Fixed asset related expenses 44 625 365,19 0,00 4 395,68 0,00 3 445 604,19 1 330 513,59 2 055 405,38 970 583,93 59 471 934,18 Other administrative expenses 87 977 501,40 6 105 376,95 3 518 412,30 8 324 737,96 4 816 219,02 65 861 316,32 30 213 225,18 5 687 622,52 404 712 908,00 Operating expenses: 60 714 249,27 697 841 194,30 4 552 640,19 21 526 122 538,25 31 530 486,25 1 211 876 717,33 307 247 898,55 451 164 573,74 94 580 031 861,20 Centralised direct management (30 348 138,27) 215 276 482,20 4 552 640,19 94 989 892,49 31 530 486,25 791 695 562,00 283 223 089,90 90 168 048,53 6 548 039 671,23 Centralised indirect management 0,00 0,00 0,00 (601 257,04) 0,00 269 715 856,15 0,00 0,00 293 199 308,89 Decentralised management 0,00 0,00 0,00 147 021 849,64 0,00 16 967,67 0,00 0,00 378 103 058,75 Shared management 0,00 470 531 514,01 0,00 21 272 810 053,16 0,00 (543 390,71) 0,00 354 109 763,51 86 925 465 101,27 Joint management 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 21 703 755,76 Other operating expenses 91 062 387,54 12 033 198,09 0,00 11 902 000,00 0,00 150 991 722,22 24 024 808,65 6 886 761,70 413 520 965,30 TOTAL OPERATING EXPENSES 385 086 459,05 729 892 574,11 49 243 102,35 21 584 094 633,59 78 935 595,07 1 368 717 203,09 422 287 160,49 503 874 103,95 96 389 172 282,70 NET OPERATING EXPENSES (345 160 297,30) (710 469 514,02) (49 235 948,86) (21 460 326 421,76) (74 552 411,43) (1 178 508 010,83) (387 403 680,80) (473 574 555,21) (93 539 200 409,37)





SEGMENT REPORTING — ACTIVITIES OUTSIDE THE EU

EUR External Relations Trade Development Enlargement Humanitarian Aid Total Activities outside the EU OPERATING REVENUE: Recovery of expenses 8 350 389,23 (46 083,70) 19 226 652,13 9 131 176,72 60 276,43 36 722 410,81 Revenues from administrative operations 60 781 919,99 0,00 (1 666,30) 1 962 607,08 0,00 62 742 860,77 Other operating revenue 6 204 915,71 12 110,81 1 301 147,76 265 258 510,04 139 317,58 272 916 001,90 TOTAL OPERATING REVENUES 75 337 224,93 (33 972,89) 20 526 133,59 276 352 293,84 199 594,01 372 381 273,48 Administrative expenses: 626 640 536,51 47 074 129,27 131 434 686,78 67 097 824,88 17 935 524,11 890 182 701,55 Staff expenses 410 582 923,68 42 521 599,62 117 424 692,35 37 307 451,22 12 975 593,70 620 812 260,57 Fixed asset related expenses 51 282 367,01 0,00 0,00 1 336 381,61 0,00 52 618 748,62 Other administrative expenses 164 775 245,82 4 552 529,65 14 009 994,43 28 453 992,05 4 959 930,41 216 751 692,36 Operating expenses: 2 082 953 186,40 10 013 446,62 780 048 497,43 2 205 715 297,71 534 995 432,15 5 613 725 860,31 Direct centralised management 1 776 530 787,59 9 450 379,12 652 893 731,15 505 802 026,55 534 676 640,75 3 479 353 565,16 Indirect centralised management 36 126 501,89 0,00 25 091 165,92 237 143 576,50 0,00 298 361 244,31 Decentralised management 135 528 670,41 0,00 50 981 058,43 1 168 210 384,90 0,00 1 354 720 113,74 Joint management 121 491 031,79 563 067,50 53 531 324,69 50 879 597,84 0,00 226 465 021,82 Other operating expenses 13 276 194,72 0,00 (2 448 782,76) 243 679 711,92 318 791,40 254 825 915,28 TOTAL OPERATING EXPENSES 2 709 593 722,91 57 087 575,89 911 483 184,21 2 272 813 122,59 552 930 956,26 6 503 908 561,86 NET OPERATING EXPENSES (2 634 256 497,98) (57 121 548,78) (890 957 050,62) (1 996 460 828,75) (552 731 362,25) (6 131 527 288,38)





