Report by the European Court of Auditors on the financial statements of the European Coal and Steel Community as at 31 December 2001

(2002/C 158/02)

1. This report concerns the reliability of the accounts drawn up by the Commission in accordance with Article 45(c)(5) of the Treaty establishing the European Coal and Steel Community.

2. The Court has audited the accounts and financial statements of the European Coal and Steel Community at 31 December 2001 in accordance with generally accepted auditing standards and carried out such checks as it considered necessary. By means of this audit the Court has obtained a reasonable basis for the opinion expressed below.

3. In the Court's opinion, the attached financial statements (balance sheet at 31 December 2001, profit-and-loss account, statement of the allocation of the surplus for the financial year then ended and notes to the financial statements), which have been drawn up in accordance with generally accepted accounting principles, give a true and fair view of the assets and financial situation of the European Coal and Steel Community at 31 December 2001 and of the results of its operations for the year then ended.

The ECSC's balance sheet, profit-and-loss account and statement of the allocation of profit for the year ending 31 December 2001 were submitted to the Commission for approval under written procedure No E/947/2002 of 5 June 2002 and are shown in this financial report as approved by the Commission.

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Profit-and-loss account for the year ending 31 December 2001

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Allocation of the surplus for the year ending 31 December 2001

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NOTES RELATING TO THE FINANCIAL STATEMENTS AT 31 DECEMBER 2001

(Amounts in euro)

A. THE ECSC

The European Coal and Steel Community (ECSC) was established by the Treaty of 18 April 1951. According to the Treaty, the task of the ECSC was to contribute to the economic expansion of the Member States through the establishment of a common market for coal and steel.

The ECSC Treaty is due to expire on 23 July 2002. The Nice European Council decided to annex to the Nice Treaty a protocol on the financial consequences of the expiry of the ECSC Treaty and on the creation and management of the Coal and Steel Research Fund. It was decided that all ECSC assets at the time of the expiry of the Treaty will be transferred to the European Community with effect from 24 July 2002. The net value of these assets is considered to be earmarked for research in the sectors associated with the coal and steel industry. The income generated by these assets will be allocated exclusively to research in these sectors.

Since the Nice Treaty will probably not be ratified before the expiry of the ECSC Treaty, the Member States have temporarily entrusted to the European Commission(1) the task of managing the assets of the ECSC in liquidation by applying the same rules.

In view of the expiry of the ECSC Treaty, the rate of the ECSC levy was reduced to zero in 1998, and the ECSC's lending activity has been discontinued since July 1997 (Commission Decision of 22 June 1994). Thus most of the ECSC's funds now come from the net balance obtained in the management of the various reserves and provisions.

B. ACCOUNTING PRINCIPLES AND METHODS

1. Presentation of the financial statements

The financial statements are drawn up in accordance with generally recognised accounting principles.

The accounting principles and evaluation methods used for the items in the financial statements take account of the constraints imposed on and resolutions applicable to the ECSC under the Treaties and other ECSC-related decisions adopted by the institutions of the European Communities.

The accounting methods used also take account of the fact that the ECSC will not operate after 23 July 2002, when the ECSC Treaty expires.

They are presented in accordance with Council Directives 78/660/EEC and 86/635/EEC(2) on the annual accounts and consolidated accounts of banks and other financial institutions wherever these are applicable and subject to the abovementioned necessary adjustments. Directive 2001/65/EC(3) amending the abovementioned Directives concerning the valuation rules and in particular fair value is not yet applicable to the ECSC financial statements. This Directive must be applied by 31 December 2003.

2. Conversion of foreign currency

The currency used by the ECSC for its annual accounts is the euro (EUR).

All foreign currency transactions carried out by the ECSC are converted into euro at the monthly rate communicated by the European Central Bank.

The value of non-financial assets/liabilities is converted into euro at the monthly rate applicable on the date on which they were acquired or on which their value was last adjusted.

On the balance sheet date, financial assets/liabilities are converted into euro at the monthly rate applicable on that date. Negative differences are entered under "charges" in the profit-and-loss account, while positive differences are deferred and entered under "accruals and deferred income" on the liabilities side.

