NATO UNCLASSIFIED Releasable to Montenegro. 8 August 2016 DOCUMENT C-M(2016)0044-AS1 (INV)

Transcription

1 Releasable to Montenegro 8 August 2016 DOCUMENT C-M(2016)0044-AS1 (INV) IBAN REPORTS ON THE 2013 FINANCIAL STATEMENTS OF NETMA, NAMMO AND NEFMO ACTION SHEET On 5 August 2016, under the silence procedure, the Council noted the IBAN reports IBA-AR(2014)26, IBA-AR(2014)33 and IBA-AR(2014)34 attached to C-M(2016)0044 (INV) and agreed the RPPB recommendation regarding public disclosure contained in the RPPB note. (Signed) Alexander Vershbow Deputy Secretary General NOTE: This Action Sheet is part of, and shall be attached to C-M(2016)0044 (INV).. NHQD46374

2 Releasable to Montenegro 1 August 2016 DOCUMENT C-M(2016)0044 (INV) Silence Procedure ends: 5 Aug :00 IBAN REPORTS ON THE 2013 FINANCIAL STATEMENTS OF NETMA, NAMMO AND NEFMO Note by the Deputy Secretary General 1. I attach the International Board of Auditors for NATO (IBAN) reports on the audits of the financial statements of the NATO EF2000 and Tornado Development Production and Logistics Management Agency (NETMA), the NATO Multi-Role Combat Aircraft Development Production and In-Service Support Management Organisation (NAMMO) and the NATO European Fighter Aircraft Development, Production and Logistic Management Organisation (NEFMO) for the year ended 31 December The audit reports all set out unqualified audit opinions. 2. The IBAN reports were brought to the attention of the Resource Policy and Planning Board (RPPB). In line with PO(2015)0052, the RPPB recommends to Council to withhold the 2013 NETMA, NAMMO and NEFMO financial statements and the associated IBAN reports from public disclosure due to sensitive data contained in the financial statements. 3. I consider that no Council discussion regarding these reports is required. Consequently, unless I hear to the contrary by 16:00 hours on Friday, 5 August 2016, I shall assume that the Council has noted the IBAN reports IBA-AR(2014)26, IBA-AR(2014)33 and IBA-AR(2014)34 and agreed the RPPB recommendation regarding public disclosure contained in the enclosed RPPB note. (Signed) Alexander Vershbow 9 annexes 3 enclosures Original: English -1- NHQD45900

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4 Releasable to Montenegro ANNEX 1 C-M(2016)0044 (INV) IBAN REPORT AND LETTER OF OBSERVATIONS AND RECOMMENDATIONS ON THE AUDIT OF THE FINANCIAL STATEMENTS FOR NETMA, NAMMO AND NEFMO FOR THE YEAR ENDED 31 DECEMBER 2013 Report by the Resource Policy and Planning Board References: (A) IBA-A(2014)244 & IBA-AR(2014)26 (B) N/ N/ /150179/15/NU, dated 15 April 2015 (C) N/ / /151540/15NU, dated 18 June 2015 (D) N/ N/ /158086/16/NU, dated 17 February Council agreed with PO(2015)0052 that, in principle, unclassified IBAN audit reports, together with any related financial statements, should be made publicly available after they have been dealt with by Council. 2. The IBAN issued an unqualified audit opinion on the 2013 audit of the financial statements for NETMA, NAMMO and NEFMO. The unqualified audit report (reference (A)) will be forwarded to Council for notation together with a recommendation on public disclosure as per agreed procedures. 3. In reference (B), the NETMA General Manager informed the Chairman RPPB that Partner Nations in the Joint Steering Committee could not agree to the publication of any of these financial statements for reasons of military and commercial sensitivity. 4. In references (C) and (D), the NETMA General Manager, on the request of the Chairman RPPB, provides further information regarding their concerns with respect to the public disclosure of the Financial Statements. The concerns relate to two of the ten categories of exemption from public disclosure outlined in C-M(2008) In an effort to reconcile the diverging arguments, the RPPB tasked the NETMA General Manager, working with the IBAN, Partner Nations and the Partner Nations representatives on the Board to find a way forward so that the 2013 financial statements could be disclosed to the public. 6. Notwithstanding these efforts, no solution has been found. For the 2013 financial statements, the NETMA General manager, on behalf of the three entities, maintains the position that all three sets of statements: NETMA, NAMMO and NEFMO should not be published on the grounds that they were not generated with publication in mind and therefore contain significant amounts of commercially sensitive data, relating to relationships with 1 NATO 3 confidential commercial information, unless the parties concerned consent to its public disclosure; NATO 7 details about current weapons systems. Reference C-M(2008)

5 Releasable to Montenegro ANNEX 1 C-M(2016)0044 (INV) existing export customers, major industrial partners and which may be detrimental to ongoing and future export campaigns. 7. Regarding public disclosure of future years financial statements, the Board is pleased to note that the entities have no concerns with the publication of the financial statements of NETMA and NAMMO from 2014 onward and these have already been disclosed. 2 However, the Board notes the entities position that the NEFMO financial statements should not be publicly disclosed due to the damage this may cause to ongoing and future significant export campaigns, since they contain confidential commercial information. 3 The Board further notes that this position is expected to be reviewed in 2019 for the 2018 statements, as by then the relevance and scale of the commercial sensitivities may have changed significantly. Weighing all arguments carefully, the Board reluctantly concludes not to recommend to Council the public disclosure of the 2013 NETMA, NAMMO and NEFMO financial statements. The Board concludes that the concerns of the entities, clearly referencing the NATO exemptions in C-M(2008)0116, cannot be disregarded. After due consideration of the arguments presented, also considering the willingness shown by the entities to find solutions to allow public disclosure of future years financial statements, the Board concludes, in line with PO(2015)0052, to recommend to Council to withhold the 2013 NETMA, NAMMO and NEFMO financial statements and the associated IBAN report from public disclosure. 2 The 2014 NETMA financial statements were disclosed with C-M(2015)0085; and the 2014 NAMMO financial statements were disclosed with C-M(2016) NATO 3 confidential commercial information, unless the parties concerned consent to its public disclosure (C-M(2008)0116). 1-2

6 Releasable to Montenegro Summary Note for Council by the International Board of Auditors for NATO (Board) on the audit of the Financial Statements of the NATO Multi-Role Combat Aircraft Development Production and In-Service Support Management Organisation (NAMMO) for the year ended 31 December 2013 ANNEX 2 C-M(2016)0044 (INV) NAMMO is a NATO Production and Logistic Organisations. The participating nations for NAMMO are Germany, Italy and the United Kingdom. The NATO EF 2000 and Tornado Development, Production and Logistics Management Agency (NETMA) manage this programme and the related budget. The Board audited the NAMMO Financial Statements for the year ended 31 December Expenditure from the operational budget amounted to EUR 406 million. The Board issued an unqualified opinion on the NAMMO Financial Statements and on compliance for the year ended 31 December There are no current year observations. During the audit, the Board followed up on the status of one observation from previous years audits related to High level of Cash and Cash Equivalents which is still outstanding and is summarised in the Letter of Observations and Recommendations (Annex 4). 2-1

7 Releasable to Montenegro ANNEX 3 C-M(2016)0044 (INV) IBA-AR(2014)33 INTERNATIONAL BOARD OF AUDITORS FOR NATO AUDITOR S REPORT ON THE FINANCIAL STATEMENTS OF THE NATO MULTI-ROLE COMBAT AIRCRAFT DEVELOPMENT PRODUCTION AND IN-SERVICE SUPPORT MANAGEMENT ORGANISATION (NAMMO) FOR THE YEAR ENDED 31 DECEMBER

8 IBAIiiiiIBA Releasable to Montenegro ANNEX 3 C-M(2016)0044 (INV) IBA-AR(2014)33 REPORT OF THE INTERNATIONAL BOARD OF AUDITORS Report on the Financial Statements FOR NATO TO THE NORTH ATLANTIC COUNCIL The International Board of Auditors for NATO (Board) audited the accompanying Financial Statements of NAMMO, which comprised the Statement of Financial Position as at 31 December 2013, and the Statement of Financial Performance, the Cash Flow Statement and the Statement of Changes in Net Assets/Equity for the year then ended, and the notes to the financial statements, including a summary of significant accounting policies. The Board also audited the Statement of Comparison of Budget and Actual Amounts for the year ended 31 December Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the NATO Accounting Framework and the requirements of the NATO Financial Regulations as authorized by the North Atlantic Council (NAC). This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit, which is conducted in accordance with our Charter and international standards on auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, due to fraud or error. In making those risk assessments, internal control relevant to the entity's preparation and presentation of financial statements is considered in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of internal control. An audit also includes evaluating the appropriateness of accounting policies used, the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 3-2

9 IBAIiiiiIBA Releasable to Montenegro ANNEX 3 C-M(2016)0044 (INV) IBA-AR(2014)33 Opinion on Financial Statements In our opinion, the financial statements present fairly, in all material respects, the financial position of NAMMO as of 31 December 2013, and of its financial performance and its cash flows for the year then ended in accordance with the NATO Accounting Framework. Report on Compliance Management s Responsibility for Compliance In addition to the responsibility for the preparation and presentation of the financial statements described above, management is also responsible for ensuring that the financial transactions and information reflected in the financial statements are in compliance with the NATO Financial Regulations and the NATO Civilian Personnel Regulations as authorised by the North Atlantic Council (NAC). Auditor s Responsibility In addition to the responsibility to express an opinion on the financial statements described above, our responsibility includes expressing an opinion on whether the financial transactions and information reflected in the financial statements are, in all material respects, in compliance with the NATO Financial Regulations and the NATO Civilian Personnel Regulations. This responsibility includes performing procedures to obtain reasonable assurance about whether the funds have been used for the settlement of authorised expenditure and whether their operations have been carried out in compliance with the financial and personnel regulations in force. Such procedures include the assessment of the risks of material non-compliance. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Opinion on Compliance In our opinion, in all material respects, the financial transactions and information reflected in the financial statements are in compliance with the NATO Financial Regulations and the NATO Civilian Personnel Regulations. Brussels, 19 December 2014 Dr Charilaos Charisis Chairman 3-3

10 IIII Releasable to Montenegro INTERNATIONAL BOARD OF AUDITORS FOR NATO ANNEX 4 C-M(2016)0044 (INV) IBA-AR(2014)33 LETTER OF OBSERVATIONS AND RECOMMENDATIONS FOR THE NATO MULTI-ROLE COMBAT AIRCRAFT DEVELOPMENT PRODUCTION AND IN-SERVICE SUPPORT MANAGEMENT ORGANISATION (NAMMO) FOR THE YEAR ENDED 31 DECEMBER

11 Releasable to Montenegro ANNEX 4 C-M(2016)0044 (INV) IBA-AR(2014)33 Introduction The International Board of Auditors for NATO (Board) audited the NAMMO Financial Statements for the year ended 31 December 2013, and issued an unqualified opinion on those financial statements and on compliance. Observations and Recommendations There are no current year observations. The Board also followed up on the status of one observation from previous years audits and noted that it is still outstanding. 4-2

12 Releasable to Montenegro ANNEX 4 C-M(2016)0044 (INV) IBA-AR(2014)33 FOLLOW-UP OF PREVIOUS YEARS OBSERVATION The Board reviewed the status of the observation and recommendation arising from the previous audit. The observation and its status are summarised in the table below. Status of previous years observations OBSERVATION / RECOMMENDATION ACTION TAKEN STATUS Audit Report 2011 Financial Statements C-M(2013)0010 & IBA-AR(2012)32 High level of Cash and Cash Equivalents The Board recommended that, as stated in the notes to the NAMMO financial statements, the agency continue to work with the Nations to reduce cash holdings in line with expected expenditure in accordance with the NETMA Financial Regulations, section 11, paragraph The cash level at the year-end of 2013 increased compared to 2012 from EUR 378 million to EUR 431 million, meanwhile expenses decreased from EUR 452 million to EUR 410 million. Observation Outstanding. Comment of the General Manager, NETMA Thank you for the opportunity to comment on the final report of the NAMMO financial statements for the year ended 31 December We will, of course, seek to address the observation you have made. 4-3

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14 Releasable to Montenegro Summary Note for Council by the International Board of Auditors for NATO (Board) on the audit of the Financial Statements of the NATO EF2000 and Tornado Development, Production and Logistics Management Agency (NETMA) for the year ended 31 December 2013 ANNEX 5 C-M(2016)0044 (INV) NETMA manages the NAMMO and NEFMO Production and Logistics Organisations programmes and their related budgets. The Board audited the Financial Statements of the Administrative Budget of NETMA for the year ended 31 December The total expenditure in 2013 for the Administrative Budget amounted to EUR 44.5 million. The Board issued an unqualified opinion on the NETMA Financial Statements and on compliance for the year ended 31 December There are no observations or recommendations. 5-1

15 Releasable to Montenegro INTERNATIONAL BOARD OF AUDITORS FOR NATO ANNEX 6 C-M(2016)0044 (INV) IBA-AR(2014)26 AUDITOR S REPORT ON THE FINANCIAL STATEMENTS OF THE NATO EF 2000 AND TORNADO DEVELOPMENT, PRODUCTION AND LOGISTICS MANAGEMENT AGENCY (NETMA) FOR THE YEAR ENDED 31 DECEMBER

16 Releasable to Montenegro ANNEX 6 C-M(2016)0044 (INV) IBA-AR(2014)26 REPORT OF THE INTERNATIONAL BOARD OF AUDITORS FOR NATO TO THE NORTH ATLANTIC COUNCIL Report on the Financial Statements The International Board of Auditors for NATO (Board) audited the accompanying Financial Statements of NETMA, which comprised the Statement of Financial Position as at 31 December 2013, and the Statement of Financial Performance, the Cash Flow Statement and the Statement of Changes in Net Assets/Equity for the year then ended, and the notes to the financial statements, including a summary of significant accounting policies. The Board also audited the Statement of Comparison of Budget and Actual Amounts for the year ended 31 December Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the NATO Accounting Framework and the requirements of the NATO Financial Regulations as authorized by the North Atlantic Council (NAC). This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit, which is conducted in accordance with our Charter and international standards on auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, due to fraud or error. In making those risk assessments, internal control relevant to the entity's preparation and presentation of financial statements is considered in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of internal control. An audit also includes evaluating the appropriateness of accounting policies used, the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 6-2

17 Releasable to Montenegro ANNEX 6 C-M(2016)0044 (INV) IBA-AR(2014)26 Opinion on Financial Statements In our opinion, the financial statements present fairly, in all material respects, the financial position of NETMA as of 31 December 2013, and of its financial performance and its cash flows for the year then ended in accordance with the NATO Accounting Framework. Report on Compliance Management s Responsibility for Compliance In addition to the responsibility for the preparation and presentation of the financial statements described above, management is also responsible for ensuring that the financial transactions and information reflected in the financial statements are in compliance with the NATO Financial Regulations and the NATO Civilian Personnel Regulations as authorised by the North Atlantic Council (NAC). Auditor s Responsibility In addition to the responsibility to express an opinion on the financial statements described above, our responsibility includes expressing an opinion on whether the financial transactions and information reflected in the financial statements are, in all material respects, in compliance with the NATO Financial Regulations and the NATO Civilian Personnel Regulations. This responsibility includes performing procedures to obtain reasonable assurance about whether the funds have been used for the settlement of authorised expenditure and whether their operations have been carried out in compliance with the financial and personnel regulations in force. Such procedures include the assessment of the risks of material non-compliance. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Opinion on Compliance In our opinion, in all material respects, the financial transactions and information reflected in the financial statements are in compliance with the NATO Financial Regulations and the NATO Civilian Personnel Regulations. Brussels, 19 December 2014 Dr Charilaos Charisis Chairman 6-3

18 Releasable to Montenegro Summary Note for Council by the International Board of Auditors for NATO (Board) on the audit of the Restated Financial Statements of the NATO European Fighter Aircraft Development, Production and Logistic Management Organisation (NEFMO) for the year ended 31 December 2013 ANNEX 7 C-M(2016)0044 (INV) NEFMO is a NATO Production and Logistic Organisations. The participating nations for NEFMO are Germany, Italy, the United Kingdom and Spain. NETMA manages this programme and the related budgets. The Board audited the Restated Financial Statements of NEFMO for the year ended 31 December Expenditure from the operational budget amounted to EUR 3.6 billion. The Board issued an unqualified opinion on the Restated Financial Statements of NEFMO and on compliance for the year ended 31 December During the audit, the Board also made one observation and one recommendation related to the Restatement of the Financial Statements. This finding is summarised in the Letter of Observations and Recommendations (Annex 9). 7-1

19 Releasable to Montenegro ANNEX 8 C-M(2016)0044 (INV) IBA-AR(2014)34 INTERNATIONAL BOARD OF AUDITORS FOR NATO AUDITOR S REPORT ON THE RESTATED FINANCIAL STATEMENTS OF THE NATO EUROPEAN FIGHTER AIRCRAFT DEVELOPMENT, PRODUCTION AND LOGISTIC MANAGEMENT ORGANISATION (NEFMO) FOR THE YEAR ENDED 31 DECEMBER

20 Releasable to Montenegro REPORT OF THE INTERNATIONAL BOARD OF AUDITORS Report on the Financial Statements FOR NATO TO THE NORTH ATLANTIC COUNCIL 8-2 ANNEX 8 C-M(2016)0044 (INV) IBA-AR(2014)34 The International Board of Auditors for NATO (Board) audited the accompanying Restated Financial Statements of NEFMO, which comprised the Statement of Financial Position as at 31 December 2013, and the Statement of Financial Performance, the Cash Flow Statement and the Statement of Changes in Net Assets/Equity for the year then ended, and the notes to the financial statements, including a summary of significant accounting policies. The Board also audited the Statement of Comparison of Budget and Actual Amounts for the year ended 31 December Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these restated financial statements in accordance with the NATO Accounting Framework and the requirements of the NATO Financial Regulations as authorized by the North Atlantic Council (NAC). This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these restated financial statements based on our audit, which is conducted in accordance with our Charter and international standards on auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, due to fraud or error. In making those risk assessments, internal control relevant to the entity's preparation and presentation of financial statements is considered in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of internal control. An audit also includes evaluating the appropriateness of accounting policies used, the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

21 Releasable to Montenegro ANNEX 8 C-M(2016)0044 (INV) IBA-AR(2014)34 Opinion on Financial Statements In our opinion, the restated financial statements present fairly, in all material respects, the financial position of NEFMO as of 31 December 2013, and of its financial performance and its cash flows for the year then ended in accordance with the NATO Accounting Framework. Report on Compliance Management s Responsibility for Compliance In addition to the responsibility for the preparation and presentation of the restated financial statements described above, management is also responsible for ensuring that the financial transactions and information reflected in the financial statements are in compliance with the NATO Financial Regulations and the NATO Civilian Personnel Regulations as authorised by the North Atlantic Council (NAC). Auditor s Responsibility In addition to the responsibility to express an opinion on the restatement of the financial statements described above, our responsibility includes expressing an opinion on whether the financial transactions and information reflected in the financial statements are, in all material respects, in compliance with the NATO Financial Regulations and the NATO Civilian Personnel Regulations. This responsibility includes performing procedures to obtain reasonable assurance about whether the funds have been used for the settlement of authorised expenditure and whether their operations have been carried out in compliance with the financial and personnel regulations in force. Such procedures include the assessment of the risks of material non-compliance. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Opinion on Compliance In our opinion, in all material respects, the financial transactions and information reflected in the restated financial statements are in compliance with the NATO Financial Regulations and the NATO Civilian Personnel Regulations. Brussels, 19 December 2014 Dr Charilaos Charisis Chairman 8-3

22 Releasable to Montenegro INTERNATIONAL BOARD OF AUDITORS FOR NATO ANNEX 9 C-M(2016)0044 (INV) IBA-AR(2014)34 LETTER OF OBSERVATIONS AND RECOMMENDATIONS THE NATO EUROPEAN FIGHTER AIRCRAFT DEVELOPMENT, PRODUCTION AND LOGISTIC MANAGEMENT ORGANISATION (NEFMO) FOR THE YEAR ENDED 31 DECEMBER