SEGMENT REPORTING — SERVICES & OTHER

Press & Communication Anti-Fraud Office Co-ordination Personnel & Administration Eurostat Budget Audit Other Total Services & Other OPERATING REVENUE: Recovery of expenses 254 215,17 11 015,16 1 863,82 1 059 619,16 (185 770,60) 150 000,00 0,00 0,00 1 290 942,71 Revenues from administrative operations 95 190,18 3 523 760,83 1 322 227,41 557 920 364,69 352,24 34 346 665,86 0,00 0,00 597 208 561,21 Other operating revenue 862 671,22 18 764,17 403 925,30 31 078 188,31 868 179,59 10 585 303,45 19,09 416 676 300,69 460 493 351,82 TOTAL OPERATING REVENUES 1 212 076,57 3 553 540,16 1 728 016,53 590 058 172,16 682 761,23 45 081 969,31 19,09 416 676 300,69 1 058 992 855,74 Administrative expenses: 89 419 856,47 40 610 680,45 150 294 222,02 1 011 508 432,30 58 596 845,23 48 657 820,36 7 447 379,66 (24 082 352,49) 1 382 452 884,00 Staff expenses 58 300 245,12 29 732 231,14 129 417 384,41 298 586 990,65 55 477 451,07 39 086 578,59 7 019 015,87 129 704,43 617 749 601,28 Fixed asset related expenses 1 164 191,40 42 659,29 0,00 97 109 517,35 0,00 0,00 0,00 0,00 98 316 368,04 Other administrative expenses 29 955 419,95 10 835 790,02 20 876 837,61 615 811 924,30 3 119 394,16 9 571 241,77 428 363,79 (24 212 056,92) 666 386 914,68 Operating expenses: 59 553 544,34 5 863 831,35 551 345,73 51 155 987,10 70 448 743,57 1 352 046 593,25 15 995,00 225 310 830,29 1 764 946 870,63 Direct centralised management 57 845 829,45 5 863 831,35 0,00 49 824 082,51 68 507 973,48 1 313 199 252,25 0,00 (1 346 092,15) 1 493 894 876,89 Indirect centralised management 1 630 514,00 0,00 0,00 256 000,00 0,00 0,00 0,00 0,00 1 886 514,00 Other operating expenses 77 200,89 0,00 551 345,73 1 075 904,59 1 940 770,09 38 847 341,00 15 995,00 226 656 922,44 269 165 479,74 TOTAL OPERATING EXPENSES 148 973 400,81 46 474 511,80 150 845 567,75 1 062 664 419,40 129 045 588,80 1 400 704 413,61 7 463 374,66 201 228 477,80 3 147 399 754,63 NET OPERATING EXPENSES (147 761 324,24) (42 920 971,64) (149 117 551,22) (472 606 247,24) (128 362 827,57) (1 355 622 444,30) (7 463 355,57) 215 447 822,89 (2 088 406 898,89)

C. CASHFLOW TABLE

EUR Note 2005 CASHFLOWS FROM ORDINARY ACTIVITIES Deficit from ordinary activities: (7 812 464 365,47) Operating activities: 5.2 Amortisation 6 842 720,30 Depreciation 277 733 537,93 Impairment of investments (11 983 099,95) (Increase)/decrease in investments (62 602 039,59) (Increase)/decrease in loans (99 048 912,16) (Increase)/decrease in long-term pre-financing (1 446 802 633,65) (Increase)/decrease in long-term receivables 63 978 273,60 (Increase)/decrease in stocks (63 215 287,24) (Increase)/decrease in short-term pre-financing 94 447 525,77 (Increase)/decrease in short-term receivables (98 792 508,68) Increase/(decrease) in long-term provisions 83 822 823,68 Increase/(decrease) in long-term financial liabilities 232 460 226,05 Increase/(decrease) in other long-term liabilities 9 097 739,78 Increase/(decrease) in short-term provisions 35 200 744,03 Increase/(decrease) in short-term financial liabilities (130 136 286,92) Increase/(decrease) in accounts payable 8 286 782 809,08 2004 Budgetary surplus taken as non cash revenue in 2005 (2 736 707 563,42) Other non-cash movements 1 527 550,43 Investing activities: 5.3 (Increase)/decrease in intangible & tangible fixed assets (350 910 120,82) (Increase)/decrease in investments 76 469 510,70 (Increase)/decrease in cash investments 3 169 579,43 Long-term employee benefits: 3.12 7 143 754 052,00 NET CASHFLOW FROM ORDINARY ACTIVITIES 3 502 624 274,88 NET INCREASE/(DECREASE) IN CASH & CASH EQUIVALENTS 3 502 624 274,88 CASH & CASH EQUIVALENTS AT THE BEGININNG OF THE YEAR (5) 3.11 8 667 335 685,27 CASH & CASH EQUIVALENTS AT THE END OF THE YEAR (5) 3.11 12 169 959 960,15

D. STATEMENT OF CHANGES IN NET ASSETS

EUR Reserves Accumulated Surplus/(Deficit) Economic outturn of the year Total Fair value reserve Other reserves BALANCE AS AT 31 DECEMBER 2004 (6) 0,00 1 055 268 223,85 9 258 037 564,68 4 194 018 305,10 14 507 324 093,63 Changes in accounting policies (7) 88 457 197,90 1 423 806 719,53 (67 616 685 004,88) 0,00 (66 104 421 087,45) BALANCE AS AT 31 DECEMBER 2004 (restated) 88 457 197,90 2 479 074 943,38 (58 358 647 440,20) 4 194 018 305,10 (51 597 096 993,82) Movement in Guarantee Fund reserve 145 081 942,86 (145 081 942,86) 0,00 Fair value movements (7 094 661,12) (7 094 661,12) Other (450 782,03) 9 072 993,58 8 622 211,55 Allocation of the Economic Result 2004 103 540 939,00 1 353 769 802,68 (1 457 310 741,68) 0,00 Budget result 2004 credited to Member States (2 736 707 563,42) (2 736 707 563,42) Economic outturn for the year (7 812 464 365,47) (7 812 464 365,47) BALANCE AS AT 31 DECEMBER 2005 81 362 536,78 2 727 247 043,21 (57 140 886 586,80) (7 812 464 365,47) (62 144 741 372,28)

E. NOTES TO THE FINANCIAL STATEMENTS

1. Accounting policies

2. Impact of the transition to accrual accounting

3. Notes to the Balance Sheet

4. Notes to the Economic Outturn Account

5. Notes to the Cashflow table

6. Off-Balance Sheet and notes

7. Financial risk management

8. Related party disclosures

9. Events after the balance sheet date

10. Consolidated entities

11. Non-consolidated entities

1. ACCOUNTING POLICIES

1.1 LEGAL PROVISIONS AND THE FINANCIAL REGULATION

The accounts are kept in accordance with Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 (OJ L 248 of 16 September 2002, p. 1, with a corrigendum in OJ L 25 of 30 January 2003, p. 43) on the Financial Regulation applicable to the general budget of the European Communities and Commission Regulation (EC, Euratom) No 2342/2002 of 23 December 2002 laying down detailed rules for the implementation of this Financial Regulation.

