EN Official Journal of the European Union C 274/1

FINAL ANNUAL ACCOUNTS OF THE EUROPEAN COMMUNITIES

FINANCIAL YEAR 2006

Volume I

CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED REPORTS ON IMPLEMENTATION OF THE BUDGET

(2007/C 274/01)

CONTENTS

Note accompanying the consolidated accounts

Principal events and key points

Part I: Consolidated financial statements of the european communities and explanatory notes

A. Balance Sheet

B. Economic Outturn Account (incl. Segment reporting)

C. Cashflow Table

D. Statement of changes in Net Assets

E. Notes to the financial statements

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

A. Consolidated reports on implementation of the budget

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

NOTE ACCOMPANYING THE CONSOLIDATED ACCOUNTS

The consolidated annual accounts of the European Communities for the year 2006 have been prepared on the basis of the information presented by the other institutions and bodies under Article 129.2 of the Financial Regulation. I hereby declare that they were prepared in accordance with Title VII of the Financial Regulation of the EC and with the accounting principles, rules and methods set out in annex 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 Communities' 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 a true and fair view of the financial position of the European Communities in all material aspects.

Brian Gray Accounting Officer of the European Commission

PRINCIPAL EVENTS AND KEY POINTS

The 2006 annual accounts of the European Communities are the second set of accounts to be prepared under the accrual-accounting based rules brought in by the European Communities in 2005. As with any set of accounts, the Commission has been working to improve on what was previously published, aiming in particular to provide more understandable and relevant information to the reader.

With regard to the presentation of the 2006 accounts the following changes should be highlighted:

— Following the update of the Financial Regulation that came into force on 1 May 2007, the Accounting Officer of the Commission has included for the first time a note accompanying these accounts that states that he has obtained reasonable assurance that the accounts present a true and fair view of the financial position of the European Communities in all material aspects.

— Each accounting officer of the bodies consolidated in these accounts has included a certification in their individual accounts, stating that he or she has obtained a reasonable assurance that their accounts present a true and fair view of the financial position of their Institution or Agency in all material aspects.

— Financial statement amounts are now shown in millions of euros, which gives a more readable format

— Budgetary implementation tables have been simplified to make them more understandable

— Further information has been given on the recovery of Commission expenditure

Finally it should be noted that the scope of consolidation has been increased since 2005 — there are now 24 Agencies consolidated compared with 16 in 2005.

MAIN POINTS OF NOTE IN THE 2006 ANNUAL ACCOUNTS

— The budget surplus has continued to decrease, from EUR 2,41 billion to EUR 1,85 billion.

— The economic outturn for the year has changed from a deficit of EUR 7,812 million in 2005 to a surplus of EUR 197 million in 2006.

— Total assets increased from EUR 58,7 billion in 2005 to EUR 67,3 billion, with total liabilities increasing from EUR 120,9 billion to EUR 131,6 billion. The difference will be financed in the short-term from budgetary funds already voted, or guaranteed by the Member States in the longer-term.

PART I

CONSOLIDATED FINANCIAL STATEMENTS OF THE EUROPEAN COMMUNITIES AND EXPLANATORY NOTES

CONTENTS

A. Balance Sheet

B. Economic Outturn Account (incl. Segment reporting)

C. Cashflow Table

D Statement of changes in Net Assets

E. Notes to the financial statements:

1. Accounting policies

2. Notes to the Balance Sheet

3. Notes to the Economic Outturn Account

4. Notes to the Cashflow table

5. Off-Balance sheet items and notes

6. Financial risk management

7. Related party disclosures

8. Events after the balance sheet date

9. Consolidated entities

10. Non-Consolidated entities

A. BALANCE SHEET

EUR millions Note 31.12.2006 31.12.2005 I. NON-CURRENT ASSETS: 31 556 31 415 Intangible fixed assets 2.1 37 27 Tangible fixed assets 2.2 4 586 4141 Investments 2.3 2 157 1 874 Loans 2.4 2 023 2 397 Long-term pre-financing 2.5 22 425 22 732 Long-term receivables 2.6 328 244 II. CURRENT ASSETS: 35 776 27 291 Stocks 2.7 115 126 Short-term investments 2.8 1 426 1 440 Short-term pre-financing 2.9 8 055 6 633 Short-term receivables 2.10 9 796 7 238 Cash & cash equivalents 2.11 16 384 11 854 Total Assets 67 332 58 706 III. NON-CURRENT LIABILITIES: 37 071 38 026 Employee benefits 2.12 32 200 33 156 Provisions for risks and charges 2.13 989 1 097 Financial liabilities 2.14 1 862 1 920 Other long-term liabilities 2.15 2 020 1 853 IV. CURRENT LIABILITIES: 94 479 82 825 Provisions for risks and charges 2.16 379 275 Financial liabilities 2.17 20 22 Accounts payable 2.18 94 080 82 528 Total Liabilities 131 550 120 851 NET ASSETS (64 218) (62 145) Reserves 2.19 2 855 2 808 Amounts to be called from Member States: 2.20 (67 073) (64 953) Employee benefits (long-term) (1) (32 200) (33 156) Other amounts (2) (34 873) (31 797) V. NET ASSETS (3) (64 218) (62 145)

B. ECONOMIC OUTTURN ACCOUNT (including Segment Reporting)

EUR millions Note 2006 2005 OPERATING REVENUE: 3.1 113 486 107 890 Own Resource and contributions revenue: 105 118 103 964 GNI resources 70 134 70 861 VAT resources 17 207 16 018 Traditional own resources 15 247 14 265 Budgetary adjustments 2 395 2 606 Contributions of Third countries (incl. EFTA countries) 135 214 Operating revenue: 8 368 3 926 Fines 2 217 719 Agricultural levies 1 695 447 Recovery of expenses 1 296 939 Revenues from administrative operations 982 895 Other operating revenue 2 178 926 OPERATING EXPENSES 113 422 107 597 Administrative expenses: 3.2 6 619 6 127 Staff expenses 3 998 3 613 Fixed asset related expenses 348 320 Other administrative expenses 2 273 2 194 Operating expenses: 3.3 106 803 101 470 Direct centralised management 12 273 11 281 Indirect centralised management 677 351 Decentralised management 1 809 1 733 Shared management 90 828 86 925 Joint management 34 248 Other operating expenses 3.4 1 182 932 SURPLUS FROM OPERATING ACTIVITIES 64 293 Financial operations revenue 3.5 621 399 Financial operations expenses 3.6 (331) (369) Movement in long-term employee benefits liability 2.12 108 (8 044) SURPLUS/(DEFICIT) FROM NON-OPERATING ACTIVITIES 398 (8 014) SHARE OF NET (DEFICIT) ASSOCIATES & JOINT VENTURES 3.7 (265) (91) SURPLUS/(DEFICIT) FROM ORDINARY ACTIVITIES 197 (7 812) ECONOMIC RESULT FOR THE YEAR 197 (7 812)

SEGMENT REPORTING

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

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

The consolidated agencies are integrated into the different policy areas. Other Institutions, aside from the Commission are grouped in a specific policy area. The various policy areas represent gross figures before consolidation eliminations and the consolidation eliminations are done globally in one column.

