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

Consolidated annual accounts of the European Union for the financial year 2018

(2019/C 327/01)

CONTENTS

FOREWORD 2

EUROPEAN UNION POLITICAL AND FINANCIAL FRAMEWORK, GOVERNANCE AND ACCOUNTABILITY 3

NOTE ACCOMPANYING THE CONSOLIDATED ACCOUNTS 9

HIGHLIGHTS OF THE FINANCIAL YEAR 2018 10

CONSOLIDATED FINANCIAL STATEMENTS AND EXPLANATORY NOTES 12

BALANCE SHEET 13

STATEMENT OF FINANCIAL PERFORMANCE 14

CASHFLOW STATEMENT 15

STATEMENT OF CHANGES IN NET ASSETS 16

NOTES TO THE FINANCIAL STATEMENTS 17

FINANCIAL STATEMENT DISCUSSION AND ANALYSIS 90

BUDGETARY IMPLEMENTATION REPORTS AND EXPLANATORY NOTES 104

GLOSSARY 159

LIST OF ABBREVIATIONS 163

FOREWORD

It is my pleasure to present the 2018 annual accounts of the European Union. They provide a complete overview of the EU finances and the implementation of the EU budget for the last year, including information on contingent liabilities, financial commitments and other obligations of the Union. Reflecting the multiannual nature of the Union’s activities, they offer explanations of the key financial figures and their evolution. The consolidated annual accounts of the European Union are part of the Commission’s integrated financial and accountability reporting package and form an essential part of our highly developed system of financial accountability.

Despite its relatively modest size, the EU budget makes a big difference to millions of Europeans. It complements national budgets and supports political priorities where it has real added value and where it can deliver results in the most efficient way.

2018 was the fifth year under the current multiannual financial framework; all the financial programmes are fully operational. The implementation of the EU budget totalled EUR 173,1 billion in commitment appropriations, and EUR 156,7 billion in payment appropriations. Throughout the year, the EU budget continued to provide our response to the challenges deriving from a complex geopolitical environment while simultaneously guaranteeing strategic investment and sustainable growth in Europe.

Nearly half of the funds were aimed at stimulating growth, employment and competitiveness. Funding was provided for reaserach and innovation under Horizon 2020, for small and medium-sized enterprises under the COSME programme or for education under Erasmus+. The European Fund for Strategic Investments, Connecting Europe Facility and the European Structural and Investment Funds all had also a major role to play. I invite you to discover the stories behind many EU investments on the ‘InvestEU’ portal (https://europa.eu/investeu).

The EU budget offered also strong support in other priority areas such as the EU’s comprehensive approach to migration, the security union and the EU’s external action. It allowed the Union to play a strong role beyond our borders during a period of turbulence in Europe’s neighbourhood and contributed to achieving cross-cutting policy objectives related to the climate change and the biodiversity. In 2018 the amount allocated to climate mainstreaming amounted to more than EUR 32 billion, 20 % of the total budget.

Finally, the continued support was provided to promoting sustainable growth and the preservation of Europe’s natural resources though the Common Agricultural and Fisheries Policies and activities in the fields of climate and environment under the LIFE programme.

The consolidated annual accounts of the European Union are produced in accordance with International Public Sector Accounting Standards. In order to uphold these standards, the Commission is consistently improving its rules and procedures, organisational structure and agility. Reporting consistently and effectively increases the accountability of the EU spending, not only for the purpose of legal compliance. It helps to engage with citizens and with other stakeholders, and to maintain their confidence and trust in the European Union.

Günther H. OETTINGER

Commissioner for Budget and Human Resources

EUROPEAN UNION POLITICAL AND FINANCIAL FRAMEWORK, GOVERNANCE AND ACCOUNTABILITY

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

1. POLITICAL AND FINANCIAL FRAMEWORK

EU Treaties

The overarching objectives and principles that guide the Union and the European Institutions are defined in the Treaties. The Union and the EU institutions may only act within the limits of the competences conferred by the Treaties so as to attain the objectives set out therein and must do this in accordance with the principles (1) of subsidiarity and proportionality. To attain its objectives and carry out its policies, the Union provides itself with the necessary financial means. The Commission is responsible for implementing the objectives in cooperation with the Member States and in accordance with the principle of sound financial management.

The EU pursues the objectives established in the Treaty with a number of tools, one of which is the EU budget. Others are, for example, proposing legislation or pursuing policy strategies.

Commission political priorities

The political priorities of the Commission are defined in the political guidelines set by the President of the Commission. These guidelines provide a roadmap for the Commission’s action that is fully consistent and compatible with Europe 2020 as the EU’s long-term growth strategy.

10 PRIORITIES

— A new boost for jobs, growth and investment. — A balanced and progressive trade policy to harness globalisation. — A connected digital single market. — An area of Justice and Fundamental Rights based on mutual trust. — A resilient Energy Union with a forward-looking climate change policy. — Towards a new policy on migration. — A deeper and fairer internal market with a strengthened industrial base. — Europe as a stronger global actor. — A deeper and fairer Economic and Monetary Union (EMU). — A Union of democratic change.

Europe 2020 strategy

The Europe 2020 strategy agreed in 2010 by the Heads of State or Government of EU Member States defined a 10-year jobs and growth strategy for the EU (2). The strategy put forward three mutually reinforcing priorities of smart, sustainable and inclusive growth with five EU headline targets.

The EU budget is one of the EU levers contributing to the delivery of the Europe 2020 objectives. A wide range of actions at national, EU and international levels are being mobilised to deliver concrete results in relation to the Europe 2020 strategy.

2030 Agenda for Sustainable Development (3)

Sustainable development has long been at the heart of the European project. The EU Treaties give recognition to its economic, social and environmental dimensions which should be addressed together. The EU is committed to development that meets the needs of the present without compromising the ability of future generations to meet their own needs. The EU budget plays an essential role in many sustainability challenges from youth unemployment to ageing populations, climate change, pollution, sustainable energy and migration. Under the current Commission, sustainable development is mainstreamed in key cross-cutting projects as well as in sectoral policies and initiatives.

The policies supported by the EU budget are implemented in accordance with the Multiannual Financial Framework (MFF) and corresponding sectorial legislation defining spending programmes.

Multiannual Financial Framework and spending programmes

The Multiannual Financial Framework translates the EU’s political priorities into financial terms over a period long enough to be effective and to provide a coherent long-term vision for beneficiaries of EU funds and co-financing national authorities. It sets maximum annual amounts (ceilings) for EU expenditure as a whole and for the main categories of expenditure (headings). The sum of the ceilings of all headings gives the total ceiling of commitment appropriations. The Multiannual Financial Framework is adopted by unanimity indicating the agreement of all Member States to the objectives and the level of spending (maximum level of budget commitments and payments), with the consent of the European Parliament.

Interinstitutional agreement

The Multiannual Financial Framework is complemented by the interinstitutional agreement (4) which is a political agreement between the European Parliament, the Council and the Commission. The purpose of this agreement, adopted in 2013 in accordance with Article 295 of the TFEU, is to implement budgetary discipline, improve the functioning of the annual budgetary procedure and cooperation between the institutions on budgetary matters as well as to ensure sound financial management.

Annual budget

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

The main sources of funding of the EU are own resources revenues which are complemented by other revenues. There are three types of own resources: traditional own resources (such as custom duties and sugar levies), the own resource based on value added tax (VAT) and the own resource based on gross national income (GNI). Other revenues arising from the activities of the EU (e.g. competition fines) normally represent less than 10 % of total revenue. The overall amount of own resources needed to finance the budget is determined by total expenditure less other revenue. In the current MFF the total amount of own resources cannot exceed 1,20 % of the sum of gross national income (GNI) of the Member States.

The EU’s operational expenditure covers the various headings of the Multiannual Financial Framework and takes different forms, depending on how the money is paid out and managed. The EU budget is implemented in three management modes:

— Shared management: under this method of budget implementation, tasks are delegated to Member States. About 75 % of the expenditure falls under this management mode covering such areas as agricultural spending and structural actions.