23 Releasable to Montenegro ANNEX 9 C-M(2016)0044 (INV) IBA-AR(2014)34 Introduction The International Board of Auditors for NATO (Board) audited the Restated Financial Statements of NEFMO for the year ended 31 December 2013, and issued an unqualified opinion on those financial statements and on compliance. Observation and Recommendation During the audit, the Board identified one observation and provided one recommendation related to the Restatement of the Financial Statements. This observation and recommendation does not impact the audit opinion. The Board also followed up on the status of one observation from previous years audits and noted that it was settled. 9-2

24 Releasable to Montenegro ANNEX 9 C-M(2016)0044 (INV) IBA-AR(2014)34 OBSERVATION AND RECOMMENDATION 1. RESTATEMENT OF THE NEFMO FINANCIAL STATEMENTS Reasoning 1.1 The financial statements should be free of any mathematical errors, non-reconciling items, or any other errors caused by lack of control during its preparation. Entities should have proper internal controls, including reviews, in place to ensure the consistency and accuracy of information presented in the statements before its issuance. Observation 1.2 The Board identified several errors in the financial statements as published on 29 April 2014 (Reference N/ N/ /140526/14/NU). One error in the Statement of Comparison of Budget and Actual Amounts was material, while immaterial errors impacted the Statement of Financial Position (payables and receivables), the Statement of Changes in Net Assets/Equity, the note C07 on Foreign Exchange Gains and Losses and the Budget Reconciliation 1 (Indirect Cash Flow Statement and Statement of Budget and Actual Amounts). These findings were discussed with and corrected by the NATO EF 2000 and Tornado Development, Production and Logistics Management Agency (NETMA) during the audit. As a result, NETMA issued the restated NEFMO financial statements on 16 October 2014 (Reference N/ N / / / NU) which were audited by the Board. Recommendation 1.3 The Board recommends NETMA, as the operational agency for NEFMO, to establish robust verification procedures of the figures and other information in the financial statements before its final issuance. Comment of the General Manager, NETMA Thank you for the opportunity to comment on the final report of the NEFMO financial statements for the year ended 31 December It is very satisfying to note the removal of the qualification on the NEFMO account in relation to Property Plant and Equipment. We are also very pleased to note the limited number of observations that remain on the accounts. We will, of course, seek to address the observations you have made. 9-3

25 Releasable to Montenegro ANNEX 9 C-M(2016)0044 (INV) IBA-AR(2014)34 FOLLOW-UP OF PREVIOUS YEAR S OBSERVATION The Board reviewed the status of the observation and recommendation arising from the previous audit. The observation and its status are summarised in the table below. Status of previous year s observations OBSERVATION / RECOMMENDATION ACTION TAKEN STATUS Audit Report 2012 Financial Statements C-M(2014)35 & IBA-AR(2013)35 Property, Plant and Equipment (PP&E) The Board issued a qualified opinion on the NEFMO Financial Statements for the year ended 31 December 2012 due to a scope limitation on the value and completeness of Property, Plant & Equipment. In 2013 the NAC approved the NATO Accounting Framework (C-M(2013)0039 which allows entities to consider PP&E acquired prior to 1 January 2013 as fully expensed. Agreements with the industry significantly improved the quality of evidence regarding the valuation and completeness of PP&E. Observation Settled. 9-4

26 ENCLOSURE 1 C-M(2016)0044 (INV) NAMMO FINANCIAL STATEMENTS FOR THE PERIOD ENDED 31 DECEMBER

27 CONTENTS Introduction to NAMMO 3 Financial Report 4 Schedule 1 Statement of Financial Position as at 31 December Schedule 2 Statement of Financial Performance for the Period ended 31 December Schedule 3 Indirect Cash Flow Statement for the Period ended 31 December Schedule 4 Statement of Changes in Net Assets / Equity for the Period ended Schedule 5 31 December Statement of Comparison of Budget and Actual Amounts for the Period ended 31 December Annex A Accounting Policies and Definitions 11 Annex B Notes to the Statement of Financial Position 17 Annex C Notes to the Statement of Financial Performance 22 Annex D Notes to the Cash Flow Statement 25 Annex E Notes to the Statement of Changes in Net Assets / Equity 27 Annex F Notes to the Budget Execution Statement 28 Annex G Application of IPSAS 30 2

28 NAMMO NATO Multi-Role Combat Aircraft Development, Production and In Service Support Management Organisation (NAMMO) is a subsidiary body created within the framework of NATO for the implementation of tasks arising out of that Treaty, and established by the North Atlantic Council pursuant of Article 9 of the North Atlantic Treaty and within the meaning of the Agreement on the Status of the North Atlantic Treaty Organisation, National Representatives and International Staff, signed in Ottawa on 20 th September NAMMO is based in Unterhaching, Germany and is a NATO Production and Logistics Organisation (NPLO) formed by the nations of Germany, Italy and United Kingdom to develop, produce and support the Tornado aircraft. Each Nation within NAMMO undertakes to fulfil the provisions and intentions laid down in the General Memorandum of Understanding between the Ministers of Defence of the Federal Republic of Germany, the Republic of Italy and United Kingdom of Great Britain and Northern Ireland on the joint development, production and in-service support of Tornado dated 14 May 1969 and in subsequent Memoranda of Understanding. As an integral part of NATO, NAMMO will exercise those rights and privileges possessed by NATO by virtue of Article 4 of the Ottawa Agreement within the limits and subject to the terms and conditions specified by the present Charter, taking into account of the Agreement between NATO and the Government of the Federal Republic of Germany, dated 30 th November A NAMMO Board of Directors (BoD), comprising of representatives from the three NAMMO nations, provides strategic direction and governance to the Tornado Programme and NETMA provides support in the delivery of this direction. In this activity, NAMMO is acting as a principal and these accounts are put together on this basis. The NAMMO BoD directs NETMA in its management of the programme including approval of the NAMMO Operational Budget after review by the associated Legal Financial and Contractual Committee (LFCC). Funding for NAMMO is wholly through contributions made by the three NATO member nations the Federal Republic of Germany, the Republic of Italy and the United Kingdom of Great Britain and Northern Ireland. As a NATO organisation two NAMMO nations are exempt from taxation relating to operating revenue and expenses. However in the case of the Federal Republic of Germany VAT is levied. 3

29 FINANCIAL REPORT Introduction The NAMMO Financial Statements have been produced in accordance with the NATO Accounting Framework which is based on International Public Sector Accounting Standards (IPSAS) tailored as permitted by the North Atlantic Council. For the purposes of IPSAS, NAMMO is regarded as a support authority and accounting policies have been applied as they would to a construction manager. NAMMO is under the direct control of the contributing nations who direct the Agency in the use of the assets resulting from the programme and also have the risks and benefits of ownership. Where the nations gain beneficial use of the assets all costs are regarded as in-service costs incurred to maintain Tornado front line capability either through the procurement of spares or, at the direction of nations, contracting for post design tasks. As NAMMO is regarded as a construction manager NATO Owned Repairable Stores (Tornado) NORS (T) are the property of Nations and are treated as an expense in the NAMMO Statement of Financial Performance. Highlights NAMMO adopted a new accounting framework through the decision of the North Atlantic Council in August This framework is based on IPSAS standards but with limited tailoring to address NATO specific issues. The adoption of this accounting framework was backdated to 1 st January 2013 and therefore these accounts are prepared on that basis and historical assets are restated where necessary. The NATO Accounting Framework allows Property, Plant and Equipment (PP&E) assets acquired prior to 1 st January 2013 to be treated as fully expensed. For the 2012 financial statements, due to issues with establishing reliable values for historically acquired assets, the organisation removed these from the face of the statements in line with IPSAS 17. The accounting framework sustains this position so there has been no financial impact on the 2013 financial statements. For NAMMO there have been no assets acquired during 2013 that meet the criteria for capitalisation. Revenue Revenue is generated through contributions from Nations as shown in the adjacent chart. Other minor revenue items include bank interest, loan fees, levies and proceeds from the disposal of NATO Owned Repairable Stores (Tornado) (NORS (T)). Breakdown of Contributions by Nation 2013 IT 42.61% UK 8.84% GE 48.55% 4

30 Costs Programme costs are currently for in service support only and can be identified by Nation as illustrated in the chart opposite. Breakdown of Costs by Nation 2013 UK 10.12% Other costs recognised within the financial statements include foreign currency gains and losses. IT 45.71% GE 44.18% Accounting and Control The budget for NAMMO is constructed on a cash basis and funds are generally called for quarterly in advance, with the exception of the United Kingdom where funds are provided more regularly. Interest generated on the programme bank accounts is returned to Italy but retained within the programme for both Germany and United Kingdom and shown as part of the Unearned Revenue balance within the financial statements. The Annual Financial Statements are constructed on an accruals basis and reconciled against the cash outturn accordingly. During 2013, the Agency has improved the process for reviewing financial statements internally and more comprehensive management reviews have been undertaken. To build on this success, the intention is to share this information with Nations during This increases the awareness of the accruals position throughout the financial year and also eases the burden of producing the Annual Financial Statements. Conclusion The Annual Financial Statements represent a true and fair view of the organisation s activities for FINANCIAL STATEMENTS 5

31 Schedule 1 STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2013 (all amounts stated in thousands of Euros) Notes ASSETS Current Assets Cash and Cash Equivalents B01 431, ,573 52, Inter Entity Current Accounts B Receivables B Prepayments B Inventories B Financial Assets B , ,573 53, Non Current Assets Property, Plant and Equipment B Intangible Assets B TOTAL ASSETS 431, ,573 53, LIABILITIES Current Liabilities Short Term Borrowings B Payables B10 31,030 21,845 9, Advances B11 400, ,728 44, , ,573 53, Non Current Liabilities Long Term Borrowings B Provisions B TOTAL LIABILITIES 431, ,573 53, TOTAL ASSETS LESS LIABILITIES NET ASSETS Accumulated Surplus / (Deficit) B Reserves B TOTAL NET ASSETS

32 FINANCIAL STATEMENTS Schedule 2 STATEMENT OF FINANCIAL PERFORMANCE FOR THE PERIOD ENDED 31 DECEMBER 2013 (all amounts stated in thousands of Euros) Notes OPERATING ACTIVITIES Revenue Operating Revenue C01 410, ,088 (41,539) (9.19) 410, ,088 (41,539) (9.19) Expenses Operating Expenses C02 410, ,003 (41,677) (9.22) 410, ,003 (41,677) (9.22) SURPLUS / (DEFICIT) FROM OPERATING ACTIVITIES GENERAL & ADMINISTRATIVE COSTS Personnel C Operations and Maintenance C IT Services C Depreciation & Amortization C NET SURPLUS / (DEFICIT) FROM OPERATING ACTIVITIES FINANCIAL INCOME & COSTS Foreign Exchange Gains & Losses C07 (376) (664) Other Financial Income & Costs C (426) (73.58) (223) (85) (138) (162.35) NET SURPLUS / (DEFICIT) FOR THE PERIOD

33 FINANCIAL STATEMENTS Schedule 3 INDIRECT CASH FLOW STATEMENT FOR THE PERIOD ENDED 31 DECEMBER 2013 (all amounts stated in thousands of Euros) Notes CASH FLOW FROM OPERATING ACTIVITIES Cash Flow from Operating & Other Activities Surplus / (Deficit) from Op Activities D Depreciation & Amortization D Financial Income & Costs D (426) (73.58) (288) (43.37) Decrease / (Increase) in Current Assets Receivables D04 (970) 0 (970) (100.00) Prepayments D Inventories D Financial Assets D (970) 0 (970) (100.00) Increase / (Decrease) in Current Liabilities Short Term Borrowings D Payables D09 9,185 (9,837) 19,022 (193.37) Advances D10 44,230 (31,952) 76,182 (238.43) 53,415 (41,789) 95,204 (227.82) NET CASH FLOW FROM OPERATING ACTIVITIES 52,821 (41,125) 93,946 (228.44) CASH FLOW FROM INVESTING ACTIVITIES Decr / (Incr) Prop, Plant & Equipment Assets D Decr / (Incr) Financial Assets D NET INCREASE / (DECREASE) CASH & CASH EQUIVALENTS 52,821 (41,125) 93,946 (228.44) CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 378, ,362 (41,789) (9.94) Effect of Exchange Rate Changes D13 (376) (664) 288 (43.37) CASH & CASH EQUIVALENTS AT END OF PERIOD 431, ,573 52,

34 FINANCIAL STATEMENTS Schedule 4 STATEMENT OF CHANGES IN NET ASSETS / EQUITY FOR THE PERIOD ENDED 31 DECEMBER 2013 (all amounts stated in thousands of Euros) Notes PP&E Asset Revaluation Translation Accumulated TOTAL Reserve Reserve Reserve Surplus / (Deficit) Balance at 31 December , (2,886) 32,218 Changes in Accounting Policy E01 (35,104) 0 0 2,886 (32,218) RESTATED BALANCE Surplus / (Deficit) on Revaluation of Prop, Plant & Equip E Surplus / (Deficit) on Revaluation of Financial Assets E Currency Translation Differences E NET INCREASE / DECREASE OF RESERVES Revenue E , ,667 Expenses E (452,791) (452,791) NET SURPLUS / (DEFICIT) FOR THE PERIOD Balance at 31 December Changes in Accounting Policy E RESTATED BALANCE Surplus / (Deficit) on Revaluation of Prop, Plant & Equip E Surplus / (Deficit) on Revaluation of Financial Assets E Currency Translation Differences E NET INCREASE / DECREASE OF RESERVES Revenue E , ,700 Expenses E (410,803) (410,803) NET SURPLUS / (DEFICIT) FOR THE PERIOD Balance at 31 December

35 FINANCIAL STATEMENTS Schedule 5 STATEMENT OF COMPARISON OF BUDGET AND ACTUAL AMOUNTS FOR THE PERIOD ENDED 31 DECEMBER 2013 (all amounts stated in thousands of Euros) Notes Budgeted Amounts Commitments Expenses Credits Carried Forward Original Adjustments Final Lapsed Credits Germany BWB F01 98, ,326 96,454 96, ,872 Germany LwWSKdo F02 128, ,817 85,420 85, ,397 Italy ARMAEREO F03 103,000 54, , , , ,380 Italy COMLOG F04 59, ,518 44,303 44, ,215 United Kingdom F05 53, ,065 41,978 41, , ,726 54, , , , ,951 10

36 ANNEX A Accounting Policies & Definitions Basis of Preparation The financial statements of NAMMO have been prepared on a going-concern basis. However, the Heads of State and Government approved at the Lisbon Summit (19-20 November 2010) the consolidation and rationalisation of the functions and programmes of the 14 NATO agencies into three agencies and a shared-service organisation, and the reorganization of the Military Commands. Subsequently Charters for a new NATO Support Organisation (NSPO), NATO Communications and Information Organisation (NCIO) and NATO Procurement Organisation (NPO) were approved on 1 July However, whilst the NSPO and NCIO Agencies are now up and running, the NPO, into which NETMA would be expected to integrate, will be in a two year design phase to develop a framework for ongoing and future programmes; executive bodies of the NPO, including the Procurement Agency, will only be established once an existent programme or a new programme would integrate into the Procurement Organisation. Current programmes must indicate when they will integrate into the new Agency, and a case made to the North Atlantic Council (NAC) if this is not possible by In June 2013 NETMA member nations informed NATO that currently they see no evidence that integration into the NPO would increase the effectiveness and efficiency of the programmes; this situation remains under review through continued engagement with the reform process. There is no information at the time of the preparation of these financial statements that would indicate an intention to cease operations. Ministers have also agreed that a NATO Shared Services Organisation will be established. Customers, including both new and current Agencies, would be directed to use shared services as they are implemented. An Office of Shared Services at NATO has at the end of February 2014 presented an Implementation Plan outlining proposals for the sharing of functions of Finance & Accounting, Human Resources and General Procurement in a centralized environment. The intention is to have a decision at NATO on these proposals and the Implementation Plan by summer The full extent and impact of Agency Reform and the establishment of a shared services organisation on NAMMO is still unclear at the time of submitting these financial statements. The NAMMO financial statements have been prepared on the accruals basis of accounting in accordance with the accounting requirements of the NATO Accounting Framework which is based on International Public Sector Accounting Standards (IPSAS) issued by the International Public Sector Accounting Standards Board (IPSASB) and relevant to NAMMO as decided by the North Atlantic Council in A list of standards issued by the IPSAS Board can be found on the following website The accounting principles recognised as appropriate for the measurement and reporting of the financial performance, the financial position and cash flows on an accrual basis using historical costs are followed in the preparation of the financial statements. 11

37 The financial statements have been prepared in accordance with the accounting requirements of the NATO Financial Regulations (NFR) and the Financial Rules and Procedures (FRP). Application of IPSAS and Tailoring NAMMO adopted all IPSAS standards issued by the IPSAS Board that were effective prior to 31 December 2013 and, where relevant, the adapted standards within the NATO Accounting Framework have been applied. As encouraged by the IPSAS Board, and to increase transparency and accountability, IPSAS standards that are available for early adoption have also been adopted. There is no material impact in the opening balances resulting from early adoption. A summary of standards adopted is provided in Annex G. Use of Estimates In accordance with generally accepted accounting principles, the financial statements necessarily include amounts based on estimates and assumptions by management, based on the most reliable information available. Estimates include accrued revenue and expenses. Actual results could differ from those estimates and changes are reflected in the period in which they become known. Consolidation The NAMMO financial statements are not consolidated. Changes in Accounting Policy During 2013, NAMMO changed its accounting policy in regards to the capitalisation threshold for Property, Plant and Equipment. Previously the threshold for recognising NAMMO-owned assets was 15,000 but following a review of the thresholds of the different asset categories in light of the NATO Accounting Framework the threshold has been increased to 200,000. The higher threshold is considered by management to be an appropriate threshold for ensuring significant assets are identified and capitalised. The NATO Accounting Framework and change in policy had no impact on the financial statements as assets acquired prior to 1 st January 2013 were not recognised in previous year s financial statements as it was not possible to measure reliably the purchase cost or fair value and there were no new assets or modifications acquired during Significant Accounting Policies Foreign Currency Transactions Foreign currency transactions are accounted for at the NATO exchange rates prevailing on the date of the transactions. Monetary assets and liabilities at year-end which were denominated in foreign currencies were translated into Euro using the NATO rates of exchange that were applicable at 31 December Realised and unrealised gains and losses resulting from the settlement of such transactions and from the revaluation at the reporting dates of monetary assets and liabilities denominated in foreign currencies are recognised in the Statement of Financial Performance. 12

38 Financial Instruments The costs of activities in the NAMMO Operational Budget are borne by Nations in accordance with the formula specified in the Memorandum of Understanding (MOU) Supplement 4. Contributions are assessed on the basis of approved budget authorisations and called for in accordance with the budgeted cash requirements of NAMMO, therefore financial instruments play a more limited role in creating risk than would apply to a non-public sector organisation of a similar size. NAMMO uses only non-derivative financial instruments as part of its normal operations. This includes the following financial assets and liabilities: Cash and cash equivalents (i.e. cash, bank accounts, deposit accounts), Accounts receivable, Accounts payable. In accordance with IPSAS 29, Financial Instruments are recognised at the contract date and initially measured at fair value. Their subsequent measurement depends on their classification. Cash, receivables and other liabilities are not revalued (except for changes in exchange rates which are included in the statement of financial performance). Financial Instruments are derecognised on expiry or when all contractual obligations are transferred. IPSAS 30 Financial Instruments: Disclosures, requires the organisation to provide disclosures in respect of the role of financial instruments on the financial position and performance, the nature and extent of the risks to which the organisation is exposed and how these risks are managed. Management is aware of the risks associated with financial instruments and is bound by NETMA Financial Rules and Regulations to keep these risks very low. Currency risk: To limit the exposure to foreign currency risk, NAMMO forecasts yearly expected expenditures in foreign currencies where it is material (i.e. GBP). In order to have the required funding, NAMMO asks the Nations to provide their contributions in either EUR or GBP. Therefore the currency risk is deemed to be minimal and hedging the foreign currency exposure is not considered necessary. The transactions in foreign currencies are denominated in the functional currency at the date of the transaction. Liquidity risk: The liquidity risk is based on the assessment of whether the organisation will encounter difficulties in meeting its obligations associated with financial liabilities. There is limited exposure to liquidity risk because of the budget mechanism that guarantees contributions for the total approved budget. The accuracy of forecasts that result in the calls for contributions as well as the delay in receiving payments, represent the main liquidity risks. Credit risk: There is very limited credit risk as the contributing Nations generally have a high credit rating. At the time of submitting these financial statements, Italy recently experienced a downgrade in their credit rating, 13