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

SEGMENT REPORTING – SUMMARY

EUR millions Activities within the EU Activities outside the EU Services & Other ECSC in Liquidation Other Institutions Consolidation eliminations TOTAL OPERATING REVENUE: Fines 2 217 0 0 0 0 0 2 217 Agricultural levies 1 695 0 0 0 0 0 1 695 Recovery of expenses 1 248 58 1 0 0 (11) 1 296 Revenues from admin operations 44 48 702 0 275 (87) 982 Other operating revenue 2 401 332 110 0 1 (666) 2 178 TOTAL OPERATING REVENUES 7 605 438 813 0 276 (764) 8 368 Administrative expenses: 1 985 899 1 576 0 2 280 (121) 6 619 Staff expenses 1 505 655 745 0 1 100 (7) 3 998 Fixed asset related expenses 62 55 102 0 129 0 348 Other administrative expenses 418 189 729 0 1 051 (114) 2 273 Operating expenses: 99 016 6 928 1 449 53 0 (643) 106 803 Direct centralised management 6 474 4 879 1 249 0 0 (329) 12 273 Indirect centralised management 611 308 1 0 0 (243) 677 Decentralised management 362 1 447 0 0 0 0 1 809 Shared management 90 828 0 0 0 0 0 90 828 Joint management 7 27 0 0 0 0 34 Other operating expenses 734 267 199 53 0 (71) 1 182 TOTAL OPERATING EXPENSES 101 001 7 827 3 025 53 2 280 (764) 113 422 NET OPERATING EXPENSES (93 396) (7 389) (2 212) (53) (2 004) 0 (105 054) Own resource and contributions revenue 105 118 Surplus from operating activities 64 Net financial revenue 290 Movement in employee benefits liability 108 Share of associates/joint venture results (265) Economic result for the year 197





SEGMENT REPORTING – ACTIVITIES WITHIN THE EU

EUR millions Economic & Financial affairs Enterprise & Industry Competition Employment Agriculture Transport & Energy Environment Research Information Society OPERATING REVENUE: Fines 0 1 2 158 0 0 0 0 0 0 Agricultural levies 0 0 0 0 1 695 0 0 0 0 Recovery of expenses 0 1 0 89 686 1 0 3 5 Revenues from administrative operations 0 8 0 1 0 2 1 0 0 Other operating revenue 1 146 0 34 436 194 39 382 23 TOTAL OPERATING REVENUES 1 156 2 158 124 2 817 197 40 385 28 Administrative expenses: 48 162 69 95 111 163 89 172 115 Staff expenses 42 120 65 77 97 130 66 134 92 Fixed asset related expenses 0 6 0 1 0 1 1 0 0 Other administrative expenses 6 36 4 17 14 32 22 38 23 Operating expenses: 51 253 269 10 003 52 212 882 209 2 860 1 841 Centralised direct management 51 191 1 147 35 749 182 2 807 1 796 Centralised indirect management 0 0 0 (2) 0 58 12 0 0 Decentralised management 0 0 0 0 275 (1) 0 0 0 Shared management 0 0 0 9 842 51 868 0 0 0 0 Joint management 0 0 0 0 0 (23) 0 0 0 Other operating expenses 0 62 268 16 34 99 15 53 45 TOTAL OPERATING EXPENSES 99 415 338 10 098 52 323 1 045 298 3 032 1 956 NET OPERATING EXPENSES (98) (259) 1 820 (9 974) (49 506) (848) (258) (2 647) (1 928) Joint Research Centre Fisheries Internal Market Regional Policy Taxation & Customs Education & Culture Health & Consumer protection Justice, Freedom & Security Total Activities within the EU OPERATING REVENUE: Fines 0 58 0 0 0 0 0 0 2 217 Agricultural levies 0 0 0 0 0 0 0 0 1 695 Recovery of expenses 0 10 0 460 0 (11) 3 1 1 248 Revenues from administrative operations 33 0 0 0 (3) (1) 0 3 44 Other operating revenue 8 0 184 0 1 182 64 707 2 401 TOTAL OPERATING REVENUES 41 68 184 460 (2) 170 67 711 7 605 Administrative expenses: 339 32 134 65 46 145 131 69 1 985 Staff expenses 214 28 98 52 42 94 97 57 1 505 Fixed asset related expenses 47 0 4 0 (2) 1 2 1 62 Other administrative expenses 78 4 32 13 6 50 32 11 418 Operating expenses: 73 652 47 28 095 35 347 275 912 99 016 Centralised direct management 67 197 10 26 35 (156) 252 84 6 474 Centralised indirect management 0 0 0 95 0 448 0 0 611 Decentralised management 0 0 0 88 0 0 0 0 362 Shared management 0 454 0 27 856 0 0 0 808 90 828 Joint management 0 0 0 30 0 0 0 0 7 Other operating expenses 6 1 37 0 0 55 23 20 734 TOTAL OPERATING EXPENSES 412 684 181 28 160 81 492 406 981 101 001 NET OPERATING EXPENSES (371) (616) 3 (27 700) (83) (322) (339) (270) (93 396)





SEGMENT REPORTING – ACTIVITIES OUTSIDE THE EU

EUR millions External Relations Trade Development Enlargement Humanitarian Aid Total Activities outside the EU OPERATING REVENUE: Recovery of expenses 35 0 1 21 1 58 Revenues from administrative operations 48 0 0 0 0 48 Other operating revenue 69 0 13 250 0 332 TOTAL OPERATING REVENUES 152 0 14 271 1 438 Administrative expenses: 632 51 125 71 20 899 Staff expenses 427 46 118 50 14 655 Fixed asset related expenses 54 0 0 1 0 55 Other administrative expenses 151 5 7 20 6 189 Operating expenses: 3 449 8 737 2 131 603 6 928 Direct centralised management 3 131 7 684 456 601 4 879 Indirect centralised management 48 0 29 231 0 308 Decentralised management 203 0 78 1 166 0 1 447 Joint management 59 1 (62) 29 0 27 Other operating expenses 8 0 8 249 2 267 TOTAL OPERATING EXPENSES 4 081 59 862 2 202 623 7 827 NET OPERATING EXPENSES (3 929) (59) (848) (1 931) (622) (7 389)





