EUROPEAN COMMISSION

Brussels, 28.6.2023

COM(2023) 391 final

COMMUNICATION FROM THE COMMISSION

TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND
THE COURT OF AUDITORS

CONSOLIDATED ANNUAL ACCOUNTS OF THE EUROPEAN UNION
FOR THE FINANCIAL YEAR 2022

CONTENTS

FOREWORD    

FINANCIAL HIGHLIGHTS OF THE YEAR    

NOTE ACCOMPANYING THE CONSOLIDATED ACCOUNTS    

CONSOLIDATED FINANCIAL STATEMENTS AND EXPLANATORY NOTES    

BALANCE SHEET    

STATEMENT OF FINANCIAL PERFORMANCE    

CASHFLOW STATEMENT    

STATEMENT OF CHANGES IN NET ASSETS    

NOTES TO THE FINANCIAL STATEMENTS    

BUDGETARY IMPLEMENTATION REPORTS AND EXPLANATORY NOTES    

GLOSSARY    

LIST OF ABBREVIATIONS    

FOREWORD

In 2022, the European Union proved once again its power of unity to respond to unprecedented challenges. European solidarity was our response to Russia's brutal war. On one hand, we have stood by our Ukrainian partners and sought to mitigate the impact of this unlawful and arbitrary war, which affected the daily lives of millions of Ukrainians. On the other hand, we have addressed the direct and indirect consequences for our citizens, businesses, and Member States. That is why we have mobilised all available means in the EU budget and under the European Peace Facility to complement support directly provided by the Member States.

The current geopolitical situation has emphasised the importance of a sustainable and diversified source of energy supply. In this context, our dedicated recovery instrument NextGenerationEU proved to be an important tool to further accelerate the green and the digital transition. At the same time, NextGenerationEU has been instrumental for the growth of the EU into the large scale-sovereign style issuer. By implementing unified EU borrowing strategy, the Commission sent a very important signal to financial markets: it showed EU solidarity and has generated confidence in the resilience of the euro area.

In addition, the SURE programme (Support to Mitigate Unemployment Risks in an Emergency) continued to support Member States to maintain people in work and help jobs affected by the pandemic. At the end of 2022, its final year, Member States had signed loan facility agreements of 98.4 billion Euro, all of which were disbursed supporting more than 30 million people and 2.5 million companies across 19 different Member States.

On top of tackling the crisis with rapid responses and ongoing adjustments to the political and financial situation, the European Union kept its promise and delivered on its overall policy objectives . In 2022, the second year of the MFF 2021-2027, it made the best use of the 2022 budget, with commitment implementation amounting to 357.1 billion Euro.

Thanks to the EU budget, the European Union could stand up to its challenges. Therefore, it is my pleasure to present the 2022 annual accounts of the European Union, which will illustrate this in detail. They provide a complete overview of EU finances, including information on contingent liabilities, financial commitments and other obligations of the Union, as well as on the implementation of the EU budget for the past year. The consolidated annual accounts of the European Union are part of the Commission’s integrated financial and accountability reporting package and form an essential part of our highly developed system of fiscal transparency and accountability.

Johannes Hahn

Commissioner for Budget and Human Resources

FINANCIAL HIGHLIGHTS OF THE YEAR

The objective of this Financial Highlights section, which has been prepared on the basis of the principles outlined in the IPSASB Recommended Practice Guideline (RPG) 2 ‘Financial Statement Discussion and Analysis’ is to assist readers to understand how the operational, financial and investment activities of the EU are reflected in the different elements of the consolidated financial statements of the EU. The information presented in this section has not been audited.

It should be noted that due to the rounding of figures into millions of euros, some financial data in the tables below may appear not to add up.

CONTENTS

1.    KEY FIGURES AND HIGHLIGHTS OF THE YEAR    

2.    THE 2021-2027 MULTIANNUAL FINANCIAL FRAMEWORK AND
   NextGenerationEU    

2.1.    MFF 2021-27 & NextGenerationEU – Key Figures    

2.2.    NextGenerationEU – overview    

2.3.    Financial situation of NGEU at 31 December 2022    

3.    SUMMARY OF BUDGET IMPLEMENTATION    

3.1.    Revenue    

3.2.    Expenditure    

4.    FINANCIAL INSTRUMENTS AND BUDGETARY GUARANTEES    

4.1.    Financial instruments financed by the EU budget    

4.2.    Budgetary guarantees: Financial assets held in guarantee funds    

4.3.    Loans and related borrowings for financial assistance programmes    

4.4.    Budgetary contingent liabilities for financial assistance programmes    

5.    FINANCIAL STATEMENTS ANALYSIS    

5.1.    REVENUE    

5.2.    EXPENSES    

5.3.    ASSETS    

5.4.    LIABILITIES    

6.    EU POLITICAL AND FINANCIAL FRAMEWORK, GOVERNANCE AND    ACCOUNTABILITY    

6.1.    POLITICAL AND FINANCIAL FRAMEWORK    

6.2.    GOVERNANCE AND ACCOUNTABILITY    

1.KEY FIGURES AND HIGHLIGHTS OF THE YEAR

2.THE 2021-2027 MULTIANNUAL FINANCIAL FRAMEWORK AND NextGenerationEU

3.MFF 2021-27 & NextGenerationEU – Key Figures

The EU’s 2021-2027 long-term budget, together with the NextGenerationEU (NGEU) recovery instrument, amounts to EUR 2.018 trillion in current prices (EUR 1.8 trillion in 2018 prices).

The package consists of the long-term budget, the 2021-2027 multiannual financial framework (MFF), made up of EUR 1.211 trillion in current prices (EUR 1.074 trillion in 2018 prices), combined with the temporary recovery instrument, NGEU of up to EUR 806.9 billion in current prices (EUR 750 billion in 2018 prices).

The budget has been designed as a response to Europe’s priorities and most urgent needs:

This included:

4.NextGenerationEU – overview 

With a budget of EUR 806.9 billion, NGEU is designed to help repair the immediate economic and social damage brought about by the coronavirus pandemic, thus building a post-COVID-19 Europe that is greener, more digital, more resilient and better fit for the current and forthcoming challenges.

A majority of the funds is channeled through the Recovery and Resilience Facility (RRF). Part of the funds, up to EUR 338.0 billion, are provided in the form of non-repayable support, or grants. The other part, up to EUR 385.8 billion, is used to provide loans from the Union to individual Member States. These loans will be repaid by those Member States starting only after the current MFF period and extending over a long time period, with the final maturity of the loans outstanding at 31 December 2022 ending only as from 2052 (see section 2.3.3).

In addition, NGEU reinforces several existing EU programmes and policies, as follows:

In addition, following Russia’s war of aggression against Ukraine and the resulting energy crisis, the Commission put forward REPowerEU, the European Commission’s plan to make Europe independent from Russian fossil fuels well before 2030. Under REPowerEU, Member States add a REPowerEU chapter to their national Recovery and Resilience Plans (RRPs) – the roadmaps to funding under the Recovery and Resilience Facility – to finance key investments and reforms in diversifying energy supplies and reducing dependence on Russian fossil fuels. REPowerEU does not increase the overall envelope for the RRF, but will accelerate the deployment of the current borrowing capacity by offering Member States the possibility to request additional loans under NGEU for REPowerEU objectives. REPowerEU is complemented by grants financed by the auctioning of ETS allowances and transfers from the Brexit Adjustment Reserve.

5.Financial situation of NGEU at 31 December 2022

6.Overview

From the launch of the NGEU funding operations on 15 June 2021 to the end of 2022, the Commission has raised EUR 170.8 billion of long-term funding (nominal amount), mainly by issuing bonds in syndicated transactions (2021: EUR 71.0 billion). In addition, as of December 2022, the Commission has EUR 17.0 billion of short-term EU-Bills outstanding. Up to year-end 2022, the Commission had disbursed a total of EUR 162.0 billion of financial support (2021: EUR 71.6 billion). The majority of this amount, EUR 138.7 billion, was disbursed under the RRF, with EUR 93.5 billion disbursed as non-repayable support and EUR 45.2 billion disbursed as financial loan support. A further EUR 23.3 billion (net of recoveries of EUR 0.2 billion) was disbursed as MFF payments under existing programmes. Furthermore, liquidity of EUR 20.5 billion is held in the NGEU bank account with the ECB and in the Commission’s central treasury account, pending disbursement to the budget for MFF programmes.

NGEU – Outstanding Borrowings and Disbursements at 31 December 2022

*    A further EUR 0.6 billion of funds were held in the Commission’s central treasury account pending disbursement to the budget for MFF programmes (including EUR 0.2 billion of recovered NGEU funds previously paid).

7.Borrowings

To meet the NGEU funding needs, the Commission issues securities on the international capital markets. Based on a unified funding approach, the Commission combines the use of different funding instruments and funding techniques with an open and transparent communication to market participants.