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

— Indirect management: this refers to cases where the Commission confers tasks of implementation of the budget to third parties, such as the EU regulatory agencies or international organisations.

Financial Regulation

The Financial Regulation (FR) (5) applicable to the general budget is a central act in the regulatory architecture of the EU’s finances defining EU financial rules applicable to the EU budget.

2. GOVERNANCE AND ACCOUNTABILITY

2.1. INSTITUTIONAL STRUCTURE

The organisational governance of the EU consists of institutions, agencies and other EU bodies, which are listed in note 9 of the notes to the consolidated financial statements. The European Investment Bank (EIB), the European Investment Fund (EIF) and the European Central Bank (ECB) are not included in the scope of the Financial Regulation. The main institutions, in the sense of being responsible for drafting policies and taking decisions, are the European Parliament, the European Council, the Council and the Commission.

The European Commission is a unique organisation. Under the Treaty, the Commission is responsible for planning, preparing and proposing legislation; for managing EU policies, including the monitoring of implementation of EU legislation and ensuring its enforcement and allocating EU funding; and for representing the EU internationally.

As foreseen in the Treaty (6), the Commission implements the budget in cooperation with the Member States. Together, they ensure that the appropriations are used in accordance with the principles of sound financial management. Regulations lay down the control and audit obligations of the Member States in the implementation of the budget and the resulting responsibilities. They also lay down the responsibilities and detailed rules for each institution concerning its part in effecting its own expenditure.

The Commission performs these roles under the leadership of the College of Commissioners, which sets priorities and takes overall political responsibility for the decisions of the Commission. The President, whose role was strengthened by the Nice and Lisbon Treaties, decides on the internal organisation of the Commission, ensuring that it acts consistently, efficiently and as a collegiate body.

The Commission’s internal functioning is based on a number of key principles underpinning good governance: clear roles and responsibilities, a strong commitment to performance management and compliance with the legal framework, clear accountability mechanisms, a high quality and inclusive regulatory framework, openness and transparency, and high standards of ethical behaviour.

2.2. THE COMMISSION’S GOVERNANCE STRUCTURE

The European Commission has a unique governance system, with a clear distinction between political and administrative oversight structures and well-defined lines of responsibility and financial accountability (7). The system is based on the Treaties and the structure has evolved to adapt to a changing environment and to remain in line with best practice as set out in relevant international standards (8).

In 2018, the Commission adopted a ‘governance package’ (9), which significantly streamlined and strengthened its corporate governance arrangements and leveraged recent audit work by the European Court of Auditors (10) and the Internal Audit Service.

— The College of Commissioners assumes collegial political responsibility for the work of the Commission. Operational implementation of the budget is delegated to Directors-General and Heads of Service who lead the administrative structure of the Commission (11).

— The College delegates financial management tasks to the Directors-General or Heads of Service who thereby become Authorising Officers by Delegation (AOD). These tasks can further be delegated to Directors, Heads of Unit and others, who thereby become Authorising Officers by Sub-Delegation. The responsibility of the Authorising Officers covers the entire management process, from determining what needs to be done to achieve the policy objectives set by the institution to managing the activities from both an operational and budgetary standpoint.

— The Audit Progress Committee follows-up implementation of audits, in particular of the Internal Audit Service but also on the basis of European Court of Auditors audits.

— Under the authority of the President, the Corporate Management Board, chaired by the Secretary-General, brings together on a regular basis the Directors-General responsible for budget, human resources and security, and the Director-General of the Legal Service. The Member(s) responsible for budget and administration in the Cabinet of the President, as well as the Head(s) of Cabinet of the Member(s) of the Commission in charge of budget, human resources and administration, are observers. The board provides coordination, oversight, advice and strategic orientations on corporate management issues, in areas including the management of financial and human resources, risk management, performance management, IT governance, cyber- and physical security, business continuity, and information management. In this way, the Corporate Management Board contributes to ensuring that the necessary structures, processes and administrative policies are in place in the Commission to deliver on the political priorities of the College and the tasks entrusted to it by the Treaties in an efficient and effective manner.

2.3. THE COMMISSION’S FINANCIAL MANAGEMENT

In the Commission, the roles and responsibilities in financial management are clearly defined (e.g. in the Financial Regulation) and applied. This is a decentralised approach with clear responsibilities with the aim of creating an administrative culture that encourages civil servants to take responsibility for activities over which they have control and to give them control over the activities for which they are responsible.

The Commission may also delegate the implementation of specific programmes to executive agencies. Expenditure decisions can also be managed via, or together with, another institution or body. A large proportion of the budget is managed under a system of shared management with the Member States, notably in the areas of structural funds and agriculture.

Budget implementation tasks are also entrusted to:

— national agencies;

— the European Investment Bank Group;

— third countries;

— international organisations (e.g. the World Bank or the United Nations);

— other entities.

As authorising officers by delegation, the Directors-General are responsible for the sound financial management of resources. In implementing the EU budget, authorising officers by delegation must comply with the provisions of the Financial Regulation and establish an appropriate internal control framework. Among other things, the internal control objectives focus on:

— effectiveness, efficiency and economy of operations;

— financial control and anti-fraud;

— integrity and ethics;

— the management of human resources;

— reliable reporting;

— communication;

— the safeguarding of assets and information.

Each authorising officer by delegation may rely on one or two senior or middle managers in charge of risk management and internal control to oversee and monitor the implementation of internal control systems. The Commission’s central services provide guidance and advice and promote best practices.

Within the context of the Commission’s Strategic Planning and Programming cycle, each authorising officer is required to prepare an annual activity report (‘AAR’) on the activities and policy achievements and results of the year. In the AAR he/she declares that resources have been used based on the principles of sound financial management and that he/she has set in place control procedures which provide the necessary guarantee concerning the legality and regularity of the underlying transactions. At Commission level the Annual Management and Performance Report for the EU budget is the main instrument through which the College of Commissioners takes political responsibility for the management of the budget.

The Accounting Officer of the Commission is centrally responsible for the treasury management, recovery procedures, laying down accounting rules based on International Public Sector Accounting Standards and methods, validating accounting systems and the preparation of the Commission’s and consolidated annual accounts of the EU. Furthermore, the Accounting Officer is required to sign the annual accounts declaring that they present fairly, in all material aspects, the financial position, the results of the operations and the cash flows of the Union. The annual accounts are adopted by the College of Commissioners. The Accounting Officer is an independent function and bears a major responsibility as regards financial reporting in the Commission. The Internal Auditor of the Commission is likewise a centralised and independent function and provides independent advice, opinions and recommendations on the quality and functioning of internal control systems inside the Commission, EU agencies and other autonomous bodies.

2.4. PERFORMANCE FRAMEWORK

Implementing robust performance frameworks is essential for ensuring a strong focus on results, EU added value and sound management of EU programmes. The performance framework of the EU budget is highly specified, scoring higher than any Organisation for Economic Co-operation and Development (OECD) country in the standard index of performance budgeting frameworks. The EU budget performance framework reports on several types and levels of strategic goals, objectives and targets, including the Europe 2020 strategy and other political priorities. It must also take account of the complementarity and mainstreaming of policies and programmes and the key role of the Member States in implementing the EU Budget.

— Objectives, indicators and targets are strongly featured in the programmes’ legal basis and every year the Commission reports on them through the Programme Statements that accompany the draft budget. They provide all of the key information that is necessary for careful programme scrutiny and performance measurement: this includes 7-year financial commitments; programme performance baselines (starting points for policy action); end-goals (to be achieved at the end of the multi-annual programming period); and intermediate milestones.

— To ensure resources are allocated to priorities and that every action brings high performance and added value, the Commission promotes a performance culture across the Commission services. Moreover, over the past years it has developed an approach that promotes a better balance between compliance and performance.

— The Annual Management and Performance Report for the EU budget provides a comprehensive overview on the performance, management and protection of the EU budget. It explains how the EU budget supports the European Union’s political priorities, the results achieved with the EU budget, and the role the Commission plays in ensuring and promoting the highest standards of budgetary and financial management.