SEGMENT REPORTING – SERVICES & OTHER

Press &Communication Anti-Fraud Office Co-ordination Personnel & Administration Eurostat Budget Audit Other Total Services & Other OPERATING REVENUE: Recovery of expenses 0 0 0 0 1 0 0 0 1 Revenues from administrative operations 0 5 0 658 0 38 0 1 702 Other operating revenue 0 0 35 5 0 0 0 70 110 TOTAL OPERATING REVENUES 0 5 35 663 1 38 0 71 813 Administrative expenses: 92 43 157 1 161 65 50 8 0 1 576 Staff expenses 63 30 135 410 58 42 7 0 745 Fixed asset related expenses 0 0 0 102 0 0 0 0 102 Other administrative expenses 29 13 22 649 7 8 1 0 729 Operating expenses: 58 14 2 48 67 1 139 0 121 1 449 Direct centralised management 57 14 0 33 66 1 083 0 (4) 1 249 Indirect centralised management 1 0 0 0 0 0 0 0 1 Other operating expenses 0 0 2 15 1 56 0 125 199 TOTAL OPERATING EXPENSES 150 57 159 1 209 132 1 189 8 121 3 025 NET OPERATING EXPENSES (150) (52) (124) (546) (131) (1 151) (8) (50) (2 212)

C. CASHFLOW TABLE

EUR millions Note 2006 2005 CASHFLOWS FROM ORDINARY ACTIVITIES Surplus/(Deficit) from ordinary activities: 197 (7 812) Operating activities: 4.2 Amortisation 11 7 Depreciation 306 278 Impairment of investments (3) (12) (Increase)/decrease in loans 374 (99) (Increase)/decrease in long-term pre-financing 307 (1 447) (Increase)/decrease in long-term receivables (84) 64 (Increase)/decrease in stocks 11 (63) (Increase)/decrease in short-term pre-financing (1 422) 94 (Increase)/decrease in short-term receivables (2 558) (99) Increase/(decrease) in long-term provisions (108) 84 Increase/(decrease) in long-term financial liabilities (58) 233 Increase/(decrease) in other long-term liabilities 167 9 Increase/(decrease) in short-term provisions 104 35 Increase/(decrease) in short-term financial liabilities (2) (130) Increase/(decrease) in accounts payable 11 552 8 287 2005 Budgetary surplus taken as non cash revenue in 2006 (2 410) (2 737) Other non-cash movements 140 2 Investing activities: 4.3 (Increase)/decrease in intangible & tangible fixed assets (772) (351) (Increase)/decrease in investments (4) (156) 13 (Increase)/decrease in short-term investments 14 3 Movement in long-term employee benefits: 2.12 (956) 7 144 NET CASHFLOW FROM ORDINARY ACTIVITIES 4 654 3 503 NET INCREASE/(DECREASE) IN CASH & CASH EQUIVALENTS (5) 4 654 3 503 CASH & CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR (5) 2.11 12 170 8 667 CASH & CASH EQUIVALENTS AT THE END OF THE YEAR (5) 2.11 16 824 12 170

D. STATEMENT OF CHANGES IN NET ASSETS

EUR millions Reserves Accumulated Surplus/(Deficit) (7) Economic outturn of the year (7) Total Fair value reserve Other reserves BALANCE AS AT 31 DECEMBER 2004 (restated) 88 2 479 (58 359) 4 194 (6) (51 598) Movement in Guarantee Fund reserve 145 (145) 0 Fair value movements (7) (7) Other 9 9 Allocation of the Economic Result 2004 103 1 354 (1 457) 0 Budget result 2004 credited to Member States (2 737) (2 737) Economic outturn for the year (7 812) (7 812) BALANCE AS AT 31 DECEMBER 2005 81 2 727 (57 141) (7 812) (62 145) Movement in Guarantee Fund reserve 22 (22) 0 Fair value movements (77) (77) Other 72 145 217 Allocation of the Economic Result 2005 30 (7 842) 7 812 0 Budget result 2005 credited to Member States (2 410) (2 410) Economic outturn for the year 197 197 BALANCE AS AT 31 DECEMBER 2006 4 2 851 (67 270) 197 (64 218)

E. NOTES TO THE FINANCIAL STATEMENTS

1. Accounting policies

2. Notes to the Balance Sheet

3. Notes to the Economic Outturn Account

4. Notes to the Cashflow table

5. Off-Balance Sheet items and notes

6. Financial risk management

7. Related party disclosures

8. Events after the balance sheet date

9. Consolidated entities

10. Non-consolidated entities

1. ACCOUNTING POLICIES

1.1 LEGAL PROVISIONS AND THE FINANCIAL REGULATION

The accounts are kept in accordance with Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 (OJ L 248 of 16 September 2002, p. 1, last amended by Council Regulation (EC, Euratom) No 1995/2006 of 13 December 2006, OJ L 390 of 30 December 2006) on the Financial Regulation applicable to the general budget of the European Communities and Commission Regulation (EC, Euratom) No 2342/2002 of 23 December 2002 laying down detailed rules for the implementation of this Financial Regulation, last modified on 28 March 2007.

Article 133 of the Financial Regulation states that the Accounting Officer of the Commission adopts the accounting rules and methods to be applied by all the institutions and bodies. Thus, he adopted the current Communities' accounting rules on 28 December 2004. These accrual-based accounting policies are derived from International Public Sector Accounting Standards (IPSAS) or by default, International Financial Reporting Standards (IFRS) as respectively issued by the International Public Sector Accounting Standard Board (IPSASB) and International Accounting Standard Board (IASB). These rules have been adopted by the Accounting Officer of the Commission after receiving the opinion of an Advisory Expert Group for Accounting Standards that provided professional guidance. The accounting rules are regularly reviewed and updated when necessary, most recently on 18 October 2006.

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

The Commission's Accounting Officer must submit the consolidated provisional accounts to the Court of Auditors for audit by 31 March of the following year. The Commission must adopt the final consolidated accounts by 31 July and they are then published in the Official Journal by 15 November together with the Court of Auditors' statement of assurance. Both the provisional and final annual accounts for 2006 are presented as follows: Volume I contains the consolidated accounts, and Volume II the Commission's accounts.

1.2 ACCOUNTING PRINCIPLES

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

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

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

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

— going concern basis;

— prudence;

— consistent accounting methods;

— comparability of information;

— materiality;

— no netting;

— reality over appearance;

— accrual-based accounting.

1.3 CONSOLIDATION

The scope of consolidation of the European Communities comprises 34 controlled entities, one associate and one joint venture. The complete list of consolidated entities can be found in note E9. In comparison with 2005, the scope of consolidation has been extended by 8 agencies.

Controlled entities

Controlled entities are all entities over which the European Communities have the power to govern the financial and operating policies so as to be able to benefit from these entities' activities. This power must be presently exercisable. The most common indicator of control, majority of voting rights, is in most of the cases not applicable for the European Communities as there are normally no capitalistic links between the entities.

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

Under the same approach, the Communities Bodies and Executive Agencies created through a secondary act of legislation are considered as under the exclusive control of the European Communities and therefore are also included in the consolidation scope. In 2006 six newly created agencies have been consolidated for the first time. Additionally, the Office for Harmonisation in the Internal Market (Alicante) and the Community Plant Variety Office (Angers), which do not receive any subsidies from the General Budget of the Communities, have been integrated for the first time in the 2006 accounts. The impact of the first time consolidation of these 8 agencies on the 2006 accounts is as follows:

Non-current assets : EUR 32 million Current assets : EUR 413 million Liabilities : EUR 168 million Net assets : EUR 277 million

Furthermore the European Coal and Steel Communities in Liquidation (ECSC) is also considered as a controlled entity.