Article 133 of the Financial Regulation states that the Accounting Officer of the Commission adopts the accounting rules and methods to be applied by all the institutions and bodies. Thus, he adopted the new Communities' accounting rules on 28 December 2004. These new accrual-based accounting policies are inspired by International Public Sector Standards (IPSAS) or by default, International Financial Reporting Standards (IFRS) as respectively issued by the International Public Sector Accounting Standard Board (IPSASB) and International Accounting Standard Board (IASB). These rules have been adopted by the Accounting Officer of the Commission after receiving the opinion of an Advisory Expert Group for Accounting Standards that provided independent professional guidance.

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

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

Both the provisional and final annual accounts for 2005 are presented as follows: Volume I contains the consolidated accounts, and Volume II the Commission's accounts.

1.2 ACCOUNTING PRINCIPLES

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

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

The accounting system of the European Institutions and Agencies comprises general accounts and budget accounts. These accounts are kept in euro on the basis of the calendar year. The budget accounts give a detailed picture of the implementation of the budget. They are based on the modified cash accounting principle. (8) The general accounts allow for the preparation of the financial statements as they show all charges and income for the financial year and are designed to establish the financial position in the form of a balance sheet at 31 December.

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

— going concern basis;

— prudence;

— consistent accounting methods;

— comparability of information;

— materiality;

— no netting;

— reality over appearance;

— accrual-based accounting.

As the financial statements for 2005 have been prepared on a different basis than in 2004, i.e. full accrual accounting, in accordance with the Communities' accounting rules, adjustments were made to the original balance sheet at 31 December 2004 so as to arrive at the opening, accrual based, balance sheet at 31 December 2004 (for example, the inclusion of pre-financing amounts). These adjustments are explained in more detail in note E2.

1.3 CONSOLIDATION

The scope of consolidation of the European Communities comprises 26 controlled entities, one associate and one joint venture. The complete list of consolidated entities can be found in note E10. In comparison with 2004, the scope of consolidation has been extended by 16 controlled entities in order to comply with the updated European Communities' accounting rules.

Controlled entities

Controlled entities are all entities over which the European Communities have 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. The most common indicator of control, majority of voting rights, is in most of the cases not applicable for the European Communities as there are normally no capitalistic links between the entities.

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

Under the same approach, all Communities Agencies created through a secondary act of legislation are considered as under the exclusive control of the European Communities and therefore are, for the first time, included in the consolidation scope. Furthermore the European Coal and Steel Communities in Liquidation (ECSC) is also considered as a controlled entity. However, the Office for Harmonisation in the Internal Market (Alicante) and the Community Plant Variety Office (Angers), which do not receive any subsidies from the General Budget of the Communities, are not consolidated in the 2005 accounts.

Controlled entities are consolidated using the full consolidation method. All inter-company transactions and balances between European Communities' controlled entities are eliminated. Unrealised gains and losses on inter-entity transactions are not material and have therefore not been eliminated.

Associates

Associates are all entities over which the European Communities have significant influence but not control, generally accompanying a shareholding of between 20 % and 50 % of the voting rights. Investments in associates are accounted for by the equity method of accounting and are initially recognised at cost.

The European Communities' share of their associates' post-acquisition profits or losses is recognised in the economic outturn account, and their share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Distributions received from an associate reduce the carrying amount of the investment.

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

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

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

Joint ventures

A joint venture is a contractual arrangement whereby the European Communities and one or more parties (the ‘venturers’) undertake an economic activity which is subject to joint control. Joint control is the contractually agreed sharing of control over an economic activity. Interests in jointly controlled entities are accounted for by the equity method of accounting and are initially recognised at cost.

The European Communities' interest of the profits or losses of their jointly controlled entities is recognised in the economic outturn account, and their interest of movements in reserves is recognised in reserves. The cumulative movements are adjusted against the carrying amount of the interest.

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

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

Non-consolidated entities

Not consolidated in the accounts of the European Communities are the funds managed by the Communities on behalf of both the Joint Sickness Insurance Scheme for staff of the European Communities, and the European Development Fund. At 31 December 2005 the total assets of both were EUR 260 million and EUR 3,5 billion respectively — see note E 11.

1.4 CURRENCY AND BASIS FOR CONVERSION

Functional and reporting currency

The consolidated financial statements are presented in euros, which is the European Communities' functional and reporting currency.

Transactions and balances

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

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

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 2005:

EURO Exchange Rate at 31 December 2005 CYP 0,5735 CZK 29,0000 DKK 7,4605 EEK 15,6466 GBP 0,6853 HUF 252,8700 LVL 0,6962 LTL 3,4528 MTL 0,4293 PLN 3,8600 SKK 37,8800 SIT 239,5000 SEK 9,3885 USD 1,1797

Different conversion methods apply to the following headings:

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

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

Changes in the fair value of monetary securities denominated in foreign currency and classified as available-for-sale are analysed between translation differences resulting from changes in the amortised cost of the security, and other changes in the carrying amount of the security. Translation differences are recognised in the economic outturn account, and other changes in carrying amount are recognised in the fair value reserve. Translation differences on non-monetary financial assets and liabilities held at fair value through profit or loss are recognised in the economic outturn account. Translation differences on non-monetary financial assets classified as available-for-sale are included in the fair value reserve.

1.5 BALANCE SHEET

1.5.1 Intangible fixed assets

Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives (4 years). Internally produced intangible assets are currently expensed in the economic outturn account.

Costs associated with developing or maintaining computer software programmes are recognised as expenses as incurred.

1.5.2 Tangible fixed assets

Property, plant and equipment

All property, plant and equipment are stated at historical cost less depreciation (excluding land, works of art and assets under construction) and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

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 associated with the item will flow to the European Communities and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the economic outturn account during the financial period in which they are incurred.