In 2022, the annual Borrowing Decision allowed the Commission to issue up to a maximum amount of EUR 140 billion in long-term funding and to have up to a maximum outstanding amount of EUR 60 billion in short-term funding. 1

Long-term funding – Syndicated transactions and auctioning of EU bonds

As of 31 December 2022, the outstanding (nominal) amount of long-term funding was EUR 170.8 billion (2021: EUR 71.0 billion). Out of this amount, EUR 36.4 billion related to green bonds (2021: EUR 12 billion). The borrowings will mature between 2025 and 2052 as follows:

Short-term funding – Auctioning of EU-Bills

The auctioning of EU-Bills gives extra flexibility to the Commission as an issuer, and is supporting the liquidity of its securities. As of 31 December 2022, the outstanding (nominal) amount of short-term funding, raised via the auctioning of EU-bills with a maturity of three or six months, amounted to EUR 17.0 billion (2021: EUR 20.0 billion).

8.Disbursements

During 2022 the Commission positively assessed the five remaining Member States’ recovery and resilience plans (Bulgaria, Hungary, Netherlands, Poland and Sweden), which were subsequently approved by the Council. As a consequence, all 27 Member States’ recovery and resilience plans were endorsed by year-end 2022. The total non-repayable support approved under the 27 Member States’ plans amounted to EUR 335.1 billion (2021: EUR 291.2 billion), corresponding to almost the whole financial envelope of NGEU non-repayable support of EUR 338.0 billion 2 . Out of this amount, EUR 234.4 billion were covered by financing agreements signed with Member States (2021: EUR 195.4 billion). The total financial loan support approved under the plans amounted to EUR 165.3 billion (2021: EUR 153.9 billion), of which the loan agreements signed by year-end covered EUR 153.9 billion (2021: EUR 153.2 billion).

Non-repayable support

By year-end 2022, the Commission had disbursed a total of EUR 93.5 billion of non-repayable support to 22 Member States (2021: EUR 46.4 billion to 20 Member States). Out of this amount, EUR 36.6 billion related to pre-financing (2021: EUR 36.4 billion) and EUR 56.9 billion related to payments made following the fulfilment of milestones and targets by Member States (2021: EUR 10.0 billion):

During 2022 the Commission disbursed non-repayable support totalling EUR 47.2 billion. This amount mainly comprised the first milestone payment to France (EUR 7.4 billion), the first and second milestone payments to Italy (EUR 10.0 billion each), and the second milestone payment to Spain (EUR 12.0 billion).

Loans

By year-end 2022, the Commission had disbursed EUR 45.2 billion of financial loan support to five Member States (2021: EUR 18.0 billion to four Member States). Out of this amount, EUR 19.9 billion related to pre-financing (2021: EUR 18.0 billion) and EUR 25.2 billion related to loan instalments made following the fulfilment of milestones and targets by Member States (2021: nil):

During 2022 the Commission provided financial loan support totalling EUR 27.2 billion. This amount comprised the loan pre-financing of EUR 1.9 billion to Romania, the payment of the first loan instalments to Greece (EUR 1.8 billion), Italy (EUR 11.0 billion), Portugal (EUR 0.6 billion) and Romania (EUR 0.8 billion), as well as the payment of the second loan instalment to Italy (EUR 11.0 billion).

According to the loan agreements, Member States will make annual repayments of 5% of the disbursed amounts starting ten years after the disbursement date. Thus Cyprus, Greece, Italy and Portugal will start repaying the loans as from 2032 and Romania as from 2033. The repayment schedule for the nominal amounts outstanding at year-end is as follows:

NGEU contribution to other programmes under the EU budget

By year-end 2022, the total net payments disbursed to other programmes under the MFF amounted to EUR 23.3 billion (2021: EUR 7.2 billion). This contribution, which is net of recoveries of EUR 0.2 billion, mainly related to REACT-EU which finances the European Regional Development Fund (ERDF) and the European Social Fund (ESF, including FEAD):

During 2022, the Commission disbursed payments to other MFF programmes totalling EUR 16.1 billion. This amount comprised mainly the payments relating to REACT-EU (EUR 11.2 billion, of which EUR 8.7 billion under the ERDF and EUR 2.5 billion under the ESF, including FEAD), Horizon Europe (EUR 1.9 billion), InvestEU (EUR 1.2 billion) as well as Rural Development (EUR 1.2 billion).

9.Liquidity

Loans provided under NGEU do not follow the strict back-to-back principle used in the past. Instead, a diversified and pooled funding strategy has been developed for the NGEU that has required the implementation of an efficient liquidity management. The objective of the NGEU liquidity management is to ensure that the amounts held on the NGEU bank account are sufficient to meet all upcoming disbursement needs and to maintain a defined safety buffer, while avoiding any excess balances. For the liquidity management, the Commission has developed an IT tool that allows for the monitoring of the NGEU account on a daily basis. At year-end 2022 the funds held in the NGEU off-budget account amounted to EUR 19.9 billion. In addition, EUR 0.6 billion of funds were held in the Commission’s central treasury account pending disbursement to the budget for MFF-programmes (including EUR 0.2 billion of recovered NGEU funds previously paid).

Following the success of the diversified funding strategy for NGEU and the growing recurrence to borrowing to secure funding for EU policy priorities, the Commission decided in 2022 to start using the unified funding approach as a main funding method as of 2023. Under this approach, the Commission – on behalf of the EU – will henceforth issue only ‘EU-Bonds’ rather than separately denominated bonds for individual programmes. The NGEU recovery programme and the new Macro-Financial Assistance + programme for Ukraine of EUR 18 billion for 2023 are the first programmes to benefit from the new funding approach.

10.SUMMARY OF BUDGET IMPLEMENTATION 

11.Revenue

In the initial adopted EU budget, total payment appropriations amounted to EUR 170 603 million and the amount to be financed by own resources totalled EUR 157 701 million. The revenue and expenditure estimates in the initial budget are typically adjusted during the budgetary year by way of amending budgets. Adjustments in the GNI-based own resources ensure that budgeted revenue matches exactly budgeted expenditure. In accordance with the principle of equilibrium, budget revenue and expenditure (payment appropriations) must be in balance.

During 2022, five amending budgets were adopted. Taking them into account, the final adopted revenue for 2022 amounted to EUR 170 038 million and the total amount financed by own resources amounted to EUR 153 928 million. Member States' contributions in 2022 were mainly reduced by the surplus of the previous year (EUR 3 227 million). The level of payment appropiations remained more or less in line with the initial voted budget.

Revenue comes from six sources (titles):

Title 1 : Own resources

The collection of traditional own resources was above the amounts forecasted in the budget. This was due mainly to a higher than expected collection in the last months of the year.

Member States' final VAT, GNI and Plastics payments corresponded closely to the final budgetary estimate. The differences between the forecasted amounts and the amounts actually paid are due to the differences between the euro rates used for drawing up the budget and the rates in force at the time when the Member States outside the euro area actually made their payments.

Title 2 : Surpluses, balances and adjustments

The surplus of the previous financial year amounted to EUR 3 227 million. This amount was inscribed in the budget 2022 through an amending budget and the own resources contributions from the Member States were reduced accordingly.

For the VAT and GNI balances, the rules are set out in Article 10b of the Making Available Regulation (Council Regulation (EU, Euratom) No 609/2014). According to these rules the total sum of the balances are calculated in order for the impact on the EU budget to be zero (‘netting system’) and the procedure does not entail a budgetary amendment. The Commission therefore directly requests the Member States to pay the net amounts in accordance with the rules of the Making Available Regulation.

Title 3 : Administrative revenue

This title comprises mainly revenue from taxes and levies on the remuneration of staff.

Title 4 : Financial revenue, default interest and fines

The main part of this title relates to the fines in connection with the implementation of competition rules.

Title 5 : Budgetary guarantees, borrowing and lending operations

This title has increased significantly with the advent of the NextGenerationEU (NGEU). NGEU funds within this title are assigned revenue. Title 5 covers revenue related to guarantees, interest and repayments of loans granted. It also channels funds (for the NGEU non-repayable support under the Recovery and Resilience Facility and for reinforcement of MFF programmes) from earmarked revenue that Member States receive under the European Union Recovery Instrument (EURI).

Title 6 : Revenue, contributions and refunds related to Union policies

This title concerns mainly revenue from financial corrections related to structural and agricultural funds (ESIF, EAGF and EAFRD). It also includes the participation of third countries in research programmes, the clearance of accounts in agricultural funds and other contributions and refunds to EU programmes/
activities. A substantial part of this total is made up of earmarked revenue, which gives rise to the entering of additional appropriations on the expenditure side.