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

Associates

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

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

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

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

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

Joint ventures

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

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

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

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

Non-consolidated entities

Not consolidated in the accounts of the European Communities are the funds managed by the Communities on behalf of both the Joint Sickness Insurance Scheme for staff of the European Communities, and the Euro pean Development Fund. At 31 December 2006 the total assets of both were EUR 279 million and EUR 3,3 billion respectively — see note E 10.

1.4 CURRENCY AND BASIS FOR CONVERSION

Functional and reporting currency

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

Transactions and balances

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

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

Year-end balances of monetary assets and liabilities denominated in foreign currencies are converted into euros on the basis of the exchange rates applying on 31 December 2006:

EURO Exchange Rate at 31 December 2006 CYP 0,5782 LTL 3,4528 CZK 27,4850 MTL 0,4293 DKK 7,4560 PLN 3,8310 EEK 15,6466 SKK 34,4350 GBP 0,6715 SIT 239,6400 HUF 251,7700 SEK 9,0404 LVL 0,6972 USD 1,3170

Different conversion methods apply to the following headings:

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

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

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

1.5 BALANCE SHEET

1.5.1 Intangible fixed assets

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

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

1.5.2 Tangible fixed assets

Property, plant and equipment

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

Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the European Communities and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the economic outturn account during the financial period in which they are incurred.

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

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

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

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

Leases

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

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

1.5.3 Impairment of non-financial assets

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

1.5.4 Investments

Investments in Associates and interests in Joint Ventures

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

Investments in Venture Capital Funds

Classification and measurement

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

Fair value considerations

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

It should be noted that a ‘fair value method’ has been developed by the European Investment Fund in compliance with IAS 39 and was applied to the European Commission's investments in venture capital funds at the year-end 2005. This change from the current valuation method to the ‘fair value method’ became effective on 1 January 2006 in the Commission accounts and the related adjustment was recognised in the fair value reserve.

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

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

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

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

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

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

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

Investments belonging to category III are valued at cost less impairment (although no investments of this type are currently held).

Other investments

Classification

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

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

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

(ii) Loans and receivables

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

(iii) Held-to-maturity investments

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

(iv) Available-for-sale financial assets

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

Initial recognition and measurement

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

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

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

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

Subsequent measurement

Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value.

Gains and losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category are included in the economic outturn account in the period in which they arise.

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

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

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

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

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

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

Impairment of financial assets

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

(i) Assets carried at amortised cost

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

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

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

(ii) Assets carried at fair value

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

1.5.5 Stocks

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

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

1.5.6 Pre-financing amounts

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

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

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

1.5.7 Receivables

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

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

1.5.8 Cash & cash equivalents

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

1.5.9 Employee benefits

Pension obligations

The European Communities operate defined benefit pension plans. A defined benefit plan is a pension plan that generally defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. Whilst staff contribute from their salaries one third of the expected cost of these benefits, the liability is not funded.

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

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

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

Post retirement sickness benefits

The European Communities provide health benefits to its employees through the reimbursement of medical expenses. A separate fund (‘RCAM’) has been created for the day-to-day administration. Both current employees, pensioners, widowers and their beneficiaries benefit from the system. The benefits granted to the current employees are classified as ‘Staff costs’ and the amounts paid during the accounting period are recognised as an expense in the Economic Outturn Account.

The benefits granted to the ‘inactives’ (pensioners, orphans, etc.) are classified as ‘Post-Employment Employee Benefits’. Given the nature of these benefits, an actuarial calculation was necessary. The liability in the balance sheet is determined on a similar basis as that for the pension obligations (see above).

1.5.10 Provisions for risks and charges

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

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

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

1.5.11 Financial liabilities

Financial liabilities include borrowings and held for trading liabilities.

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

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

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

1.5.12 Payables

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

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

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

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

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

According to the accounting rules, transactions and events are recorded in the accounting systems and recognised in the financial statements in the period to which they relate. When the amount cannot be recognised within the time frame necessary for the preparation of the financial statements, the amounts that are known with reasonable certainty before the financial statements are completed, should be recognised as accrued expenses. The recognition criteria foresee that an expense is recognised by the European Communities for an amount equal to the estimated amount of the transfer obligation due for the period. In order to calculate the best estimate of the accrued charges, the Communities make an analysis of all aspects related to the cut-off of a public entity. The Communities established an exhaustive inventory of the applicable rules and considered the presentation in the financial statements. The ultimate goal is to make sure the proposed methodology would reduce the risk that the financial statements do not reflect a true and fair view. The Communities then translated this designed cut-off strategy into operational and practical instructions, including the recommended methodology and a description of possible techniques by topics.

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

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

1.6 ECONOMIC OUTTURN ACCOUNT

1.6.1 Revenue

Exchange revenue

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

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

Non-exchange revenue

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

GNI based resources and VAT resources

Receivables and related revenues are recognised when the European Communities send out a call for funds to the Member States claiming their contribution. They are measured at their ‘called amount’. As VAT and GNI resources are based on estimates 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

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

Fines

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

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

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

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

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

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

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

Interest income and expense

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

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

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

Dividend income

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

1.6.2 Expenditure

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

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

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

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

1.7 CONTINGENT ASSETS AND LIABILITIES

Contingent assets

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

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

Contingent liabilities

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

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

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

Commitments for future funding

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

Guarantees

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

1.8 USE OF ESTIMATES

In accordance with generally accepted accounting principles, the financial statements necessarily include amounts based on estimates and assumptions by management based on the most reliable information available. Significant estimates include, but are not limited to, amounts for pensions, provisions for future charges, valuation of publications stocks, financial risk on inventories and accounts receivables, accrued income and charges, contingent assets and liabilities, and degree of impairment of fixed assets. Actual results could differ from those estimates. Changes in estimates are reflected in the period in which they become known.

2. NOTES TO THE BALANCE SHEET

I. NON CURRENT ASSETS

2.1 INTANGIBLE FIXED ASSETS

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

Intangible Fixed Assets

EUR millions Amount Gross carrying amount at 31 December 2005 65 Additions during the year 15 Disposals (3) Transfers between headings (5) Other changes 10 Gross carrying amount at 31 December 2006 82 Accumulated depreciation at 31 December 2005 38 Depreciation charge for the year 11 Disposal 0 Transfers between headings (2) Other changes (2) Accumulated depreciation at 31 December 2006 45 NET CARRYING AMOUNT AT 31 DECEMBER 2006 37

2.2 TANGIBLE FIXED ASSETS

2.2.1 Land and buildings

In some countries the value of the land occupied by Delegations cannot be distinguished from the value of the building. The Commission intends to evaluate, country by country, all such properties in order to define the value of the land, which is not subject to amortisation.