— The European Court of Auditors takes a systematic and thorough approach to assessing the qualitative aspects of budgeting, including the performance dimension, as a normal part of its annual reporting and through special reports.

All of these elements place the budget authority in a strong position to take performance into account as a significant factor in deciding on the next annual budget.

2.5. FINANCIAL REPORTING

The main element of EU financial reporting is the Integrated Financial and Accountability Reporting of the EU, which comprises the consolidated annual accounts of the EU, the Annual Management and Performance Report for the budget, which includes the evaluation report according to Art. 247(1) (e) FR, the annual internal audit report, a long-term forecast of future inflows and outflows covering the next five years and the report on the follow-up to the discharge. The Integrated Financial and Accountability Reporting provides the public with a comprehensive view of the financial and operational situation of the EU each year.

The consolidated annual accounts of the EU provide financial information on the activities of the institutions, agencies and other bodies of the EU from both an accrual accounting and budgetary perspective. These accounts do not encompass the annual accounts of Member States.

The consolidated annual accounts of the EU consist of two separate but linked parts:

a) the consolidated financial statements; and

b) the reports on implementation of the budget, which provide an aggregated record of budget implementation.

In addition, the consolidated annual accounts of the EU are accompanied by a Financial Statement Discussion and Analysis (FSDA), which summarises significant changes and trends in the financial statements and explains significant risks and uncertainties the EU has faced and needs to address in future.

Reporting and Accountability in the Commission:

Integrated Financial & Accountability Reporting Article 247 FR — Consolidated Annual Accounts of the EU — Annual Management and Performance Report for the EU budget (incl. reporting on the evaluation of the EU finances) — Annual internal audit report — A long-term forecast of future in- and outflows for 5 years — Report on the follow up to the discharge Other reports — Communication package at the occasion of the State of the Union address — General Report on the activities of the EU — Annual Activity Reports of the Directorates-General — Report on Budgetary and Financial Management

2.6. EXTERNAL AUDIT AND DISCHARGE PROCEDURE

External audit

The European Court of Auditors (ECA) is the external auditor of the EU institutions (and bodies). The ECA’s mission is to contribute to improving EU financial management, promote accountability and transparency, and act as the independent guardian of the financial interests of the citizens of the EU. Its role as the EU’s independent external auditor is to check that EU funds are correctly accounted for, are collected and spent in accordance with the relevant rules and regulations and have achieved value for money.

As part of its activities, the ECA draws up for the use of the European Parliament and the Council:

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

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

(3) special reports covering specific areas as well as specific annual reports (on e.g. the European Development Fund, on EU Agencies).

Discharge

The final step of the budget lifecycle is the discharge procedure for a given financial year. It represents the political dimension of the external control of budget implementation and is the decision by which the ‘Discharge Authority’ (i.e. the European Parliament, acting on a Council recommendation) ‘releases’ the Commission (and other EU bodies) from its responsibility for the management of a given budget. This decision is based on an examination of the EU consolidated annual accounts and a set of Commission reports (the Annual Management and Performance Report for the EU budget, the report on the follow-up to the previous year’s discharge and the annual report to the discharge authority on internal audits carried out) as well as on the European Court of Auditors’ Annual Report, audit opinion (the ‘Statement of Assurance’) and Special Reports. It also takes account of the Commission written replies to questions and other information requests as well as hearings of the Budget Commissioner, Commissioners and Directors-General responsible for the main spending areas and the Secretary General before the European Parliament’s Budgetary Control Committee (CONT).

The outcome of the discharge procedure may be threefold: granting, postponement or refusal of the discharge. The final discharge reports also include specific requests addressed to the Commission by both the European Parliament and the Council. These requests are subject to a follow up report in which the Commission outlines the concrete actions it has already taken or intends to take.

NOTE ACCOMPANYING THE CONSOLIDATED ACCOUNTS

The consolidated annual accounts of the European Union for the year 2018 have been prepared on the basis of the information presented by the institutions and bodies under Article 246(2) of the Financial Regulation applicable to the general budget of the European Union. I hereby declare that they were prepared in accordance with Title XIII of this Financial Regulation and with the accounting principles, rules and methods set out in the notes to the financial statements.

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

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

Rosa ALDEA BUSQUETS Accounting Officer of the Commission 21 June 2019

HIGHLIGHTS OF THE FINANCIAL YEAR 2018

Implementation of the 2018 Union budget

The 2018 adopted budget focused on two main policy priorities for Europe among the ten priorities set by President Juncker at the beginning of this Commission’s mandate. One was a European response to the new challenges deriving from the complex geopolitical environment, from migration management to the protection of the EU’s external borders and the security of its citizens. The other was strategic investment and sustainable growth, to support economic cohesion, and create jobs, in particular for young people. In addition to these two clear priorities, in 2018, the EU budget and other instruments continued to support farmers and rural development, and deepened and strengthened the strategic interconnectors and networks between EU countries with the implementation of the digital single market and the energy union. The Commission continued to support the external projection of the EU as a key economic and political partner as well as a leading international provider of investment and humanitarian assistance.

The implementation of the EU budget in 2018 totalled EUR 173,1 billion in commitment appropriations, and EUR 156,7 billion in payment appropriations.

Nearly half of the funds – EUR 87,4 billion in commitment appropriations were aimed at stimulating smart and inclusive growth, jobs, competitiveness and cohesion. This included funding for research and innovation under Horizon 2020, education under Erasmus+, small and medium-sized enterprises under the COSME programme, the Connecting Europe Facility (CEF), the guarantee fund for the European Fund for Strategic Investments (EFSI) which is the tool behind the Investment Plan for Europe, and fostering convergence among Member States and among regions through the European Structural and Investment Funds (ESIF). Moreover, the EU budget support to European farmers amounted to EUR 44,4 billion in payments made.

The budget was also used to reinforce the external borders of the Union and address the migration and refugee crisis by funding actions including emergency assistance, relocation, border control, resettlement, return and integration of refugees and asylum-seekers. Finally, the budget continued to fund programmes to support the protection of justice and fundamental rights as well as social cohesion so that our European societies remain inclusive, free and fair.

The United Kingdom’s withdrawal from the European Union

Background

On 23 June 2016 a majority of the citizens of the United Kingdom who voted in the referendum on membership of the European Union voted to leave the EU. On 29 March 2017, the United Kingdom formally notified the European Council of its intention to leave the EU and the European Atomic Energy Community (Euratom). In doing so, it triggered Article 50 of the Treaty on European Union, which sets out the procedure for a Member State to withdraw from the Union.

The negotiation process

On 19 March 2018 the Commission published a draft of the Withdrawal Agreement that outlined the progress made in the negotiations. In the financial settlement part of the draft Withdrawal Agreement, the EU and the UK translated the progress achieved in the first phase of negotiations into a legal text.

A Joint Report was published on 14 November 2018 reporting agreement at negotiators’ level on the full text of the draft Withdrawal Agreement, and on an outline of the Political Declaration on the framework for the future relationship between the United Kingdom and the European Union. On the same day, this updated and agreed draft Withdrawal Agreement was published, in which the UK agreed to pay all its obligations under the current Multiannual Financial Framework (MFF) and previous financial perspectives as if it were still a Member State, including its share of the Union’s liabilities and contingent liabilities. The UK government approved the draft Withdrawal Agreement on the 14 November and the European Council endorsed it on 25 November 2018. On 11 January 2019, the Council (Article 50) approved the decision on the conclusion of the Withdrawal Agreement and sent it to the European Parliament for its consent. On the request of the United Kingdom, in accordance with the procedure set in the Article 50 of the TFEU, on 21 March 2019 the European Council agreed to extend the UK’s departure date to 22 May 2019, provided the Withdrawal Agreement was approved by the House of Commons by 29 March 2019 at the latest and to the 12 April 2019 if it was not the case (12). Subsequent to this, the House of Commons did not approve the Withdrawal Agreement by 29 March 2019 and so, again on the request of the United Kingdom, on 10 April 2019 the European Council agreed to an extension to the UK’s departure until 31 October 2019 (13). The withdrawal should take place on the first day of the month following the completion of the ratification procedures or on 1 November 2019, whichever is the earliest. The United Kingdom will remain a Member State until the new withdrawal date, with full rights and obligations in accordance with Article 50 TEU, and the United Kingdom has a right to revoke its notification at any time.