2.1. Conversion rates

The following rates have been used for converting year-end balance-sheet amounts expressed in national currency into euro:

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2.2. At 31 December 2001, the various currencies listed above, together with the euro, made up the ECSC's balance sheet as follows:

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3. Treasury investment and valuation of bonds and other securities

The ECSC's internal prudential rules stipulate that portfolio investments are to be confined to securities issued by first-ranking entities. However in 1998, under an agreement to restructure the debt of a defaulting debtor, the ECSC exceptionally acquired shares and other variable-income securities from a private-sector company.

Bonds and other fixed-income securities and shares and other variable-income securities are valued at the average purchase price or the market value obtaining at the end of the financial year, whichever is the lower.

This principle is not applied in the case of securities considered as financial fixed assets, which are valued at the average purchase price or the redemption value, whichever is the lower.

4. Special features of the ECSC financial statements

(a) ECSC operating budget

Part of the ECSC's funds are made available to the ECSC operating budget, which is adopted annually by the Commission after informing the Council and consulting the European Parliament.

The commitments entered into by the operating budget vis-à-vis third parties and the provisions for financing the operating budget are shown under the heading "ECSC operating budget" (see Note C.12).

(b) Budget for financing coal and steel research

The Member States of the European Union have decided that the income from the management of ECSC assets after 23 July 2002 should be allocated to the general budget of the European Communities(4). This income is earmarked for a research programme relating to the coal and steel industries, as stated in Note A to this report.

The ECSC has already constituted provisions at 31 December in order to prepare the ground for this mechanism for financing coal and steel research. These provisions are entered under the heading "Budget for financing coal and steel research" (see Note C.13).

(c) Fines and interest subsidies

Fines and interest subsidies whose repayment has been requested are not regarded as ECSC resources until they have actually been received. Fines imposed but not yet paid and interest subsidies whose repayment has been requested are therefore allocated to provisions (see Note C.14.3.a).

C. EXPLANATORY NOTES TO THE HEADINGS IN THE BALANCE SHEET AND THE PROFIT-AND-LOSS ACCOUNTS

1. Balances with central banks

This item represents the ECSC's balances with the central banks of certain Member States.

2. Loans and advances to credit institutions

2.1. With agreed maturity dates or periods of notice

The breakdown of the remaining time to maturity of these operations is as follows:

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2.2. Loans

The breakdown of the remaining time to maturity of these operations is as follows:

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3. Loans and advances to customers

3.1. Loans

The loans granted to credit institutions are shown under "Loans and advances to credit institutions" (see Note C.2).

The other loans break down as follows:

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NB.

Loans are generally guaranteed by Member States, banks or businesses or by mortgages.

3.2. Levy

The levy rate for 1998-2001 was 0 %, so the claims at 31 December 2001 relate to previous years.

This item breaks down as follows:

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It includes in particular EUR 5377782 subject to legal proceedings (EUR 5551715 at 31 December 2000).

3.3. Fines

This item contains the Commission's claims on companies fined in accordance with the rules set out in the Treaty.

After value adjustment it amounts to EUR 39806715 (EUR 38950716 at 31 December 2000).

This item has two main components.

A fine totalling EUR 104364350 that the Commission imposed on steel companies for infringing the rules on competition in the marketing of steel beams (Decision 94/215/ECSC(5) of 16 February 1994). In its judgment of 11 March 1999, the Court of First Instance reduced the total fines by EUR 24774000 to EUR 79590350. Seven companies have lodged appeals against the judgment of the Court of First Instance. Pending the decision of the European Court of Justice, a total (without interest) of EUR 28959000 remained outstanding at 31 December 2001.

A fine totalling EUR 27380000 was imposed by the Commission (Decision 98/247/ECSC(6) of 21 January 1998) under Article 65 of the Treaty on steel companies for concerted agreement on the formula for calculating the alloy surcharge. In its judgment of 13 December 2001, the Court of First Instance reduced the total amount of fines by EUR 4970000 to EUR 22410000. A total (without interest) of EUR 8064000 had not yet been paid at 31 December 2001.