The most significant additions for the Commission concerned two buildings purchased in Brussels, totalling EUR 201 million (land included of EUR 47 million) and land in Tokyo costing EUR 34 million. Four Commission buildings with acquisition values totalling EUR 300 million have been transferred to this heading (from the finance lease heading) since the Commission has exercised its purchase option for them and they are thus no longer considered as leased assets. Additionally the Parliament acquired three buildings in Strasbourg for a cost of EUR 143 million during 2006.

Included on the line ‘other changes’ are assets belonging to two newly consolidated agencies, the Office for Harmonisation in the Internal Market and the Community Plant Variety Office.

2.2.2 Plant and equipment

As part of the integration of the delegations' transactions directly in the central accounting system, all 132 Delegations have uploaded their fixed asset information into the Commission's central accounting system by 31 December 2006. Further IT developments during 2007 will allow for better control over the quality and exhaustiveness of this information.

Adjustments as a direct result of the ABAC Assets project and related inventory of delegation assets are shown under the heading ‘other changes’ in the table. Also included on this line are assets belonging to two newly consolidated agencies, the Office for Harmonisation in the Internal Market and the Community Plant Variety Office.

2.2.3 Finance leases (and similar rights)

The main building occupied by the Publications Office is not included in the balance sheet since it is classified as an operating lease. Although the Office has a purchase option (valid from October 2006 to 2010) with values based on the market value, it is not considered that the risks and rewards incident to ownership of the asset are substantially transferred to the Office. A purchase analysis has been made but no decision has yet been taken.

The Parliament occupied a new leased building in Brussels during 2006, having a value of EUR 34 million.

2.2.4 Fixed assets under construction

On March 2003 the Council signed a contract for the construction and acquisition of the LEX building in Brussels through a financial lease. From 2003 to 2006 the Council made several advance payments, which were secured by bank guarantees, the capitalised value of which was, at 31 December 2006, EUR 224 million (2005: EUR 123 million.) On 1 February 2007 the Council signed the contract for the acquisition of the LEX building for a provisional contractual purchase price of EUR 262 million. At this date the Council paid the difference between this provisional contractual purchase price and the capitalised value of the advance payments. The final cost price will be established in 2007.

In October 2004 the Parliament signed a financial lease with a purchase option for a building complex in Brussels and the construction began during 2004. In November 2004 the first advance payment of EUR 40 million was paid. Until the signature of the provisional approval report the Parliament has the right to make additional advance payments and at 31 December 2006 EUR 253 million has been paid, reflecting the work done up to this date (at 31 December 2005 EUR 196 million had been paid.)

Tangible Fixed Assets

EUR millions Land and buildings Plant and equipment Furniture and vehicles Computer hardware Other tangible fixed assets Finance leases and similar rights Assets under construction TOTAL Gross carrying amount at 31 December 2005 2 823 317 136 367 105 2 189 343 6 280 Additions during the year 423 32 13 56 14 37 156 731 Disposals (2) (14) (7) (35) (2) 0 0 (60) Transfers between headings 300 (2) 1 4 3 (300) (1) 5 Other changes 36 (2) 38 35 (10) 0 (15) 82 Gross carrying amount at 31 December 2006 3 580 331 181 427 110 1 926 483 7 038 Accumulated depreciation at 31 December 2005 1 150 256 92 258 64 319 2 139 Depreciation charge for the year 124 26 14 62 13 70 309 Write-back of depreciation 0 (1) 0 (2) 0 0 (3) Disposals (2) (13) (7) (31) (2) 0 (55) Impairment 0 0 0 0 0 0 0 Write-back of impairment 0 0 0 0 0 0 0 Transfers between headings 77 (2) 1 1 2 (77) 2 Other changes 5 (1) 30 26 0 0 60 Accumulated depreciation at 31 December 2006 1 354 265 130 314 77 312 2 452 NET CARRYING AMOUNT AT 31 DECEMBER 2006 2 226 66 51 113 33 1 614 483 4 586

Charges still to be paid in respect of finance leases and similar entitlements are shown in long-term and short-term liabilities in the balance sheet. They break down as follows:

Finance Leases & Similar Rights

EUR millions Description Cumulative charges (A) Future amounts to be paid Total Value Acquisition value of works Asset value Depreciation Net carrying amount =A+B+C+E < 1 year > 1 year > 5 years Total Liability (B) A+B (C) A+B+C (E) Land and buildings 304 28 142 1 391 1 561 1 865 60 1 925 (312) 1 613 Other tangible fixed assets 0 0 1 0 1 1 0 1 0 1 Total at 31.12.2006 304 28 143 1 391 1 562 1 866 60 1 926 (312) 1 614

2.3 INVESTMENTS

This heading covers investments made with a view to establishing permanent links and/or seen as supporting the activities of the European Communities. It also includes the net assets of the Guarantee Fund.

Investments

EUR millions Balance at 31.12.2006 Balance at 31.12.2005 Investment in Associates: EIF 208 186 Interest in Joint ventures: Galileo 62 141 Guarantee Fund 1 371 1 309 Available-for-Sale assets 495 211 Held for trading assets 21 27 Total Investments 2 157 1 874

2.3.1 Investments in associates and interests in joint ventures

Associates and Joint-Ventures

EUR millions Investments in Associates: EIF Interests in Joint Venture: Galileo Amount at 31 December 2005 186 141 Acquisitions 0 212 Disposals and withdrawals 0 (12) Share of profit/(loss) 14 (279) Adjustment from IFRS transition of EIF recognised in retained earnings 7 0 Fair-value changes recognised in equity 6 0 Other equity movements (dividend) (5) 0 Amount at 31 December 2006 208 62

European Investment Fund (EIF)

The EIF is the European Union's financial institution specialising in risk capital and guarantees to SMEs. Under the Council Decision of 6 June 1994 the European Communities, represented by the Commission, subscribed for a total of ECU 600 million of the EIF's capital, being 600 shares. This represents 30 % of the EIF's capital. The Commission has paid all the called-up capital, which amounts to 20 %. Payments outstanding on the non-called up capital (80 %) total EUR 480 million.

Under an agreement between the Commission and the European Investment Bank (EIB) signed in 2005, the Commission is entitled to sell its shares at any time to the EIB at the price corresponding to the EIF valuation divided by the total number of issued shares. The value of the put option is close to nil since the formula used for determining the sale price of the shares is similar to the one used to determine the net equity of the EIF.

The equity method is used to value the Communities' share in the EIF, in accordance with the accounting rules. The shareholding is thus valued at 30 % of the EIF's own capital, which at 31 December 2006 amounts to EUR 208 million (2005: EUR 186 million), of which EUR 14 million concerns the result for 2006. A dividend of EUR 5 million relating to the financial year 2005 was received in 2006.