Financial settlement and the 2018 EU annual accounts

With regard to the financial settlement, it was stated in the draft Withdrawal Agreement published on 14 November 2018, that the UK would pay all its obligations under the current MFF and previous financial perspectives as if it were still a Member State. More specifically, the draft Withdrawal Agreement states that the United Kingdom shall in particular be liable to the Union for its share of:

— The budgetary commitments of the Union budget and of the budgets of the Union decentralised agencies outstanding on 31 December 2020 – see Article 140 of the draft Withdrawal Agreement;

— The financing of the Union’s liabilities incurred until 31 December 2020, with certain exceptions – see Article 142;

— The contingent financial liabilities of the Union arising from financial operations decided/approved before the withdrawal date – see Articles 143 & 144; and

— The payments required to discharge the contingent liabilities of the Union that become due related to legal cases concerning financial interests of the Union (provided that the facts forming the subject matter of those cases occurred no later than 31 December 2020) – see Article 147.

At the time of the signature of these accounts, and in the absence of ratification by the United Kingdom, the actual departure date and manner of departure (with or without agreement) is not yet known. Based on this current situation, there is no financial impact to be reported in the 2018 consolidated EU annual accounts.

CONSOLIDATED FINANCIAL STATEMENTS AND EXPLANATORY NOTES (14)

CONTENTS

BALANCE SHEET 13

STATEMENT OF FINANCIAL PERFORMANCE 14

CASHFLOW STATEMENT 15

STATEMENT OF CHANGES IN NET ASSETS 16

NOTES TO THE FINANCIAL STATEMENTS 17

1. SIGNIFICANT ACCOUNTING POLICIES 17

2. NOTES TO THE BALANCE SHEET 30

3. NOTES TO THE STATEMENT OF FINANCIAL PERFORMANCE 57

4. CONTINGENT LIABILITIES AND ASSETS 65

5. BUDGETARY AND LEGAL COMMITMENTS 69

6. FINANCIAL RISK MANAGEMENT 73

7. RELATED PARTY DISCLOSURES 84

8. EVENTS AFTER THE BALANCE SHEET DATE 86

9. SCOPE OF CONSOLIDATION 86

BALANCE SHEET

EUR million Note 31.12.2018 31.12.2017 NON-CURRENT ASSETS Intangible assets 2.1 446 405 Property, plant and equipment 2.2 11 185 10 745 Investments accounted for using the equity method 2.3 591 581 Financial assets 2.4 65 231 59 980 Pre-financing 2.5 26 006 25 022 Exchange receivables and non-exchange recoverables 2.6 416 611 103 875 97 344 CURRENT ASSETS Financial assets 2.4 4 168 8 655 Pre-financing 2.5 23 968 24 005 Exchange receivables and non-exchange recoverables 2.6 24 248 11 755 Inventories 2.7 73 295 Cash and cash equivalents 2.8 18 113 24 111 70 570 68 821 TOTAL ASSETS 174 444 166 165 NON-CURRENT LIABILITIES Pension and other employee benefits 2.9 (80 456 ) (73 122 ) Provisions 2.10 (3 281 ) (2 880 ) Financial liabilities 2.11 (53 289 ) (50 063 ) (137 025 ) (126 065 ) CURRENT LIABILITIES Provisions 2.10 (852) (659) Financial liabilities 2.11 (2 617 ) (6 850 ) Payables 2.12 (32 227 ) (39 048 ) Accrued charges and deferred income 2.13 (63 186 ) (63 902 ) (98 882 ) (110 459 ) TOTAL LIABILITIES (235 907 ) (236 524 ) NET ASSETS (61 463 ) (70 359 ) Reserves 2.14 4 961 4 876 Amounts to be called from Member States (*1) 2.15 (66 424 ) (75 234 ) NET ASSETS (61 463 ) (70 359 )

STATEMENT OF FINANCIAL PERFORMANCE

EUR million Note 2018 2017 REVENUE Revenue from non-exchange transactions GNI resources 3.1 105 780 78 620 Traditional own resources 3.2 22 767 20 520 VAT resources 3.3 17 624 16 947 Fines 3.4 6 740 4 664 Recovery of expenses 3.5 2 215 1 879 Other 3.6 3 312 10 376 158 438 133 006 Revenue from exchange transactions Financial revenue 3.7 3 115 1 845 Other 3.8 1 379 1 332 4 494 3 177 Total Revenue 162 932 136 183 EXPENSES Implemented by Member States 3.9 European Agricultural Guarantee Fund (43 527 ) (44 289 ) European Agricultural Fund for Rural Development and other rural development instruments (13 149 ) (11 359 ) European Regional Development Fund and Cohesion Fund (30 230 ) (17 650 ) European Social Fund (11 935 ) (7 353 ) Other (2 826 ) (1 253 ) Implemented by the Commission, executive agencies and trust funds 3.10 (17 551 ) (15 738 ) Implemented by other EU agencies and bodies 3.11 (3 396 ) (2 667 ) Implemented by third countries and international organisations 3.11 (4 016 ) (4 115 ) Implemented by other entities 3.11 (3 569 ) (1 478 ) Staff and pension costs 3.12 (10 929 ) (10 002 ) Changes in employee benefits actuarial assumptions 3.13 — (3 544 ) Finance costs 3.14 (1 677 ) (1 896 ) Other expenses 3.15 (6 208 ) (6 756 ) Total Expenses (149 014 ) (128 101 ) ECONOMIC RESULT OF THE YEAR 13 918 8 082

CASHFLOW STATEMENT

EUR million 2018 2017 Economic result of the year 13 918 8 082 Operating activities Amortisation 104 99 Depreciation 998 888 (Reversal of) impairment losses on investments — — (Increase)/decrease in loans 1 041 497 (Increase)/decrease in pre-financing (947) (3 557 ) (Increase)/decrease in exchange receivables and non-exchange recoverables (12 299 ) (745) (Increase)/decrease in inventories 222 (130) Increase/(decrease) in pension and other employee benefits 7 334 5 891 Increase/(decrease) in provisions 594 928 Increase/(decrease) in financial liabilities (1 007 ) (438) Increase/(decrease) in payables (6 821 ) (957) Increase/(decrease) in accrued charges and deferred income (716) (3 678 ) Prior year budgetary surplus taken as non-cash revenue (556) (6 405 ) Remeasurement of employee benefits liability (non-cash movement not included in statement of financial performance) (4 396 ) — Other non-cash movements (71) 3 Investing activities (Increase)/decrease in intangible assets and property, plant and equipment (1 583 ) (1 687 ) (Increase)/decrease in investments accounted for using the equity method (9) (53) (Increase)/decrease in available for sale financial assets (1 811 ) (3 190 ) (Increase)/decrease in financial assets at fair value through surplus or deficit 7 (22) NET CASHFLOW (5 998 ) (4 474 ) Net increase/(decrease) in cash and cash equivalents (5 998 ) (4 474 ) Cash and cash equivalents at the beginning of the year 24 111 28 585 Cash and cash equivalents at year-end 18 113 24 111

STATEMENT OF CHANGES IN NET ASSETS

EUR million Amounts to be called from Member States Accumulated Surplus/(Deficit) Other reserves Fair value reserve Net Assets BALANCE AS AT 31.12.2016 (76 881 ) 4 516 325 (72 040 ) Movement in Guarantee Fund reserve (20) 20 — — Fair value movements — — (2) (2) Other (11) 62 (46) 5 2016 budget result credited to Member States (6 405 ) — — (6 405 ) Economic result of the year 8 082 — — 8 082 BALANCE AS AT 31.12.2017 (75 234 ) 4 598 278 (70 359 ) Movement in Guarantee Fund reserve (186) 186 — — Fair value movements — — (47) (47) Remeasurements in employee benefits liabilities (4 396 ) — — (4 396 ) Other 30 (54) — (24) 2017 budget result credited to Member States (556) — — (556) Economic result of the year 13 918 — — 13 918 BALANCE AS AT 31.12.2018 (66 424 ) 4 730 231 (61 463 )

NOTES TO THE FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

1.1. LEGAL BASIS AND ACCOUNTING RULES

The accounts of the EU are kept in accordance with Regulation (EU, Euratom) 2018/1046 of the European Parliament and of the Council of 18 July 2018 on the financial rules applicable to the general budget of the Union, amending Regulations (EU) No 1296/2013, (EU) No 1301/2013, (EU) No 1303/2013, (EU) No 1304/2013, (EU) No 1309/2013, (EU) No 1316/2013, (EU) No 223/2014, (EU) No 283/2014, and Decision No 541/2014/EU and repealing Regulation (EU, Euratom) No 966/2012 (15) hereinafter referred to as the ‘Financial Regulation’ (FR).