Land, works of art and assets under construction are not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:

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

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

Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the economic outturn account.

Leases

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

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

1.5.3 Impairment of non-financial assets

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

1.5.4 Investments

Investments in Associates and interests in Joint Ventures

Investments in associates and interests in joint ventures are accounted for by using the equity method.

Investments in Venture Capital Funds

Classification and measurement

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

Fair value considerations

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

It should be noted that a ‘fair value method’ has been recently developed by the European Investment Fund in compliance with IAS 39. However, this method can only be applied to the European Communities' investments in venture capital funds at the year-end 2005. Indeed, based on the data collected in 2004, it is not possible to restate the value of investments in Venture Capital Funds at previous year-end. Consequently and for comparability reasons, the current valuation method, as described in the above paragraph, has been consistently applied at year end 2005. The fair value resulting from the application of the ‘fair value method’ is disclosed in note E 3.3.3.1 for information purposes only. The change from the current valuation method to this ‘fair value method’ will be effective on 1 January 2006 and the related adjustment will be recognised in the fair value reserve.

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

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

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

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

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

For Categories I & II, unrealised gains from the fair value measurement are recognised in reserves and unrealised losses are assessed for impairment so as to determine whether they are recognised as impairment losses in the economic outturn account or as changes in the fair value reserve.

The fair valued attributable NAV is determined through applying either the European Communities' percentage ownership in the fund to the NAV reflected in the most recent report or, to the extent available, the precise share value at the same date, submitted by the respective Fund Manager.

Investments belonging to category III are valued at cost less impairment.

Other investments

Classification

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

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

This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. 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 European Communities. Derivatives are also categorised as held for trading unless they qualify for hedge accounting. Assets in this category are classified as current assets if they are expected to be realised within 12 months of the balance sheet date.

(ii) Loans and receivables

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

(iii) Held-to-maturity investments

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

(iv) Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless the Communities intend to dispose of the investment within 12 months of the balance sheet date.

Initial recognition and measurement

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

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

In the case of loans to officials granted by the ECSC in liquidation, the transaction price is used as fair value at inception independently from any preferential interest rate granted, for practicable reasons and based on materiality considerations.

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

Subsequent measurement

Available-for-sale financial assets and 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 assets at fair value through profit or loss’ category are included in the economic outturn account in the period in which they arise.

Changes in the fair value of monetary financial assets denominated in a foreign currency and classified as available-for-sale are analysed between translation differences resulting from changes in amortised cost of the asset and other changes in the carrying amount of the asset. The translation differences are recognised in the economic outturn account, and other changes in carrying amount are recognised in the fair value reserve. Changes in the fair value of non-monetary financial assets classified as available-for-sale are recognised in the fair value reserve.

When financial assets classified as available-for-sale are sold or impaired, the cumulative fair value adjustments previously recognised in the fair value reserve should be recognised in the economic outturn account.

Interest on available-for-sale financial assets calculated using the effective interest method is recognised in the economic outturn account. Dividends on available-for-sale equity instruments are recognised when the European Communities right to receive payment is established.

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

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

Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. In the case of loans granted on borrowed funds, the effective interest method may not be applied separately to loans and borrowings, based on materiality considerations. The transaction costs incurred by the European Communities and then recharged to the beneficiary of the loan are directly recognised in the economic outturn account.

Impairment of financial assets

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

(i) Assets carried at amortised cost

If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the economic outturn account. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.

The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through the economic outturn account.

(ii) Assets carried at fair value

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

1.5.5 Stocks

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

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

1.5.6 Pre-financing amounts

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

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

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

1.5.7 Receivables

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

See also note 1.5.13 below concerning the treatment of accrued income recognised at year-end

1.5.8 Cash & cash equivalents

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

1.5.9 Employee benefits

Pension obligations

The European Communities operate defined benefit pension plans. A defined benefit plan is a pension plan that generally defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.

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

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised immediately in the economic outturn account.

Past-service costs are recognised immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortised on a straight-line basis over the vesting period.

1.5.10 Provisions for risks and charges

Provisions for risks and charges are recognised when the European Communities have a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are not recognised for future operating losses.

The amount of the provision is the best estimate of the expenditures expected to be required to settle the present obligation at the reporting date. Where the provision involves a large number of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities (‘expected value’ method).

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

1.5.11 Financial liabilities

Financial liabilities include borrowings and held for trading liabilities.

Borrowings are composed of borrowings from credit institutions and debts evidenced by certificates. Borrowings are recognised initially at fair value, being their issue proceeds (fair value of consideration received) net of transaction costs incurred, then subsequently carried at amortised cost using the effective interest method; any difference between proceeds, net of transaction costs, and the redemption value is recognised in the economic outturn account over the period of the borrowings using the effective interest method. They are classified as non-current liabilities, except for maturities less than 12 months after the balance sheet date.

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

Held for trading liabilities include derivatives that do not qualify for hedge accounting when their fair value is negative. They follow the same accounting treatment as held for trading assets, see note 1.5.4.

1.5.12 Payables

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

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

1.5.13 Separation of accounting periods — accrued and deferred income and charges

As part of the move to accrual accounting, one important aspect is the exercise of ensuring that transactions made during the year are recorded in the correct accounting year — a cut-off exercise: transactions must be recognised in the period to which they relate.

In particular an assessment has to be made concerning eligible expenses incurred by beneficiaries of Communities' funds but not yet reported to the Communities (accrued charges). Different methods are used depending on the type of activities and information available so as to arrive at the best estimate of these amounts. Conversely, some expenses are recorded in current year although they relate to subsequent periods (deferred charges) and those have to be identified and included in the relevant period.