Total 2022 budget revenue amounted to EUR 245 265 million:

12.Expenditure

13.Budget implementation

In 2022, the second year of the MFF 2021-2027, the final adopted budget amounted to EUR 182.2 billion of commitment appropriations and EUR 170.0 billion of payment appropriations. In addition, EUR 295.0 billion of commitment appropriations were available as assigned revenue, out of which EUR 277.8 billion related to the NGEU 3 , and EUR 4.5 billion of commitment appropriations were carried over from 2021. The payment appropriations related to 2022 assigned revenue amounted to EUR 87.0 billion, out of which EUR 64.3 billion related to the NGEU and EUR 4.3 billion of payment appropriations were carried over from 2021.

The implementation of the 2022 budget was still partly impacted by the late adoption of the MFF Regulation (December 2020), which led to the adoption of the legal acts of the new generation of programmes only in the course of 2021. Moreover, the implementation of the 2022 budget was heavily affected by the invasion of Ukraine by Russia and the need to take resolute actions to provide complex humanitarian and financial support to Ukraine, help refugees as well as countries hosting them, and to respond to a crisis that had consequences beyond Ukrainian borders.

The implementation of the total commitment appropriations in 2022 amounted to EUR 357.1 billion:

The implementation of the total payment appropriations in 2022 amounted to EUR 243.3 billion:

In cases allowed by the Financial Regulation and/or legal bases, the appropriations of the voted budget that were not implemented in 2022 were carried over to 2023: EUR 1.5 billion of commitment appropriations and EUR 2.5 billion of payment appropriations.

Likewise, EUR 121.5 billion of commitment appropriations of assigned revenue, of which EUR 115.1 billion related to the NGEU, and EUR 15.2 billion of payment appropriations of assigned revenue, of which EUR 0.8 billion related to the NGEU, were carried over to 2023 in accordance with the Financial Regulation.

Total 2022 commitment appropriations implementation per EU policy objectives were as shown below:

The 2022 implementation for all types of appropriations (budget, carry-overs from previous year and assigned revenue) was 74% for commitments and 93% for payments. Implementation rates including the appropriations carried over to 2023 (in accordance with the Financial Regulation and/or legal bases) reached 99% for commitment appropriations and 100% for payment appropriations of the voted budget for 2022.

In 2022, the annual tranche of commitments under NGEU 4 was EUR 144.6 billion. In addition, EUR 21.1 billion of commitments were carried over from 2021. In total, EUR 165.7 billion was available for commitments in 2022, out of which 162.7 billion, or 98%, were consumed. The remaining EUR 114 billion of the NGEU total envelope are planned for implementation in 2023 (and in later years for administrative appropriations which can be implemented until 2027). In line with art. 3(4) of EURI Regulation 5 2020/2094, over 60% of legal commitments for the relevant programmes under NGEU (with the exception of InvestEU and Recovery and Resilience Facility (RRF) loans) were entered into by 31 December 2022. The implementation of the NGEU payment appropriations reached 99%.

14.Outstanding commitments

Outstanding commitments (commonly referred to as RAL – reste à liquider), which correspond to amounts committed but not yet paid for, stood at EUR 452.8 billion at the end of 2022. The outstanding commitments increased as compared to 2021 (by EUR 111.2 billion).

The main driver of the 2022 increase of the RAL was the NGEU (non-repayable part) implementation, contributing EUR 189.1 billion (42%) to the total RAL at the end of 2022. As the NGEU appropriations will be committed until 31 December 2023 and paid by 31 December 2026, in accordance with the Articles 3(4) and 3(9) of the EURI Regulation, the trend of nominally growing RAL linked to NGEU will continue in 2023.

15.Budget result

The budget result (surplus) decreased from EUR 3.2 billion in 2021 to EUR 2.5 billion in 2022. A major contributor to the budget result (surplus) 2022 was higher than expected revenue from the customs duties.

16.FINANCIAL INSTRUMENTS AND BUDGETARY GUARANTEES

17.Financial instruments financed by the EU budget

Financial instruments financed by the EU budget exist in the form of guarantee instruments, equity instruments and loan instruments. Under the 2021-2027 MFF the use of budgetary guarantees is expected to increase in comparison to the use of financial instruments fully financed or provisioned from the EU budget. In particular, under the InvestEU Programme, EUR 26.2 billion of EU guarantees will be provided to the EIB group and other financial institutions to support various policy objectives of the Union by means of financing investment operations. The basic concept behind this approach, in contrast to the traditional method of budget implementation of giving grants and subsidies, is that for each euro spent from the budget via financial instruments, the final beneficiary receives more than EUR 1 as financial support due to the leverage effect.

Under this type of budget implementation, funds are either already disbursed to the fiduciary accounts managed by the entrusted entities and stay available (as cash and cash equivalents, debt securities or investments in money market funds or pooled portfolios of assets) to cover future guarantee calls or have been invested in equity. The significance and volume of financial instruments financed by the EU budget under direct and indirect management has been increasing in recent years.

18.Budgetary guarantees: Financial assets held in guarantee funds

Under this type of budget implementation the EU provides guarantees to counterparts for which the funding is only partially provisioned via guarantee funds set up by the Commission. This creates contingent liabilities for the EU budget, in case the provisioning is not sufficient to cover the calls. The EU has given guarantees to the EIB Group for loans granted outside of the EU (the so-called External Lending Mandate, or ELM) and on debt and equity operations covered by the EFSI guarantee. The EU has also given guarantees to the EIB Group and other financial institutions for operations covered by the EFSD, the NDICI-External Action Guarantee and InvestEU.

As of 2021, the provisioning is held in the Common Provisioning Fund (CPF). The CPF is established by the Financial Regulation 6 to hold the provisioning made (i.e. funds held) to cover financial liabilities arising from financial instruments, budgetary guarantees and financial assistance loans as of the 2021-2027 MFF. It also includes some assets of provisioning for financial liabilities from previous MFFs.

The CPF is created and functions as a single portfolio, currently combining provisioning for all the EU budgetary guarantees and some financial assistance programmes. The resources of the CPF are allocated into compartments for the purpose of tracing the amounts relating to the contributing budgetary guarantees and financial assistance programmes.

At 31 December 2022, the Commission holds financial assets in the CPF for the following compartments:

In addition, EUR 342 million is held in the Commission central treasury as a liquidity buffer to cover for immediate guarantee calls.

19.Loans and related borrowings for financial assistance programmes

The EU borrowing and lending activities for financial assistance programmes are non-budget operations. Except for the NGEU, funds raised are on-lent to the beneficiary country, back-to-back i.e. with the same coupon, maturity and amount. As a result, the EU services the borrowings with the money it receives from the loans. Nevertheless, the service of the borrowings is a legal obligation of the EU, which will ensure that all payments are made fully and in a timely manner. The Commission has put procedures in place to ensure the repayment of borrowings even in case of a loan default.

The financial support for Member States and third countries, in the form of bilateral loans financed from the capital markets with the guarantee of the EU budget, is provided by the Commission under decisions of the European Parliament and of the Council. In 2022 the Commission, acting on behalf of the EU, operates six main programmes under which it may grant loans:

At 31 December 2022, the nominal amount of the loans granted for financial assistance, excluding NGEU (see section 2), were:

The repayment schedule for the amounts outstanding at year-end is as follows:

SURE

SURE was established in 2020 to provide financial assistance to Member States who are experiencing, or are seriously threatened with, a severe economic disturbance caused by the COVID-19 pandemic in their territory. The instrument complements the national measures taken by affected Member States. The maximum amount of financial assistance shall not exceed EUR 100 billion for all Member States.

At the end of 2022, Member States had signed loan facility agreements of EUR 98.4 billion, all disbursed by year-end 2022. In 2022, the Commission disbursed new loans of EUR 8.7 billion. The maturity of loans varies between 5 and 30 years.

EFSM

EFSM was created to provide financial assistance to all Member States experiencing or seriously threatened by a severe economic financial disturbance caused by exceptional occurrences beyond their control. The EFSM was used to provide financial assistance, conditional on the implementation of reforms, to Ireland and Portugal between 2011 and 2014. This programme has expired and no additional loans can be drawn, though it remains in place for specific tasks such as the lengthening of maturities of existing loans and providing bridging loans. In 2022, loans of EUR 2.2 billion to Portugal, maturing in April 2022, were extended by 4.5 years, whilst EUR 0.5 billion were repaid.

MFA

The MFA programme is a form of financial assistance extended by the EU to partner countries outside the EU experiencing a balance of payments crisis. It takes the form of medium/long-term loans or grants, or a combination of these, and is only available to countries benefiting from a disbursing International Monetary Fund (IMF) programme.

Ukraine

In 2022 the European Parliament and the Council agreed three packages of financial assistance for Ukraine 7 , totalling EUR 7.2 billion, to strengthen the immediate resilience of the country subsequent to Russia’s unprovoked and unjustified war of aggression. All the loans have been disbursed to Ukraine by the end of 2022. The maturity of these new loans to Ukraine varies between 10 to 30 years.