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

Application of new and amended European Union accounting rules (EAR)

Revised EAR which is effective for annual periods beginning on or after 1 January 2018

The following accounting rules, adopted by the Accounting Officer of the Commission, became mandatorily effective in the current year:

— Revision of EAR 12 ‘Employee Benefits’: The revised EAR 12 was adopted by the Accounting Officer in 2017 which is based on the new IPSAS 39 ‘Employee Benefits’ published in July 2016. For the first application of the revised EAR 12 there were no significant impacts on the EU consolidated financial statements, aside from the recognition of any gain or loss resulting from changes in the actuarial assumptions, which under the revised EAR is recognised directly in net assets, in contrast with the previous requirement to recognise in surplus or deficit.

New EAR adopted but not yet effective at 31 December 2018

The EU has not applied the following new EAR, which have been adopted by the Accounting Officer of the Commission, but which is not yet effective:

— New EAR 20 ‘Public Sector Combinations’ (effective for annual periods beginning on or after 1 January 2019): The EAR 20, which is based on the IPSAS 40 ‘Public Sector Combinations’, establishes the classification of a public sector combination into two different types depending on whether the transaction takes place under common control or not: (i) amalgamation, in which the transaction is based on the carrying amounts of the entity combined with the EU; and (ii) acquisition, in which the transaction is based on the acquisition date fair values of the entity acquired by the EU. Both have distinct requirements and levels of disclosure, in order to provide a better understanding of its effects to users of the financial statements of the EU. The impact on the EU financial statements in the year of initial application will depend on whether in that period the EU would enter into a public sector combination transaction.

1.2. ACCOUNTING PRINCIPLES

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

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

1.3. CONSOLIDATION

Scope of consolidation

The consolidated financial statements of the EU comprise all significant controlled entities (i.e. the EU institutions (including the Commission) and the EU agencies), associates and joint ventures. The complete list of consolidated entities can be found in note 9 of the EU financial statements. It now comprises 52 controlled entities and 1 associate. Entities that fall under the consolidation scope, but which are immaterial to the EU consolidated financial statements as a whole, need not be consolidated or accounted for using equity method where to do so would result in excessive time or cost to the EU. Those entities are referred to as ‘Minor entities’ and are separately listed in note 9. In 2018, 7 entities have been classified as minor entities.

Controlled entities

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

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

Under this approach, the EU’s institutions (except the European Central Bank) and agencies (excluding the agencies of the former 2nd pillar) are considered as under the exclusive control of the EU and are therefore included in the consolidation scope. Furthermore, the European Coal and Steel Community (ECSC) in Liquidation is also considered as a controlled entity.

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

Joint Arrangements

A joint arrangement is an agreement over which the EU and one or more parties have joint control. Joint control is contractually agreed sharing of control over an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of parties sharing control. Joint agreements can be either joint operations or joint ventures. In case a joint arrangement is structured through a separate vehicle and parties to the joint arrangement have rights to the net assets of the arrangement, this joint arrangement classifies as a joint venture. Participations in joint ventures are accounted for using the equity method (see note 1.5.4). In case the parties have rights to the assets, and obligations for the liabilities, related to the arrangement, this joint arrangement is classified as a joint operation. In relation to its interest in joint operations, the EU recognises in its financial statements: its assets and liabilities, revenue and expense, as well as its share of assets, liabilities, revenue and expense held or incurred jointly.

Associates

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

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

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

1.4. BASIS OF PREPARATION

Financial statements are presented annually. The accounting year begins on 1 January and ends on 31 December.

1.4.1. Currency and basis for conversion

Functional and reporting currency

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

Transactions and balances

Foreign currency transactions are translated into euros using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the re-translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of financial performance. Translation differences on non-monetary financial instruments classified as available for sale financial assets are included in the fair value reserve.

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

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

Euro exchange rates

Currency 31.12.2018 31.12.2017 Currency 31.12.2018 31.12.2017 BGN 1,9558 1,9558 PLN 4,3014 4,177 CZK 25,7240 25,5350 RON 4,6635 4,6585 DKK 7,4673 7,4449 SEK 10,2548 9,8438 GBP 0,8945 0,8872 CHF 1,1269 1,1702 HRK 7,4125 7,4400 JPY 125,8500 135,01 HUF 320,9800 310,3300 USD 1,145 1,1993

1.4.2. Use of estimates

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

1.5. BALANCE SHEET

1.5.1. Intangible assets

Acquired computer software licences are stated at historical cost less accumulated amortisation and impairment losses. The assets are amortised on a straight-line basis over their estimated useful lives (311 years). The estimated useful lives of intangible assets depend on their specific economic lifetime or legal lifetime determined by an agreement. Internally developed intangible assets are capitalised when the relevant criteria of the EU accounting rules are met and the expenses relate solely to the development phase of the asset. The costs capitalisable include all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management. Costs associated with research activities, non-capitalisable development costs and maintenance costs are recognised as expenses as incurred.

1.5.2. Property, plant and equipment

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

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

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

Type of asset Straight line depreciation rate Buildings 4 % to 10 % Space assets 8 % to 25 % Plant and equipment 10 % to 25 % Furniture and vehicles 0 % to 25 % Computer hardware 25 % to 33 % Other 10 % to 33 %

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

Leases

Leases of tangible assets, where the EU has substantially all the risks and rewards of ownership, are classified as finance leases. Finance leases are capitalised at the lease’s commencement at the lower of the fair value of the leased asset and the present value of the minimum lease payments. The interest element of the finance lease payment is charged to expenditure over the period of the lease at a constant periodic rate in relation to the balance outstanding. The rental obligations, net of finance charges, are included in financial liabilities (non-current and current). The interest element of the finance cost is charged to the statement of financial performance over the lease period so as to produce a constant periodic interest rate on the remaining balance of the liability for each period. The assets held under finance leases are depreciated over the shorter of the asset’s useful life and the lease term.

Leases where the lessor retains a significant portion of the risks and rewards inherent to ownership are classified as operating leases. Operating lease payments are recognised as an expense in the statement of financial performance on a straight-line basis over the lease term.

1.5.3. Impairment of non-financial assets

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

Intangible assets and property, plant and equipment residual values and useful lives are reviewed, and adjusted if appropriate, at least once per year. An asset’s carrying amount is written down immediately to its recoverable (service) amount if the asset’s carrying amount is greater than its estimated recoverable (service) amount. If the reasons for impairments recognised in previous years no longer apply, the impairment losses are reversed accordingly.

1.5.4. Investments accounted for using the equity method

Participations in associates and joint ventures

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

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

If there are indications of impairment, a write-down to the lower recoverable amount is necessary. The recoverable amount is determined as described under note 1.5.3. If the reason for impairment ceases to apply at a later date, the impairment loss is reversed to the carrying amount that would have been determined had no impairment loss been recognised.

In cases where the EU holds 20 % or more of an investment capital fund, it does not seek to exert significant influence. Such funds are therefore treated as financial instruments and categorised as available for sale financial assets.