The EIF has reported for the first time using the IFRS standards, with an opening balance sheet as at 1 January 2005. The impact of the transition has been recognised by the EIF in its opening balance sheet through retained earnings. The Communities have recognised their share of this amount (EUR 7 million) through retained earnings as at 31 December 2006. The fair value changes recognised in equity relate to the AFS portfolio of the EIF. An assessment has been made of the departures between the EC accounting rules and the EIF's current accounting standards. The impact is considered to be non-material.

Galileo Programme

For the implementation of the development phase of the Galileo programme, a joint undertaking, within the meaning of Article 171 of the Treaty, was set-up by the Council Regulation (EC) No 876/2002 for a period of 4 years (2002 to 2006.) The aim of this legal entity is to ensure the unity of the administration and the financial control of the Galileo programme for its development, and to this end to mobilise the funds assigned to that programme. The founding members are the European Communities, represented by the Commission, and the European Space Agency (ESA). The Commission, through grants given under the trans-European networks (TEN) budget, makes available to the Galileo joint undertaking (GJU) the requested funds to co-finance the related activities of the development phase.

The Commission has subscribed to and paid in EUR 650 million of the capital of this entity at 31 December 2006. Just before year-end an amount of EUR 12 million of the paid-in capital was reimbursed to the European Communities. This amount was part of a cash transfer of EUR 70 million to the GNSS agency, part of the transfer of the activities of the GJU to this GNSS agency. On 1 January 2007 the GJU was put into liquidation. During 2007, assets and liabilities of the GJU will be transferred to the GNSS agency, which will continue the project.

Galileo is accounted for using the equity method. For 2006 the Commission's share of the loss of the joint undertaking was EUR 279 million. Thus the value of the investment at 31 December 2006 was EUR 62 million being the investment of EUR 637 million less the accumulated share of the losses, EUR 575 million.

2.3.2 Guarantee Fund

Council Regulation (EC, Euratom) No 2728/94 of 31 October 1994 set up a Guarantee Fund for external actions to repay the Communities' creditors in the event of default by beneficiaries of loans granted or guaranteed by the Communities. This facility covers loans guaranteed by the Communities as a result of a Council Decision, in particular European Investment Bank (EIB) lending operations outside the European Union and loans under macro-financial assistance (MFA loans) and Euratom loans outside the European Union.

In accordance with Article 6 of the Regulation the Commission entrusted financial management of the Fund to the EIB under an agreement signed between the Communities and the EIB on 23 November 1994 in Brussels and on 25 November 1994 in Luxembourg.

Regulation (EC, Euratom) No 2728/94 on the Guarantee Fund, as amended by Council Regulation (EC, Euratom) No 1149/1999 of 25 May states that with effect from 1 January 2000 the Fund is endowed by payments from the Communities' general budget equivalent to 9 % of the capital value of the operations, the proceeds from interest on investments made from the Fund's assets, and sums recovered from defaulting debtors for whom the Fund has had to activate its guarantee. The same Regulation sets the target amount at 9 %. In accordance with the Regulation, ‘if, at the end of a year, the target amount is exceeded, the surplus shall be paid back to a special heading in the statement of revenue in the general budget of the European Communities.’

The Inter-institutional Agreement of 6 May 1999 on budgetary discipline and improvement of the budgetary procedure provided that the general budget of the European Communities should include a guarantee reserve to cover loans to third countries. This reserve is intended to cover the requirements of the Guarantee Fund and, where necessary, activated guarantees exceeding the amount available in the Fund, so that these amounts may be charged to the budget.

This reserve of EUR 1 253 million corresponds to the target amount (9) for the Guarantee Fund calculated on the basis of the amount outstanding at 31 December 2006. The entry on the assets side of the Commission's balance sheet of EUR 1 379million before elimination of MFA debt certificates represents the Fund's net assets at 31 December 2006. The difference between the amount of the Fund shown on the assets side and the amount of the reserve corresponds to the surplus to be repaid to the budget, i.e. EUR 126 million.

Net assets of the Guarantee Fund

EUR millions Balance at 31.12.2006 Balance at 31.12.2005 Current assets 1 380 1 325 After elimination 1 372 1 310 Short-term investments: Available-for-sale assets 940 1 009 After elimination 932 994 Cash and cash equivalents 440 316 Current liabilities (1) (1) Net assets 1 379 1 324 After elimination 1 371 1 309

The Guarantee Fund holds two floating rate notes issued by the European Communities for an amount of EUR 8 million, including accrued interest, as at 31 December 2006 (2005: EUR 15 million) these bonds were issued by the non-budgetary instrument MFA. From an accounting point of view, both assets (GF) and liabilities (MFA) have to be eliminated at the Communities level. Fair-value changes of the AFS debt security portfolio have been recognised in equity in 2006 with the amount of EUR 32 million. The corresponding amount in 2005 amounted to EUR 11 million.

The risk management policies of the Guarantee Fund are described in section E 6.

2.3.3 Other investments

2.3.3.1 Available-for-sale assets

This heading includes investments and participations purchased to help beneficiaries develop their business activities.

Long-term Available-for-sale assets

EUR millions EBRD RCO ETF Start up EFSE Other Total Amounts 31.12.2005 157 0 48 0 6 211 Transfers 0 224 0 0 0 224 Acquisitions 0 15 24 46 1 86 Disposals/withdrawals 0 (17) (8) 0 (2) (27) Revaluation surplus/ (deficit) t/f to equity 0 (4) 11 3 0 10 Impairment loss 0 (7) (1) 0 (1) (9) Amounts 31.12.2006 157 211 74 49 4 495

European Bank for Reconstruction and Development (EBRD) investment

The EBRD was given initial capital of EUR 10 billion, of which 3 % was subscribed by the Communities. The proportion of this capital called up is 30 %. On 15 April 1996, at their annual meeting, the Bank's governors decided to double the amount of authorised capital. Under this decision, the Communities have subscribed for 30 000 additional shares with a face value of EUR 10 000 each. This operation involves called-in shares and callable shares in the following proportions: 22,5 % of the subscribed shares represent the number of called-in shares and the remainder will be callable shares.

At balance sheet date, the Commission's subscription to the EBRD's capital amount to EUR 157 million, of which EUR 151 million have been called up and partially paid. Payments outstanding on called up capital (EUR 6 million) are recorded under long-term liabilities and accounted for at amortised cost. Payments outstanding on non-called up capital amount to EUR 443 million and are included as contingent liabilities in the off-balance sheet.

As the EBRD is not quoted on any stock exchange and in view of the contractual restrictions included in the EBRD's articles of incorporation relating, amongst others, to the sale of participating interests, capped at acquisition cost and only authorised to existing shareholders, the 3 % European Communities' shareholding in the EBRD is valued at cost less any write-down for impairment.