At the end of 2022 the total MFA loans outstanding to Ukraine amounted to EUR 11.6 billion (nominal amount).

To continue the EU support for Ukraine in 2023, a new package of financial assistance of EUR 18 billion was adopted by the European Parliament and the Council on 14 December 2022 (Regulation (EU) 2022/2463). The Commission and Ukraine signed a Memorandum of Understanding and a Loan Facility Agreement in early 2023 and EUR 7.5 billion of loans has been disbursed by 31 May 2023. The Commission plans to disburse the remaining amount by the end of 2023 in monthly tranches of EUR 1.5 billion.

BOP

The BOP is an assistance programme designed for Member States outside the euro area that are experiencing or are threatened by difficulties regarding their balance of payments. BOP assistance takes the form of medium-term loans that are conditional on the implementation of policies designed to address underlying economic problems. Typically, BOP assistance from the EU is offered in cooperation with the IMF and other international institutions or countries. No new operations or loan repayments occurred in 2022.

Euratom

The European Atomic Energy Community (Euratom, represented by the Commission) lends money to both Member States and non-Member States, and to entities of both, to finance projects relating to energy installations.

20.Budgetary contingent liabilities for financial assistance programmes

Borrowings of the EU constitute direct and unconditional obligations of the EU and are guaranteed by the EU Member States (budgetary contingent liabilities). Borrowings undertaken to fund loans to countries outside the EU are covered by the CPF. Should a beneficiary Member State default, the debt service will be drawn from the available treasury balance of the Commission, if possible. If that is not possible at that time, the Commission would draw the necessary funds from the Member States. EU Member States are legally obliged, according to the EU own resources legislation (Article 14 of Council Regulation (EU, Euratom) No 609/2014), to make available sufficient funds to meet the EU’s obligations. Thus investors are only exposed to the credit risk of the EU, not to that of the beneficiary of loans funded. ‘Back-to-back’ lending ensures that the EU budget does not assume any interest rate or foreign exchange risk.

Loans provided to Member States under the SURE instrument are underpinned by a system of voluntary guarantees from Member States amounting to 25% of the maximum amount of financial assistance. Each Member State’s contribution to the overall amount of the guarantee corresponds to its relative share in the total gross national income (GNI) of the European Union based on the 2020 EU budget.

EUR 6 billion of loans provided to Ukraine in 2022 under the exceptional MFA financial assistance, are covered by a system of guarantees from Member States for 61% of the exposure, with the first 9% of any losses to be covered by the EU budget (CPF). See note 2.4.1.1 in the consolidated EU annual accounts.

For each country programme, the European Parliament, the Council and the Commission decisions determine the overall granted amount, the number of instalments to be disbursed, and the maximum (average) maturity of the loan package. Subsequently, the Commission and the country concerned agree the loan/funding parameters, in particular the maturity of instalments. In addition, except for the first one, all instalments of the loan depend on compliance with policy conditions in the context of an EU financial assistance, which is another factor influencing the timing of funding operations. This implies that the timing and maturities of issuances are dependent on the related EU lending activity. Funding is exclusively denominated in euro and the maturity spectrum is from 3 to 30 years.

21.FINANCIAL STATEMENTS ANALYSIS

22.REVENUE

The consolidated revenue of the EU incorporates amounts related to exchange transactions and non-exchange transactions, the latter being the most significant. The five-year trend of the main non-exchange revenue categories (comprising GNI resources, Traditional own resources, VAT resources, the new Plastics own resources, Fines and Recovery of expenses) is as follows:

Five-year trend of revenue from main non-exchange transactions*

*2020 to 2022 figures: excluding revenue relating to the UK’s withdrawal from the EU

As budget revenue should equal (or exceed) budget expenditure, the main driver in the revenue trend shown above is the payments made each year.

Consolidated revenue – main developments in 2022

In 2022, the consolidated revenue, comprising all revenue categories, amounted to EUR 171.2 billion, compared to EUR 178.9 billion the previous year. The main developments explaining the decrease of EUR 7.7 billion or 4.3% were:

·Financial revenue decreased by EUR 2.5 billion mainly due to a decrease in accrued late payment interest for custom cases.

23.EXPENSES

The main component of expenses recognised in the consolidated financial statements are expenses under the shared management mode, which includes the following funds: (i) European Agricultural Guarantee Fund (EAGF), (ii) European Agricultural Fund for Rural Development (EAFRD) and other rural development instruments, (iii) European Regional Development Fund (ERDF) & Cohesion Fund (CF), and (iv) European Social Fund (ESF). These funds made up EUR 114.8 billion or 43.6% of the total expenses of EUR 263.1 billion incurred in 2022 (2021: EUR 119.9 billion, 54.3% of the total expenses). The split of expenses under the shared management mode and their relative weights are presented below:

Main expenses under the shared management mode for the financial year 2022

The decrease of expenses under the shared management mode is mainly due to decreased expenses relating to the ERDF and Cohesion Fund (by EUR 3.8 billion) and the ESF (by EUR 2.1 billion). This reflects the transition from the former programming period of the 2014-2020 MFF to the current MFF 2021-2027: the costs declared for the previous programming period are decreasing while the costs related to the current period are low due to the slow start of its implementation. Expenses relating to the EAFRD and other rural development instruments and the EAGF increased by EUR 0.6 billion and EUR 0.2 billion respectively.

Following the successful launch of NGEU (see section 2) in 2021, expenses under the direct management mode, which represents budget implementation by the Commission, executive agencies and trust funds, continued to increase from EUR 63.0 billion in 2021 to EUR 94.0 billion in 2022. The increase of EUR 31.0 billion is mainly due to the non-repayable support granted under the NGEU’s RRF, which amounted to EUR 69.5 billion (2021: EUR 42.9 billion).

Expenses under the indirect management mode represent the budget implementation by EU agencies, EU bodies, third countries, international organisations and other entities. In 2022 the expenses under the indirect management mode amounted to EUR 13.6 billion (2021: EUR 10.9 billion). The increase is mainly due to the increased expenses in the External Action area.

24.ASSETS

As at 31 December 2022 total assets amounted to EUR 445.9 billion (2021: EUR 414.1 billion) – the increase is due to further lending from the SURE instrument and the lending and advances paid under the NGEU instrument. The most significant items were financial assets other than cash and cash equivalents (EUR 235.4 billion), pre-financing (EUR 100.5 billion), receivables and recoverables (EUR 48.2 billon) and cash and cash equivalents (EUR 46.5 billion). Other assets, amounting to EUR 15.2 billion, mainly included property, plant and equipment and intangible assets.

Composition of assets at 31 December 2022

The increase in total assets of EUR 31.8 billion or 7.7% from the previous year was mainly due to the following effects:

UK Withdrawal from the EU

On 31 January 2020, the United Kingdom (UK) withdrew from the European Union. The terms of its departure are defined in an Agreement on the withdrawal of the UK from the EU and the European Atomic Energy Community, also known as the ‘Withdrawal Agreement’ or ‘WA’. As part of this deal, the UK agreed to honour all financial obligations undertaken while it was a member of the EU. The agreement entered into force on 31 January 2020. The UK will continue to contribute to the EU budget and to benefit from pre-2021 EU programmes and expenditure as if it was a Member State. The UK will also receive back certain defined monies it paid into the EU budget or monies received by the EU budget linked to its period of membership. The EU reports twice a year to the UK on the amounts due and the UK pays these on a monthly basis. The reporting is updated each year based on actual figures.

The obligations under the Withdrawal Agreement create liabilities and receivables for the EU which have to be calculated and reflected in the EU’s annual accounts and cover in particular the following areas:

Pre-financing

In 2022, pre-financing, excluding other advances to Member States and contributions to the trust funds Bêkou and Africa, amounted to EUR 94.1 billion (2021: EUR 86.2 billion), almost all of which related to Commission activities. The increase of EUR 7.9 billion or 9.2% is related to the increase of pre-financing related to shared management from EUR 31.8 billion in 2021 to EUR 40.6 billion in 2022:

Commission pre-financing by management mode

The level of pre-financing granted under MFF programmes is significantly influenced by the respective MFF cycle – for example at the beginning of an MFF period large advances are expected to be paid to Member States under cohesion policy and these amounts remain available to Member States until the closure of the programmes. An annual pre-financing is also paid out, which must be used within the year or be recovered the following year as part of the annual closure of the accounts cycle. The Commission makes every effort to ensure that pre-financing is maintained at an appropriate level. A balance has to be struck between ensuring sufficient funding for projects and the timely recognition of expenditure.