Revenue should also be accounted for in the period to which it relates. At year-end, when an invoice is not sent and the service has been rendered or the supplies have been delivered or a contractual agreement exists (i.e., by reference to a treaty), the amount should be assessed and recognised in the financial statements as an accrued revenue.

In addition, at year-end, when an invoice is sent although it does not relate to the reporting period, the amount should be deferred and recognised as a decrease in revenues. The objective is to reduce revenues for the amount equal to the deferral.

Since this is the first year of such an exercise, and given the particularities of the Communities' activities, there are no benchmark methods available to compare these methods of estimation to.

1.6 ECONOMIC OUTTURN ACCOUNT

1.6.1 Revenue

Exchange revenue

Revenue from the sale of goods is recognised when the significant risk and rewards of ownership of the goods are transferred to the purchaser.

Revenue associated with a transaction involving the provision of services is recognised by reference to the stage of completion of the transaction at the reporting date.

Non-exchange revenue

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

GNI based resources and VAT resources

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

Traditional own resources

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

Fines

Receivables and related revenues are recognised when the Communities' decision imposing a fine has been taken and it is officially notified to the addressee. If there are doubts about the undertaking's solvency, a value reduction on the entitlement should be recognised.

After the decision to impose a fine, the debtors have two months from the date of notification:

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

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

However, the principal of the fine must be paid within the time limit laid down as the appeal does not have suspensory effect (Article 242 of the EC Treaty). The debtors have two options; they can present a bank guarantee for the amount or pay the fine provisionally.

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

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

Interest income and expense

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

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

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

Dividend income

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

1.6.2 Expenditure

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

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

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

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

1.7 CONTINGENT ASSETS AND LIABILITIES

Contingent assets

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

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

Contingent liabilities

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

A contingent liability is disclosed unless the possibility of an outflow of resources embodying economic benefits or service potential is remote.

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

Commitments for future funding

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

Guarantees

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

1.8 USE OF ESTIMATES

In accordance with 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 pensions, provisions for future charges, valuation of publications stocks, financial risk on inventories and accounts receivables, accrued income and charges, contingent assets and liabilities, and degree of impairment of fixed assets. Actual results could differ from those estimates. Changes in estimates are reflected in the period in which they become known.

2. IMPACT OF THE TRANSITION TO ACCRUAL ACCOUNTING

2.1 BASIS OF PREPARATION

The Communities' opening balance sheet has been prepared in accordance with the new accounting rules adopted on 28 December 2004, which apply for the first time for the financial year 2005.

2.2 PRESENTATION OF THE FINANCIAL STATEMENTS

The annual accounts include the following primary statements: balance sheet, economic outturn account, statement of changes in net assets and cashflow table.

2.3 EQUITY RECONCILIATION

OPENING BALANCE SHEET

EUR Note 31.12.2004 Restated Adjustments 31.12.2004 I. NON-CURRENT ASSETS: 30 142 730 492,69 (4 143 923 005,85) 34 286 653 498 54 Intangible fixed assets 17 137 089,53 10 795 517,23 6 341 572,30 Tangible fixed assets 2.3.1 4 084 425 922,70 257 822 280,52 3 826 603 642,18 Investments 2.3.2 2 150 177 300,19 123 900 459,79 2 026 276 840,40 Loans 2.3.3 2 298 277 591,00 (30 831 701,00) 2 329 109 292,00 Long-term pre-financing 2.3.4 21 284 928 692,20 21 284 928 692,20 0,00 Long-term receivables 2.3.5 307 783 897,07 (25 790 538 254,59) 26 098 322 151,66 II. CURRENT ASSETS: 23 450 507 504,46 7 700 336 944,33 15 750 170 560,13 Stocks 63 255 048,68 (5 972 804,31) 69 227 852,99 Short-term investments 2.3.2 1 442 821 890,84 46 841 216,60 1 395 980 674,24 Short-term pre-financing 2.3.4 6 727 929 511,29 6 727 929 511,29 0,00 Short-term receivables 2.3.5 7 139 062 014,64 263 155 996,45 6 875 906 018,19 Cash & cash equivalents 2.3.6 8 077 439 039,01 668 383 024,30 7 409 056 014,71 Total Assets 53 593 237 997,15 3 556 413 938,48 50 036 824 058,67 III. NON-CURRENT LIABILITIES: 30 556 735 482,10 (1 143 539 962,90) 31 700 275 445,00 Employee benefits 26 012 130 886,00 3 744 986,00 26 008 385 900,00 Provisions for risks and charges 2.3.7 1 013 020 111,03 (1 254 230 501,43) 2 267 250 612,46 Financial liabilities 2.3.8 1 688 032 288,29 109 698 482,45 1 578 333 805,84 Other long-term liabilities 1 843 552 196,78 (2 752 929,92) 1 846 305 126,70 IV. CURRENT LIABILITIES: 74 633 599 508,87 70 804 374 988,83 3 829 224 520,04 Provisions for risks and charges 2.3.7 240 240 253,60 240 240 253,60 0,00 Financial liabilities 2.3.8 152 154 480,63 (74 095 519,37) 226 250 000,00 Accounts payable 2.3.9 74 241 204 774,64 70 638 230 254,60 3 602 974 520,04 Total Liabilities 105 190 334 990,97 69 660 835 025,93 35 529 499 965,04 NET ASSETS (51 597 096 993,82) (66 104 421 087,45) 14 507 324 093,63 Reserves 2.3.10 2 567 532 141,28 1 512 263 917,43 1 055 268 223,85 Amounts to be called from Member States: 2.3.10 (54 164 629 135,10) (67 616 685 004,88) 13 452 055 869,78 Staff pensions (long-term) (26 012 130 886,00) 0,00 (26 012 130 886,00) Other (28 152 498 249,10) (67 616 685 004,88) 39 464 186 755,78 V. NET ASSETS (51 597 096 993,82) (66 104 421 087,45) 14 507 324 093,63

The table above summarises the impact of the changes made to restate the balance sheet as at 31 December 2004 under the new accounting rules.