Risk Capital Operations (RCO)

Under risk capital operations amounts are granted to financial intermediaries to finance equity investments. These finance contracts do not have the basic and constituent characteristics of a loan as there is no fixed reimbursement schedule nor interest rate agreed for the principal consideration and therefore are assimilated to indirect equity investments. It has thus been decided for the 2006 and future accounts that they should be presented as investments under this heading — they had been previously been presented as loans, see note E 2.4.1 below.

They are held at historic cost less any provisions for impairment, as there are no quoted market prices available in an active market and their fair value cannot currently be reliably measured. The provisions for impairment as at the balance sheet date are based on the provisional or definitive write-offs as communicated by the financial counterparts.

ETF Start up facility

The Growth & Employment programme and the MAP programme, under the trusteeship of the EIF, support the creation and financing of start-up SMEs by investing in suitable specialised venture capital funds.

The ‘fair value method’ has been applied for the first time to the investments of the ETF Start up facility during 2006. Had this also been applied at 31 December 2005, the balance would have amounted to EUR 70 million (in place of EUR 48 million.) The revaluation surplus/(deficit) movements in 2006 include both value adjustment and foreign exchange movements in the fair-value reserve.

European Fund for South East Europe (EFSE)

The European Fund for South East Europe was, created in 2005 with an initial share capital of EUR 147 million. It is structured as an investment company with variable share capital (SICAV). The overall objective of EFSE is to foster economic development and prosperity in South East Europe through the sustainable provision of additional development finance, notably to the small and micro enterprise sector and to private households via local financial intermediaries.

European Communities have obtained a stake of 17,9 % (Voting Rights) in the EFSE fund.

2.3.3.2 Held for trading assets

The European Communities use derivative instruments in the form of currency and interest rate swaps or hedging purposes. Currency and interest rate swaps are commitments to exchange one set of cash flow for another. Swaps result in an economic exchange of currencies or interest rates (for example, fixed-rate for floating-rate) or a combination of all those (i.e. cross-currency interest rate swaps). Swaps, as detailed below, are used to match the cash flows of loans with the cash flows of related borrowings.

These derivative instruments become favourable (assets) or unfavourable (liabilities) as a result of fluctuations in market interest rates or foreign exchange rates relative to their terms. The extent to which instruments are favourable or unfavourable and thus the fair values of derivative financial assets and liabilities can fluctuate significantly from time to time.

The ECSC in liquidation (ECSC) entered into an interest rate swap agreement and combination of both interest rate swap and cross-currency interest rate swap agreement. The fair value of these interest rate swaps was obtained by discounting the net fixed cash flows using zero-coupon swap rates on the balance sheet date. This fair value (including accrued interests) of these swaps with final maturity of more than one year after the balance sheet date is detailed below:

Held for trading assets

EUR millions Derivative Balance at 31.12.2006 Balance at 31.12.2005 ECSC in liquidation swaps 21 27

2.4 LOANS

This heading covers loan amounts owed to the European Communities maturing in over one year.

2.4.1 Loans granted from the European Communities budget and the ECSC in liquidation

This item covers loans with special conditions granted as part of co-operation with non-member countries as well as housing loans granted by the ECSC in liquidation from its own funds. All amounts fall due more than 12 months after year-end.

Loans granted from the European Communities budget & ECSC in liquidation

EUR millions Loans with special conditions Risk Capital Operations ECSC in Liquidation Total Total 31.12.2005 170 224 44 438 Transfers 0 (224) 0 (224) New loans 0 0 0 0 Repayments (26) 0 (8) (34) Exchange differences 0 0 0 0 Changes in carrying amount 17 0 3 20 Impairment losses 0 0 0 0 Total 31.12.2006 161 0 39 200

Loans with Special Conditions

Loans with special conditions are loans granted at preferential rates. The effective interest rates on these loans vary between 7,39 % and 12,36 %.

Risk Capital Operations

These amounts have been transferred to the Available-for-sale (AFS) investment heading — see note E 2.3.3.1 above.

Housing loans of the ECSC in liquidation (ECSC)

Housing loans are loans granted by the ECSC from its own funds in accordance with articles 54 and 54.2 of the ECSC Treaty. These loans are granted at a fixed rate of 1 % and consequently, considered as loans at preferential rates. The effective interest rates on these loans are 2,806 %-22,643 %.

2.4.2 Loans granted from borrowed funds

Under the Communities' Treaties, the Council, acting unanimously, has the power to adopt guarantee or borrowing programmes if it considers this necessary to attain the objectives of the Communities. Communities borrowings are direct commitments by the Communities itself and not by any individual Member State. This item includes loans granted by Macro Financial Assistance (MFA) and Euratom and the ECSC in liquidation.

In accordance with the accounting policy described in note E 1.5.4, loans are initially recognised at fair value, then subsequently measured at amortised cost. The fair value of a financial instrument on initial recognition is normally the transaction price. However, if part of the consideration given or received is for something other than the financial instrument, the fair value of the financial instrument is estimated using a valuation technique.

Loans granted from borrowed funds

EUR millions Macro Financial Assistance (MFA) Euratom loans ECSC in liquidation Total Total 31.12.2005 1 086 389 508 1 983 New loans 19 51 0 70 Repayments (130) 0 (2) (132) Exchange differences 0 0 (4) (4) Changes in carrying amount 2 2 (3) 1 Impairment losses 0 0 0 0 Total 31.12.2006 977 442 499 1 918 Amount due < 1 year 20 0 75 95 Amount due > 1 year 957 442 424 1 823

Macro Financial Assistance (MFA) loans

MFA is a policy-based financial instrument of untied and undesignated balance-of-payment and/or budget support to partner third-countries geographically close to the EU territory. It takes the form of medium/long term loans or grants or an appropriate combination of both and generally complements financing provided in the context of an IMF-supported adjustment and reform program.

Based on materiality considerations, the effective interest rate method is not applied separately to loans and borrowings. The transaction costs are directly expensed in the economic outturn account.

Euratom loans

Euratom is a separate legal entity of the European Union represented by the European Commission. The financial objective of this entity is to grant loans to Member States and non-Member States as follows:

— Euratom loans to Member States are granted for the purpose of financing investment projects in the Member States relating to the industrial production of electricity in nuclear power stations and to industrial fuel cycle installations.

— Euratom loans to non-Member States are granted to improving the level of safety and efficiency of nuclear power stations and installations in the nuclear fuel cycle which are in service or under construction.

Based on materiality considerations, the effective interest rate method is not applied separately to loans and borrowings. The transaction costs are directly expensed in the economic outturn account.

ECSC in liquidation loans

This item mainly includes loans granted by the ECSC in liquidation on borrowed funds in accordance with articles 54 and 56 of the ECSC Treaty as well as two unquoted debt securities issued by the European Investment Bank (EIB) as substitute of a defaulted debtor. These debt securities will be held till their final maturity (2017 and 2019) in order to cover the service of related borrowings.