25.LIABILITIES

As at 31 December 2022 the total liabilities were EUR 577.2 billion (2021: EUR 496.4 billion) – the increase is driven mainly by the borrowings taken out in 2022 under the SURE and NGEU instruments. The most significant liabilities were borrowings for NGEU and financial assistance (EUR 344.3 billion), accrued charges and deferred income (EUR 86.2 billion), pension obligations and other post-employment benefits liabilities (EUR 80.6 billion) and payables to third parties (EUR 55.3 billion).

Composition of liabilities at 31 December 2022

The increase of EUR 80.8 billion or 16.3% over the previous year was mainly due to the following effects:

Total cost claims and invoices received and recognised in the Balance Sheet under the heading ‘Payables’

Net assets

The excess of liabilities over assets at 31 December 2022 amounted to EUR 131.3 billion (2021: EUR 82.3 billion). The considerable increase of EUR 49.0 billion is mainly due to the borrowings in relation to non-repayable support taken out under NGEU in 2022 (resulting in direct management expenses of EUR 69.5 billion, an increase of EUR 26.6 billion against the previous year). It is noted that the excess of liabilities over assets does not mean that the EU institutions and bodies are in financial difficulties, rather it means that certain liabilities will be funded by future annual budgets. Many expenses are recognised under accrual accounting rules in the current year although they may be actually paid in following years and funded using future budgets; the related revenues will only be accounted for in future periods. Apart from the borrowings for NGEU, which are to be repaid between 2028 and 2052, and the employee benefits liability, which is to be paid over several decades, the most significant amounts to be highlighted are the activities relating to the EAGF, the bulk of which is usually paid in the first quarter of the following year.

26.EU POLITICAL AND FINANCIAL FRAMEWORK, GOVERNANCE AND ACCOUNTABILITY

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

27.POLITICAL AND FINANCIAL FRAMEWORK

The EU pursues the objectives established by the Treaty with various instruments, one of which is the EU budget. Others are, for example, a common legislative framework or joint policy strategies.

The main sources of funding of the EU budget are own resources revenues which are complemented by other revenues. There are four types of own resources: Traditional own resources (mainly custom duties), the own resource based on value added tax (VAT), the own resource based on non-recycled plastic packaging waste (introduced in 2021) and the own resource based on gross national income (GNI). Other revenues arising from the activities of the EU (e.g. competition fines) normally represent less than 10% of total revenue.

28.GOVERNANCE AND ACCOUNTABILITY

29.Institutional structure

The EU has an institutional framework through which it aims to promote its values, advance its objectives, serve its interests, those of its citizens and those of the Member States, and ensure the consistency, effectiveness and continuity of its policies and actions. The organisational structure consists of institutions, agencies and other EU bodies. The Financial Regulation, together with the applicable accounting rules, defines which of these entities are included in the EU consolidated accounts (please see note 9 of the EU consolidated annual accounts for the list of entities included in the scope of consolidation).

The European Parliament, jointly with the Council, exercises legislative and budgetary functions. The Commission is politically accountable to the European Parliament. The Council also carries out policy-making and coordinating functions within the general political direction and priorities of the Union set by the European Council.

The European Commission is the executive arm of the European Union. It promotes the Union’s general interest and takes appropriate initiatives to that end. It ensures the application of the Treaties and oversees the application of Union law by Member States under the control of the Court of Justice of the European Union. It exercises coordinating, executive and management functions, executes the budget and manages programmes.

The Commission implements the budget, in large part in cooperation with the Member States. 10 Together, they ensure that the appropriations are used in accordance with the principles of sound financial management. Regulations lay down the control and audit obligations of the Member States when they share the implementation of the budget and the resulting responsibilities. They also lay down the responsibilities and detailed rules for each of the EU’s institutions as concerns their own expenditure.

30.The Commission’s governance structure

The Commission’s governance arrangements and how these ensure that the Commission functions as a modern, accountable and performance-oriented institution are described in the Communication 11 on Governance in the European Commission.

The Commission performs its functions under the leadership of the College of Commissioners, which sets priorities and takes overall political responsibility for the work of the Commission. As a College, the Commission works under the political guidance of its President, who presents, as part of his or her nomination to the European Parliament the objectives he or she intends to pursue in the form of political guidelines. The President decides on the internal organisation of the Commission, ensuring that it acts consistently, efficiently and as a collegiate body.

The College delegates the operational implementation of the budget and financial management to the Directors-General and Heads of Service who lead the administrative structure of the Commission. This decentralised approach creates an administrative culture that encourages civil servants to take responsibility for activities over which they have control and requires them to provide assurance as concerns the activities for which they are accountable.

Under the authority of the President and in close cooperation with the Member of the Commission in charge of budget, human resources and administration, and with the involvement of the Presidential and central services, the Corporate Management Board provides coordination, oversight, advice and strategic orientations.

The internal arrangements define a coherent set of robust controls and management tools which allow the College of Commissioners to assume political responsibility for the work of the Commission. 12

31.The Commission’s financial management

In the Commission, the roles and responsibilities in financial management are clearly defined (e.g. in the Financial Regulation and the Internal Rules 13 ) and applied accordingly. As authorising officers by delegation, the Commission’s Directors-General and Heads of Service are responsible for the sound financial management of EU resources, compliance with the provisions of the Financial Regulation, risk management and establishing an appropriate internal control framework.

The responsibility of the Authorising Officers covers the entire management process, from determining what needs to be done to achieve the policy objectives set by the institution to managing the activities from both an operational and a sound financial management standpoint. Tasks can further be sub-delegated to Directors, Heads of Unit and others, who thereby become Authorising Officers by Sub-Delegation. Each authorising officer by delegation may rely on one or two directors in charge of risk management and internal control to oversee and monitor the implementation of internal control systems.

The Commission’s central services provide guidance and advice and promote best practices, including through the work of the Corporate Management Board.

The Financial Regulation requires each authorising officer to prepare an annual activity report (AAR) detailing achievements, internal control and financial management activities during the year. The AAR includes a declaration that resources have been used based on the principles of sound financial management and that control procedures are in place which provide the necessary guarantees concerning the legality and regularity of the underlying transactions. The Annual Management and Performance Report for the EU budget 14 is the main instrument through which the College of Commissioners assumes political responsibility for the financial management of the EU budget.

The Accounting Officer of the Commission is centrally responsible for treasury management, recovery procedures, laying down accounting rules based on International Public Sector Accounting Standards (IPSAS), validating accounting systems and the preparation of the Commission's and consolidated annual accounts of the EU. Furthermore, the Accounting Officer is required to sign the annual accounts declaring that they present fairly, in all material aspects, the financial position, the results of the operations and the cash flows of the Union. The annual accounts are adopted by the College of Commissioners. The Accounting Officer is an independent function and bears a major responsibility as regards financial reporting in the Commission.

The Internal Auditor of the Commission is likewise a centralised and independent function and provides independent advice, opinions and recommendations on the quality and functioning of internal control systems inside the Commission, EU agencies and other autonomous bodies.

The Audit Progress Committee ensures the independence of the Internal Auditor and monitors the quality of internal audit work and the follow-up given by the Commission services to internal and external audit recommendations, as well as to the European Court of Auditors’ discharge related findings and recommendations on the reliability of the annual consolidated EU accounts. The advisory role of the committee contributes to the overall further improvement of the Commission’s effectiveness and efficiency in achieving its goals and facilitates the College’s oversight of the Commission’s governance, risk management, and internal control practices.

32.External audit and discharge procedure

In line with the principles of sound financial management, funds must be managed in an effective, efficient and economic manner. An accountability framework based on comprehensive reporting, external audit and political control exists to provide reasonable assurance that EU funds are spent in a proper manner.

The European Parliament decides, after a recommendation by the Council, on whether or not to provide its final approval, known as ‘granting discharge’, on the way the Commission implemented the EU budget in a given year. The annual discharge procedure ensures that the Commission is held politically accountable for the implementation of the EU budget.

Every year the European Court of Auditors examines the reliability of the accounts, whether all revenue has been received and all expenditure incurred in a lawful and regular manner and whether the financial management and the qualitative aspects of budgeting, including the performance dimension, have been sound. As from 2021, given the considerable importance of NextGenerationEU, the European Court of Auditor’s opinion on the legality and regularity of expenditure under the traditional EU budget is complemented by a separate opinion on the legality and regularity of expenditure under the Recovery and Resilience Facility. The publication of the annual report of the European Court of Auditors is the starting point for the discharge procedure. The auditors also prepare special reports on specific spending or policy areas, or on budgetary or management issues.

The decision on the discharge is also based on the Commission’s integrated financial and accountability reporting, on hearings of Commissioners in the European Parliament and on the replies provided to written questions addressed to the Commission.