The presentation of the balance at 31 December 2004 (before restatement) differs slightly to that published in the Financial Statements 2004. This is due to the reclassification of certain balances within the balance sheet, made necessary to allow a relevant comparison with the restated figures. The original net assets figure of EUR 14,5 billion (then called ‘Own Capital’) at 31 December 2004 corresponds to the published figure.

Almost the entire impact is noticed in the accounts of the Commission and to a much lesser extent in the ECSC in liquidation. The first time inclusion of the Agencies in the consolidation scope has had a limited impact on the consolidated accounts, the main being an increase in cash balances.

2.3.1 Tangible fixed assets

The main change in accounting policy for tangible fixed assets relates to depreciation policy. Under previous rules, newly acquired assets were depreciated for a full 12 months in the year in which they were purchased (regardless of the date of acquisition). In accordance with the new rules depreciation is applied from the month of acquisition. Historically therefore assets had been ‘over-depreciated’. This and other changes in accounting policies have led to an increase in the net value of tangible fixed assets, by EUR 69 million in the Commission, and EUR 137 million in the Parliament. The balance of the increase primarily relates to the inclusion of the Agencies for the first time.

2.3.2 Investments

The investment portfolio of the Guarantee Fund and of the ECSC in liquidation, made up of debt securities, was previously recorded at the lower of cost (or in case of premiums/discounts, amortised cost using linear method) or market value. These securities are now classified as available-for-sale assets and consequently carried at their fair value. The impact of the valuation at fair value has been accounted for in the fair value reserve and amounted to EUR 88 million.

The Guarantee Fund was holding three floating rate notes issued by the European Communities for an amount of EUR 21 million, including accrued interests, as at 31 December 2004. These debt securities have been duly eliminated against the corresponding debt evidenced by certificates issued by the Macro Financial Assistance (MFA) program (see note 2.3.8).

The debt securities, amounting to EUR 38 million, held within the context of budgetary instruments managed by fiduciaries on behalf of the European Commission were included in the net asset calculation of these instruments and as such, classified as short-term receivables as at 31 December 2004. Under the new accounting rules, the components of the budgetary instruments are now classified in the relevant headings of the annual accounts according to their nature and when applicable, residual maturity.

Derivative financial instruments with a positive fair value including accrued interest (EUR 33 million) are recognised as held-for-trading assets whilst previously they were only disclosed as off balance-sheet items. The balance of the movement (EUR 33 million) relates to other reclassifications, revaluations and the inclusion of accrued interest under this heading.

2.3.3 Loans

Loans with special conditions were previously recorded at cost less any provision for impairment. Under the new accounting rules, these loans granted at preferential rates are initially recognised at fair value which, in the case of loans carrying interest below market conditions, corresponds to the net present value of expected cash flows discounted at the average prevailing EIB lending rate of interest for borrowers in the respective countries, then subsequently measured at amortised cost. The provisions for impairment, if any, are based on the provisional or definitive write-offs as provided for under the respective finance contract. The combined impact of the valuation of these loans at their amortised cost (EUR -152 million), on one side, and, of their entire classification as non-current assets since all have final maturities above one year after the balance sheet date (EUR 20 million), on the other side, has been accounted through the accumulated deficit account and amount to EUR -132 million.

Housing loans of the ECSC in liquidation granted at preferential rates were previously recorded at their outstanding nominal amount less any provision for impairment. Under the new accounting rules, these loans are initially recognised at fair value which corresponds to the net present value of expected cash flows discounted at the market rate of interest prevailing for bonds with similar maturities issued by the member states where the borrowers are located, then subsequently measured at amortised cost. The provisions for impairment, if any, are based on the provisional or definitive write-offs as provided for under the respective finance contracts. The impact of the valuation of these loans at their amortised cost amounts to a negative EUR 21 million.

Loans granted from borrowed funds have also been classified as non-current assets when their final maturity was above one year after the balance sheet date, increasing the balance of long-term loans by EUR 123 million and decreasing the one of short-term receivables by the same amount (see note 2.3.5).

2.3.4 Pre-financing

Financial statements of the European Communities published prior to 2005 included, within short term receivables, a limited number of amounts concerning pre-financing payments made on specific projects (financial intermediaries). During 2004 an inventory of all open pre-financing amounts paid out up to 31 December 2004 was prepared by every Institution and body.

The balance shown for pre-financing as at 31 December 2004 is, however, this total amount outstanding to beneficiaries at that date less accrued charges. These accrued charges represent the estimate of the actual utilisation by the beneficiaries of the pre-financing amounts at this date, for which no cost statements have yet been received by the European Communities.

As many of the projects funded by the European Communities Structural Fund actions are long-term in nature, the related advances are available for more than one year. Thus these pre-financing amounts are shown under both long-term and short-term asset headings.

2.3.5 Receivables

Long-term receivables have greatly decreased as the guarantee from Member States in relation to the Commission's pension obligations towards staff does not meet the accounting criteria, set down by the new accounting rules, necessary to be recognised as an asset. Originally this had amounted to EUR 26 billion at 31 December 2004.

Short term receivables have increased due to the inclusion of accrued own resource income of EUR 2,3 billion at 31 December 2004. The overall movement on the balance however is offset by the transfer of previously included pre-financing amounts, net assets of the budgetary instruments managed by fiduciaries on behalf of the European Communities and portions of loans with final maturity above one year after the balance sheet date, and accrued interest, to separate headings.

2.3.6 Cash and cash equivalents

The biggest impact of the inclusion of the Agencies was under this heading, being EUR 339 million.