The changes in carrying amount correspond to the change in accrued interests plus the amortisation of the year of premiums paid and transaction cost incurred at inception, calculated according to the effective interest rate method. The effective interest rates (expressed as a range of interest rates) were as follows:

Effective interest rates on loans granted from borrowed funds

Borrowings 31.12.2006 31.12.2005 Macro Financial Assistance (MFA) 3.222 % - 4.54 % 2.039 % - 4.54 % Euratom 3.372 % - 5.76 % 2.224 % - 5.76 % ECSC in liquidation. 3.064 % - 12.077 % (10) 2.241 % - 12.077 % (10)

2.5 LONG-TERM PRE-FINANCING

Pre-financing is a payment intended to provide the beneficiary with a cash advance, i.e. a float. It may be split into a number of payments over a period defined in the particular pre-financing agreement. The float or advance is 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 expenditures he has the obligation to return the pre-financing advance to the European Communities. Thus pre-financing paid is not a definitive expense until the relevant contractual conditions are met and so is recorded as an asset on the balance sheet when the initial payment is made. The amount of the pre-financing asset is reduced (wholly or partially) by the acceptance of eligible costs and amounts returned. When a pre-financing amount is fully or partially accepted by the Communities, following analysis of the eligibility of a cost claim received, then the accepted amount of eligible expenditure is removed from the balance sheet and taken as an expense in the economic outturn account. In this way, interim or final payments are intended to reimburse expenditure incurred by the beneficiary on the basis of a statement of expenditure. This may clear the pre-financing amount in whole or in part.

Pre-financing is valued at its estimated recoverable amount. The Communities reviews its pre-financing for ‘value reductions’ whenever events, changes in circumstances or information indicate that the carrying amount of the asset might not be recoverable. This assessment takes into consideration the existence of a related guarantee attached to the pre-financing. The expected irrecoverable pre-financing, or the amount for which recovery has ceased to be probable, is recognised as a value reduction or charge in the economic outturn account. The corresponding amount is recognised as a decrease in the pre-financing carrying value in the balance sheet.

At year-end outstanding pre-financing amounts are valued at the original amount(s) paid less: amounts returned, eligible amounts cleared, estimated eligible amounts not yet cleared at year-end, and value reductions. Guarantees related to pre-financing amounts are disclosed in the off-balance sheet as contingent assets.

Interest is generally earned on all pre-financing paid out, except for amounts paid to Member States or as pre-accession aid. This interest is recognised as it is earned in accordance with the provisions of the relevant agreement. An estimate of the accrued interest revenue, based on the most reliable information, is made at the year-end and included in the balance sheet. The ownership of this interest designates the two categories of pre-financing existing — European Communities and Third Party. The difference between the two categories is that the interest generated by ‘European Communities’ pre-financing amounts remains the property of the Communities and so must be returned to the Communities, while that earned on ‘Third Party’ pre-financing is the property of the beneficiary.

Long-term Pre-financing amounts

EUR millions Management type Balance at 31.12.2006 Balance at 31.12.2005 Pre-financing European Communities: 920 3 Direct centralised management 300 3 Indirect centralised management 549 0 Decentralised management 50 0 Other 21 0 Pre-financing Third parties: 21 505 22 729 Direct centralised management 57 145 Indirect centralised management 30 0 Decentralised management 224 106 Shared management 20 744 22 478 Joint management 450 0 Total long-term Pre-financing 22 425 22 732

The most significant long-term pre-financing amounts relate to Structural Fund actions. As many of these projects are long-term in nature, it is necessary that the related advances are available for more than one year. Thus these pre-financing amounts are shown as long-term assets. The Commission makes a payment on account concerning Structural Funds once the programme is adopted. The Commission then makes interim payments to reimburse actual expenditure certified by the Member State. The balance of 5 % is paid on the closure of the programme once all the documents required are submitted and approved by the Commission. Payments are posted to the earliest open commitment. In 2005 the split between long-term and short-term pre-financing amounts was only made for Structural Actions.

2.6 LONG-TERM RECEIVABLES

Long-term receivables

EUR millions Balance at 31.12.2006 Balance at 31.12.2005 Building contribution 24 42 Due from Member States 272 135 ECSC staff loans 17 20 EAR credit schemes 10 40 Guarantees and deposits 5 7 Total 328 244

The building contribution is primarily the financial contribution by the Belgian State to the purchase and fitting-out of the D3 building for the Parliament, which came to EUR 176 million and is to be paid over ten years ending in 2008. At year-end EUR 22 million is due greater than one year (2005: EUR 42 million), while a further EUR 20 million (2005: EUR 21 million) falls due within one year.

Amounts to be received from Member States refer to amounts due to the ECSC in liquidation from former accession countries. The total contribution amounts to EUR 170 million and is to be paid in four instalments on the first working day of each year, starting in 2006, in the following amounts: 15 %, 20 %, 30 % and 35 %. The net present value of these contributions was EUR 138 million at year-end (2005: EUR 159 million), being split up between long-term receivables, EUR 104 million (2005: EUR 135 million) and short-term receivables, EUR 34 million (2005: EUR 24 million).

The amounts due from Member States at 31 December 2006 also includes EUR 168 million relating to a Commission decision of 2005 reducing the assistance granted from the ERDF to one Member State. The amount due at 31 December 2005 had not been included in the 2005 accounts thus understating this heading by EUR 318 million at that date (see also notes E2.10.2 & E3.1.4).

Also included under this heading is an amount of EUR 17 million relating to loans given by the ECSC in liquidation to officials of the European Communities. These loans are financed by the ECSC in liquidation from its own funds and are currently managed by the Commission. EAR (the European Agency for Reconstruction and Development) credit schemes refer primarily to Counterpart Funds and Credit Line Schemes advanced.

II. CURRENT ASSETS

2.7 STOCKS

STOCKS

EUR millions Description Acquisition value Value reduction Net book value at 31.12.2006 Net book value at 31.12.2005 Scientific Equipment: Scientific material 11 0 11 11 Fissile material & heavy water 30 0 30 32 Scientific material for re-sale 60 0 60 64 Vaccinations 7 0 7 7 Production materials 7 0 7 7 Publications & goods for re-sale 16 (16) 0 5 Total 131 (16) 115 126

The Commission keeps a stock of production material, valued to EUR 7 million, mainly consisting of building maintenance material and spare parts used by the Joint Research Centres. The stock of publications held and/or managed by the Publications Office for which a charge is made (paying stock) is fully written off due to low rotation. Also publications distributed for free have been fully written down as its realisable value is lower than its cost.

2.8 SHORT-TERM INVESTMENTS

Short-term investments consist of available-for-sale securities, which are purchased for their investment return or yield, or held to establish a particular asset structure or a secondary source of liquidity and may therefore be sold in response to needs for liquidity or changes in interest rates.

2.8.1 Short-term available-for-sale assets

Short-term available-for-sale assets

EUR millions SME Guarantee Facility ETF Start up TEN Risk Capital EIB ECSC in Liquidation Total Amounts 31.12.2005 22 4 3 1 411 1 44