NOTE ACCOMPANYING THE CONSOLIDATED ACCOUNTS

The consolidated annual accounts of the European Union for the year 2022 have been prepared on the basis of the information presented by the institutions and bodies under Article 246(2) of the Financial Regulation applicable to the general budget of the European Union. I hereby declare that they were prepared in accordance with Title XIII of this Financial Regulation and with the accounting principles, rules and methods set out in the notes to the financial statements.

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

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

Rosa ALDEA BUSQUETS

Accounting Officer of the Commission

19 June 2023

EUROPEAN UNION

FINANCIAL YEAR 2022

CONSOLIDATED FINANCIAL STATEMENTS AND EXPLANATORY NOTES

It should be noted that due to the rounding of figures into millions of euros, some financial data in the tables below may appear not to add-up.

CONTENTS

BALANCE SHEET    

STATEMENT OF FINANCIAL PERFORMANCE    

CASHFLOW STATEMENT    

STATEMENT OF CHANGES IN NET ASSETS    

NOTES TO THE FINANCIAL STATEMENTS    

1.    SIGNIFICANT ACCOUNTING POLICIES    

2.    NOTES TO THE BALANCE SHEET    

3.    NOTES TO THE STATEMENT OF FINANCIAL PERFORMANCE    

4.    CONTINGENT LIABILITIES AND ASSETS    

5.    BUDGETARY AND LEGAL COMMITMENTS    

6.    FINANCIAL RISK MANAGEMENT    

7.    RELATED PARTY DISCLOSURES    

8.    EVENTS AFTER THE BALANCE SHEET DATE    

9.    SCOPE OF CONSOLIDATION    

BALANCE SHEET

*    The European Parliament adopted a budget on 23 November 2022 which provides for the payment of the Union's short-term liabilities from own resources to be collected by, or called up from, the Member States in the following year. Additionally, under Article 83 of the Staff Regulations (Regulation (EEC, Euratom, ECSC) No 259/68 of 29 February 1968 as amended), the Member States shall jointly guarantee the liability for pensions.

STATEMENT OF FINANCIAL PERFORMANCE

CASHFLOW STATEMENT

STATEMENT OF CHANGES IN NET ASSETS

NOTES TO THE FINANCIAL STATEMENTS

Note that in the following tables amounts concerning the UK in relation to MFFs up to end 2020 are still shown under the heading Member States as although the UK withdrew from the Union on 1 February 2020, in accordance with the Withdrawal Agreement, it continues to have a financial relationship with the Union equivalent to that of a Member State for these periods.

1.SIGNIFICANT ACCOUNTING POLICIES

2.LEGAL BASIS AND ACCOUNTING RULES

The accounts of the EU are kept in accordance with Regulation (EU, Euratom) 2018/1046 of the European Parliament and of the Council of 18 July 2018 on the financial rules applicable to the general budget of the Union, amending Regulations (EU) No 1296/2013, (EU) No 1301/2013, (EU) No 1303/2013, (EU) No 1304/2013, (EU) No 1309/2013, (EU) No 1316/2013, (EU) No 223/2014, (EU) No 283/2014, and Decision No 541/2014/EU and repealing Regulation (EU, Euratom) No 966/2012 (OJ L 193, 30 July 2018, p. 1) hereinafter referred to as the ‘Financial Regulation’ (FR).

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

Application of new and amended European Union Accounting Rules (EAR)

Revised EAR effective for annual periods beginning on or after 1 January 2022

There are no new EAR which became effective for annual periods beginning on or after 1 January 2022.

New EAR adopted but not yet effective at 31 December 2022

There are no new EAR adopted but not yet effective at 31 December 2022.

3.ACCOUNTING PRINCIPLES

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

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

The qualitative characteristics of financial reporting are relevance, faithful representation (reliability), understandability, timeliness, comparability and verifiability.

4.CONSOLIDATION

Scope of consolidation

The consolidated financial statements of the EU comprise all significant controlled entities, joint arrangements and associates. The complete list of entities falling under the scope of consolidation, which now comprises 54 controlled entities and 1 associate (2021: 55 controlled entities and 1 associate), can be found in note 9. Among the controlled entities are the EU institutions (including the Commission, but not the European Central Bank) and the EU agencies (except those of the Common and Foreign Security Policy). The European Coal and Steel Community in Liquidation (ECSC i.L.) is also considered as a controlled entity. The EU’s only associate is the European Investment Fund (EIF).

Entities falling under the scope of consolidation but immaterial to the EU consolidated financial statements as a whole need not be consolidated or accounted for using the equity method where to do so would result in excessive time or cost to the EU. These entities are referred to as ‘Minor entities’ and are separately listed in note 9. In 2022, 8 entities have been classified as such minor entities (2021: 8 entities).

Controlled entities

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

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

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

Joint Arrangements

A joint arrangement is an agreement of which the EU and one or more parties have joint control. Joint control is the agreed sharing of control of an arrangement by way of a binding arrangement, which exists only when decisions about the relevant activities require the unanimous consent of parties sharing control. Joint agreements can be either joint ventures or joint operations. A joint venture is a joint arrangement that is structured through a separate vehicle and whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Participations in joint ventures are accounted for using the equity method (see note 1.5.4). A joint operation is a joint arrangement whereby the parties that have joint control of the arrangements have rights to the assets, and obligations for the liabilities, related to the arrangement. Participations in joint operations are accounted for by recognising in the EU’s financial statements its assets and liabilities, revenues and expenses, as well as its share of assets, liabilities, revenues and expenses jointly held or incurred.

Associates

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

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

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

5.BASIS OF PREPARATION

Financial statements are presented annually in accordance with Article 243 of the Financial Regulation. The accounting year begins on 1 January and ends on 31 December.

6.Currency and basis for conversion

Functional and reporting currency

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

Transactions and balances

Foreign currency transactions are translated into euros using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the re-translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of financial performance.

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

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

Euro exchange rates

7.Use of estimates

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

8.BALANCE SHEET

9.Intangible assets

An intangible asset is an identifiable non-monetary asset without physical substance. An asset is identifiable if it is either separable (i.e. it is capable of being separated or divided from the entity, e.g. by being sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so), or arises from binding arrangements (including rights from contracts or other legal rights), regardless of whether those rights are transferable or separable from the entity or from other rights and obligations).

Acquired intangible assets are stated at historical cost less accumulated amortisation and impairment losses. Internally developed intangible assets are capitalised when the relevant criteria of the EU Accounting Rules are met and the expenses relate solely to the development phase of the asset. The capitalisable costs include all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management. Costs associated with research activities, non-capitalisable development costs and maintenance costs are recognised as expenses as incurred.

Intangible assets are amortised on a straight-line basis over their estimated useful lives (3 to 11 years). The estimated useful lives of intangible assets depend on their specific economic life time or legal life time determined by an agreement.

10.Property, plant and equipment

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

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

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

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

Leases

A lease is an agreement whereby the lessor conveys to the lessee, in return for a payment or series of payments, the right to use an asset for an agreed period of time. Leases are classified as either finance leases or operating leases.

Finance leases are leases where substantially all the risks and rewards incidental to ownership are transferred to the lessee. When entering a finance lease as a lessee, the assets acquired under the finance lease are recognised as assets and the associated lease obligations as liabilities as from the commencement of the lease term. The assets and liabilities are recognised at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. Over the period of the lease term, the assets held under finance leases are depreciated over the shorter of the asset’s useful life and the lease term. The minimum lease payments are apportioned between the finance charge (the interest element) and the reduction of the outstanding liability (the capital element). The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability, which is presented as current/non-current, as applicable. Contingent rents are charged as expenses in the period in which they are incurred.

An operating lease is a lease other than a finance lease, i.e. a lease where the lessor retains substantially all the risks and rewards incidental to ownership of an asset. When entering an operating lease as a lessee, the operating lease payments are recognised as an expense in the statement of financial performance on a straight-line basis over the lease term with neither a leased asset nor a leasing liability presented in the balance sheet.

11.Impairment of non-financial assets

An impairment is a loss in the future economic benefits or service potential of an asset, over and above the systematic recognition of the loss of the asset's future economic benefits or service potential through amortisation or depreciation (as applicable). Assets that have an indefinite useful life are not subject to amortisation/depreciation and are tested annually for impairment. Assets that are subject to amortisation/depreciation are tested for impairment whenever there is an indication at the reporting date that an asset may be impaired. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable (service) amount. The recoverable (service) amount is the higher of an asset’s fair value less costs to sell and its value in use.

Intangible assets and property, plant and equipment residual values and useful lives are reviewed, and adjusted if appropriate, at least once per year. If the reasons for impairments recognised in previous years no longer apply, the impairment losses are reversed accordingly.

12.Investments accounted for using the equity method

Participations in associates and joint ventures

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

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

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

In cases where the EU holds 20% or more of an investment capital fund, it does not seek to exert significant influence. Such funds are therefore treated as financial instruments and categorised as financial assets at fair value through surplus or deficit (‘FVSD’).