Current accounts and short-term deposits, amounting to EUR 323 million, held within the context of budgetary instruments managed by fiduciaries on behalf of the European Communities were included in the net asset calculation of these instruments and as such, classified as short-term receivables as at 31 December 2004. Under the new accounting rules, the components of the budgetary instruments are now classified in the relevant headings of the annual accounts according to their nature and when applicable, residual maturity.

2.3.7 Provisions

The balance on provisions has been revised upward by the application of a more precise discount rate to the dismantling provision for the JRC (EUR 59 million). Following a more detailed review of pending legal cases there has also been an increase in the specific provisions made for these.

The significant change has been that the provisions previously recognised concerning the Guarantee Fund (EUR 1,086 million) and the ECSC in Liquidation (EUR 328 million) no longer meet the requirements to be classed as a provision under the new rules and so are removed from this heading. Reserves for the same amounts are instead recognised.

Additionally financial provisions (EUR 239 million) have been recognised within the context of budgetary instruments whilst previously they were only disclosed as off balance-sheet items. Finally, provisions relating to legal cases of EUR 81 million and provisions of EUR 21 million from other Institutions and agencies were included for the first time (see note 3.13).

2.3.8 Financial liabilities

As with loans granted, borrowings with final maturity above one year after the balance sheet date have been classified as non-current liabilities, increasing the balance of long-term borrowings by EUR 109 million and decreasing short-term borrowings by the same amount.

Moreover, debts evidenced by certificates issued by the Macro Financial Assistance (MFA) program and recorded as long-term borrowings were subscribed to by the Guarantee Fund. These debts have been duly eliminated against the corresponding assets held by the Guarantee Fund.

Derivative financial instruments with a negative fair value (EUR 19 million) are recognised as held-for-trading liabilities whilst previously they were only disclosed as off balance-sheet items.

2.3.9 Accounts payable

The biggest impact (EUR 70.6 billion) on the balance sheet has been under this heading and it is due primarily to two main exercises introduced by the modernisation project — the recording of invoices and accrued charges:

— In accordance with the Financial Regulation payment appropriations carried over to the following year are entered as budget expenditure. Until the financial year 2004, the contra-entry to these appropriations carried over and not yet used were to be found in the short-term liabilities in the balance sheet. This classification no longer exists, since all outstanding debts have been inventoried. The adjustment is included under ‘accounts payable.’ Amounts of EUR 2,8 billion previously reported under this heading and relating to budgetary appropriations to be carried over to the following year are no longer included following the introduction of the new accounting rules.

— All invoices, cost claims and credit notes received by the Communities are systematically recorded in the accounting system. This process began in the fourth quarter 2004 and in January 2005 the outstanding amounts of EUR 9,4 billion were transferred into the accounting system for the opening balance sheet.

— Accrued charges at 1 January 2005 totalled EUR 64,2 billion and represent the most significant impact on the opening balance sheet in comparison with the published 2004 annual accounts. These relate to current liabilities for amounts already due to eligible beneficiaries (Member States, Institutions, suppliers or service providers, individuals, etc.) but not yet recognised at the reporting date since no cost claim or invoice has been received. According to the new accounting rules, transactions and events are recorded in the accounting systems and recognised in the financial statements in the period to which they relate. When the amount cannot be recognised within the time frame necessary for the preparation of the financial statements, the amounts that are known with reasonable certainty before the financial statements are completed, should be recognised as accrued expenses. The recognition criteria foresee that an expense is recognised by the European Communities for an amount equal to the estimated amount of the transfer obligation due for the period. In order to calculate the best estimate of the accrued charges, the Communities did an analysis of all aspects related to the cut-off of a public entity. The Communities established an exhaustive inventory of the applicable rules and considered the presentation in the financial statements. The ultimate goal was to make sure the proposed methodology would reduce the risk that the financial statements do not reflect a true and fair view. The Communities then translated this designed cut-off strategy into operational and practical instructions, including the recommended methodology and a description of possible techniques by topics.

— The main amounts of accrued charges are for EAGGF-Guarantee: EUR 26,3 billion cover incurred expenses between 16 October and 31 December 2004 which are declared by Member States beyond the time frame necessary for the preparation of the financial statements, EUR 21,2 billion cover market measures including direct aid (this consists of entitlements incurred in 2004 with financial consequences in 2005) and rural development (this consists of eligible expenditure incurred by operators or the payment authorities until the 31.12.2004, for which no payment request was yet received by the Communities). Another significant amount represents accrued charges for Structural Funds: at 31 December 2004 EUR 6,3 billion for the FEDER 2000-2006, ISPA, innovative actions, EUR 5,1 billion for FSE. The remaining amounts of EUR 5,3 billion cover accrued charges for other policies, the most significant of which is the research area with +/- EUR 1,5 billion — see note 3.18.4.

2.3.10 Reserves and accumulated surplus/deficit

In accordance with new accounting rules, the adjustment to fair value of available-for-sale assets is now accounted for through the fair value reserve (EUR 88 million). The biggest effect on reserves was however the inclusion of the Guarantee Fund reserve (EUR 1,086 million), which corresponds to the 9 % target amount and, of other reserves of the ECSC in liquidation (EUR 328 million). Previously these amounts had been recognised as a provision.

All changes, other than fair value adjustments, required to restate the opening balance sheet where made through the accumulated surplus/deficit account, thus the large impact on its balance.