3.4. Interest subsidies to be recovered

This item comprises claims on companies in receipt of subsidised loans which the Commission has been obliged to ask to reimburse all or part of the interest subsidy already paid.

4. Bonds and other fixed-income securities

4.1. Composition

Bonds and other fixed-income securities break down as follows:

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4.2. Maturities in 2002

Securities in the portfolio reaching final maturity during 2002 represent the following amounts:

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4.3. Financial fixed assets (see Note B.3)

Financial fixed assets are defined as securities that will remain in the portfolio until their final maturity. They comprise mainly short- or medium-term paper and own-debt securities repurchased for servicing ECSC borrowings.

At 31 December 2001, financial fixed assets totalled EUR 48519675.

The redemption value of these securities is EUR 1548471 less than the average acquisition price.

4.4. Return on investment

Treasury investments take account of the maturity dates and liquidity requirements applicable to ECSC financial operations. They are subject to strict criteria with regard to the financial standing of the counterparty.

The return on investment, including the variation in the market value of bonds (calculated by the Modified Dietz Method) was 5,6 % for the year ending 31 December 2001.

5. Shares and other variable-income securities

Shares and other variable-income securities break down as follows:

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These shares and other variable-income securities were received by the ECSC as part of the restructuring plan of a defaulting debtor (see Note B.3).

A portion of one of these securities, representing a net value of EUR 17070666, was the subject of a loan contract with a credit institution (maturity date 1 July 2004 with call option 1 July 2002).

6. Other assets

Other assets break down as follows:

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7. Prepayments and accrued income

Prepayments and accrued income break down as follows:

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8. Amounts owed to credit institutions

The remaining time to maturity on these operations is as follows:

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9. Debts evidenced by certificates

This item comprises loan securities.

EUR 104115280 of the borrowings outstanding at 31 December 2001 is due to reach maturity during the 2002 financial year.

10. Other liabilities

Other liabilities break down as follows:

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11. Accruals and deferred income

Accruals and deferred income break down as follows:

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12. ECSC operating budget

This item comprises commitments for the operating budget totalling EUR 380926428 (EUR 434516282 at 31 December 2000) and provisions associated with financing the operating budget totalling EUR 149794520 (EUR 401000000 at 31 December 2000).

In 2001, commitments for the ECSC operating budget were as follows:

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13. Budget for financing coal and steel research

This item breaks down as follows:

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In view of the expiry of the ECSC Treaty on 23 July 2002 and the winding-up of the ECSC, it has been decided that all ECSC assets at the time of the expiry of the Treaty will be transferred to the European Community with effect from 24 July 2002(7). The net value of these assets is considered to be earmarked for research in the sectors associated with the coal and steel industries. The income generated by these assets will be allocated exclusively to research in these sectors.

In practice, the net profit from the management of the assets (invested mainly in the portfolio of securities and term deposits) in year n will be transferred to the general budget of the European Community and will be used for research in year n+2. On the basis of simulations of the net profit from the management of the assets, it was decided to set the initial funding at EUR 60 million.

In order to reduce fluctuations in research funding resulting from movements on the financial markets, a smoothing formula will be applied in accordance with the procedures approved by the Member States. This smoothing formula will be applied for the first time to the results for the 2003 financial year and will be used to determine the allocation for research in 2005. In order to launch this mechanism, the ECSC constituted a provision at 31 December 2001 of EUR 120 million.

14. Provision for liabilities and charges

14.1. Guarantee Fund

The Guarantee Fund is intended to cover lending and borrowing operations. After allocation of EUR 15 million, the Guarantee Fund totalled EUR 580 million at 31 December 2001. This reinforcing of the Guarantee Fund is connected with the forthcoming expiry of the ECSC Treaty.

On 11 September 1996 the Commission confirmed its intention of maintaining reserves to cover 100 % of those loans outstanding after 23 July 2002 which are not guaranteed by the government of a Member State. This means that the Guarantee Fund must be gradually increased to approximately EUR 580 million (calculated at the conversion rate applicable on 31 December 2001). At 31 December 2001, this coverage was 100 % on condition that there is no default on the loans due to mature before 23 July 2002. However, since some of the loans are denominated in GBP, the 100 % coverage may change as a result of fluctuation in the GBP/EUR exchange rate.