Associates and joint ventures classified as minor entities are not accounted for under the equity method. EU contributions to those entities are accounted for as an expense of the period.

1.5.5. Financial assets

Classification

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

(i) Financial assets at fair value through surplus or deficit

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 entity. Derivatives are also categorised in this category. Assets in this category are classified as current assets if they are expected to be realised within 12 months of the balance sheet date.

(ii) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the EU provides money, goods or services directly to a debtor with no intention of trading the receivable, or in case the EU is subrogated to the rights of the original lender following a payment made by the EU under a guarantee contract. Payments due within 12 months of the balance sheet date are classified as current assets. Payments due after 12 months from the balance sheet date are classified as non-current assets. Loans and receivables include term deposits with the original maturity above three months.

(iii) Held-to-maturity investments

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

(iv) Available for sale financial assets

Available for sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are classified as either current or non-current assets, depending on the period of time the EU expects to hold them. Investments in entities that are neither consolidated nor accounted for using the equity method and other equity-type investments (e.g. Risk Capital Operations) are also classified as available for sale financial assets.

Initial recognition and measurement

Purchases and sales of financial assets at fair value through surplus or deficit, held-to-maturity and available for sale are recognised on trade-date – the date on which the EU commits to purchase or sell the asset. Cash equivalents and loans are recognised when cash is deposited in a financial institution or advanced to borrowers. Financial instruments are initially recognised at fair value. For all financial assets not carried at fair value through surplus or deficit transactions costs are added to the fair value at initial recognition. Financial assets carried at fair value through surplus or deficit are initially recognised at fair value and transaction costs are expensed in the statement of financial performance.

The fair value of a financial asset on initial recognition is normally the transaction price (i.e. the fair value of the consideration received), unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets (e.g. in case of some derivative contracts). However, when a long-term loan that carries no interest or an interest below market conditions is granted, its fair value can be estimated as the present value of all future cash receipts discounted using the prevailing market rate of interest for a similar instrument with a similar credit rating.

Loans granted are measured at their nominal amount, which is considered to be the fair value of the loan. The reasoning for this is as follows:

— The ‘market environment’ for EU lending is very specific and different from the capital market used to issue commercial or government bonds. As lenders in these markets have the opportunity to choose alternative investments, the opportunity possibility is factored into market prices. However, this opportunity for alternative investments does not exist for the EU, which is not allowed to invest money on the capital markets; it only borrows funds for the purpose of lending at the same rate. This means that there is no alternative lending or investment option available to the EU for the sums borrowed. Thus, there is no opportunity cost and therefore no basis of comparison with market rates. In fact, the EU lending operation itself represents the market. Essentially, since the opportunity cost ‘option’ is not applicable, the market price does not fairly reflect the substance of the EU lending transactions. Therefore, it is not appropriate to determine the fair value of EU lending with reference to commercial or government bonds.

— Furthermore, as there is no active market or similar transactions to compare with, the interest rate to be used by the EU for fair valuing its lending operations under the EFSM, BOP and other such loans, should be the interest rate charged.

— In addition, for these loans, there are compensating effects between loans and borrowings due to their back-to-back character. Thus, the effective interest for the loan equals the effective interest rate for the related borrowings. The transaction costs incurred by the EU and then recharged to the beneficiary of the loan are directly recognised in the statement of financial performance.

Financial instruments are derecognised when the rights to receive cashflows from the investments have expired or the EU has transferred substantially all risks and rewards of ownership to another party.

Subsequent measurement

a) Financial assets at fair value through surplus or deficit are subsequently carried at fair value. Gains and losses arising from changes in the fair value of the ‘financial instruments at fair value through surplus or deficit’ category are included in the statement of financial performance in the period in which they arise.

b) Loans and receivables are carried at amortised cost using the effective interest method. In the case of loans granted on borrowed funds, the same effective interest rate is applied to both the loans and borrowings since these loans have the characteristics of ‘back-to-back operations’ and the differences between the loan and the borrowing conditions and amounts are not material. The transaction costs incurred by the EU and then recharged to the beneficiary of the loan are directly recognised in the statement of financial performance.

c) Held to maturity assets are carried at amortised cost using the effective interest method. The EU currently holds no held to maturity investments.

d) Available for sale financial assets are subsequently carried at fair value. Gains and losses arising from changes in the fair value of available for sale financial assets are recognised in the fair value reserve, except for translation differences on monetary assets, which are recognised in the statement of financial performance. When assets classified as available for sale financial assets are derecognised or impaired, the cumulative fair value adjustments previously recognised in the fair value reserve are recognised in the statement of financial performance. Interest on available for sale financial assets calculated using the effective interest method is recognised in the statement of financial performance. Dividends on available for sale equity instruments are recognised when the EU’s right to receive payment is established.

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

Investments in Venture Capital Funds, classified as available for sale financial assets, which do not have a quoted market price in an active market are valued at the attributable net asset value, which is considered as an equivalent of their fair value.

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

Impairment of financial assets

A financial asset is impaired and a loss is recognised if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset and that loss event (or events) has an impact on the estimated future cashflows of the financial asset that can be reliably estimated. The EU assesses at each reporting date whether there is objective evidence that a financial asset is impaired.

(a) Assets carried at amortised cost

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

(b) Assets carried at fair value

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

1.5.6. Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first-in, first-out (FIFO) method. The cost of finished goods and work in progress comprises raw materials, direct labour, other directly attributable costs and related production overheads (based on normal operating capacity). Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses. When inventories are held for distribution at no charge or for a nominal charge, they are measured at the lower of cost and current replacement cost. Current replacement cost is the cost the EU would incur to acquire the asset on the reporting date.

1.5.7. Pre-financing amounts

Pre-financing is a payment intended to provide the beneficiary with a cash advance, i.e. a float. It may be split into a number of payments over a period defined in the particular contract, decision, agreement or basic legal act. The float or advance is either used for the purpose for which it was provided during the period defined in the agreement or it is repaid. If the beneficiary does not incur eligible expenditure, they have the obligation to return the pre-financing advance to the EU. The amount of the pre-financing may be reduced (wholly or partially) by the acceptance of eligible costs (which are recognised as expenses).

Pre-financing is, on subsequent balance sheet dates, measured at the amount initially recognised on the balance sheet less eligible expenses (including estimated amounts where necessary) incurred during the period.

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

Other advances to Member States which originate from reimbursement by the EU of amounts paid as advances by the Member States to their beneficiaries (including ‘financial instruments under shared management’) are recognised as assets and presented under the pre-financing heading. Other advances to Member States are subsequently measured at the amount initially recognised on the balance sheet less a best estimate of the eligible expenses incurred by final beneficiaries, calculated on the basis of reasonable and supportable assumptions.

The EU contributions to the trust funds of the European Development Fund or other unconsolidated entities are also classified as pre-financing since their purpose is to give a float to the trust fund to allow it to finance specific actions defined under the trust fund’s objectives. The EU contributions to trust funds are measured at the initial amount of the EU contribution less eligible expenses, including estimated amounts where necessary, incurred by the trust fund during the reporting period and allocated to the EU contribution in accordance with the underlying agreement.

1.5.8. Exchange receivables and non-exchange recoverables

As the EU accounting rules require a separate presentation of exchange and non-exchange transactions, for the purpose of drawing up the accounts, receivables are defined as stemming from exchange transactions and recoverables are defined as stemming from non-exchange transactions, i.e. when the EU receives value from another entity without directly giving approximately equal value in exchange (for example recoverables from Member States related to own resources).

Receivables from exchange transactions meet the definition of financial instruments and are thus classified as loans and receivables and measured accordingly (see note 1.5.5). The financial instruments notes disclosures concerning receivables from exchange transactions include accrued revenue and deferred charges from exchange transactions, as they are not material. A general write-down based on past experience is made for outstanding recovery orders not already subject to a specific write-down.