3. NOTES TO THE BALANCE SHEET

I. NON CURRENT ASSETS

3.1 INTANGIBLE FIXED ASSETS

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

Intangible Fixed Assets

EUR Amount Gross carrying amount at 31 December 2004 (restated) 43 147 504,22 Additions during the year 15 428 793,99 Disposals (473 054,00) Other changes 6 445 391,79 Gross carrying amount at 31 December 2005 64 548 636,00 Accumulated depreciation at 31 December 2004 (restated) 26 010 414,69 Depreciation charge for the year 6 842 720,30 Disposal (200 762,00) Other changes 5 219 638,51 Accumulated depreciation at 31 December 2005 37 872 011,50 NET CARRYING AMOUNT AT 31 DECEMBER 2005 26 676 624,50

3.2 TANGIBLE FIXED ASSETS

3.2.1 Land and buildings

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

In December 2005, together with the Parliament, the Commission bought a building in Copenhagen with a value of EUR 9,9 million. Each party owns 50 %, although the Parliament paid the full amount for the building and the Commission will repay its share to the Parliament during the life of the building. In the same month, the two Institutions also jointly signed an acquisition contract worth EUR 7,4 million for a building in The Hague, but since the building was not put into use until 2006, it does not appear in the balance sheet at 31 December 2005.

3.2.2 Plant and equipment

For approximately 20 % of the Delegations, there is no information available about tangible fixed assets at 31 December 2005. An initiative is underway since January 2003 to improve the quality and exhaustiveness of the information provided by the Delegations and this, as well as a specific inventories project launched in 2004, should help to resolve this problem in the future. Furthermore, the integration of the delegations' transactions directly in the central accounting system in 2007 will also improve this situation.

Adjustments as a direct result of these projects total EUR 3,6 million and are shown under the heading ‘other changes’ in the table below. The total net amount of tangible fixed assets included for the Delegations at 31 December 2005 is EUR 72,3 million.

3.2.3 Finance leases (and similar rights)

The main building occupied by the Publications Office is not included in the balance sheet since it is classified as an operating lease. Although the Office has two purchase options (in October 2006 and in 2010) with values based on the market value, it is not considered that the risks and rewards incident to ownership of the asset are substantially transferred to the Office. The classification will be reviewed later in 2006, when the first purchase option may be taken up.

On 21 September 2005 the Commission signed a 27 year finance lease contract for a building in Brussels valued to EUR 50 million.

The Economic and Social Committee (ESC) and the Committee of the Regions (CoR) have entered the finance leasing contracts for their Belliard building in Brussels on the assets side of the balance sheet. It is co-financed on the following scale: ESC: 50 % — CoR: 50 %. The 27 year financial lease these two Committees signed in May 2004 for another Brussels building has been included in the restated opening balance sheet for 2005. It is co-financed on the following scale: ESC: 40 % — CoR: 60 %.

3.2.4 Fixed assets under construction

On March 2003 the Council signed a contract for the construction and acquisition of the LEX building in Brussels. The estimated price upon completion is EUR 258 million as at 31 December 2005. EUR 64 million has been paid in 2005 as an advance for this construction and EUR 59 million in previous years — in total EUR 123 million.

In October 2004 the Parliament signed a financial lease with a purchase option for a building complex in Brussels and the construction began during 2004. In November 2004 an advance payment of EUR 40 million was paid. Until the signature of the provisional approval report the Parliament has the right to make additional advance payments and which so far have been done as following (in Euro millions):

Balance 31 December 2004 EUR 40,0 million Payments 2005 for work done in 2004 (incl. in the restated opening balance sheet) EUR 82,3 million Expenses for work done 2005 EUR 73,7 million Total at 31 December 2005 EUR 196,0 million





Tangible Fixed Assets

EUR Land and buildings Plant and equipment Furniture and vehicles Computer hardware Other tangible fixed assets Finance leases and similar rights Assets under construction TOTAL Gross carrying amount at 31 December 2004 (restated) 2 798 459 908,84 314 685 311,72 151 655 006,60 359 450 313,77 94 848 414,86 2 128 258 298,61 204 629 792,33 6 051 987 046,73 Additions during the year 22 183 255,17 28 503 264,15 13 886 120,31 58 804 654,05 13 083 916,15 60 966 303,61 142 094 984,67 339 522 498,11 Disposals 0,00 - 18 802 716,65 - 5 955 058,02 - 48 288 305,99 -1 639 942,74 0,00 - 099 843,00 - 74 785 866,40 Transfers between headings 3 986 584,00 1 173 719,60 - 322 248,13 281 086,13 -1 134 157,60 1,600,00 - 3 986 584,00 0,00 Other changes - 1 971 063,00 - 8 036 654,33 - 23 723 883,65 - 3 096 256,80 353 124,82 0,00 0,00 - 36 474 732,96 Gross carrying amount at 31 December 2005 2 822 658 685,01 317 522 924,49 135 539 937,11 367 151 491,16 105 511 355,49 2 189 226 202,22 342 638 350,00 6 280 248 945,48 Accumulated depreciation at 31 December 2004 (restated) 1 033 480 507,23 258 891 143,45 110 533 143,17 254 904 329,06 57 922 871,90 251 829 129,22 1 967 561 124,03 Depreciation charge for the year 116 156 557,09 22 621 584,39 9 779 959,02 54 066 519,67 8 767 186,25 67 317 044,30 278 708 850,72 Write-back of depreciation 0,00 0,00 -229 829,46 - 729 745,93 -15 737,40 0,00 - 975 312,79 Disposals 0,00 - 18 211 797,85 - 5 493 049,90 - 47 248 494,30 -1 591 914,10 0,00 - 72 545 256,15 Impairment 0,00 0,00 0,00 0,00 0,00 0,00 0,00 Write-back of impairment 0,00 0,00 0,00 0,00 0,00 0,00 0,00 Transfers between headings 0,00 868 666,66 - 28 854,37 262 731,22 -1 104 143,51 1 600,00 0,00 Other changes 72 548,64 - 8 311 960,11 -22 789 122,90 - 2 934 810,67 242 634,39 0,00 - 33 720 710,65 Accumula