39 however, the risk of financial loss due to a participating Nation s failure to raise funds is still assessed as very low. In the event that there is a shortage of funds by one or more Nations to meet financial obligations, other Nations will be expected to provide the necessary funding. Interest rate risk: NAMMO is restricted from entering into borrowings and investments, and therefore there is no significant interest rate risk identified. Current Assets Cash and cash equivalents are carried in the Statement of Financial Position at fair value and comprise deposits held within nominated programme bank accounts. Foreign currency balances are translated using the NATO rate applicable as at 31 December Accounts receivable consist of outstanding Calls for Funds from Nations for the 2013 financial year and any other receivables from external sources in relation to loan agreements, levies, etc. Non Current Assets In accordance with IPSAS 17, Property, Plant and Equipment (PPE) are considered as tangible assets when it is probable that future economic benefits or service potential associated with the item will flow to the entity and only recognised in the financial statements when the cost or fair value can be measured reliably. NAMMO-owned assets includes such items as rigs, jigs, Special to Type Test Equipment (STTE) and general tooling procured under NAMMO contracts and are held within industry. The Tornado programme is some forty-five years old and there is little available historical cost information for assets held by industry and due to the specialist nature of the assets, there is no market-based fair value available. As neither the cost nor fair value could be measured reliably, legacy assets acquired in previous years were not recognised on the Statement of Financial Position. This position is sustained by the NATO Accounting Framework which allows assets acquired prior to 1 st January 2013 to be treated as fully expensed. Aircraft, government owned in-service equipment or nationally modified equipment are not included within NAMMO PP&E as these are National Assets owned by the benefiting Nation and are included within National Financial Statements and Accounts accordingly. NAMMO assets were purchased under NAMMO contracts mainly for the intended use in the development and production phase of the programme therefore it is considered fair to assume these assets have mostly been consumed and depreciated by the end of the production period. However, certain rigs, jigs and test equipment are required to be retained for use beyond the production phase in order to meet Nations requirements for future planned capability and support programmes. Information on the Rig Disposal Plan, produced as part of the NAMMO Asset Cost Reduction Programme, is used as a basis for determining which major rigs, jigs and test equipment acquired 14

40 prior to 1 st January 2013 are retained for use and considered significant in value; these are disclosed in the notes to the financial statements. Assets acquired after 1 st January 2013 are recognised at their cost where there are reliable values at the time of acquisition or construction. After recognition as an asset an item of PP&E is carried at its cost less any accumulated depreciation and any accumulated impairment losses. NAMMO s capitalisation threshold is 200,000. Items acquired after 1 st January 2013 with a cost on acquisition above this threshold are capitalised, items falling below this threshold are fully expensed in the year of procurement. There are no Intangible Assets to be capitalised for NAMMO, as they are not separately identifiable costs and are deemed to be integral part of the production equipment construction costs. Development costs associated with the aircraft are delivered and accounted for as part of aircraft delivered and therefore owned by the Nations. The carrying amount of tangible assets are reviewed for impairment if events or changes in circumstances indicate that they maybe not recoverable. If any such indication exists, the recoverable amount of an asset is estimated in order to determine the extent of the impairment loss (if any). Any provision for impairment is charged against the statement of financial performance in the year concerned. The gross value of a new asset will be capitalised as PP&E on the Statement of Financial Position. The revenue for the full amount of the asset is accounted for in the year of purchase on the Statement of Financial Performance. Therefore a surplus on the Statement of Financial Performance is generated in the first year of purchase and transferred to the PP&E Asset Reserve account to increase accumulated asset reserves. Depreciation is charged each year on a straight-line basis over the asset s useful life and accounted for as an expense which generates a deficit on the Statement of Financial Performance. This deficit is transferred to PP&E Asset Reserves at the end of each year to reduce the accumulated asset reserve. Tangible assets are derecognised either on disposal or when no future economic benefit or service potential is expected from their use or disposal. Liabilities NAMMO liabilities include amounts payable to suppliers for work undertaken but not yet paid, amounts owing to Nations in respect of miscellaneous revenue that is to be returned in accordance with instructions from Nations, and advance contributions and unearned revenue. Advances and Unearned Revenue Advance contributions are those funds received for future years budgets. Unearned revenue represents contributions received from Nations and third parties that have 15

41 been called for in the current or prior years that have not been recognised as revenue. Funds are called for in advance of their need because NAMMO has no capital that would allow it to pre-finance any of its activities. Unearned revenue also includes miscellaneous income earned that Nations have instructed remain on the programme accounts rather than be returned to the respective National Treasuries. Provisions and contingent liabilities Provisions are recognised when NAMMO has a present obligation as a result of a past event, and it is probable that NAMMO will be required to settle that obligation, and where a reliable estimate of the amount of obligation can be made. Provisions are measured at management s best estimate of the expenditure required to settle the obligation at the date of the statement of financial position, and are discounted to present value where the effect is material. Other commitments, which do not meet the recognition criteria for liabilities, are disclosed in the notes to the financial statements as contingent liabilities when their existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events which are not wholly within the control of NAMMO. Revenue NAMMO is funded by the three contributing Nations Germany, Italy and United Kingdom. Contributions are usually called for quarterly in advance, apart from the UK which often occurs on a monthly basis. Other revenue earned during a financial period includes loan fees, levies and bank interest. Expenses NAMMO operates comparable to a construction manager for the purposes of IPSAS and payments made to industry are expensed accordingly. All expenses incurred on the Tornado Weapons System Programme are for the in-service support of the aircraft. Related Parties Disclosure The key management personnel of NAMMO have no significant related party relationships that could affect the operation of NAMMO. Board members and senior management are remunerated in accordance with published NATO pay scales. Neither receives loans that are not available to all staff. 16

42 ANNEX B Notes to the Statement of Financial Position B01: Cash and Cash Equivalents 431, ,573 52, Germany BAAINBw (ex BWB) 105,224 94,981 10, Germany KdoUstgVbde Lw (ex LwWSKdo) 132,477 88,154 44, Italy ARMAEREO (Banca Intesa) 166, ,938 36, Italy COMLOG 22,530 60,552 (38,022) (62.79) UK Lloyds 2,270 1, (38.50) UK Lloyds (GBP account) 1,572 2,310 (738) (31.95) The Tornado Weapons System Program has a number of bank accounts relating to the various funding offices from which payments are made and contributions received. With the exception of the UK Lloyds account held in GBP all others are held in Euros. The accounting system (PARMIS) functionality necessitates that each cash and bank account separately identified has an associated clearing account to enable the sub-ledger to interface with the General Ledger. The carrying balance on all clearing accounts is zero. The overall levels of cash holdings have increased over the year as Nations expenditure in the area of In-Service Support (ISS), Modification Sets, Repair & Overhaul, Spares and some direct contracts was lower than estimated on CADPS and industry reports. The levels of national cash holdings within NAMMO remain high. NETMA continues to support Nations in their consideration and investigation as to how best to reduce these holdings without detrimental effect on the long-term viability of the NAMMO programme. While this work is ongoing NETMA continues to seek only sufficient funds to pay expected level of claims. B02: Inter Entity Current Accounts Any balances that exist on these accounts represent amounts owed to or from either NEFMO or the NETMA Administration Budget. At the end of 2013 there were no balances on these accounts. B03: Receivables Commercial Exploitation Levies Receivable - Germany Italy National Contributions receivable represent the outstanding amounts from budgeted Calls for Funds and Commercial Exploitations Levies for the financial year. There are no outstanding amounts from Call for Funds as Calls that were made and not fully met by Nations by the end of the year are accounted for as contributions for the next period. The outstanding amounts relate to Commercial Exploitation Levies from Saudi British Defence Cooperation Programme due for the last 6 months of 2013, these amounts are collected by the United Kingdom and transferred to the other two Nations. B04: Prepayments NAMMO does not make prepayments to industry. B05: Inventories

43 NAMMO does not hold any inventory assets. Any inventories held in industry to be consumed in the production process are expensed and any inventory assets held in the ordinary course of operations to support Tornado are owned by the benefiting Nations. B06: Financial Assets NAMMO does not hold any financial assets other than cash and receivables that have been separately reported on within the Annual Financial Statements. B07: Property, Plant and Equipment The ownership of all Turbo Union assets has been handed over to industry and for PANAVIA an assessment has been made on information available. The asset base of PANAVIA and its sub-contractors is large and consists of rigs, jigs, tools and test equipment. At the request of Nations, the NAMMO Cost Reduction and Asset Rationalisation Programme was set up to develop a disposal strategy for rigs and tooling to reduce costs and identify rigs and tooling that are required to meet Nations requirements up to the individual Out of Service Dates (OSD). The assets to be retained are those required to support the remaining aircraft configurations and reduced fleet size. Due to the age of these special to type assets and the evidence available as to their value, either initially or currently, it was not possible to establish reliable values for them and as such, in line with IPSAS 17 and the NATO Accounting Framework, the organisation has not recognised any assets acquired prior 1 st January 2013 on the financial statements. There were no new asset additions or modifications acquired during 2013 that meet the capitalisation criteria. The major rigs, jigs and test equipment that are retained to support the programme are identified as part of the rigs disposal strategy. In total there are forty-four Major Rigs and Test Equipment of significant value located at various contractor sites in Germany, Italy and UK that are retained for continued support of the programme. Based on information available on industry asset registers and the technical and engineering expertise within NETMA, it is estimated that these assets have an original purchase cost of approximately 116M. The NAMMO tooling strategy and implementation plan is still being developed with industry to determine the range and scale of tooling that is required to be retained to meet Repair and Overhaul (R&O) and aircraft support tooling requirements of each Nation. Given the age and value of tooling assets, it is assumed that the asset pool has been fully depreciated over the production period and any remaining residual value is negligible. When the tooling strategy and implementation plans have been agreed with Nations, a reassessment will be made and adjustment included in future financial statements if considered material. Asset Write Offs NETMA Financial Rules and Regulations require the disclosure of NAMMO-owned assets, regardless of value, that have been subject to write off during The majority of assets written off during 2013 include general tooling and test equipment items which are individually relatively low in value, a summary by Nation and company is provided below for information: COMPANY NATION QUANTITY ALENIA AERMACCHI VARESE ITALY 1 BAES ROCHESTER UK 45 BAES WARTON UK 103 EATON AEROSPACE UK 56 RRD OBERURSEL GERMANY 1 UTC CLAVERHAM LTD UK 5 TOTAL 211 The maximum total value (i.e. historical purchase cost) of write offs is estimated at 125K. 18

44 B08: Intangible Assets NAMMO does not hold any intangible assets. Development costs are expensed by NAMMO and the intangible assets are held on the Statement of Financial Position of the benefiting Nations. B09: Short Term Borrowings NAMMO does not have any short term loans from any organisation with all funds being provided by Nations and the generation of miscellaneous revenue such as Commercial Exploitation Levies. B10: Payables 31,030 21,845 9, Payable to Suppliers reconciled to AP Trial Balance 1,412 1,986 (574) (28.90) Manual Accrual 20,349 13,326 7, Bank Interest earned payable to Italy (309) (68.51) NORS(T) payable to: - Italy (17) (2.77) - United Kingdom Commercial Exploitation Levies payable to: - Germany 5,940 3,567 2, Italy 2,589 1, Amounts payable to suppliers represents invoices for work undertaken but not yet paid. This account is reconciled to the Payables sub-ledger within the financial system operated by NAMMO on a monthly basis. The manual accrual has been assessed by analysing invoices accounted for in January and February 2014 with 2013 (and earlier) invoice dates. Also the process has been improved as all January and February CADPs invoices and other material invoices dated January and February 2014 were reviewed to ensure they were accrued for in the correct year. Bank interest earned on the Italian bank accounts throughout the year is payable to Italy s National Treasury and is repaid in the year following that in which the interest was earned. Gains on NORS(T) disposals payable to Italy and United Kingdom are generated from the disposal of NATO Owned Repair Stock for Tornado by participating nations. As ownership of all NORS(T) assets have been transferred to Nations, disposal receipts for Italy and UK are to be transferred to the respective National Treasuries accordingly. Gains for Germany remain on the account and are treated as unearned revenue. Commercial Exploitation Levies payable to Nations are those levies generated by the Saudi British Defence Co- Operation Programme that are payable to Germany and Italy. Age Analysis of Payables to Suppliers ,000,000 1,500,000 1,000, , ,609, ,263 1,654, ,589-1,338, , ,000-1,000, Days Days > 30 Days - 1,500,000 19

45 B11: Advances 400, ,728 44, Advance Contributions: - Germany BAAINBw (ex BWB) 15,255 8,250 7, Germany KdoUstgVbde Lw (ex LwWSKdo) 4,066 4, Italy COMLOG 0 20,064 (20,064) (100.00) Unearned Revenue 381, ,347 57, Advance contributions represent those contributions received for the next financial year. Accumulated Unearned Revenue represents the excess of national contributions and miscellaneous revenue over expenditure on the NAMMO program to date and is similarly reflected in the level of cash holdings within the NAMMO bank accounts. The movement on Unearned Revenue can be reconciled as follows: Unearned Revenue b/f 324, ,014 National Contributions 467, ,485 Miscellaneous Revenue (excl Bank Interest) 0 1,937 Bank Interest 255 1,195 Less: Operational Expenditure (410,326) (452,003) Bank Interest returned to Nations (103) (617) Add: Miscellaneous Financial Charges / (Income) 2 (0) Foreign Exchange Gains / (Losses) (376) (664) Unearned Revenue c/f 381, ,347 Movement on Unearned Revenue In Year Cumulative 400,000, ,013, ,637, ,000, ,430, ,347, ,000, ,196, ,000,000 68,234,410 33,583,235 57,289, ,000, ,666, ,588, ,000,000 B12: Long Term Borrowings NAMMO does not have any long term loans from any organisation with all funds being provided by Nations and the generation of miscellaneous revenue such as Commercial Exploitation Levies. B13: Provisions NAMMO has no provisions or contingent liabilities. 20

46 B14: Accumulated Surplus / (Deficit) PP&E Additions Depreciation charge NAMMO does not accumulate surpluses or deficits as all expenditure is funded by Nations contributions. Any surplus or deficit that may occur is treated as unearned revenue. B15: Reserves NAMMO does not have any reserves at this time. If there are PP&E assets capitalised then these are transferred to the PP&E Assets Reserve in the following year and reflects Nations Equity in PP&E Assets. 21

47 ANNEX C Notes to the Statement of Financial Performance C01: Operating Revenue 410, ,088 (41,539) (9.19) National Contributions: - Germany BAAINBw (ex BWB) 98, ,103 (3,103) (3.07) - Germany KdoUstgVbde Lw (ex LwWSKdo) 129, ,043 16, Italy ARMAEREO 164, ,245 58, Italy COMLOG 35,018 60,882 (25,864) (42.48) - United Kingdom 41,364 47,212 (5,848) (12.39) Movement on Unearned Revenue (57,290) 21,667 (78,957) (364.41) Commercial Exploitation Levies - Germany 2,465 1,324 1, Italy United Kingdom 3,014 1,576 1, Commercial Exploitation Levies transferred to Treasury - Germany (2,465) (1,324) (1,141) Italy (739) (397) (342) United Kingdom (3,014) (1,576) (1,438) NORS (T) Disposals - Germany 0 45 (45) (100.00) - Italy 0 78 (78) (100.00) - United Kingdom (202) (100.00) NORS (T) Disposals transferred to Treasury - United Kingdom 0 1,612 (1,612) (100.00) Excluded from Operating Revenue: Mutual Supply Support Revenue 725 3,429 (2,704) (78.86) Special Cromes Revenue (332) (100.00) Transportation Settlement (31) (41.20) National contributions represent the funds provided by Nations to support NAMMO in fulfilling its objectives. Funding is normally called for quarterly in advance although the United Kingdom has smaller, more frequent calls. The movement on unearned revenue represents the excess of revenue over expenditure in the financial year. The practice is to adjust revenue to reduce it accordingly and account for it on the Statement of Financial Position within advances. Revenue from Licence or Loan Agreement Fees is generated when NAMMO owned equipment or intellectual property rights are used on other programmes. Revenue from Commercial Exploitation Levies is generated by the Saudi British Defence Co-operation Programme and is collected by UK MoD on behalf of all participating nations. Revenue for Germany and Italy is transferred back to the respective national treasuries accordingly. Revenue from NORS (T) disposals is generated from the disposal of NATO Owned Repair Stock for Tornado and collected by the participating nations. Reconciliation is carried out, normally on an annual basis with revenue being allocated between the nations based on an agreed percentage split. Mutual Supply Services and Special Cromes are non-budgetary transfers made to reimburse one nation for the work done by another and in accordance with IPSAS 23 - Revenue from Non-Exchange Transactions, NAMMO excludes such transactions from operating revenue. 22

48 Budgeted Contributions Pre Adjustment for Unearned Revenue ,000, ,000, ,000, ,000, ,000,000 80,000,000 60,000,000 40,000,000 20,000, ,530,000 98,326, ,043, ,817, ,319, ,211,871 60,882,000 59,518,000 61,362,378 53,065,000 0 Germany BAAINBw Germany KdoUstgVbde Lw Italy ARMAEREO Italy COMLOG United Kingdom C02: Operating Expenses 410, ,003 (41,677) (9.22) Germany BAAINBw (ex BWB) 102, ,844 (13,524) (11.67) Germany KdoUstgVbde Lw (ex LwWSKdo) 78, ,824 (24,870) (23.95) Italy ARMAEREO 134, ,908 (14,080) (9.46) Italy COMLOG 52,714 30,725 21, United Kingdom 41,510 52,703 (11,193) (21.24) Excluded from Operating Expenses: Mutual Supply Support 725 3,429 (2,704) (78.86) Special Cromes (332) (100.00) Transportation Settlement (31) (41.33) Expenditure on the NAMMO program is booked upon the validation of invoices received from industry and identified by funding office. An analysis of expenditure by funding office over the last two years is shown in the chart below. Mutual Supply Services and Special Cromes are non-budgetary transfers made to reimburse one nation for the work done by another and in accordance with IPSAS 23 - Revenue from Non-Exchange Transactions, NAMMO excludes such transactions from operating expenses. Accrued Expenditure 160,000, ,000, ,000, ,000,000 80,000,000 60,000,000 40,000,000 20,000, ,843, ,320,258 Germany BAAINBw 103,823,737 78,953,694 Germany KdoUstgVbde Lw 148,907, ,827,589 Italy ARMAEREO 30,724,633 52,714,179 Italy COMLOG 52,703,466 41,510,257 United Kingdom 23

49 C03: Personnel All of the personnel costs for NAMMO are accounted for in the NETMA Administration Budget C04: Operations and Maintenance The costs for operating the Agency s headquarters are accounted for in the NETMA Administration Budget C05: IT Services All IT Services costs are accounted for in the NETMA Administration Budget C06: Depreciation and Amortization Any depreciation and amortization will relate to major rigs, jigs and test equipment assets procured since 1 st January 2013 for use during the support phase of the programme. C07: Foreign Exchange Gains and Losses (376) (664) 288 (43.37) Translation Gains / (Losses) (22) (17.64) Realised Gains / (Losses) (478) (788) 310 (39.34) Translation gains and losses occur when assets and liabilities held in foreign currencies are converted to a Euro value at the closing NATO-promulgated exchange rates for the financial period. Translation adjustments have been applied to the bank balance held in GBP and outstanding debtors, liabilities and advances. Realised gains and losses occur when currency transactions are paid or received at a different rate to that which the expense or income was accounted when accrued for. C08: Other Financial Income and Costs (426) (73.58) Bank Interest Earned: - Germany (425) (74.17) - Italy (514) (83.31) - United Kingdom 3 5 (2) (40.00) Bank Interest Returned: - Italy (103) (617) 513 (83.36) Bank Charges & Errors Bank interest is earned on the accounts held to fund the NAMMO program. Italy have decided to have all bank interest earned returned to their national treasury. All other bank interest earned remains on account and is treated as unearned revenue. The decrease in the amount of interest earned is due to the lower level of interest rates during the course of 2013 compared to