Recoverables from non-exchange transactions are carried at original amount (adjusted for interest and penalties) less write-down for impairment. A write-down for impairment of recoverables from non-exchange transactions is established when there is objective evidence that the EU will not be able to collect all amounts due according to the original terms of recoverables from non-exchange transactions. The amount of the write-down is the difference between the asset’s carrying amount and the recoverable amount. The amount of the write-down is recognised in the statement of financial performance. A general write-down, based on past experience, is also made for outstanding recovery orders not already subject to a specific write-down. See note 1.5.14 concerning the treatment of accrued revenue at year-end. Amounts displayed and disclosed as recoverables from non-exchanges transactions are not financial instruments, as they do not arise from a contract that would give rise to a financial liability or equity instrument. However, in the notes to the financial statements recoverables from non-exchange transactions are disclosed together with receivables from exchange transactions where appropriate.

1.5.9. Cash and cash equivalents

Cash and cash equivalents are financial instruments and include cash at hand, deposits held at call or at short notice with banks and other short-term highly liquid investments with original maturities of three months or less.

1.5.10. Employee benefits

The accounting policy for employee benefits has been updated in line with the requirements of the revised accounting rule EAR 12 Employee Benefits, effective for periods beginning on or after 1 January 2018, which is based on the new IPSAS 39 (Employee Benefits) published in July 2016. The main change, arising from the revision of accounting rule 12, is the presentation of actuarial gains and losses as a movement in net assets instead of in the statement of financial performance.

Accounting for defined benefit plans is complex because actuarial assumptions and judgement are required to measure the obligation. In applying the revised accounting rule, the EU has reassessed the judgements used, in particular, as regards to the estimate of the ultimate cost of the benefit attributed to the employees. As a result of this exercise, the appropriateness of the use of the estimated active service period of the employee as the basis for attributing benefits to periods of service was confirmed. The benefits which the EU’s employees are entitled to are given under a single plan – although split in two schemes – and they must be treated similarly so as to give a fair presentation of the situation and reflect the economic reality.

The EU provides a set of benefits (emoluments and social security) to employees. For accounting purposes these have to be classified into short-term and post-employment benefits.

Short-term employee benefits

Short-term employee benefits are those benefits due to be settled before twelve months after the end of the reporting period in which employees rendered the service, such as salaries, annual and paid sick leaves, and other short-term allowances. Short-term employee benefits are recognised as an expense when the related service is provided. A liability is recognised for the amount expected to be paid if the EU has a present legal or constructive obligation to pay as a result of past service provided by the employee and the obligation can be estimated reliably.

Post-employment benefits

The EU grants a set of post-employment benefits to employees, which include retirement, invalidity and survival pensions, as well as medical coverage (see note 2.9).

The EU provides its staff with a post-employment benefit plan that includes:

i. Pension Scheme of European Officials (PSEO): The benefits granted under this notionally funded (16) scheme relate to seniority, invalidity and survival, as well as, family allowances, death before retirement to those employees that work or worked in the EU Institutions, Agencies and other EU bodies or are survivors of deceased officials or pensioners. Staff contribute one third of the expected cost of these benefits from their salaries.

ii. Joint Sickness Insurance Scheme (JSIS): Under this scheme, the EU provides health coverage for staff of the European Commission, Institutions, Agencies and other EU bodies through the reimbursement of medical expenses. The benefits granted to the ‘inactives’ of this scheme (i.e. pensioners, orphans, etc.) are classified as post-employment benefits.

The EU also provides post-employment benefits to members of the EU institutions via separate pension schemes. These are shown under the heading other retirement benefit schemes. Under these schemes the EU provides pension benefits to members of the Commission, Court of Justice and General Court, Court of Auditors, Council, European Parliament, Ombudsman, Data Protection Supervisor, Civil Service Tribunal. The EU provides health coverage to the members of the EU Institutions via the JSIS.

The above post-employment benefits qualify as defined benefit obligations of the EU and are calculated at each reporting date by estimating the amount of future benefit that employees have earned in the current and prior periods, discounting that amount and deducting the fair value of any plan assets. The calculation of defined benefit obligation is performed annually using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of government bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability.

The post-employment benefits provided to EU staff are incorporated in a single plan comprising both a pension scheme (PSEO) and a sickness insurance scheme (JSIS), with the right to coverage under the JSIS scheme being dependent on having acquired the right to coverage under the PSEO scheme. Under the terms of this single plan, as set out in the Staff Regulation, certain entitlements, such as the right to a deferred and reduced pension under the PSEO scheme, are acquired after 10 years of service. However, the entitlements acquired under the single plan by the employee’s subsequent service are materially higher than those initial entitlements as reflected by subsequent annually accrued pension rights.

Therefore, in order to depict the economic substance of the underlying transaction required by the faithful representation qualitative characteristic of financial reporting as outlined in both EAR 1 and the IPSAS Conceptual Framework, the service cost incurred is accrued on a straight-line basis over staff’s estimated active service period, i.e. the period from the date when service by the employee first leads to benefits under the plan (whether or not the benefits are conditional on further service) until the date when further service by the employee will lead to no material amount of further benefits under the plan, other than from further salary increases. This approach is applied consistently to the benefits provided for under the single plan.

Remeasurements of the net defined benefit liability comprise actuarial gains and losses and the return on plan assets, and are recognised immediately in net assets.

The EU recognises the net interest expense (income) and other expenses related to the defined benefit plans in the statement of financial performance within the caption ‘staff and pension costs’.

When benefits provided are changed or curtailed, the resulting change in benefits that relates to past service or the gain or loss on curtailment is recognised immediately in the statement of financial performance. Gains and losses on settlement are recognised when the settlement occurs. Past service cost is recognised immediately in the statement of financial performance, unless the changes are conditional on the employees remaining in service for a specified period of time.

1.5.11. Provisions

Provisions are recognised when the EU has a present legal or constructive obligation towards third parties as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are not recognised for future operating losses. The amount of the provision is the best estimate of the expenses 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).

Provisions for onerous contracts are measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract.

1.5.12. Financial liabilities

Financial liabilities are classified as financial liabilities at fair value through surplus or deficit, financial liabilities carried at amortised cost or as financial guarantee liabilities.

Borrowings are composed of borrowings from credit institutions and debts evidenced by certificates. They are recognised initially at fair value, being their issue proceeds (fair value of consideration received) net of transaction costs incurred, then subsequently carried at amortised cost using the effective interest method; any difference between proceeds, net of transaction costs, and the redemption value is recognised in the statement of financial performance over the period of the borrowings using the effective interest method. In the case of loans granted on borrowed funds, the effective interest method may not be applied to loans and borrowings, based on materiality considerations. The transaction costs incurred by the EU and then recharged to the beneficiary of the loan are directly recognised in the statement of financial performance.

Financial liabilities categorised at fair value through surplus or deficit include derivatives where fair value is negative. They follow the same accounting treatment as financial assets at fair value through surplus or deficit, see note 1.5.5.

Financial guarantee liabilities are initially recognised at fair value, being the premium received. Subsequently, financial guarantee liabilities are measured at the higher of the best estimate of the expenses expected to be required to settle the financial guarantee liability and the amount initially recognised less, when appropriate, cumulative amortisation. The EU recognises a financial guarantee liability when it receives consideration for granting of the guarantee, that is at market terms, or when the fair value of the guarantee can be measured reliably. In case no active market for a directly equivalent guarantee contract exists, the EU discloses the guarantee given as a contingent liability (see note 1.7.2) or - when it is more likely than not that an outflow of resources will be required to settle the obligation – the EU recognises a provision (see note 1.5.11).

Financial liabilities are classified as non-current liabilities, except for maturities less than 12 months after the balance sheet date.

EU trust funds that are considered as part of the Commission’s operational activities are accounted for in the Commission accounts and further consolidated in the EU annual accounts. Therefore, contributions from other donors to the EU trust funds fulfil the criteria of revenues from non-exchange transactions under conditions and they are presented as financial liabilities until the conditions attached to the contributions transferred are met, i.e. eligible costs are incurred by the trust fund. The trust fund is required to finance specific projects and return remaining funds at the time of winding-up. At the balance sheet date the outstanding contribution liabilities are measured at contributions received less the expenses incurred by the trust fund, including estimated amounts when necessary. For reporting purposes the net expenses are allocated to the contributions of other donors in proportion to net contributions paid as at 31 December. This allocation of contributions is only indicative. When the trust fund is wound up the actual split of remaining resources will be decided by the trust fund board.