Associates and joint ventures classified as minor entities (see note 1.3) are not accounted for under the equity method. EU contributions to those entities are accounted for as an expense of the period.

13.Financial assets

Classification at initial recognition

The classification depends on two criteria:

·The financial assets management model. This requires an assessment of how the EU manages the financial assets to generate cash flows and to achieve its objectives and how it evaluates the performance on financial assets.

·The asset contractual cash-flow characteristics. This requires an assessment of whether the contractual cash flows are solely payments of principal and interest on the principal outstanding. The interest is the consideration for the time value of money, credit risk and other basic lending risks and costs.

Following assessment based on these criteria, the financial assets can be classified in three categories: Financial assets at amortised cost (‘AC’), financial assets at fair value through net assets/equity (‘FVNA’) or financial assets at fair value through surplus or deficit (‘FVSD’).

Financial assets with contractual cash flows that represent solely principal and interests are classified depending on the entity’s management model. If the management model is to hold the financial assets in order to collect contractual cash flows, the financial assets are classified at AC. If the management model is to hold the financial assets both to collect contractual cash flows and to sell the financial assets, the classification is FVNA. If the management model is different to these two models (e.g. the financial assets are held for trading or held in a portfolio managed and evaluated on a fair value basis), the financial assets are classified as FVSD.

Financial assets with contractual cash flows that do not represent only principal and interests, but introduce exposure to risks and volatility other than those present in a basic lending arrangement (e.g. changes in equity prices), are classified as FVSD regardless of the management model.

At initial recognition, the EU classifies the financial assets as follows:

(I)Financial assets at amortised cost

The EU classifies in this category:

·Cash and cash equivalents;

·Loans (including term deposits with original maturity of more than three months);

·Exchange receivables, except for the financial guarantee contract receivable leg classified as financial asset at fair value through surplus or deficit.

These non-derivative financial assets meet two conditions: The EU’s management model is to hold them in order to collect the contractual cash flows. Furthermore, on specified days, there are contractual cash flows that represent only principal and interest on the outstanding principal.

Financial assets at amortised cost are included in current assets, except for those with maturity of more than 12 months from the reporting date.

(II)Financial assets at fair value through net assets/equity

These non-derivatives financial assets have contractual cash flows that represent only principal and interest on the outstanding principal. In addition, the management model is to hold the financial assets both to collect contractual cash flows and to sell the financial assets.

Assets in this category are classified as current assets, if they are expected to be realised within 12 months from the reporting date.

The EU does not hold such assets at 31 December 2022.

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

The EU classifies the following financial assets as FVSD because the contractual cash flows do not represent only principal and interests on the principal:

·Derivatives;

·Equity investments and investments in money market funds or in pooled portfolio funds;

·Other equity-type investments (e.g. Risk Capital Operations).

In addition, the EU classifies the debt securities it holds as FVSD because the portfolios of debt securities are managed and evaluated on a portfolio fair value basis (e.g. Common Provisioning Fund under Article 212 of the Financial Regulation).

Assets in this category are classified as current assets, if they are expected to be realised within 12 months from the reporting date.

Initial recognition and measurement

Purchases of financial assets at fair value through net assets/equity and at fair value through surplus or deficit are recognised on their trade-date – the date on which the EU commits to purchase the asset. Cash equivalents and loans are recognised when cash is deposited in a financial institution or advanced to borrowers.

Financial assets are initially measured at fair value. For all financial assets not carried at fair value through surplus or deficit, the transactions costs are added to the fair value at initial recognition. For financial assets carried at fair value through surplus or deficit the transaction costs are expensed in the statement of financial performance.

The fair value of a financial asset on initial recognition is normally the transaction price unless the transaction is not at arm’s length i.e. at no or at nominal consideration for public policy purposes. In this case, the difference between the fair value of the financial instrument and the transaction price is a non-exchange component which is recognised as an expense in the statement of financial performance. In this case, the fair value of a financial asset is derived from current market transactions for a directly equivalent instrument. If there is no active market for the instrument, the fair value is derived from a valuation technique that uses available data from observable markets.

When a long-term loan that carries no interest or an interest below market conditions is granted, its fair value can be estimated as the present value of all future cash receipts discounted using the prevailing market rate of interest for a similar instrument with a similar credit rating.

Loans granted under the Recovery and Resilience Facility and loans for financial assistance are initially measured at their nominal amount, with the transaction price considered the fair value of the loan. This is because:

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

·Furthermore, as there is no active market or similar transactions to compare with, the interest rate to be used by the EU for fair valuing its lending operations should be the interest rate charged.

Subsequent measurement

Financial assets at amortised cost are subsequently measured at amortised cost using the effective interest method.

Financial assets at fair value through net assets/equity are subsequently measured at fair value. Gains and losses from changes in the fair value are recognised in the fair value reserve, except for foreign exchange translation differences on monetary assets, which are recognised in the statement of financial performance.

Financial assets at fair value through surplus or deficit are subsequently measured at fair value. Gains and losses from changes in the fair value (including those stemming from foreign currency translation and any interests earned) are included in the statement of financial performance in the period in which they arise.

Fair value at subsequent measurement

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

Investments in venture capital funds which do not have a quoted market price in an active market are valued at the attributable net asset value, which is considered as an equivalent of their fair value.

Impairment of financial assets

The EU recognises and measures an impairment loss for expected credit losses on financial assets that are measured at amortised cost and at fair value through net assets/equity.

The expected credit loss (ECL) is the present value of the difference between the contractual cash flows and the cash flows that the EU expects to receive. The ECL incorporates reasonable and supportable information that is available without undue cost or effort at the reporting date.

The ECL is measured with a three stage model that takes into account probability weighted default events during the lifetime of the financial asset and the evolution of credit risk since the origination of the financial asset. For loans, origination is the date of the irrevocable loan commitment.

If there is no significant increase in credit risk since origination (‘stage 1’), the impairment loss is the ECL from possible default events in the next 12 months from the reporting date (’12 months ECL’). If there is a significant increase in credit risk since origination (‘stage 2’), or if there is objective evidence of a credit impairment (‘stage 3’), the impairment loss equals the ECL from possible default events over the whole lifetime of the financial asset (‘lifetime ECL’) (see note 6.5).

For assets at amortised cost, the asset’s carrying amount is reduced by the amount of the impairment loss which is recognised in the statement of financial performance. For assets at fair value through net assets/equity the loss allowance is recognised in net assets/equity and does not reduce the carrying amount of the financial asset in the balance sheet. If, in a subsequent period, the amount of the impairment loss decreases, the previously recognised impairment loss is reversed through the statement of financial performance.

(a)Loans to sovereigns

The EU bases its assessment of loans’ impairment, in the context of the nature of the EU’s financing and its unique institutional status.

For the impairment of loans to non-Member States, the EU calculates the expected credit losses using external credit quality data, however taking into account its preferred creditor status, which reduces the credit risk. For the calculation of the present value, the discount rate is the loan’s original effective interest rate. If a loan has a variable interest rate, the discount rate is the current effective interest rate determined under the contract.

For loans to Member States, the EU has never incurred any impairment losses, nor faced any defaults on payments. For these loans, in addition to the preferred creditor status, the EU takes into account the relationships with its Member States. These two elements, in principle, guarantee the full recovery of the loans to Member States, on maturity. Therefore, the EU considers the expected credit losses from loans to Member States to be negligible, and a statistical approach to calculate expected credit losses as inappropriate for these loans. Thus no expected credit losses are recognised in the statement of financial performance for the loans to Member States.

(b)Receivables

The EU measures the impairment loss at the amount of lifetime ECL, using practical expedients (e.g. provision matrix).

(c)Cash and cash equivalents

The EU holds cash and cash equivalents in current bank accounts and term deposits of up to 3 months. The cash is held in banks with very high credit ratings (see note 6.5), thus having very low default probabilities. Given the short duration and low default probabilities, the expected credit losses from cash and cash equivalents are negligible. As a result, no impairment allowance is recognised for cash equivalents.

Derecognition

Financial instruments are derecognised when the rights to receive cashflows from the investments have expired or the EU has transferred substantially all risks and rewards of ownership to another party. Sales of financial assets at fair value through net assets/equity and through surplus or deficit are recognised on their trade-date.

14.Inventories

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

15.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 in accordance with the principle of sound financial management over a period defined in the particular contract, decision, agreement or basic act. The float or advance is either used for the purpose for which it was provided during the period defined in the agreement or it is repaid. If the beneficiary does not incur eligible expenditure, they have the obligation to return the pre-financing to the EU. As the EU retains control over the pre-financing and is entitled to a refund for the ineligible part, the amount is presented as an asset.

Pre-financing is initially recognised on the balance sheet when cash is transferred to the recipient. It is measured at the amount of the consideration given. In subsequent periods pre-financing is measured at the amount initially recognised on the balance sheet less the eligible expenses (including estimated amounts where necessary) incurred during the period.