50 ANNEX D Notes to the Cash Flow Statement D01: Surplus / (Deficit) from Operating Activities This represents the surplus or deficit from normal operating activities before interest, depreciation and financial charges such as exchange differences arising from transactions. D02: Depreciation and Amortisation There are no depreciation costs for this financial period as there were no new assets acquired during 2013 meeting capitalisation criteria. D03: Financial Income and Costs (426) (73.58) This represents the bank interest earned for the financial year net of that returnable to Italy under the current agreement with that nation. D04: Receivables (970) 0 (970) (100.00) Contributions Due Receivables (970) 0 (970) (100.00) The movement on Contributions Due represents the change in the nations debt to the programme from one financial year to the current one. The movement on receivables represents the change in debt to the programme from sources other than the nations. D05: Prepayments NAMMO does not make prepayments to industry. D06: Inventories NAMMO does not hold any inventory assets. Any inventories held in industry to be consumed in the production process are expensed and any inventory assets held in the ordinary course of operations to support Tornado are owned by the benefiting Nations. D07: Financial Assets NAMMO does not hold any financial assets other than cash and receivables that have been separately reported on within the Annual Financial Statements. 25

51 D08: Short Term Borrowings NAMMO does not have any short term loans from any organisation with all funds being provided by Nations and the generation of miscellaneous revenue such as Commercial Exploitation Levies. D09: Payables 9,185 (9,837) 19,022 (193.37) Payable to Suppliers 6,449 (10,772) 17,221 (159.87) Payable to Italian Treasury (309) (829) 520 (62.73) NORS(T) Payable to Treasuries (16) 0 (16) (100.00) Levies Payable to Treasuries 3,061 1,763 1, Payables to suppliers represent validated invoices presented but not yet paid. Payable to Italian Treasury represents the accumulated bank interest earned on the Italian bank accounts that is to be transferred back to Italy. NORS(T) payable represents gains generated from the disposal of NATO Owned Repair Stock for Tornado to be transferred to Italy and UK national treasuries. Levies payable represents the element of the Commercial Exploitation Levies collected by UK to be transferred to Germany and Italy. D10: Advances 44,230 (31,952) 76,182 (238.43) Advance Contributions (13,060) (10,285) (2,775) Unearned Revenue 57,290 (21,667) 78,957 (364.41) Advance contributions represent the funds received from nations for the next financial year. The movement on Unearned Revenue represents the accumulated excess of contributions over expenditure for the financial year. D11: Decrease / (Increase) Prop, Plant & Equipment Assets This represents Property, Plant and Equipment asset additions which have been capitalised in year has been restated as detailed on page 12 to reflect the accounting policy change in respect of Property, Plant and Equipment recognition. D12: Decrease / (Increase) Financial Assets NAMMO does not hold any financial assets other than cash and receivables that have been separately reported within the Annual Financial Statements. D13: Effect of Exchange Rate Changes (376) (664) 288 (43.37) Translation Gains and (Losses) (22) (17.74) Realised Gains and (Losses) (478) (788) 310 (39.34) Translation gains and losses occur when assets and liabilities held in foreign currencies are converted to a Euro value at the closing NATO-promulgated exchange rates for the financial period. Translation adjustments have been applied to the bank balance held in GBP and outstanding debtors, liabilities and advances. Realised gains and losses occur when currency transactions are paid or received at a different rate to that which the expense or income was accounted when accrued for. 26

52 ANNEX E Notes to the Statement of Changes in Net Assets / Equity E01: Changes in Accounting Policy There was a change in accounting policy regarding the capitalisation threshold for PP&E assets (see page 12), however, there was no financial impact or restatement required as there were no assets meeting the capitalisation and recognition criteria for either 2012 or 2013 financial statements. E02: Surplus / (Deficit) on Revaluation of Prop, Plant & Equip NAMMO has not generated any revaluations at this time. Following the cost model method under IPSAS 17 for measuring asset values, after recognition as an asset an item of PP&E is carried at its cost less any accumulated depreciation and any accumulated impairment losses. Under this method revaluations are not expected. E03: Surplus / (Deficit) on Revaluation of Financial Assets NAMMO does not hold any financial assets other than cash and receivables that have been separately reported within the Annual Financial Statements and do not incur any revaluation. E04: Currency Translation Differences (22) (17.74) Translation gains and losses occur when assets and liabilities held in foreign currencies are converted to a Euro value at the closing NATO-promulgated exchange rates for the financial period. E05: Revenue 410, ,667 (41,967) (9.27) All revenue items are included here and cover national contributions, bank interest, levies, loan fees, etc. E06: Expenses (410,803) (452,791) 41,988 (9.27) All expenditure items are included here and cover program expenditure, depreciation and miscellaneous financial charges, etc. Translation differences on currency balances are disclosed above in note E04. 27

53 ANNEX F Notes to the Budget Execution Statement F01: Germany BAAINBw (ex BWB) 98, ,530 (5,204) (5.03) For 2013, there was a variance of - 1,872K when comparing actual Expenses to Operational Budget for Germany BAAINBw. This underspend was mainly due variations in the area of Modification Sets. There was slight decrease in the 2013 budget compared to the 2012 budget, which reflects the reduction in fleet size in line with budget planning assumptions. F02: Germany KdoUstgVbde Lw (ex LwWSKdo) 128, ,043 15, For 2013, there was a variance of - 43,397K when comparing actual Expenses to Operational Budget for Germany LwWSKdo. The underspend was mainly due to lower expenditure for Repair & Overhauls, Reprovisioning (RP) Spares and ISS than forecasted where the estimates were based on CADPS and industry reports. Compared to the 2012 budget, the 2013 budget was increased to reflect budget planning assumptions in the area of Modification Sets and RP Spares. F03: Italy ARMAEREO 157, ,319 (3,107) (1.94) For 2013, there was a variance of - 19,380K when comparing actual Expenses to Operational Budget for Italy ARMAEREO. This underspend was mainly due to delays on the programme for Reccelite System for IAF Tornado (RAFAEL), overprovisioning of funds for the OTO MELARA contract and variation on the price types used to estimate the cost of Modification Sets (TPR). There is an additional expenditure variance of - 10,701K as no budgetary adjustment was made to reflect the transfer of funds to Italy COMLOG. There was a decrease in 2013 budget compared to the 2012 budget, which reflects the reduction in fleet size in line with budget planning assumptions. F04: Italy COMLOG 59,518 60,882 (1,364) (2.24) For 2013, there was a variance of - 15,215M when comparing actual Expenses to Operational Budget for Italy COMLOG. This was mainly due to lower levels of expenditure on In-Service Support contract and Repair & Overhaul activities. There is also an additional expenditure variance of + 10,701K as no budgetary adjustment was made to reflect the transfer of funds from Italy ARMAEREO to meet invoice payments. There was a decrease in 2013 budget compared to the 2012 budget, which reflects the reduction in fleet size in line with budget planning assumptions. F05: United Kingdom 53,065 61,362 (8,297) (13.52) For 2013, there was a variance - 11,087K when comparing actual Expenses to Operational Budget for the UK. This underspend was mainly due to the expenditure for RP spares being over estimated; the budget was based on annual trend from industry reports. There was a decrease in 2013 budget compared to the 2012 budget, which reflects the reduction in fleet size in line with budget planning assumptions. 28

54 F10: Reconciliation between Cashflow Statement and Statement of Budget and Actual Amounts for the Period Ended 31 December 2013: NET CASH OUTFLOW FROM OPERATING ACTIVITIES (52,821) 41,125 (93,946) (228.44) - Cash Contributions received in year 454, ,200 36, Bank Interest in year 255 1,195 (940) (78.66) - Mutual Supply Support 725 3,429 (2,704) (78.86) - Special Cromes (332) (100.00) - NORS (T) Income (325) (100.00) - Levies 2,233 1, Other Reimbursements 0 1,612 (1,612) (100.00) GROSS CASH OUTFLOW FROM OPERATING ACTIVITIES 405, ,939 (62,768) (13.41) - Bank Interest returned to Italy in year (428) (1,446) 1,018 (70.40) - Mutual Supply Support disbursements (725) (3,429) 2,704 (78.86) - Special Cromes disbursements 0 (332) 332 (100.00) EXPENSES PRE EXCHANGE RATE VARIATIONS 404, ,732 (58,714) (12.69) - Foreign Exchange Gains & Losses (288) (43.37) - Operational Budget vs Actual Exchange Gains and Losses 1,667 (7,426) 9,093 (122.45) PREDICTED EXPENSES 406, ,969 (49,908) (10.95) SCHEDULE 5: EXPENSES 405, ,932 (49,945) (10.95) Residual Variance The budget is compiled based on the advice and assistance of a number of sources including Nations, commercial and technical staff within NETMA and industry. The budget has been based on the best information available and takes into account known payment plans and estimates of new work in line with advice on technical progress. No carry forward from 2013 was included in the estimate and no unused budget will be carried into 2014 with credits lapsing accordingly. In accordance with IPSAS 24 Presentation of Budget Information in Financial Statements the above reconciliation has been carried out for the financial year ending 31 December Under IPSAS 24 the reconciliation is carried out between the Cash Flow Statement (Net Cash Outflow from Operating Activities) and the Statement of Comparison of Budget and Actual. To present Budgeted and Actual amounts on a comparable basis, as required under the IPSAS, Actual amounts have been converted using the Operational Budget rates for the comparison with Budgeted Amounts. The difference between Expenses stated at the Operational Budget and the Actual Exchange rate is included as a reconciling movement. The residual variance between predicted expenses and budget is less than 0.02% and results from timing differences in payments. F11: Reconciliation between Statement of Financial Performance and the Statement of Comparison of Budget and Actual Amounts for the Period Ended 31 December 2013: SCHEDULE 2: OPERATING EXPENSES 410, ,003 (41,677) (9.22) Add: Opening Payables and Accruals 15,312 26,084 (10,772) (41.30) Less: Closing Payables and Accruals (21,760) (15,312) (6,448) Exchange Rate difference (OB v Corporate) 1,667 (7,426) 9,093 (122.45) Foreign Exchange Gains and Losses (288) (43.37) PREDICTED CASH PAYMENTS 405, ,013 (50,092) (10.98) SCHEDULE 5: EXPENSES 405, ,932 (49,945) (10.95) Residual Variance (66) 81 (147) (182.48) The above reconciliation is carried out between the Statement of Financial Performance and the Statement of Comparison of Budget and Actual Amounts for the financial year ending 31 December This reconciles accrual based expenditure that is reported on the Statement of Financial Position and cash based expenditure reported as expenses on the Budget Statement. The residual variance between cash and budget is less than 0.02% and results from timing differences in payments. 29

55 ANNEX G Application of IPSAS IPSAS IPSAS 1: Presentation of Financial Statements IPSAS 2: Cashflow Statement IPSAS 3: Accounting Policies, Changes on Accounting Estimates and Errors IPSAS 4: The Effects of Changes in Foreign Exchange Rates IPSAS 5: Borrowing Costs IPSAS 6: Consolidated and Separate Financial Statements IPSAS 7: Investments in Associates Statements IPSAS 8: Interests in Joint Ventures IPSAS 9: Revenue from Exchange Transactions IPSAS 10: Financial Reporting in Hyperinflationary Economies IPSAS 11: Construction Contracts IPSAS 12: Inventories IPSAS 13: Leases IPSAS 14: Event after the Reporting Date IPSAS 15: Financial Instruments (Disclosure and Presentation) IPSAS 16: Investment Property IPSAS 17 Adapted: Property, Plant and Equipment (as adapted by the North Atlantic Council) IPSAS 18: Segment Reporting IPSAS 19: Provisions, Contingent Liabilities and Contingent Assets IPSAS 20: Related Party Disclosures IPSAS 21: Impairment of non-cash generating assets IPSAS 22: Disclosure of Financial Information about General Government Sector IPSAS 23: Revenue from Non-Exchange Transactions IPSAS 24: Presentation of Budget Information in Financial Statements IPSAS 25: Employee Benefits IPSAS 26: Impairment of Cash-Generating Assets IPSAS 27: Agriculture IPSAS 28: Financial Instruments : Presentation IPSAS 29: Financial Instruments : Recognition and Measurement IPSAS 30: Financial Instruments: Disclosures IPSAS 31: Intangible Assets IPSAS 32: Service Concession Arrangements: Grantor Status Implemented Implemented Implemented Implemented Not relevant Not relevant Not relevant Not relevant Implemented Not relevant Implemented Not relevant Not relevant Implemented Replaced by IPSAS 28,29,30 Not relevant Implemented Not relevant Implemented Implemented Implemented Not relevant Implemented Implemented Not relevant Not relevant Not relevant Implemented Implemented Implemented Implemented Not relevant 30

56 31

57 ENCLOSURE 2 C-M(2016)0044 (INV) NETMA FINANCIAL STATEMENTS FOR THE PERIOD ENDED 31 DECEMBER

58 Contents Introduction to NETMA 3 Financial Report 4 Schedule 1 Statement of Financial Position as at 31 December Schedule 2 Statement of Financial Performance for the Period ended 31 December Schedule 3 Indirect Cash Flow Statement for the Period ended 31 December Schedule 4 Statement of Changes in Net Assets / Equity for the Period ended 31 December Schedule 5 Statement of Comparison of Budget and Actual Amounts for the Period ended 31 December Annex A Accounting Policies and Definitions 11 Annex B Notes to the Statement of Financial Position 18 Annex C Notes to the Statement of Financial Performance 23 Annex D Notes to the Cash Flow Statement 27 Annex E Notes to the Statement of Changes in Net Assets / Equity 29 Annex F Notes to the Budget Execution Statement 30 Annex G Application of IPSAS 32 2

59 NETMA NATO EF2000 and Tornado Development, Production and Logistics Management Agency (NETMA) is an agency created within the framework of NATO and established by the North Atlantic Council pursuant of Article 9 of the North Atlantic Treaty and within the meaning of the Agreement on the Status of the North Atlantic Treaty Organisation, National Representatives and International Staff, signed in Ottawa on 20 th September It is based in Unterhaching, Germany and is an Executive Body created by charter to administer the functions of two NATO Production and Logistic Organisations (NPLOs). The two NPLOs are NAMMO (NATO Multi-Role Combat Aircraft Development, Production and In-Service Support Management Organisation) and NEFMO (NATO European Fighter Aircraft Development, Production and Logistics Support Management Organisation). NETMA is a procurement agent formed jointly by NEFMO and NAMMO in 1996 to manage procurement for and the administration of the two programmes. As such the agency is accounted for as a joint venture in these financial statements. The operations of NETMA concerning NAMMO and NEFMO are controlled by a Joint Steering Committee of the three NAMMO Nations and the four NEFMO Nations involved in the programmes. The budgetary organisation of NETMA is funded by the four member Nations Germany, Italy, Spain and United Kingdom. Budget approval is given jointly by the Boards of Directors of NAMMO and NEFMO. As a NATO agency, NETMA is exempt from taxation relating to operating revenue and expenses. 3

60 FINANCIAL REPORT Introduction The NETMA Financial Statements have been produced in accordance with the NATO Accounting Framework which is based on International Public Sector Accounting Standards (IPSAS) tailored as permitted by the North Atlantic Council. Highlights The introduction of the new NATO Accounting Framework approved by the North Atlantic Council in August 2013 had only a minor impact on the NETMA accounts. IT and Communications assets that were capitalised over the last two years since the adoption of IPSAS 17 Property Plant and Equipment (PP&E) continue to be recognised in the Financial Statements. However, the length of time in which such assets are depreciated was changed from five years to three years to align with the NATO policy on depreciation period for this class of asset. This resulted in a restatement of prior year s net carrying asset values to reflect the additional depreciation charge of 91K in Based on this new depreciation policy, the net book value of capitalised assets at the end of 2013 was 239K. The office building in Unterhaching where NETMA is currently located is contracted under operating lease arrangements. A new operating lease agreement for building premises in Hallbergmoos, Germany was signed in September 2013 and the obligations under this contract have been included in the notes to the financial statements in accordance disclosure requirements under IPSAS 13 - Operating Leases. Revenue Revenue is generated through contributions from Nations as shown in the adjacent chart. Other minor revenue items include bank interest and recoveries from staff and contractors for car parking and telephone calls. Costs Agency costs are covered in three chapters Chapter 1 for Personnel Costs, Chapter 2 for Agency Support Costs and Chapter 3 for Process and IT Management. All costs are in support of both the NAMMO and NEFMO programmes. Breakdown of Contributions by Nation 2013 UK 34.79% SP 10.88% GE 32.02% IT 22.31% Breakdown of Costs by Chapter 2013 CH % CH % CH % Accounting and Control The budget for NETMA is constructed on a cash basis and funds are called for quarterly in advance. In the case of Italy funds are provided biannually. Interest earned in prior years is maintained on the NETMA bank account and used to offset 4

61 future Calls for Funds for all Nations excluding Italy who have their apportioned interest returned to them in the year following that in which it was earned. The Annual Financial Statements are constructed on an accruals basis and reconciled against the cash outturn accordingly. The Agency has continued with the process of reviewing financial statements internally during the year and the aspiration is to share the information with Nations during This will help increase the awareness of the accruals position throughout the financial year and also ease the burden of producing the Annual Financial Statements. Conclusion The Annual Financial Statements represent a true and fair view of the organisation s activities for

62 FINANCIAL STATEMENTS Schedule 1 STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2013 (all amounts stated in thousands of Euros) Notes Restated ASSETS Current Assets Cash and Cash Equivalents B01 18,211 5,991 12, Inter Entity Current Accounts B Receivables B Prepayments B Inventories B Financial Assets B ,969 6,671 12, Non Current Assets Property, Plant and Equipment B Intangible Assets B TOTAL ASSETS 19,208 6,867 12, LIABILITIES Current Liabilities Short Term Borrowings B Payables B10 1, Advances B11 17,788 5,710 12, ,969 6,670 12, Non Current Liabilities Long Term Borrowings B Provisions B TOTAL LIABILITIES 18,969 6,670 12, TOTAL ASSETS LESS LIABILITIES NET ASSETS Accumulated Surplus / (Deficit) B Reserves B TOTAL NET ASSETS

63 FINANCIAL STATEMENTS Schedule 2 STATEMENT OF FINANCIAL PERFORMANCE FOR THE PERIOD ENDED 31 DECEMBER 2013 (all amounts stated in thousands of Euros) Notes Restated OPERATING ACTIVITIES Revenue Operating Revenue C01 45,712 44,567 1, ,712 44,567 1, Expenses Operating Expenses C SURPLUS / (DEFICIT) FROM OPERATING ACTIVITIES 45,712 44,567 1, GENERAL & ADMINISTRATIVE COSTS Personnel C03 35,979 35, Operations and Maintenance C04 4,606 4, IT Services C05 4,896 4, Depreciation & Amortization C (93) (46.97) 45,585 44,469 1, NET SURPLUS / (DEFICIT) FROM OPERATING ACTIVITIES FINANCIAL INCOME & COSTS Foreign Exchange Gains & Losses C07 0 (8) 8 (100.00) Other Financial Income & Costs C08 (84) (77) (7) 9.09 (84) (85) 1 (1.18) NET SURPLUS / (DEFICIT) FOR THE PERIOD

64 FINANCIAL STATEMENTS Schedule 3 INDIRECT CASH FLOW STATEMENT FOR THE PERIOD ENDED 31 DECEMBER 2013 (all amounts stated in thousands of Euros) Notes Restated CASH FLOW FROM OPERATING ACTIVITIES Cash Flow from Operating & Other Activities Surplus / (Deficit) from Op Activities D Depreciation & Amortization D (93) (46.97) Financial Income & Costs D03 (84) (77) (7) (71) (32.42) Decrease / (Increase) in Current Assets Receivables D04 (78) (282) 204 (72.34) Prepayments D (9) (100.00) Inventories D Financial Assets D (78) (273) 195 (71.43) Increase / (Decrease) in Current Liabilities Short Term Borrowings D Payables D Advances D10 12,078 (6,294) 18,372 (291.90) 12,298 (6,260) 18,559 (296.47) NET CASH FLOW FROM OPERATING ACTIVITIES 12,369 (6,314) 18,683 (295.90) CASH FLOW FROM INVESTING ACTIVITIES Decr / (Incr) Prop, Plant and Equipment D11 (148) (210) 62 (29.52) Decr / (Incr) Financial Assets D (148) (210) 62 (29.52) NET INCREASE / (DECREASE) CASH & CASH EQUIVALENTS 12,220 (6,524) 18,745 (287.32) CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,991 12,523 (6,532) (52.16) Effect of Exchange Rate Changes D13 0 (8) 8 (100.00) CASH & CASH EQUIVALENTS AT END OF PERIOD 18,211 5,991 12,