The Guarantee Fund increased as follows:

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14.2. Provision for major exposures

Against the background of the expiry of the ECSC Treaty in 2002 and the gradual reduction in outstanding loans, exposure is becoming increasingly concentrated on a limited number of large loans (these large exposures are defined in accordance with Directive 92/121/EEC of 21 December 1992 on the monitoring and control of large exposures).

The provision for major exposures concerns loans exceeding 25 % of the ECSC's own funds which are not covered by first-rate guarantees.

It is intended to provide cover specifically for this concentration of risk and to enable the ECSC to weather any major default.

The provision, calculated on the basis of outstanding major exposures at 31 December 2001 according to a procedure recommended by a firm of international experts, totals EUR 6 million (EUR 17 million at 31 December 2000).

14.3. Other provisions

This item comprises provisions for fines and interest subsidies repayable totalling EUR 42385781 (EUR 42272249 at 31 December 2000) and other provisions totalling EUR 108313490 (EUR 116391098 at 31 December 2000).

(a) Provisions for fines and interest subsidies repayable (See Note B.5):

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(b) Other provisions:

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15. Reserves

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The Special Reserve is used to grant loans from ECSC own funds to finance subsidised housing. At 31 December 2001, loans outstanding totalled approximately EUR 118 million. Consequently, it proved possible to release EUR 58055284, which was transferred to free reserves.

The former Pension Fund originally represented the ECSC's total pension obligations prior to 5 March 1968. Since that date, the Member States have assumed responsibility, via the general budget, for the payment of staff pensions. This fund is used to finance housing loans for officials of the European Communities. At 31 December 2001, the amount outstanding on these loans was approximately EUR 40 million. Consequently, it proved possible to release EUR 34577321, which was transferred to free reserves.

The "Assets of the Coal and Steel Research Fund" reserve, constituted in the context of the winding-up of the ECSC (see Note 13), comprises free reserves. The freeing of the abovementioned reserves means that EUR 92632605 can already be allocated to the assets of the Coal and Steel Research Fund. The allocation of the surplus recorded at 31 December 2001 will further increase these assets to a total of EUR 100 million.

16. Analysis of the result for the financial year

Overall ECSC performance is influenced by both the result of non-budgetary operations (lending/borrowing - treasury investment - exchange-rate variations) and the out-turn of the ECSC operating budget.

16.1. Non-budgetary operations

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16.2. Out-turn of the ECSC operating budget

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17. Interest and similar charges

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18. Administrative overheads

The ECSC paid a lump sum of EUR 5 million to the general budget of the Commission of the European Communities to cover its administrative expenditure.

19. Other operating charges

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The loss on loans and advances is offset by a withdrawal from the corresponding value adjustment.

20. Interest received and other income

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21. Other operating income

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22. Income relating to the operating budget

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23. Off-balance-sheet commitments

23.1. Commitments received

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23.2. Commitments given

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The ECSC has always been keen to meet the commitments it has entered into and therefore has traditionally honoured coupons even after they have lapsed. The winding-up of the ECSC will see the end of this practice.

24. Changes in the financial situation for the year ending 31 December 2001

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(1) Decision of the Representatives of the ECSC Member States, meeting within the Council, of 27 February 2002 (OJ L 79, 22.3.2002, p. 42).

(2) OJ L 222, 14.8.1978; OJ L 372, 31.12.1986.

(3) OJ L 283, 27.10.2001.

(4) Decision of the Representatives of the ECSC Member States, meeting within the Council, of 27 February 2002 (OJ L 79, 22.3.2002, p. 42).

(5) OJ L 116, 6.5.1994.

(6) OJ L 100, 1.4.1998.

(7) Decision of the Representatives of the ECSC Member States, meeting within the Council, of 27 February 2002 (OJ L 79, 22.3.2002, p. 42).