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

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

The contributions to EU trust funds (as established under Article 234 of the Financial Regulation) not consolidated in the European Commission, or to other unconsolidated entities, are classified as pre-financing since their purpose is to give a float to the trust fund to allow it to finance specific actions defined under the trust fund’s objectives. The EU contributions to trust funds are measured at the initial amount of the EU contribution less eligible expenses, including estimated amounts where necessary, incurred by the trust fund during the reporting period and allocated to the EU contribution in accordance with the underlying agreement.

16.Exchange receivables and non-exchange recoverables

The EU Accounting Rules require a separate presentation of exchange and non-exchange transactions. To distinguish between the two categories, the term ‘receivables’ is reserved for exchange transactions, whereas for ‘non-exchange transactions’, i.e. when the EU receives value from another entity without directly giving approximately equal value in exchange, the term ‘recoverables’ is used (e.g. recoverables from Member States related to own resources).

Receivables from exchange transactions are financial assets measured at amortised cost, except for certain amounts of financial guarantee contract receivable leg which are classified as financial asset at fair value through surplus or deficit (see note 1.5.5).

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

17.Cash and cash equivalents

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

18.Employee benefits

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

Short-term employee benefits

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

Post-employment benefits

The EU grants a set of post-employment benefits to employees, which include retirement, invalidity and survival pensions provided under the Pension Scheme of the European Officials (PSEO), as well as health insurance coverage provided under the Joint Sickness Insurance Scheme (JSIS) (see note 2.9). These benefits are provided under a single plan – although split in two schemes – and they must be treated similarly so as to give a fair presentation of the situation and reflect the economic reality:

I.Pension Scheme of European Officials (PSEO): The benefits granted under this notionally funded 15 scheme relate to seniority, invalidity and survival, as well as, family allowances, death before retirement to those employees that work or worked in the EU Institutions, Agencies and other EU bodies or are survivors of deceased officials or pensioners. Staff contribute one third of the expected cost of these benefits from their salaries.

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

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

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

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

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

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

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

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

19.Provisions

Provisions are recognised when the EU has a present legal or constructive obligation towards third parties as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are not recognised for future operating losses. The amount of the provision is the best estimate of the expenses expected to be required to settle the present obligation at the reporting date. Where the provision involves a large number of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities (‘expected value’ method).

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

20.Financial liabilities

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

Borrowings are composed of borrowings from credit institutions and debts evidenced by certificates (EU bonds, EU deposits and EU bills). They are recognised initially at fair value, being their issue proceeds (fair value of consideration received) net of transaction costs incurred, then subsequently carried at amortised cost using the effective interest method; any difference between proceeds, net of transaction costs, and the redemption value is recognised in the statement of financial performance over the period of the borrowings using the effective interest method. The transaction costs incurred by the EU and then recharged to the beneficiary of the loan are immaterial and are directly recognised in the statement of financial performance.

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

The EU recognises a financial guarantee contract liability when it enters into a contract that requires the EU to make specified payments to reimburse the guarantee holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. Where the guarantee contract requires the EU to make payments in response to financial instruments price changes or changes to other underlyings, the guarantee contract is a derivative i.e. a financial liability at fair value through surplus or deficit. All other guarantee contracts are accounted for as financial provisions.

Financial guarantee contract liabilities are initially recognised at fair value. This equals the net present value of the premium receivable, if it is at market terms. When no guarantee premium is charged or where the consideration is not fair value, the fair value is determined based on the quoted prices in an active market for financial guarantee contracts directly equivalent to that entered into the financial guarantee liability, if available, or using a valuation technique. If no reliable measure of fair value can be determined either by direct observation of an active market or through another valuation technique, the financial guarantee contract liability is initially measured at the amount of the lifetime expected credit losses.

The subsequent measurement depends on the evolution of the credit risk exposure from the financial guarantee. If there is no significant increase in credit risk (‘stage 1’), financial guarantee liabilities are measured at the higher of the 12 months expected credit losses and the amount initially recognised less, when appropriate, cumulative amortisation. If there is a significant increase in credit risk (‘stage 2’), financial guarantee liabilities are measured at the higher of the lifetime expected credit losses and the amount initially recognised less, when appropriate, cumulative amortisation (see note 6.5).

Financial liabilities are classified as non-current liabilities, except for maturities less than 12 months after the balance sheet date. Financial guarantee contracts are classified as current liabilities except if the EU has an unconditional right to defer the settlement of the liability for at least twelve months after the reporting date.

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

The same measurement principles apply to the external contributions to the EU programmes, in case such contributions are received with conditions to use the resources as stipulated in the contribution agreements or otherwise to return them to the contributor.

21.Payables

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

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

22.Accrued and deferred revenue and charges

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

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

23.STATEMENT OF FINANCIAL PERFORMANCE

24.Revenue

REVENUE FROM NON-EXCHANGE TRANSACTIONS

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

GNI based resources, VAT and Plastics own resources

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

Traditional own resources

Recoverables from non-exchange transactions and related revenues are recognised when the relevant monthly ‘A’ statements (including duties collected and amounts due that are guaranteed and not contested) are received from the Member States. At the reporting date, revenue collected by the Member States for the period but not yet paid to the Commission is estimated and recognised as accrued revenue. The quarterly ‘B’ statements (including duties neither collected nor guaranteed, as well as guaranteed amounts that have been contested by the debtor) received from the Member States are recognised as revenue less the collection costs to which they are entitled. In addition, a value reduction is recognised for the amount of the estimated recovery gap.

Fines

Revenue from fines is recognised when the EU’s decision imposing a fine has been adopted and it is officially notified to the addressee. After the decision to impose a fine, the fined entities have two months from the date of notification:

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

b)not to accept the decision, in which case they challenge it in accordance with EU law.

Even if appealed, the fine must be paid within the time limit of three months laid down, as the appeal does not have suspensory effect (Article 278 TFEU). The cash received is used to clear the recoverable. However, subject to the agreement of the Commission’s Accounting Officer, the undertaking may present a bank guarantee for the amount instead. In that case the fine remains as a recoverable. If neither cash nor a guarantee is received and there are doubts about the undertaking’s solvency, a value reduction on the entitlement is recognised.

If the undertaking appeals against the decision, and has already provisionally paid the fine, the amount is disclosed as a contingent liability, or, if it appears probable that the General Court may not rule in favour of the EU, a provision is recognised to cover this risk. If a guarantee is given instead, the outstanding recoverable is written down.

The accumulated interest received by the Commission on the bank accounts where received payments are deposited is recognised as revenue, and any contingent liability is increased accordingly.

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

REVENUE FROM EXCHANGE TRANSACTIONS

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

Interest revenue and expense

Interest revenue and expense are recognised in the statement of financial performance using the effective interest method. This is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest revenue or interest expense over the relevant period. When calculating the effective interest rate, the EU estimates cashflows considering all contractual terms of the financial instrument (for example prepayment options) but does not consider future credit losses. The calculation includes all fees and interest rate points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

Once a financial asset or a group of similar financial assets is considered credit impaired (‘stage 3’), the interest revenue is recognised using the rate of interest to discount the future cashflows for the purpose of measuring the impairment loss.

Revenue from dividends

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

Revenue and expense from financial assets through surplus or deficit

This refers to the fair value gains (revenue) and fair value losses (expense) from these financial assets, including those stemming from foreign exchange translation. For interest-bearing financial assets, this also includes interest. See also note 3.9.

Revenue from financial guarantee contracts

The revenue from financial guarantee contracts (guarantee premium) is recognised over the time the EU stands ready to compensate the holder of the financial guarantee contract for the credit loss it may incure. The amortisation schedule applied takes into account the passage of time and the volume of the guaranteed exposure. Revenue from financial guarantee contracts include also amortisation of financial guarantee contracts liability in cases when the guarantee was provided at no or nominal consideration.

25.Expenses

Expenses from non-exchange transactions account for the majority of the EU’s expenses. They relate to transfers to beneficiaries and can be of three types: (i) entitlements, (ii) transfers under agreement and discretionary grants, as well as (iii) contributions and donations.

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

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

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

26.CONTINGENT ASSETS AND LIABILITIES

27.Contingent assets

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

28.Contingent liabilities

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

29.CASHFLOW STATEMENT

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

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

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

The cashflow statement reports cashflows during the period classified by operating, investing and financing activities.

Operating activities are the activities of the EU that are not investing or financing activities. These are the majority of the activities performed.

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

Financing activities are activities that result in changes in the size and composition of borrowings other than those granted to beneficiaries on a back-to-back basis or for the acquisition of properaty, plant and equipment (which are included under operating activities).

30.NOTES TO THE BALANCE SHEET

ASSETS

31.INTANGIBLE ASSETS