65 Schedule 4 FINANCIAL STATEMENTS STATEMENT OF CHANGES IN NET ASSETS / EQUITY FOR THE PERIOD ENDED 31 DECEMBER 2013 (all amounts stated in thousands of Euros) Notes PP&E Asset Revaluation Translation Accumulated TOTAL Reserve Reserve Reserve Surplus / (Deficit) Balance at 31 December (93) 184 Changes in Accounting Policy E RESTATED BALANCE (93) 184 Surplus / (Deficit) on Revaluation of Prop, Plant & Equip E Surplus / (Deficit) on Revaluation of Financial Assets E Currency Translation Differences E NET INCREASE / DECREASE OF RESERVES Revenue E ,567 44,567 Expenses E (44,464) (44,464) NET SURPLUS / (DEFICIT) FOR THE PERIOD Balance at 31 December Changes in Accounting Policy E (91) (91) RESTATED BALANCE (81) 196 Surplus / (Deficit) on Revaluation of Prop, Plant & Equip E Surplus / (Deficit) on Revaluation of Financial Assets E Currency Translation Differences E NET INCREASE / DECREASE OF RESERVES Revenue E ,712 45,712 Expenses E (45,669) (45,669) NET SURPLUS / (DEFICIT) FOR THE PERIOD Balance at 31 December (38) 239 9

66 FINANCIAL STATEMENTS Schedule 5 STATEMENT OF COMPARISON OF BUDGET AND ACTUAL AMOUNTS FOR THE PERIOD ENDED 31 DECEMBER 2013 (all amounts stated in thousands of Euros) Notes Budgeted Amounts Commitments Expenses Credits Carried Forward Original Adjustments Final Lapsed Credits Personnel F01 36,185 36,185 35,863 35, Operations and Maintenance F02 3,989 3,989 3,879 3, IT Services F03 4,871 4,871 4,480 4, ,045 45,045 44,222 43, Personnel c/o from 2012 F Personnel c/o from 2011 F O and M c/o from 2012 F O and M c/o from 2011 F IT Services c/o from 2012 F08 1,317 1,317 1, IT Services c/o from 2011 F , ,018 1, , ,063 46,085 44,467 1,

67 ANNEX A Accounting Policies & Definitions Basis of Preparation The financial statements of NETMA have been prepared on a going-concern basis. However, the Heads of State and Government approved at the Lisbon Summit (19-20 November 2010) the consolidation and rationalisation of the functions and programmes of the 14 NATO agencies into three agencies and a shared-service organisation, and the reorganization of the Military Commands. Subsequently Charters for a new NATO Support Organisation (NSPO), NATO Communications and Information Organisation (NCIO) and NATO Procurement Organisation (NPO) were approved on 1 July However, whilst the NSPO and NCIO Agencies are now up and running, the NPO, into which NETMA would be expected to integrate, will be in a two year design phase to develop a framework for ongoing and future programmes; executive bodies of the NPO, including the Procurement Agency, will only be established once an existent programme or a new programme would integrate into the Procurement Organisation. Current programmes must indicate when they will integrate into the new Agency, and a case made to the North Atlantic Council (NAC) if this is not possible by In June 2013 NETMA member nations informed NATO that currently they see no evidence that integration into the NPO would increase the effectiveness and efficiency of the programmes; this situation remains under review through continued engagement with the reform process. There is no information at the time of the preparation of these financial statements that would indicate an intention to cease NETMA operations. Ministers have also agreed that a NATO Shared Services Organisation will be established. Customers, including both new and current Agencies, would be directed to use shared services as they are implemented. An Office of Shared Services at NATO has at the end of February 2014 presented an Implementation Plan outlining proposals for the sharing of functions of Finance & Accounting, Human Resources and General Procurement in a centralized environment. The intention is to have a decision at NATO on these proposals and the Implementation Plan by summer The full extent and impact of Agency Reform and the establishment of a shared services organisation on NETMA is still unclear at the time of submitting these financial statements. The NETMA financial statements have been prepared on the accruals basis of accounting in accordance with the accounting requirements of the NATO Accounting Framework which is based on International Public Sector Accounting Standards (IPSAS) issued by the International Public Sector Accounting Standards Board (IPSASB) and relevant to NETMA as decided by the North Atlantic Council in A list of standards issued by the IPSAS Board can be found on the following website The financial statements have been prepared in accordance with the accounting requirements of the NATO Financial Regulations (NFR) and the Financial Rules and Procedures (FRP). 11

68 Application of IPSAS and Tailoring NETMA adopted all IPSAS standards issued by the IPSAS Board that were effective prior to 31 December 2013 and, where relevant, the adapted standards within the NATO Accounting Framework have been applied. As encouraged by the IPSAS Board, and to increase transparency and accountability, IPSAS standards that are available for early adoption have also been adopted. There is no material impact in the opening balances resulting from early adoption. A summary of standards adopted is provided in Annex G. Use of Estimates In accordance with generally accepted accounting principles, the financial statements necessarily include amounts based on estimates and assumptions by management, based on the most reliable information available. Estimates include accrued revenue and expenses. Actual results could differ from those estimates and changes are reflected in the period in which they become known. Consolidation The NETMA financial statements are not consolidated. Changes in Accounting Policy During 2013, NETMA changed its accounting policy for depreciating IT and Communications equipment. In previous periods, IT and Communications assets were depreciated over a five year period. This has been reduced to a period of three years in accordance with the depreciation policy under the NATO Accounting Framework. For consistency, the change has been applied to assets recognised before and after 1 st January This change in accounting policy has been accounted for retrospectively, and comparative statements for 2012 have been restated. The effect of the change on 2012 is tabulated below: (Amounts stated in thousand of Euros) 2012 Previous Adjustment 2012 Restated Effect on Statement of Financial Position: Decrease in Property, Plant and Equipment 286 (91) 196 Decrease in Deficit for the period 103 (91) 12 Decrease in Total Net Assets 286 (91) 196 Effect on Statement of Financial Performance: Increase in Depreciation & Amortization Decrease in Surplus from Operating Activities 189 (91) 98 Decrease in Surplus for the period 103 (91) 12 Effect on Indirect Cashflow Statement: Decrease in Deficit from Operating Activities 189 (91) 98 Increase in Depreciation & Amortization

69 Effect on the Statement of Changes in Net Assets / Equity: PP&E Asset Revaluation Translation Accumulated TOTAL (Amounts stated in thousand of Euros) Reserve Reserve Reserve Surplus/ (Deficit) Balance at 31 December 2012 as previously reported Change in accounting policy in respect of the capitalisation of Property Plant and Equipment (91) (91) Balance at 31 December 2012 as restated (81) 196 Significant Accounting Policies NETMA s significant accounting policies are set out below. The accounting policies have been consistently applied to all periods. Foreign Currency Transactions The functional and reporting currency of NETMA is the EURO. Foreign currency transactions are accounted for at the NATO exchange rates prevailing on the date of the transactions. Monetary assets and liabilities at year-end which were denominated in foreign currencies were translated into Euro using the NATO rates of exchange that were applicable at 31 December Realised and unrealised gains and losses resulting from the settlement of such transactions and from the revaluation at the reporting dates of monetary assets and liabilities denominated in foreign currencies are recognised in the Statement of Financial Performance. Financial Instruments The costs of activities in the Administrative Budget are borne by Nations in accordance with the formula specified in the Agency Integration Memorandum of Understanding (MOU), Section 4 Funding Arrangements. Contributions are assessed on the basis of approved budget authorisations and called for in accordance with the actual cash requirements of NETMA, therefore financial instruments play a more limited role in creating risk than would apply to a non-public sector organisation of a similar size. NETMA uses only non-derivative financial instruments as part of its normal operations. This includes the following financial assets and liabilities: Cash and cash equivalents (i.e. cash, bank accounts, deposit accounts), Accounts receivable, Accounts payable. In accordance with IPSAS 29, Financial Instruments are recognised at the contract date and initially measured at fair value. Their subsequent measurement depends on their classification. Cash, receivables and other liabilities are not revalued (except for changes in exchange rates which are included in the statement of financial performance). Financial Instruments are derecognised on expiry or when all contractual obligations are transferred. IPSAS 30 Financial Instruments: Disclosures, requires the organisation to provide disclosures in respect of the role of financial instruments on the financial position and 13

70 performance, the nature and extent of the risks to which the organisation is exposed and how these risks are managed. Management is aware of the risks associated with financial instruments and is bound by NETMA Financial Rules and Regulations to keep these risks very low. Currency risk: The majority of transactions associated with the Administrative budget are contracted in Euros and in order to have the required funding, NETMA also asks Nations to provide their contributions in Euros. Therefore the exposure of financial instruments to foreign currency exchange risk associated with the Administrative budget is considered negligible. Liquidity risk: The liquidity risk is based on the assessment of whether the organisation will encounter difficulties in meeting its obligations associated with financial liabilities. There is limited exposure to liquidity risk because of the budget mechanism that guarantees contributions for the total approved budget. The accuracy of forecasts that result in the calls for contributions as well as the delay in receiving payments, represent the main liquidity risks. Credit risk: There is very limited credit risk as the contributing Nations generally have a high credit rating. At the time of submitting these financial statements, Spain and Italy recently experienced a downgrade in their credit rating. However, the risk of financial loss due to a participating Nation s failure to raise funds is still assessed as very low. In the event that there is a shortage of funds by one or more Nations to meet financial obligations, other Nations will be expected to provide the necessary funding. Interest rate risk: NETMA is restricted from entering into borrowings and investments, and therefore is no significant interest rate risk identified. Current Assets Cash and cash equivalents are carried in the Statement of Financial Position at fair value and comprise deposits held within nominated programme bank accounts. Accounts receivable consist of outstanding Calls for Funds from Nations for the 2013 financial year and any other receivables from staff and external sources such as German MoD in relation to VAT receivable. Prepayments include payments made to suppliers in advance of 2014 and to staff for advances of pay and duty travel. Non Current Assets In accordance with IPSAS 17, Property, Plant and Equipment (PPE) are recognised as tangible assets when it is probable that future economic benefits or service potential associated with the item will flow to the entity and the cost or fair value can be measured reliably. Assets are recognised at historical purchase cost or fair value at the time of acquisition or construction. Following the Cost Model method of measurement, after recognition as an asset the item is carried at its cost less any accumulated depreciation and any accumulated impairment losses. 14

71 The categories of Property, Plant and Equipment relevant for NETMA are detailed below: Land and Buildings: The agency s office accommodation is subject of a building lease and therefore not capitalised as Property, Plant and Equipment. The office accommodation has been determined as an operating lease and, in accordance with IPSAS 13 - Leases, is expensed on a straight-line basis over the lease term. Office Furniture and Equipment: This includes items of office furniture, installed equipment (i.e. security installations and air conditioning units), and other miscellaneous office items (i.e. lamps, fans, projectors, printing equipment). Items in this category are depreciated on a straight line basis over a ten year period which equates to their useful life. It is assumed an item is fully depreciated with nil residual value at the end of its useful life. IT and Communications Equipment: This consists of Commercial-Off-The-Shelf purchase of (COTS) computer systems (hardware and software), and communications equipment (i.e. telephones, faxes and accessories). Items in this category are depreciated on a straight line basis over a three year period. It is assumed an item is fully depreciated with nil residual value at the end of its useful life. NETMA s capitalisation threshold is 15,000. Items with a purchase cost or fair value on acquisition above this threshold are capitalised, items falling below this threshold are fully expensed in the year of procurement. Intangible Assets for NETMA consists of computer software developed in-house and are depreciated over a three year period, in line with computer systems capitalised within tangible assets. The carrying amounts of tangible and intangible assets are reviewed for impairment if events or changes in circumstances indicate that they maybe not recoverable. If any such indication exists, the recoverable amount of an asset is estimated in order to determine the extent of the impairment loss (if any). Any provision for impairment is charged against the statement of financial performance in the year concerned. For historical PP&E purchased prior to 1 st January 2011, the carrying amounts (i.e. gross purchase cost less accumulated depreciation) are capitalised as non-current assets with the corresponding balance directly taken to PP&E asset reserves within Net Assets on the Statement of Financial Position. The Net Assets balance represents the Nations equity in PP&E assets. The Net Asset balance is reduced each year with the depreciation accounted for as an expense. For new asset additions during the year, the gross value of an asset is capitalised as PP&E on the Statement of Financial Position. The revenue for the full amount of the asset is accounted for in the year of purchase on the Statement of Financial Performance. Therefore a surplus on the Statement of Financial Performance is generated in the first year of purchase and transferred to the PP&E Asset Reserve account to increase accumulated asset reserves. 15

72 For both historic and new additions, depreciation is charged each year on a straightline basis over the asset s useful life and accounted for as an expense which generates a deficit on the Statement of Financial Performance. This deficit is transferred to PP&E Asset Reserves at the end of each year to reduce the accumulated asset reserve. Tangible and intangible assets are derecognised either on disposal or when no future economic benefit or service potential is expected from their use or disposal. Liabilities NETMA liabilities include amounts payable to suppliers for work undertaken but not yet paid, amounts owing to Nations with respect to miscellaneous revenue that is to be returned in accordance with instructions from Nations and advance contributions and unearned revenue. Advances and Unearned Revenue Advance contributions are those funds received for future years budgets. Unearned revenue represents contributions received from Nations and third parties that have been called for in the current or prior years that have not been recognised as revenue. Funds are called for in advance of their need because NETMA has no capital that would allow it to pre-finance any of its activities. Unearned revenue also includes miscellaneous income earned that Nations have instructed remain on the programme accounts rather than be returned to the respective National Treasuries. Provisions and contingent liabilities Provisions are recognised when NETMA has a present obligation as a result of a past event, and it is probable that NETMA will be required to settle that obligation, and where a reliable estimate of the amount of obligation can be made. Provisions are measured at management s best estimate of the expenditure required to settle the obligation at the date of the statement of financial position, and are discounted to present value where the effect is material. Other commitments, which do not meet the recognition criteria for liabilities, are disclosed in the notes to the financial statements as contingent liabilities when their existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events which are not wholly within the control of NETMA. Revenue Revenue comprises of contributions from the four contributing Nations: Germany, Italy, Spain and United Kingdom and other revenue earned during the period. Contributions from the four Nations are called for quarterly in advance. Other revenue earned during a financial period includes bank interest and miscellaneous recoveries from staff for car parking and telephone calls. Revenue is recognised to the extent that it is probable that economic benefits will flow to NETMA and revenue can be measured reliably. Where a transfer is subject to conditions that, if unfulfilled, require the return of the transferred resources, NETMA recognises a liability until the condition is filled. Nation s contributions to the Administrative Budget are initially recorded as unearned revenue liabilities. They are recognised as revenue on the statement of financial 16

73 performance when such contributions are used for their intended purpose as envisioned within the approved budget. Expenses The NETMA financial statements cover the running costs of the agency and of the NAMMO and NEFMO programmes. These costs cover pay and personnel, utilities, rental payments and those costs associated with information management support. 17

74 ANNEX B Notes to the Statement of Financial Position as at 31 December 2013 B01: Cash and Cash Equivalents 18,211 5,991 12, Petty Cash General Petty Cash Building Maintenance Admin 18,200 5,963 12, Admin Interest 9 26 (17) (65.38) NETMA operates one bank account into which all contributions are received and payments to suppliers made. Interest earned is accumulated on an associated account and in the subsequent year is transferred to the main account to offset future Calls for Funds. The apportioned interest for Italy is returned to their National Treasury. The petty cash accounts enable small, essential purchases to be made quickly and are reconciled on a monthly basis. The main reasons for the variance between 2013 and 2012 on the main account is that more advance contributions have been received from Nations as at 31 December Advanced contributions from Germany ( 3,520K) and UK ( 3,936) were received at the end of December 2013 in response to the 1 st Call for Funds for At Spain s request, additional funds ( 147K) were also called for in 2013 and treated as an advance payment for The remaining balance on the bank account relates to funds received specifically for NETMA relocation and Business Model Review (BMR) Benefits Tracking Support activities that are funded separately from the main Administrative Budget approvals. PARMIS functionality necessitates that each cash and bank account separately identified has an associated clearing account to enable the sub-ledger to interface with the General Ledger. The carrying balance on all clearing accounts is zero. The chart below identifies the level of cash holdings for the Administrative Budget represented as a percentage of the cash budget. With NETMA funded quarterly in advance the cash holdings should not exceed 25% of the annual budget. Cash Held as a Percentage of Annual Budget % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 12.28% NETMA Administrative Budget 23.74% B02: Inter Entity Current Accounts Any balances that exist on these accounts represent amounts owed to or from either NAMMO or NEFMO. At the end of 2013 there were no balances on these accounts. 18

75 B03: Receivables Nations (275) (100.00) - Third Parties NATO Entities Staff Members Receivables from Nations represent the revenue generated outside of the Calls for Funds process. Receivables from Third Parties represent the VAT recoverables from MoD Germany. In agreement with the German Government VAT can only be reclaimed for invoices where VAT is in excess of (converted from DM50). VAT is normally recovered twice per year but due to the delay in reimbursements the balance represents the total VAT recoverable for the year rather than just the second 6 months of Receivables from NATO entities include organisations such as Allianz. outstanding recoveries to be made. As at the end of 2013 there were no Receivables from staff members relate to the outstanding recoveries from advances of salaries made in the year. This account has been reconciled with payroll records at year end. B04: Prepayments Suppliers Staff Prepayments made to suppliers are in respect of invoices paid for services received during 2013 and prepayments made to staff are in respect of advances of duty travel. As at 31 December 2013 there were no outstanding prepayments. B05: Inventories NETMA does not hold any inventory assets. Agency consumables such as stationery are not considered material and are below the 15K threshold for capitalisation. B06: Financial Assets NETMA does not hold any financial assets other than cash and receivables that have been separately reported within the Annual Financial Statements. Restated B07: Property, Plant and Equipment IT and Communications Equipment The building currently occupied by the Agency and the new office accommodation in Hallbergmoos are both deemed to be under operating lease arrangements and therefore are not capitalised. The Agency controls two types of Property, Plant and Equipment and is responsible for replacement and maintenance of these assets; Office Furniture & Equipment, and IT & Communications Equipment. The capitalisation threshold for all Property, Plant and Equipment is 15,000. As at 31 December 2013 only items within IT and Communications Equipment met the criteria for capitalisation. This consists of Commercial Off The Shelf purchase of (COTS) computer systems (hardware and software), and communications equipment (i.e. telephones, faxes and accessories). IT and Communications assets are measured at cost less depreciation. Depreciation is calculated on a straight-line basis over the useful life of IT and Communications Equipment. In accordance with the NATO Accounting Framework, NETMA changed its accounting policy for depreciating IT and Communications equipment over a five year period to a three year period. For consistency, the change has been applied to assets recognised before and after 1 st January This change in accounting policy has been accounted for retrospectively, and comparative statements for 2012 have been restated as detailed on page