1.5.13. Payables

A significant amount of the payables of the EU are unpaid cost claims from beneficiaries of grants or other EU funding (non-exchange transactions). They are recorded as payables for the requested amount when the cost claim is received. Upon verification and acceptance of the eligible costs, the payables are valued at the accepted and eligible amount.

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

1.5.14. Accrued and deferred revenue and charges

Transactions and events are recognised in the financial statements in the period to which they relate. At year-end, if an invoice is not yet issued but the service has been rendered, the supplies have been delivered by the EU or a contractual agreement exists (e.g. by reference to a treaty), an accrued revenue will be recognised in the financial statements. In addition, at year-end, if an invoice is issued but the services have not yet been rendered or the goods supplied have not yet been delivered, the revenue will be deferred and recognised in the subsequent accounting period.

Expenses are also accounted for in the period to which they relate. At the end of the accounting period, accrued expenses are recognised based on an estimated amount of the transfer obligation of the period. The calculation of accrued expenses is done in accordance with detailed operational and practical guidelines issued by the Commission which aim at ensuring that the financial statements provide a faithful representation of the economic and other phenomena they purport to represent. By analogy, if payment has been made in advance for services or goods that have not yet been received, the expense will be deferred and recognised in the subsequent accounting period.

1.6. STATEMENT OF FINANCIAL PERFORMANCE

1.6.1. Revenue

REVENUE FROM NON-EXCHANGE TRANSACTIONS

The vast majority of the EU’s revenue relates to non-exchange transactions:

GNI based resources and VAT resources

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

Traditional own resources

Recoverables from non-exchange transactions 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 Commission is estimated and recognised as accrued revenue. The quarterly ‘B’ statements (including duties neither collected nor guaranteed, as well as guaranteed amounts that have been contested by the debtor) received from the Member States are recognised as revenue less the collection costs to which they are entitled. In addition, a value reduction is recognised for the amount of the estimated recovery gap.

Fines

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

a) 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 EU;

b) or not to accept the decision, in which case they lodge an appeal under EU law.

However, even if appealed, the fine must be paid within the time limit of three months laid down as the appeal does not have suspensory effect (Article 278 of the EU Treaty) or, under certain circumstances and subject to the agreement of the Commission’s Accounting Officer, the debtor may present a bank guarantee for the amount instead.

If the undertaking appeals against the decision, and has already provisionally paid the fine, the amount is disclosed as a contingent liability. However, since an appeal against an EU decision by the addressee does not have suspensory effect, the cash received is used to clear the recoverable. If a guarantee is received instead of payment, the fine remains as a recoverable. If it appears probable that the General Court may not rule in favour of the EU, a provision is recognised to cover this risk. If a guarantee had been given instead, then the recoverable outstanding is written-down as required. The accumulated interest received by the Commission on the bank accounts where received payments are deposited is recognised as revenue, and any contingent liability is increased accordingly.

Since 2010, all provisionally cashed fines are managed by the Commission in a specifically created fund (BUFI) and invested in financial instruments.

REVENUE FROM EXCHANGE TRANSACTIONS

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

Interest revenue and expense

Interest revenue and expense are recognised in the statement of financial performance 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 revenue or interest expense over the relevant period. When calculating the effective interest rate, the EU estimates cashflows considering all contractual terms of the financial instrument (for example prepayment options) but does 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.

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

Revenue from dividends

Revenue from dividends and similar distributions is recognised when the right to receive payment is established.

1.6.2. Expenses

Expenses from non-exchange transactions account for the majority of the EU’s expenses. 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 an agreement 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 a 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 due to the beneficiaries but not yet reported are estimated and recorded as accrued expenses.

Expenses from exchange transactions arising from the purchase of goods and services are recognised when the supplies are delivered and accepted by the EU. They are valued at original invoice amount. Furthermore, at the balance sheet date expenses related to the service delivered during the period for which an invoice has not yet been received or accepted are estimated and recognised in the statement of financial performance.

1.7. CONTINGENT ASSETS AND LIABILITIES

1.7.1. 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 EU. A contingent asset is disclosed when an inflow of economic benefits or service potential is probable.

1.7.2. 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 EU; or a present obligation that arises from past events but is not recognised because: it is not probable that an outflow of resources embodying economic benefits or service potential will be required to settle the obligation or in the rare circumstances where the amount of the obligation cannot be measured with sufficient reliability.

1.8. CASHFLOW STATEMENT

Cashflow information is used to provide a basis for assessing the ability of the EU to generate cash and cash equivalents, and its needs to utilise those cashflows.

The cashflow statement is prepared using the indirect method. This means that the economic result for the financial year is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of revenue or expense associated with investing cashflows.

Cashflows arising from transactions in a foreign currency are recorded in the EU’s reporting currency (Euro), by applying to the foreign currency amount the exchange rate between the euro and the foreign currency at the date of the cashflow.

The cashflow statement reports cashflows during the period classified by operating and investing activities (the EU does not have financing activities).

Operating activities are the activities of the EU that are not investing activities. These are the majority of the activities performed. Loans granted to beneficiaries (and the related borrowings, when applicable) are not considered as investing (or financing) activities as they are part of the general objectives and thus daily operations of the EU.

Investing activities are the acquisition and disposal of intangible assets and property, plant and equipment and of other investments which are not included in cash equivalents. Investing activities do not include loans granted to beneficiaries. The objective is to show the real investments made by the EU.

2. NOTES TO THE BALANCE SHEET

ASSETS

2.1. INTANGIBLE ASSETS

EUR million Gross carrying amount at 31.12.2017 940 Additions 152 Disposals (16) Transfer between asset categories 0 Other changes (2) Gross carrying amount at 31.12.2018 1 073 Accumulated amortisation at 31.12.2017 (535) Amortisation charge for the year (105) Amortisation written back 1 Disposals 13 Transfer between asset categories — Other changes (1) Accumulated amortisation at 31.12.2018 (627) Net carrying amount at 31.12.2018 446 Net carrying amount at 31.12.2017 405

The above amounts relate primarily to computer software.

2.2. PROPERTY, PLANT AND EQUIPMENT

The Space assets category covers operational fixed assets related to the two EU space programmes: the Global Navigation Satellite Systems (GNSS), i.e. Galileo and EGNOS, and the Copernicus European Earth observation programme, while assets of the space systems which are not yet operational are included under the Assets under construction heading.

For Galileo, four new satellites have been added to the operational constellation in 2018 bringing it up to 22 satellites. The Galileo operational fixed assets, covering both satellites and ground installations, amounted to EUR 2 410 million at 31 December 2018, net of depreciation (2017: EUR 2 276 million). The remaining assets under construction totalling EUR 1 324 million (2017: EUR 1 026 million) include the four satellites launched in July 2018 for which the in-orbit testing had not yet been completed at the balance sheet date. The development of the Galileo system will continue until the system reaches its full operational capacity. When completed, the Galileo constellation will comprise 24 operational satellites and 6 spares.

Regarding Copernicus, two new satellites (Sentinel 5P & 3B) became operational in 2018, in addition to the five other Copernicus operational satellites, increasing the total value of Copernicus operational fixed assets to EUR 1 455 million (2017: EUR 1 140 million), net of accumulated depreciation. Another EUR 1 207 million related to Copernicus satellites is recognised as assets under construction (2017: EUR 1 443 million).

Fixed assets related to the European Geostationary Navigation Overlay System (EGNOS) ground infrastructure of EUR 52 million (2017: EUR 67 million) are also included under the Space assets heading. In addition, EGNOS assets under construction amount to EUR 130 million (2017: EUR 52 million).

The assets related to the EU space programmes are being built with the assis