76 Office Furniture & Equipment includes office furniture, installed equipment (i.e. security installations and air conditioning units), and other miscellaneous office items (i.e. lamps, fans, projectors, printing equipment). Items in this category are depreciated on a straight line basis over a ten year period. All legacy items of Office Furniture and Equipment were fully depreciated when IPSAS 17 was adopted in 2011 and all new purchases fell below the capitalisation threshold of 15,000, hence there are no items included for capitalisation in However, the agency continues to maintain a register of all items of Office Furniture and Equipment. As at 31 December 2013, the register identifies a total of 6,053 items with a total historical purchase value of under 2,300K. The estimated value of items after depreciation is less than 250K. In accordance with IPSAS 17, below is a reconciliation of the carrying amounts for Property, Plant and Equipment. IT & Communications Reporting Period (Restated) Opening Balance Additions Disposals Depreciation (105) (198) Closing Balance Gross Carrying Amount Accumulated Depreciation (671) (566) Net Carrying Amount * Amounts stated in thousands of Euros B08: Intangible Assets NETMA does not hold any intangible assets. Development costs are expensed by NETMA and the intangible assets for the operational budget are held on the Statement of Financial Position of the benefiting Nations. B09: Short Term Borrowings NETMA does not have any short term loans from any organisation with all funds being provided by Nations and the generation of miscellaneous revenue. B10: Payables 1, Payable to Suppliers reconciled to AP Trial Balance 2 4 (2) (50.00) Estimate Accrual 1, Bank Interest earned payable to Italy 2 7 (5) (71.43) Payable to Staff Amounts payable to suppliers represents invoices for work undertaken but not yet paid. This account is reconciled to the payables sub-ledger within the financial system operated by NETMA on a monthly basis. The Estimate Accrual figure is made up of three elements. The first element relates to goods and services provided during 2013, an estimate is undertaken by reviewing invoices paid in January and February The estimated accrual for goods and services as at 31 December 2013 is 802K, which represents a 209K increase to the previous year which is mainly due to relocation invoices received after 31 December The second element is to recognise cash in transit where invoices have been cleared as paid but the cash did not leave the bank until The final element is the estimated accrual relating to unpaid leave, this is based on the untaken leave carried forward as at 31 December 2013 multiplied by the average salary costs per day. A total of 1,224 days were carried over resulting in an accrual of 375K at the end of 2013 which is at a similar level to previous years. Bank interest earned on the NETMA bank accounts throughout the year is apportioned by contributing Nation based on the funding provided and the timing of that funding. The apportioned amount for Italy is payable to their National Treasury in agreement with Italy. 20

77 Age Analysis of Payables to Suppliers ,000 2,745 2,500 2,000 1,801 1,500 1, Days Days > 30 Days 0 B11: Advances 17,788 5,710 12, Advance Contributions: - Germany 3, ,240 40, Italy 1,116 1,264 (148) (11.71) - Spain , United Kingdom 10, , , Unearned Revenue 3,062 4,427 (1,365) (30.83) Advance contributions represent those contributions received for the next financial year. These are a combination of Calls for Funds for 2014 received in 2013 and bank interest earned and apportioned to Germany, Spain and United Kingdom that will be used to offset the 1 st Call for Funds in Advances for Italy also include funding provided specifically to cover Italian Duty Travel costs. Advances for United Kingdom include funding for NETMA relocation and Business Model Review Benefits Tracking support activities. Accumulated Unearned Revenue represents the excess of national contributions and miscellaneous revenue over expenditure on the NETMA program to date and is similarly reflected in the level of cash holdings within the NETMA bank accounts. A review of unearned revenue and expected cash requirements will be undertaken within the Agency with a view to reducing Calls for Funds for 2014 and to reduce the level of Unearned Revenue in NETMA. The movement on Unearned Revenue can be reconciled as follows: Unearned Revenue b/f 4,427 3,681 National Contributions 44,246 45,265 Miscellaneous Revenue (excl Bank Interest) Bank Interest 9 26 Less: Operational Expenditure 45,712 44,559 Bank Interest to offset future CFFs 7 19 Bank Interest returned to Nations 2 7 Miscellaneous Financial Charges / (Income) 0 0 Foreign Exchange Gains / (Losses) 0 8 Unearned Revenue c/f 3,062 4,427 21

78 Movement on Unearned Revenue In Year Cumulative 5,000,000 4,427,144 4,000,000 3,681,219 3,000,000 2,000,000 1,000, ,000,000-2,000,000 3,061,756 2,175,609 1,505,610 1,159, , , ,365-1,365,388 B12: Long Term Borrowings NETMA does not have any long term loans from any organisation with all funds being provided by Nations. B13: Provisions There were no provisions for at the end of 2011 and There was a contingent liability reported for 2011 relating to a pension case for a former staff member who is still a NATO employee. During 2012, this case was resolved and a settlement was agreed with the NATO Financial Controller and the Assistant Secretary General Executive Management, the respective liability was fully paid in Restated B14: Accumulated Surplus / (Deficit) The accumulated surplus or (deficit) balance represents in year movements relating to PP&E. The surplus for 2013 results from in year depreciation charges totalling (- 105K) and recognition of new assets acquired and capitalised as PP&E (+ 148K). Any surplus or deficit is transferred to Reserves at the close of each financial year. Restated B15: Reserves PP&E Asset Reserve The PP&E Asset Reserve represents the Nations Equity in Property, Plant and Equipment assets. IT & Communications Equipment assets are capitalised and accounted for at their net carrying amount (i.e. gross historical purchase costs less accumulated depreciation). At the end of 2012, the PP&E Asset Reserve was increased by the accumulated surplus of 12K resulting in an opening Net Assets balance as at 1 st January 2013 of 196K. As a result of 2013 asset additions (+ 148K) and depreciation charges (- 105K) the closing Net Assets as at 31 December 2013 have increased by 43K to 239K. In accordance with the NATO Accounting Framework, NETMA changed its accounting policy for depreciating IT and Communications equipment over a five year period to a three year period. For consistency, the change has been applied to assets acquired before and after 1 st January This change in accounting policy has been accounted for retrospectively, and comparative statements for 2012 have been restated as detailed on page

79 ANNEX C Notes to the Statement of Financial Performance for the period ending 31 December 2013 CY-PY C01: Operating Revenue 45,712 44,567 1, National Contributions: - Germany 14,122 14,878 (756) (5.08) - Italy 9,839 10,568 (729) (6.90) - Italy Duty Travel Spain 4,796 4, United Kingdom 14,788 15,122 (334) (2.21) - NETMA Relocation Miscellaneous Revenue Movement on Unearned Revenue 1,365 (746) 2,111 (282.98) Operating revenue represents revenue from exchange transactions in accordance with IPSAS 9. National contributions represent the funds provided by Nations to support NETMA in fulfilling its objectives under the Administrative Budget. Funding is normally called for quarterly in advance although Italy provides funds on a 6- monthly basis. Italy provides an advance for Italian Duty Travel and this advance is reduced accordingly and identified as contributions earned as and when duty travel is expensed. Funding for the planned NETMA relocation to Halbergmoos site at the end of 2014 is also provided as an advance and this is reduced accordingly and identified as contributions earned as and when relocation costs are expensed. Miscellaneous revenue includes such items as car parking and telephone recoveries from staff employed by the Agency, and other reimbursements such as underspent Representation Allowance and DCPS pension refunds. NETMA also receives funding from Austria and Saudi Arabia to accommodate liaison officers in support of their interests in the EF2000 program. The movement on unearned revenue represents the excess of revenue over expenditure in the financial year. Good practice is to adjust revenue to reduce it accordingly and account for it on the Statement of Financial Position within advances. %age Budgeted Contributions Pre Adjustment for Unearned Revenue 16,000,000 14,000, ,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 14,877,888 14,122,286 10,567,557 9,839,230 4,551,003 4,795,751 15,122,382 14,787,587 0 Germany Italy Spain UK C02: Operating Expenses All of NETMA s expenditure is classed as General and Administrative with all operating expenses being contained within the NAMMO and NEFMO financial statements. 23

80 C03: Personnel 35,979 35, Pay and Overtime 21,535 20, Allowances 5,685 6,023 (338) (5.61) - Pension 2,528 2, Medical and Insurance 4,132 3, Travel 2,099 1, Personnel costs for NETMA account for 81% of the Agency running costs and are driven by the establishment for NETMA and the NATO promulgated rates of pay. The costs of personnel include basic salary, allowances, insurance and pension plan contributions. It also includes accruals for untaken leave carried forward at the end of the financial year. A breakdown of wages, salaries and employee benefits is provided below: (Amounts are stated in thousands of Euros) Employee benefits expense 31,333 31,019 Post employment benefits - for defined contribution pension scheme 2,528 2,524 Untaken leave accrued Total employee benefits expense* 34,236 33,899 *Employee Benefits exclude Duty Travel costs During 2013, the number of staff employed by NETMA fell from 256 employees to 254 employees at the end of December 12. The increase in pay costs is mainly attributable to a 2% salary adjustment directed by the NATO Appeals Board. NATO introduced the Defined Contribution Pension Scheme (DCPS) on 1st July The scheme is a money purchase pension scheme which is funded by NETMA and the staff member. This pension scheme is compulsory for all new entrants. NETMA s contribution is 12% of the value of the Basic Salary. Pension costs are predominantly for those members in the DCPS with one member remaining on the old Provident Fund scheme. Both schemes are administered and accounted for centrally by NATO IS. Travel costs include duty travel, home leave travel, removals and travel for interviews and repatriation. Related Party Disclosures The key management personnel of the NETMA have no significant third party relationships that could affect the operations of the organisation. Board members and senior management are remunerated in accordance with published NATO pay scales. Neither group receives loans that are not available to all staff. The remuneration of key management personnel of NETMA are determined by NATO salary scales and was as follows during the year: (Amounts stated in thousands of Euros) Current Year 2013 Prior Year 2012 EUR EUR Basic Salaries Allowances Employers contribution to Insurance Post-employment benefits Number of individuals on a full time equivalent basis: General Manager 1 1 Directors

81 Representation Allowance Certain designated high officials are entitled to representation allowances to cover expenses associated with establishing and maintaining business relationships of value to NATO (e.g. hosting of functions such as dinners, luncheons and receptions). The following table provides a summary of expenditure related to the representation allowance as required by PO(2013)0154 dated 27 March As of 1 June 2013, management of the representation allowance moved from a situation where recipients receive the representation allowance as an advance and return the unspent amount to the NATO body to a situation where all recipients are reimbursed permitted expenses within the limits of their individual representation allowance allocation. The total entitlement to representation allowance for 2013 was 12.69K. The actual expenses during 2013 were as follows: (Amounts stated in thousands of Euros) EUR 2013 Rental supplement expenses Hospitality expenses Total C04: Operations and Maintenance 4,606 4, Building Rent and Maintenance 3,494 2, Security (124) (20.36) - Other Costs (48) (7.11) Operations and Maintenance costs for NETMA account for 8% of the Agency running costs. Building costs include rent of the Agency s accommodation ( 1.820M), utilities and cleaning. The current building is provided under an operating lease contracted on a firm price basis for the period 1 st May 2009 to 31 December Although a firm price is agreed to 31 December 2015, the contract incorporates a formula for triggering a rental increase when inflation in Germany reaches a 10 point higher level based on the consumer price index. Also under the terms of the lease, should the number of NETMA staff fall below 239 employees the lease contract can be cancelled with a one year penalty charge. To replace the office accommodation in Unterhaching, the agency has taken on a new lease for office accommodation in Hallbergmoos, Munich. NETMA signed a contract on 27 th September 2013 to lease the new office building from 1 st December 2014 to 30 th November The contract includes a rent free period of six months starting from commencement of the lease period. During the rent free period NETMA is only required to pay for the ancillary costs and advance service charges (i.e. utilities charges). Although a firm price has been agreed, the contract incorporates a clause whereby a rental increase or reduction can be triggered after the first three years if inflation in Germany varies by more than 5% based on the consumer price index. Utility payments are subject to an annual review and can vary on the basis of actual usage of the previous year. The contract includes an option to extend the lease for a further two periods of 5 years. In accordance with IPSAS 13 Leases, the table below details obligations under the Operating Leases as at 31 December 2013: Buildings: Not later than one year 1,820,329 1,820,329 Later than one year and not later than five years 4,732,375 3,640,657 Later than five years 4,808,262 0 Utilities: Not later than one year 291, ,423 Later than one year and not later than five years 1,356, ,846 Later than five years 1,610,138 0 Garage: Not later than one year 91,405 91,405 Later than one year and not later than five years 347, ,811 Later than five years 423,160 0 Security costs are predominantly those of the contracted out guard service. Other costs include office supplies, the rental of reprographic equipment and the costs for the canteen services that have been outsourced. 25

82 C05: IT Services 4,896 4, Communication Information Technology Support 4,821 4, IT Services costs for NETMA account for 11% of the Agency running costs. The major cost elements in this category are for consultancy and outsourced support costs for the Agency s information systems. Restated C06: Depreciation and Amortization (93) (46.97) Property, Plant and Equipment is depreciated on a straight-line basis over the useful life of the asset. The depreciation charge relates to IT and Communication Equipment assets purchased before and after 1 st January In accordance with the NATO Accounting Framework, NETMA changed its accounting policy for depreciating IT and Communications equipment over a five year period to a three year period. This change in accounting policy has been accounted for retrospectively, and comparative statements for 2012 have been restated as detailed on page 12. C07: Foreign Exchange Gains and Losses 0 (8) Translation Gains / (Losses) Realised Gains / (Losses) 0 (8) Translation gains and losses occur when assets held in foreign currencies are converted to a Euro value at the closing NATO-promulgated exchange rates for the financial period. The only balance affected by translation gains and losses is the holding of British stamps. Realised gains and losses occur when currency transactions are paid or received at a different rate to that which the expense or income was accounted when accrued for. C08: Other Financial Income and Costs (84) (77) (7) 9.09 Bank Interest 9 26 (17) (65.38) - Interest returned to Treasury (2) (7) 5 (71.43) - Interest to offset future Calls for Funds (7) (19) 12 (63.16) Other Charges Bank interest is earned on the account held to fund the NETMA program. Italy wish to have all bank interest earned returned to their National Treasury. All other apportioned bank interest earned remains on account and is used to offset future Calls for Funds for the following year. Other charges include VAT expensed during the year. VAT is only reclaimed on qualifying invoices where the VAT amount exceeds (converted from DM50.00). Any VAT amounts less than this are expensed. Any difference between VAT incurred and that which is recoverable is written off as an expense. The movement reflects a reduction in qualifying transactions that can be reclaimed. 26

83 ANNEX D Notes to the Cash Flow Statement for the period ending 31 December 2013 Restated D01: Surplus / (Deficit) from Operating Activities This represents the surplus or deficit from normal operating activities before interest and financial charges such as exchange differences arising from transactions. In accordance with the NATO Accounting Framework, NETMA changed its accounting policy for depreciating IT and Communications equipment over a five year period to a three year period. This change in accounting policy has been accounted for retrospectively, and comparative statements for 2012 have been restated as detailed on page 12. Restated D02: Depreciation and Amortisation (93) (46.97) This represents the annual depreciation on Property, Plant and Equipment. D03: Financial Income and Costs (84) (77) (7) 9.09 This represents miscellaneous charges such as bank interest and VAT expensed which fall outside of the administration budget and excludes gains and losses. D04: Receivables (78) (282) 204 (72.34) National Contributions 275 (275) 550 (100.00) VAT (346) (40) (306) Madrid Line (2) (2) Other Receivables (5) 36 (41) (113.89) The movement on the VAT debtor reflects an increase in the level of VAT reclaimed by the Agency on qualifying transactions. The movement on the Madrid Line reflect the increase in receivables to be recovered from MoD Spain for the Madrid Communications Link relating to current years costs. Other receivables include advances of salary to staff and at the end of 2013 there were two staff loans and two salary advances outstanding. D05: Prepayments NETMA makes some prepayments for items such as the rental on the building accommodation, insurances and travel advances. D06: Inventories NETMA does not hold any inventory assets. Any inventories held in industry to be consumed in the production process are expensed and any inventory assets held in the ordinary course of operations to support either the Eurofighter or Tornado programmes are owned by the benefiting Nations. D07: Financial Assets NETMA does not hold any financial assets other than cash and receivables that have been separately reported on within the Annual Financial Statements. 27

84 D08: Short Term Borrowings NETMA does not have any short term loans from any organisation with all funds being provided by Nations and the generation of miscellaneous revenue. CY-PY D09: Payables Payable to Suppliers Payable to Italian Treasury (6) (4) (2) Rounding Difference The movement on payables to suppliers in 2013 represents an increase in the outstanding liabilities from The increase is attributable to the higher estimate for accrued expenditure based on a review of invoices accounted for in early 2014 with 2013 invoice dates. The movement on the payable to the Italian Treasury was minimal as a result of interest rates continuing to be at static state during %age D10: Advances 12,078 (6,294) 18,372 (291.90) Advance Contributions 7,315 (8,303) 15,618 (188.10) Italy Duty Travel (148) 1,263 (1,411) (111.72) NETMA Relocation 5, , BMR Support Unearned Revenue (1,365) 746 (2,111) (282.98) Rounding Difference Advance contributions represent the funds received from Nations for the next financial year. The movement reflects the higher levels of advance contributions received from all Nations at the end of 2013 compared to The movement on Italian Duty Travel reflects the reduction in advances due to expenditure on Italian Duty travel as no additional funding was provided during The movement on Unearned Revenue represents the surplus / deficit for the financial year that is reflected by an adjustment to the contributions received in year. The movement represents a deficit of revenue over expenditure by 3%. D11: Decrease / (Increase) Prop, Plant and Equipment (148) (210) 62 (29.52) This represents movement on Property, Plant and Equipment purchased or sold during the year. There was one IT & Communications asset addition for D12: Decrease / (Increase) Financial Assets NETMA does not hold any financial assets other than cash and receivables that have been separately reported within the Annual Financial Statements. D13: Effect of Exchange Rate Changes 0 (8) 8 (100.00) The exchange rate changes are minimal for the Agency as the majority of transactions are in Euros only with some GBP transactions for removals. The changes identified are realised gains and losses. 28

85 ANNEX E Notes to the Statement of Changes in Net Assets / Equity for the period ending 31 December 2013 E01: Changes in Accounting Policy 0 (91) 91 (100.00) In accordance with the NATO Accounting Framework, NETMA changed its accounting policy for depreciating IT and Communications equipment over a five year period to a three year period. This change in accounting policy has been accounted for retrospectively, and comparative statements for 2012 have been restated as detailed on page 12. E02: Surplus / (Deficit) on Revaluation of Prop, Plant & Equip NETMA does not have any revaluation reserves at this time and is not expected to have revaluations given asset are measured at their carrying amount using the Cost Model method under IPSAS 17. E03: Surplus / (Deficit) on Revaluation of Financial Assets NETMA does not hold any financial assets other than cash and receivables that have been separately reported within the Annual Financial Statements and do not incur any revaluation. E04: Currency Translation Differences The currency translation differences arise on the translation of the closing balance of the value of UK stamps held in GBP. Translation is at the closing SHAPE-issued rate for the financial period. E05: Revenue 45,712 44,567 1, All revenue items are included here and cover national contributions, bank interest and miscellaneous revenue from car parking and telephone recoveries from staff. Restated E06: Expenses (45,669) (44,555) (1,114) 2.50 All expenditure items are included here and cover general and administrative expenditure and miscellaneous financial charges, etc and depreciation. Translation differences are disclosed above in note E04. The total expenses for 2012 has been restated to reflect the additional depreciation charge of 91K as a result of a change in accounting policy for depreciating IT and Communications assets over a five year period to a three year period accounting (see page 12). 29

86 ANNEX F Notes to the Budget Execution Statement for the period ending 31 December 2013 FINAL FINAL F01: Personnel 36,185 36,295 (110) (0.30) The 2013 budgetary process resulted in an overall reduction of 0.3% from the previous year s budget. There was an underspend of 322K against the budget for 2013 mainly due to a lower level of expenditure on expatriation allowances than expected. The return of the lapsed credits will be agreed with Nations in Budgetary credits carried forward from 2013 total 342K and are mainly due to commitments relating to pensions, duty travel and education allowances. FINAL FINAL F02: Operations and Maintenance 3,989 3, The 2013 budget and expenditure relating to the main building management and running cost for the Agency remained at similar levels to Budgetary credits carried forward from 2013 total 42K; these mainly relate to commitments on utilities, maintenance and repair costs. FINAL FINAL F03: IT Services 4,871 6,021 (1,150) (19.10) The 19.09% reduction in budget for IT Services for the year 2013 was due to three main drivers. Firstly, the previous year s contributions for the expected costs of new business requirements such as Videoconferencing and NETMA CIS Services Continuity improvement) were no longer included in the budget for 2013 but are funded by the approved carry over from 2012 (see note F08 & F09). There were further savings achieved with the new PARMIS support contract through the merging of PARMIS and AIMS support in Finally, there were reductions made for the 2013 budget due to the optimisation of Oracle Software licensing. The major cost element in this chapter relates to the outsourced support of NETMA systems; the Agency is highly dependent on consultancy support due to a lack of IT-qualified secondees from Nations. Actual expenditure was 391K lower than the 2013 budget mainly due to a lower amount of consultancy support work committed and spent than expected. As at 31 December 2013 the credits carried forward of 360K relate mainly to commitments outstanding and were for consultancy support ( 286K) and software purchases ( 38K). FINAL FINAL F04 & F05 : Personnel c/f from prior years (336) (88.65) At the end of 2013, there is no remaining carry forward from prior years as 38K of commitments were actually expensed with the remaining 5K identified as lapsed credits. FINAL FINAL CY-PY FINAL F06& F07 : Operations and Maintenance c/f from prior years (133) (86.95) At the end of 2013, there is no remaining prior year credits to carry forward as 16K of commitments were actually expensed with the remaining 4K identified as lapsed credits. FINAL FINAL CY-PY FINAL F08 & F09: IT Services c/f from prior years 1,955 1,969 (14) (0.71) By the end of 2013, 935K of prior year commitments were expensed in year and a further carry forward of 874K was carried over to cover mainly the implementation of the Videoconferencing System and NETMA CIS Services Continuity improvement (as approved by the FAC), other credits carried forwards related to commitments on hardware and software purchases. 30

87 The lapsed credits amounts relating to 2013 and lapsed credits from previous years will be reviewed during 2014 and amounts to be returned to national treasuries will be agreed with Nations. F10: Reconciliation between Cash Flow Statement and Statement of Budget and Actual Amounts: NET CASH OUTFLOW FROM OPERATING ACTIVITIES (12,369) 6,314 (18,683) (295.90) Add: - Cash Contributions received in year 57,957 40,821 17, Bank Interest in year 9 30 (21) (70.00) - VAT reimbursement from Germany MoD (313) (45.36) - Other Cash revenue in year (54) (28.27) GROSS CASH OUTFLOW FROM OPERATING ACTIVITIES 46,111 48,046 (1,935) (4.03) Less: - Recoverable VAT paid in year (723) (730) 7 (0.96) - Madrid Line funded by Spain (24) (24) Interest transferred to Treasury - Italy (7) (12) 5 (41.67) - Lapsed credits returned to Nations (1,359) (1,053) (306) Transfers to Italy Duty Travel Advance 0 (1,200) 1,200 (100.00) - Other Cash payments in year (84) (162) 78 (48.15) PREDICTED BUDGET CASH PAYMENTS 44,467 44,865 (398) (0.89) SCHEDULE 5: EXPENSES 44,467 44,865 (398) (0.89) Residual Variation In accordance with IPSAS 24 Presentation of Budget Information in Financial Statements the above reconciliation has been carried out for the financial year ending 31 December The reconciliation is carried out between the Cash Flow Statement (Net Cash Outflow from Operating Activities) and the Statement of Comparison of Budget and Actual. The reconciliation takes account of the budget being expressed net of German VAT whereas the cash outflow includes VAT. F11: Reconciliation between Statement of Financial Performance and the Statement of Comparison of Budget and Actual: CY-PY SCHEDULE 2: EXPENSES 45,585 44,469 1, Add: Opening Payables and Accruals Less: Closing Payables and Accruals (1,181) (960) (221) Property, Plant and Equipment adjustments CASH PAYMENTS 45,407 44, Payables and Accruals included in/(excluded from) Budget (233) 568 (801) (141.02) Less: AP movement on Interest Payable to Treasury (6) (4) (2) Less: Italian Duty Travel expenses excluded from Budget (148) (146) (2) 1.37 Less: NETMA Relocation costs excluded from Budget (553) 0 (553) (100.00) PREDICTED BUDGET CASH PAYMENTS 44,467 44,865 (398) (0.89) SCHEDULE 5: EXPENSES 44,467 44,865 (398) (0.89) Residual Variance (0) (0) (0) 0.00 The above reconciliation is carried out between the Statement of Financial Performance and the Statement of Comparison of Budget and Actual Amounts for the financial year ending 31 December This reconciles accrual based expenditure that is reported on the Statement of Financial Position and cash based expenditure reported as expenses on the Budget Statement. 31

88 ANNEX G Application of IPSAS IPSAS IPSAS 1: Presentation of Financial Statements IPSAS 2: Cashflow Statement IPSAS 3: Accounting Policies, Changes on Accounting Estimates and Errors IPSAS 4: The Effects of Changes in Foreign Exchange Rates IPSAS 5: Borrowing Costs IPSAS 6: Consolidated and Separate Financial Statements IPSAS 7: Investments in Associates Statements IPSAS 8: Interests in Joint Ventures IPSAS 9: Revenue from Exchange Transactions IPSAS 10: Financial Reporting in Hyperinflationary Economies IPSAS 11: Construction Contracts IPSAS 12: Inventories IPSAS 13: Leases IPSAS 14: Event after the Reporting Date IPSAS 15: Financial Instruments (Disclosure and Presentation) IPSAS 16: Investment Property IPSAS 17 Adapted: Property, Plant and Equipment (as adapted by the North Atlantic Council) IPSAS 18: Segment Reporting IPSAS 19: Provisions, Contingent Liabilities and Contingent Assets IPSAS 20: Related Party Disclosures IPSAS 21: Impairment of non-cash generating assets IPSAS 22: Disclosure of Financial Information about General Government Sector IPSAS 23: Revenue from Non-Exchange Transactions IPSAS 24: Presentation of Budget Information in Financial Statements IPSAS 25: Employee Benefits IPSAS 26: Impairment of Cash-Generating Assets IPSAS 27: Agriculture IPSAS 28: Financial Instruments : Presentation IPSAS 29: Financial Instruments : Recognition and Measurement IPSAS 30: Financial Instruments: Disclosures IPSAS 31: Intangible Assets IPSAS 32: Service Concession Arrangements: Grantor Status Implemented Implemented Implemented Implemented Not relevant Not relevant Not relevant Not relevant Implemented Not relevant Implemented Not relevant Not relevant Implemented Replaced by IPSAS 28,29,30 Not relevant Implemented Not relevant Implemented Implemented Implemented Not relevant Implemented Implemented Not relevant Not relevant Not relevant Implemented Implemented Implemented Implemented Not relevant 32

89 33

90 ENCLOSURE 3 C-M(2016)0044 (INV) NEFMO FINANCIAL STATEMENTS FOR THE PERIOD ENDED 31 DECEMBER

91 CONTENTS Introduction to NEFMO 3 Financial Report 4 Schedule 1 Statement of Financial Position as at 31 December Schedule 2 Statement of Financial Performance for the Period ended 31 December Schedule 3 Indirect Cash Flow Statement for the Period ended 31 December Schedule 4 Statement of Changes in Net Assets / Equity for the Period ended Schedule 5 31 December Statement of Comparison of Budget and Actual Amounts for the Period ended 31 December Annex A Accounting Policies and Definitions 12 Annex B Notes to the Statement of Financial Position 18 Annex C Notes to the Statement of Financial Performance 24 Annex D Notes to the Cash Flow Statement 28 Annex E Notes to the Statement of Changes in Net Assets / Equity 30 Annex F Notes to the Budget Execution Statement 31 Annex G Application of IPSAS 33 2

92 NEFMO NATO European Fighter Aircraft Development, Production and Logistics Management Organisation (NEFMO) is a subsidiary body created within the framework of NATO for the implementation of tasks arising out of that Treaty, and established by the North Atlantic Council pursuant of Article 9 of the North Atlantic Treaty and within the meaning of the Agreement on the Status of the North Atlantic Treaty Organisation, National Representatives and International Staff, signed in Ottawa on 20 th September NEFMO is based in Unterhaching, Germany and is a NATO Production and Logistics Organisation (NPLO) formed by the nations of Germany, Italy, Spain and United Kingdom to develop, produce and support the Typhoon aircraft. Each of the Eurofighter (EF2000) Member States within NEFMO undertakes to fulfil the provisions and intentions laid down in the General Memorandum of Understanding between the Ministers of Defence of the Federal Republic of Germany, the Republic of Italy, the Kingdom of Spain and United Kingdom of Great Britain and Northern Ireland on the joint development, production and in-service support of Eurofighter (EF2000) dated 21 October 1986 and in subsequent Memoranda of Understanding. As an integral part of NATO, NEFMO will exercise those rights and privileges possessed by NATO by virtue of Article 4 of the Ottawa Agreement within the limits and subject to the terms and conditions specified by the present Charter, taking into account of the Agreement between NATO and the Government of the Federal Republic of Germany, dated 30 th November A NEFMO Board of Directors (BoD), comprising of representatives from the four NEFMO nations, provides strategic direction and governance to the Typhoon programme and NETMA provides support in the delivery of this direction. In this activity, NEFMO is acting as a principal and these accounts are put together on this basis. The NEFMO BoD directs NETMA in its management of the programme including approval of the NEFMO Operational Budget after review by the associated Legal Financial and Contractual Committee (LFCC). Funding for NEFMO is wholly through contributions made by the four NATO member nations the Federal Republic of Germany, the Republic of Italy, the Kingdom of Spain and United Kingdom of Great Britain and Northern Ireland. As a NATO organisation three NEFMO nations are exempt from taxation relating to operating revenue and expenses. However in the case of the Federal Republic of Germany VAT is levied. 3

93 FINANCIAL REPORT Introduction The NEFMO Financial Statements have been produced in accordance with the NATO Accounting Framework which is based on International Public Sector Accounting Standards (IPSAS) tailored as permitted by the North Atlantic Council. For the purposes of IPSAS NEFMO is regarded as a support authority and accounting policies have been applied as they would to a construction manager. NEFMO is under the direct control of the contributing nations who direct the Agency in the use of the assets resulting from the programme and also have the risks and benefits of ownership. Where the nations gain beneficial use of the assets all costs are regarded as in-service costs incurred to maintain Typhoon front line capability either through the procurement of spares or, at the direction of nations, contracting for post design tasks. Highlights NEFMO adopted a new accounting framework through the decision of the North Atlantic Council in August This framework is based on IPSAS standards but with limited tailoring to address NATO specific issues. The adoption of this accounting framework was backdated to 1 st January 2013 and therefore these accounts are prepared on that basis and historical assets are restated where necessary. The major impact of this tailoring on NEFMO accounts is the removal of historically acquired assets from the face of the financial statements and only assets acquired after 1 st January 2013 are now shown in the accounts. To reflect this change in accounting policy, the comparative statements for 2012 have been restated and relevant disclosures included in the notes to the financial statements. Revenue Revenue is generated through contributions from Nations as shown in the adjacent chart. Contributions are generally called for in arrears based on the presentation of validated invoices from industry. Other minor revenue items include bank interest, loan fees and commercial exploitation levies. High value revenue streams such as levies are returned to nations whereas interest and loan fees are sometimes retained within the programme. Breakdown of Contributions by Nation 2013 UK 33.34% SP 22.18% GE 23.99% IT 20.49% 4

94 Costs Programme costs are currently for all stages of the aircraft s life development, production and in service support (including weapon system enhancements) and can be identified by Nation as illustrated in the chart opposite. The total annual spend on production was 38% and in service support 62%. Breakdown of Costs by Nation 2013 UK 32.27% SP 12.89% GE 29.92% IT 24.92% Other costs recognised within the financial statements include foreign currency gains and losses. Accounting and Control The budget for NEFMO is constructed on a cash basis and funds are generally called for in arrears upon the presentation of validated invoices, with the exception of Italy where funds are provided throughout the year in advance. Interest generated on the programme bank accounts is returned to Italy, Spain and United Kingdom but retained within the programme for Germany and shown as part of the advance contributions balance within the financial statements. The Annual Financial Statements are constructed on an accruals basis and reconciled against the cash outturn accordingly. During 2013, the Agency has improved the process for reviewing financial statements internally and more comprehensive management reviews have been undertaken. To build on this success, the intention is to share this information with Nations during This increases the awareness of the accruals position throughout the financial year and also eases the burden of producing the Annual Financial Statements. Conclusion The Annual Financial Statements represent a true and fair view of the organisation s activities for

95 FINANCIAL STATEMENTS Schedule 1 STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2013 (all amounts stated in thousands of Euros) Notes Restated ASSETS Current Assets Cash and Cash Equivalents B01 437, ,059 92, Inter Entity Current Accounts B Receivables B03 1,157,390 1,947,870 (790,480) (40.58) Prepayments B Inventories B Financial Assets B ,594,470 2,292,929 (698,459) (30.46) Non Current Assets Property, Plant and Equipment B07 12, , Intangible Assets B , , TOTAL ASSETS 1,607,164 2,292,929 (685,765) (29.91) LIABILITIES Current Liabilities Short Term Borrowings B Payables B10 1,451,574 2,192,027 (740,453) (33.78) Advances B11 125,726 82,202 43, ,577,300 2,274,229 (696,929) (30.64) Non Current Liabilities Long Term Borrowings B Provisions B13 17,170 18,700 (1,530) (8.18) 17,170 18,700 (1,530) (8.18) TOTAL LIABILITIES 1,594,470 2,292,929 (698,459) (30.46) TOTAL ASSETS LESS LIABILITIES 12, , NET ASSETS Accumulated Surplus / (Deficit) B14 12, , Reserves B TOTAL NET ASSETS 12, ,

96 FINANCIAL STATEMENTS Schedule 2 STATEMENT OF FINANCIAL PERFORMANCE FOR THE PERIOD ENDED 31 DECEMBER 2013 (all amounts stated in thousands of Euros) Notes Restated OPERATING ACTIVITIES Revenue Operating Revenue C01 2,706,354 4,692,990 (1,986,636) (42.33) 2,706,354 4,692,990 (1,986,636) (42.33) Expenses Operating Expenses C02 2,670,394 4,684,334 (2,013,940) (42.99) 2,670,394 4,684,334 (2,013,940) (42.99) SURPLUS / (DEFICIT) FROM OPERATING ACTIVITIES 35,960 8,656 27, GENERAL & ADMINISTRATIVE COSTS Personnel C Operations and Maintenance C IT Services C Depreciation & Amortization C06 1, , , , NET SURPLUS / (DEFICIT) FROM OPERATING ACTIVITIES 34,228 8,656 25, FINANCIAL INCOME & COSTS Foreign Exchange Gains & Losses C07 (21,533) (8,656) (12,877) Other Financial Income & Costs C (21,533) (8,656) (12,877) NET SURPLUS / (DEFICIT) FOR THE PERIOD 12, ,

97 FINANCIAL STATEMENTS Schedule 3 INDIRECT CASH FLOW STATEMENT FOR THE PERIOD ENDED 31 DECEMBER 2013 (all amounts stated in thousands of Euros) Notes Restated CASH FLOW FROM OPERATING ACTIVITIES Cash Flow from Operating & Other Activities Surplus / (Deficit) from Op Activities D01 34,228 8,656 25, Depreciation & Amortization D02 1, , Financial Income & Costs D ,960 8,656 27, Decrease / (Increase) in Current Assets Receivables D04 790, , , Prepayments D Inventories D Financial Assets D , , , Increase / (Decrease) in Current Liabilities Short Term Borrowings D Payables D09 (740,453) (208,954) (531,499) Advances D10 43,524 12,105 31, (696,929) (196,848) (500,080) Increase / (Decrease) in Non Current Liabilities Provisions D11 (1,530) 4,700 (6,230) (132.55) NET CASH FLOW FROM OPERATING ACTIVITIES 127, ,445 (64,464) (33.50) CASH FLOW FROM INVESTING ACTIVITIES Decr / (Incr) Prop, Plant and Equipment Assets D12 (14,425) 0 (14,425) (100.00) Decr / (Incr) Financial Assets D (14,425) 0 (14,425) (100.00) NET INCREASE / (DECREASE) CASH & CASH EQUIVALENTS CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 113, ,445 (78,889) (40.99) 345, , , Effect of Exchange Rate Changes D14 (21,533) (8,656) (12,877) CASH & CASH EQUIVALENTS AT END OF PERIOD 437, ,059 92,

98 FINANCIAL STATEMENTS Schedule 4 STATEMENT OF CHANGES IN NET ASSETS / EQUITY FOR THE PERIOD ENDED 31 DECEMBER 2013 (all amounts stated in thousands of Euros) Notes PP&E Asset Revaluation Translation Accumulated TOTAL Reserve Reserve Reserve Surplus / (Deficit) Balance at 31 December Changes in Accounting Policy E RESTATED BALANCE Surplus / (Deficit) on Revaluation of Prop, Plant & Equip E Surplus / (Deficit) on Revaluation of Financial Assets E Currency Translation Differences E NET INCREASE / DECREASE OF RESERVES NET SURPLUS / (DEFICIT) FOR THE PERIOD Balance at 31st December Changes in Accounting Policy E RESTATED BALANCE Surplus / (Deficit) on Revaluation of Prop, Plant & Equip E Surplus / (Deficit) on Revaluation of Financial Assets E Currency Translation Differences E NET INCREASE / DECREASE OF RESERVES NET SURPLUS / (DEFICIT) FOR THE PERIOD ,694 12,694 Balance at 31 December ,694 12,694 9

99 FINANCIAL STATEMENTS Schedule 5 STATEMENT OF COMPARISON OF BUDGET AND ACTUAL AMOUNTS FOR THE PERIOD ENDED 31 DECEMBER 2013 (all amounts stated in thousands of Euros) Notes Budgeted Amounts Commitments Expenses Credits Carried Forward Lapsed Credits Original Adjustments Final Germany Chapter 1 11,786 (8,892) 2,894 4,785 4,785 0 (1,891) Chapter 2 282,129 (106,868) 175, , ,397 0 (40,136) Chapter 3 693,471 6, , , , , ,386 (109,243) 878, , , ,276 Italy Chapter 1 0 3,715 3,715 4,099 4,099 0 (384) Chapter 2 293, , , ,720 0 (50,720) Chapter 3 600,000 (2,415) 597, , , , ,000 1, , , , Spain Chapter 1 21,196 (17,296) 3,900 2,491 2, ,409 Chapter 2 347,943 59, , , ,239 0 (14,966) Chapter 3 427,276 79, , , , , , , , , , ,766 United Kingdom Chapter 1 35,646 (24,786) 10,860 5,316 5, ,544 Chapter 2 706,451 (82,545) 623, , ,922 0 (24,016) Chapter 3 731,362 (54,689) 676, , , ,798 1,473,459 (162,020) 1,311,439 1,141,113 1,141, ,326 4,150,259 (147,985) 4,002,274 3,620,908 3,620, ,367 Notes: 1. Original Budget is the Issue B budget as approved by 163rd BOD dated 20/21st November 2012 for GE, SP & UK. IT approved under ref:sma422/76/12/c dated 21st December Final Budget is the Issue D budget as approved by 166th BOD dated 8/9th October

100 ANNEX A Accounting Policies & Definitions Basis of Preparation The financial statements have been prepared on a going-concern basis and the amounts shown in these financial statements are presented in Euros. The financial statements of NEFMO have been prepared on a going-concern basis. However, the Heads of State and Government approved at the Lisbon Summit (19-20 November 2010) the consolidation and rationalisation of the functions and programmes of the 14 NATO agencies into three agencies and a shared-service organisation, and the reorganization of the Military Commands. Subsequently Charters for a new NATO Support Organisation (NSPO), NATO Communications and Information Organisation (NCIO) and NATO Procurement Organisation (NPO) were approved on 1 July However, whilst the NSPO and NCIO Agencies are now up and running, the NPO, into which NETMA would be expected to integrate, will be in a two year design phase to develop a framework for ongoing and future programmes; executive bodies of the NPO, including the Procurement Agency, will only be established once an existent programme or a new programme would integrate into the Procurement Organisation. Current programmes must indicate when they will integrate into the new Agency, and a case made to the North Atlantic Council (NAC) if this is not possible by In June 2013 NETMA member nations informed NATO that currently they see no evidence that integration into the NPO would increase the effectiveness and efficiency of the programmes; this situation remains under review through continued engagement with the reform process. There is no information at the time of the preparation of these financial statements that would indicate an intention to cease operations. Ministers have also agreed that a NATO Shared Services Organisation will be established. Customers, including both new and current Agencies, would be directed to use shared services as they are implemented. An Office of Shared Services at NATO has at the end of February 2014 presented an Implementation Plan outlining proposals for the sharing of functions of Finance & Accounting, Human Resources and General Procurement in a centralized environment. The intention is to have a decision at NATO on these proposals and the Implementation Plan by summer The full extent and impact of Agency Reform and the establishment of a shared services organisation on NEFMO is still unclear at the time of submitting these financial statements. The NEFMO financial statements have been prepared on the accruals basis of accounting in accordance with the accounting requirements of the NATO Accounting Framework which is based on International Public Sector Accounting Standards (IPSAS) issued by the International Public Sector Accounting Standards Board (IPSASB) and relevant to NEFMO as decided by the North Atlantic Council in A list of standards issued by the IPSAS Board can be found on the following website The accounting principles recognised as appropriate for the measurement and reporting of the financial performance, the financial position and cash flows on an 11

101 accrual basis using historical costs are followed in the preparation of the financial statements. The financial statements have been prepared in accordance with the accounting requirements of the NATO Financial Regulations (NFR) and the Financial Rules and Procedures (FRP). Application of IPSAS and Tailoring NEFMO adopted all IPSAS standards issued by the IPSAS Board that were effective prior to 31 December 2013 and, where relevant, the adapted standards within the NATO Accounting Framework have been applied. As encouraged by the IPSAS Board, and to increase transparency and accountability, IPSAS standards that are available for early adoption have also been adopted. There is no material impact in the opening balances resulting from early adoption. A summary of standards adopted is provided in Annex G. Use of Estimates In accordance with generally accepted accounting principles, the financial statements necessarily include amounts based on estimates and assumptions by management using the most reliable information available. Estimates include accrued revenue and expenses. Actual results could differ from those estimates and changes are reflected in the period in which they become known. Consolidation The NEFMO financial statements are not consolidated. Changes in Accounting Policy During 2013, NEFMO changed its accounting policy for the treatment of Property, Plant and Equipment. Due to historical issues with measuring reliably the cost or fair value of assets acquired prior to 2013, the organisation has decided to treat assets acquired prior to 1 st January 2013 as fully expensed in accordance with IPSAS 17 adapted accounting framework for NATO. This change in accounting policy has been accounted for retrospectively, and comparative statements for 2012 have been restated. The effect of the change on 2012 is tabulated below: (Amounts stated in thousands of Euros) 2012 Previous Adjustment 2012 Restated Effect on Statement of Financial Position: Decrease in Property, Plant and Equipment 700,970 (700,970) 0 Decrease in Total Assets 2,993,899 (700,970) 2,292,929 Decrease in Deficit for the period (44,478) 44,478 0 Decrease in Reserves 745,448 (745,448) 0 Decrease in Total Net Assets 700,970 (700,970) 0 Effect on Statement of Financial Performance: Increase in Operating Expenses 4,638,517 45,817 4,684,334 Decrease in Surplus from Operating Activities 54,473 (45,817) 8,656 Decrease in Depreciation & Amortization 90,295 (90,295) 0 12

102 Decrease in Net Deficit from Operating Activities (35,822) 44,478 8,656 Decrease in Deficit for the period (44,478) 44,478 0 Effect on Indirect Cashflow Statement: Decrease in Deficit from Operating Activities (35,822) 44,478 8,656 Decrease in Depreciation & Amortization 90,295 (90,295) 0 Decrease in Net Cash Flow from Operating Activities 238,262 (45,817) 192,445 Decrease in Fixed Assets (45,817) 45,817 0 Effect on the Statement of Changes in Net Assets / Equity: PP&E Asset Reserve Revaluatio n Reserve Translatio n Reserve Accumulate d Surplus/ (Deficit) TOTAL Balance at 31 December 2012 as previously reported 740,599 77,820 - (117,448) 700,971 Change in accounting policy in respect of the capitalisation of Property Plant and Equipment Balance at 31 December 2012 as restated (740,599 ) (77,820) - 117,448 (700,971 ) To align with the NATO capitalisation threshold that is applicable for Aircraft production and support equipment, the threshold for capitalising new assets has been increased from 15,000 to 200,000. As detailed above assets acquired in previous years are fully expensed therefore the new threshold applies only to new assets acquired since 1 st January Significant Accounting Policies Foreign Currency Transactions Foreign currency transactions are accounted for at the NATO exchange rates prevailing on the date of the transactions. Monetary assets and liabilities at year-end which were denominated in foreign currencies were translated into Euro using the NATO rates of exchange that were applicable at 31 December Realised and unrealised gains and losses resulting from the settlement of such transactions and from the revaluation at the reporting dates of monetary assets and liabilities denominated in foreign currencies are recognised in the Statement of Financial Performance. Financial Instruments The costs of activities in the NEFMO Operational Budget are borne by Nations in accordance with the formula specified in the Memorandum of Understanding (MOU). Contributions are assessed on the basis of approved budget authorisations and called for in accordance with the budgeted cash requirements of NEFMO, therefore financial instruments play a more limited role in creating risk than would apply to a non-public sector organisation of a similar size. NEFMO uses only non-derivative financial instruments as part of its normal operations. This includes the following financial assets and liabilities: 13

103 Cash and cash equivalents (i.e. cash, bank accounts, deposit accounts), Accounts receivable, Accounts payable. In accordance with IPSAS 29, Financial Instruments are recognised at the contract date and initially measured at fair value. Their subsequent measurement depends on their classification. Cash, receivables and other liabilities are not revalued (except for changes in exchange rates which are included in the statement of financial performance). Financial Instruments are derecognised on expiry or when all contractual obligations are transferred. IPSAS 30 Financial Instruments: Disclosures, requires the organisation to provide disclosures in respect of the role of financial instruments on the financial position and performance, the nature and extent of the risks to which the organisation is exposed and how these risks are managed. Management is aware of the risks associated with financial instruments and is bound by NETMA Financial Rules and Regulations to keep these risks very low. Currency risk: To limit the exposure to foreign currency risk, NEFMO forecasts the yearly expected expenditures in foreign currencies where it is material. In order to have the required funding, NEFMO asks the Nations to provide their contributions in the currencies that will be needed where USD and GBP amounts are required and significant in value. The currency risk is deemed to be minimal and hedging the foreign currency exposure is not considered necessary. The transactions in foreign currencies are denominated in the functional currency at the date of the transaction. Liquidity risk: The liquidity risk is based on the assessment of whether the organisation will encounter difficulties in meeting its obligations associated with financial liabilities. There is limited exposure to liquidity risk because of the budget mechanism that seeks to guarantee contributions for the total approved budget. The accuracy of forecasts that result in the calls for contributions as well as the delay in receiving payments, represent the main liquidity risks. Credit risk: There is very limited credit risk as the contributing Nations generally have a high credit rating. At the time of submitting these financial statements, Spain and Italy recently experienced a downgrade in their credit rating, however, the risk of financial loss due to a participating Nation s failure to raise funds is still assessed as very low. In the event that there is a shortage of funds by one or more Nations to meet financial obligations, other Nations are ultimately committed to provide the necessary funding. Interest rate risk: NEFMO is restricted from entering into borrowings and investments, and therefore there is no significant interest rate risk identified. Current Assets 14

104 Cash and cash equivalents are carried in the Statement of Financial Position at fair value and comprise deposits held within nominated programme bank accounts. Foreign currency balances are translated using the NATO rate applicable as at 31 December Accounts receivable consist of outstanding Calls for Funds from Nations for the 2013 financial year and any other receivables from external sources in relation to loan agreements, levies, etc. Non Current Assets NEFMO Property, Plant and Equipment (PP&E) assets include large and significant items of equipment that are procured for the development and production of the Eurofighter aircraft. Newly acquired assets or modifications that individually cost above 200,000 are capitalised and depreciated over the asset s useful life. The assets will mainly be used during production phase thus it is considered appropriate to depreciate them up to the end of the production period, currently expected to be For initial recognition, it is assumed the assets will have no residual value at the end of the production phase, the residual values and useful life for each asset shall be reassessed at the end of the production phase. If at the end of the production phase assets are considered to have residual useful life, a reassessment of asset value and useful life will be made if appropriate. Aircraft and government owned in-service equipment are not included within NEFMO PP&E as these are National Assets owned by the benefiting Nation and are included within National Financial Statements and Accounts accordingly. Based on the asset information from the Customer Owned Asset Registers (COARs) delivered by industry, only assets acquired or modified since 1 st January 2013 will be capitalised and recognised in the financial statements. Information on pre-2013 assets shall be disclosed in notes to the financial statements, in accordance with the NATO Accounting Framework. In accordance with IPSAS 17, Property, Plant and Equipment (PPE) are recognised as tangible assets when it is probable that future economic benefits or service potential associated with the item will flow to the entity and the cost or fair value can be measured reliably. Assets are recognised at historical purchase cost at the time of acquisition or construction. Following the Cost Model method of measurement, after recognition as an asset the item is carried at its cost less any accumulated depreciation and any accumulated impairment losses. NEFMO s capitalisation threshold is 200,000. Items with a purchase cost or fair value on acquisition above this threshold are capitalised, items falling below this threshold are fully expensed in the year of procurement. There are no Intangible Assets to be capitalised for NEFMO, as they are not separately identifiable costs and are deemed to be integral part of the production equipment 15

105 construction costs. Development costs associated with the aircraft are delivered and accounted for as part of aircraft delivered and therefore owned by the Nations. The carrying amounts of tangible assets are reviewed for impairment if events or changes in circumstances indicate that they may not be recoverable. If any such indication exists, the recoverable amount of an asset is estimated in order to determine the extent of the impairment loss (if any). Any provision for impairment is charged against the Statement of Financial Performance in the year concerned. For new asset additions during the year, the gross value of an asset is capitalised as PP&E on the Statement of Financial Position. The revenue for the full amount of the asset is accounted for in the year of purchase on the Statement of Financial Performance. Therefore a surplus on the Statement of Financial Performance is generated in the first year of purchase and transferred to the PP&E Asset Reserve account to increase accumulated asset reserves. Depreciation is charged each year on a straight-line basis over the asset s useful life and accounted for as an expense which generates a deficit on the Statement of Financial Performance. This deficit is transferred to PP&E Asset Reserves at the end of each year to reduce the accumulated asset reserve. Tangible assets are derecognised either on disposal or when no future economic benefit or service potential is expected from their use or disposal. Liabilities NEFMO liabilities include amounts payable to suppliers for work undertaken but not yet paid, amounts owing to Nations with respect miscellaneous revenue that is to be returned in accordance with instructions from Nations and advance contributions. Advance contributions are those funds received for future years budgets and unearned revenue represents contributions received in prior years that have not been recognised as revenue. Unearned revenue also includes miscellaneous income earned that Nations have instructed remain on the programme accounts rather than be returned to the respective National Treasuries. As NEFMO is mainly funded in arrears it is assumed that all accrued expenditure will be subject to future calls for funds and thus the programme does not retain any unearned revenue. Provisions and contingent liabilities Provisions are recognised when NEFMO has a present obligation as a result of a past event, and it is probable that NEFMO will be required to settle that obligation, and where a reliable estimate of the amount of obligation can be made. Provisions are measured at management s best estimate of the expenditure required to settle the obligation at the date of the statement of financial position, and are discounted to present value where the effect is material. Other commitments, which do not meet the recognition criteria for liabilities, are disclosed in the notes to the financial statements as contingent liabilities when their existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events which are not wholly within the control of NEFMO. 16

106 Revenue NEFMO is funded by the four contributing Nations Germany, Italy, Spain and United Kingdom. Contributions are usually called for in arrears for invoices that have been presented for payment by industry and validated by NETMA. Germany also provides funding based on a forecast of expected invoice payments. Italy is the exception to this rule and provides funding in advance throughout the year. Other revenue earned during a financial period includes loan fees, levies and bank interest. Expenses NEFMO operates comparable to a construction manager for the purposes of IPSAS and payments made to industry are expensed accordingly. All expenses incurred on the Typhoon Weapons System Programme are for the development, production and inservice support of the aircraft. Related Parties Disclosure The key management personnel of NEFMO have no significant related party relationships that could affect the operation of NEFMO. Board members and senior management are remunerated in accordance with published NATO pay scales. Neither receives loans that are not available to all staff. 17

107 ANNEX B Notes to the Statement of Financial Position CY-PY %age B01: Cash and Cash Equivalents 437, ,059 92, Germany BAAINBw (ex BWB & 64,254 58,778 5, MOD) (EUR) Germany BAAINBw (Suspense 1,210 8,514 (7,304) (85.79) EUR) Germany LwM (EUR) 216, ,274 32, Italy (BNL EUR) 57,544 18,685 38, Spain (BBVA EUR) 88,340 71,111 17, Spain (BBVA GBP) 8, ,721 20, Spain (EUR) 0 37 (37) (100.00) Spain (USD) Spain (Deposit EUR) 0 2,800 (2,800) (100.00) UK (EUR) UK (USD) (685) (100.00) UK (Lloyds GBP) (130) (97.74) The Typhoon Weapons System Program has a number of bank accounts relating to the various funding offices from which payments are made and contributions received. The majority of accounts are held in EUR but Spain and UK have accounts for GBP and USD transactions as well. Italy has rationalised its accounts and now only operates one account for the Typhoon Weapons System Program with BNL. The accounting system (PARMIS) functionality necessitates that each cash and bank account is separately identified and has an associated clearing account to enable the sub-ledger to interface with the General Ledger. The carrying balance on all clearing accounts is zero. In general, the Eurofighter programme is funded in arrears and funds are called for on the strength of invoices received and validated as payable from industry. The level of cash holdings for Germany has increased as call for funds were based on forecasted expenditure that was overestimated and will therefore be disbursed against validated invoices in Italy has a different approach and usually requires NETMA to make calls quarterly based on the annual budget, the level of cash holdings has increased as cash received against the 2013 budget were not disbursed against validated invoices until January The higher level of cash holdings at the end of 2013 for Spain was due to funding ringfenced for critical activities. CY-PY %age B02: Inter Entity Current Accounts Any balances that exist on these accounts represent amounts owed to or from either NAMMO or the NETMA Administration Budget. At the end of 2013 there were no balances on these accounts. CY-PY %age B03: Receivables 1,157,390 1,947,870 (790,480) (40.58) Contributions Receivable - Germany BAAINBw (ex BWB & 251, ,049 29, MOD) - Germany LwM Italy 230, ,834 (256,170) (52.62) - Spain 104, ,855 (415,232) (79.87) - United Kingdom 444, ,132 (274,974) (38.24) Receivables from Industry - Germany BAAINBw (ex BWB & 37, , MOD) - Germany LwM

108 - Italy 24, , Spain 14, , United Kingdom 50, , Contributions Receivable represent funds required from Nations in order to reimburse industry for work completed whether it has been invoiced or estimated as complete but not yet invoiced. As Calls for Funds are made in arrears of invoices being presented it is assumed that all work accrued must be called for and is represented as receivable from Nations. The Contributions Receivable has fallen significantly due to a decrease in payable invoices and accruals for Italy, Spain and UK at the end of 2013, this has been slightly offset by increases in closing payables and accruals for Germany. The Contributions Receivable from Spain has reduced significantly as the required funds were provided by the Spanish Government to pay off the outstanding debts from previous years and meet their obligations to the Eurofighter programme. Receivables from Industry have been broken out for These are credit notes from industry relating to milestones that have undergone price investigation and have subsequently changed in value. Previously these items were accounted for as credits within payables. B04: Prepayments NEFMO does not make prepayments to industry. 19 B05: Inventories NEFMO does not hold any inventory assets. Any inventories held in industry to be consumed in the production process are expensed and any inventory assets held in the ordinary course of operations to support Typhoon are owned by the benefiting Nations. B06: Financial Assets NEFMO does not hold any financial assets other than cash and receivables that have been separately reported within the Annual Financial Statements. Restated B07: Property, Plant and Equipment 12, , Major Rigs, Jigs and STTE Equipment 12, , During 2013, the organisation changed its accounting policy on the treatment of PP&E due to issues with valuing assets acquired before 1 st January 2013 and the implementation of tailored IPSAS 17 under the NATO Accounting Framework. This resulted in a restatement of 2012 PP&E balances and associated transactions to reflect the removal of pre-2013 assets from the financial statements (see page 12 for details). The asset bases of EUROFIGHTER (EF) and EUROJET (EJ) and their sub-contractors are large and consist of Major Rigs, Jigs, Tools and Test Equipment, Instrumented Production Aircraft and general tooling. These are located at various contractor sites in Germany, Italy, Spain and UK that are used to support the development and production of the Eurofighter aircraft. There are six Instrumented Production Aircraft (IPAs) located at the main test facilities in each of the Nations; three IPAs in the UK and one in each of the other Nations (Germany, Spain and Italy). As IPSAS 17 was not a requirement at the beginning of the programme, industry was not contracted in previous years to provide individual asset values and purchase data thus the asset data available to NEFMO was limited for assets acquired before Based on the best information available from industry it is estimated that assets acquired in previous years have an initial purchase cost of approximately 1,400M. New Stores Accounting & Disposal Procedures (SADPs) were introduced for contracts with EUROFIGHTER and EUROJET. The requirement for industry to provide the necessary asset information was initially established through a Contract 1 Supplementary Demand (N/ N/49810/126394/12/NU dated 6 November 2012) and a contract amendment was finally signed in December 2013 to include a formal requirement for industry (under C#1 Annex 13 SADPs Issue 5) to deliver a Customer Owned Assets Register (COAR) with assets value and date information for

109 assets acquired since 1 st January Based on the asset information from the COARs delivered by industry, only assets acquired or modified in 2013 are capitalised and included in the financial statements. A capitalisation threshold of 200,000 has been applied to all NEFMO assets. In accordance with IPSAS 17, below is a reconciliation of the carrying amounts for Property, Plant and Equipment: Major Rig, Jigs and STTE Reporting Period Opening Balance 0 0 Additions 14,425 0 Disposals 0 0 Depreciation (1,732) 0 Revaluations (net) 0 0 Closing Balance 12,694 0 Gross Carrying Amount 14,425 0 Accumulated Depreciation (1,732) 0 Net Carrying Amount 12,694 0 * Amounts are stated in thousands of Euros Spanish Aircraft To manage within national funding constraints Spain currently is not in a position to accept into service completed aircraft until 1 January As a result a formal agreement was made on 27 th July 2012 between Spain and the other Partner Nations that NEFMO will accept delivery of fifteen aircraft from Cassidian (Spain). By the end of December 2013 NEFMO accepted the delivery of ten aircraft and the remaining five aircraft are due to be delivered in Under the arrangement, NEMFO has legal title over the aircraft until they are formally accepted by Spain. The Spanish aircraft will be stored in accordance with an agreed Storage and Maintenance Plan in Spain until 1 January NEFMO will have influence over their use and their support arrangements but all the liabilities and risks associated with the aircraft are deemed to remain with Spain. An assessment against IPSAS 17 Property, Plant and Equipment and the key control criteria for the recognition of assets was undertaken along with a review of the liabilities, risks and benefits of the arrangement. This concluded that, although NEFMO has legal title over these aircraft, the economic substance of the arrangement suggests Spain retains control over these assets and have all the liabilities and risks associated with the aircraft. It is not probable that future economic benefit or service potential associated with these assets will flow to NEFMO, therefore it was not considered appropriate to capitalise the Spanish aircraft as NEFMO PP&E on the Statement of Financial Position. Asset Write Offs NETMA Financial Rules and Regulations require the disclosure of NEFMO-owned assets, regardless of value, that have been subject to write off during Assets written off during 2013 include General Tooling and Test Equipment items held by Industry which are individually relatively low in value, a summary by Nation and company is provided below for information: 20

110 Company Nation Quantity CASSIDIAN GE AND CASSIDIAN GE SUPPLIERS (ULM) Germany 6 NORTHROP GRUMMAN Germany 7 ASE SAN GIORGIO SU LEGNANO MILANO Italy 5 AVIO BRINDISI Italy 24 AVIO POMIGLIANO NAPOLI SITE Italy 16 MICROTECNICA MILANO Italy 31 UTC AEROSPACE SYSTEMS (FORMER MICROTECNICA) Italy 1 BAES ROCHESTER UK 2 BAES SAMLESBURY UK 259 BAES WARTON UK 297 BAES SUPPLIERS - VARIOUS UK 81 FLIGHT REFUELLING WIMBORNE UK 2 GE AVIATION SYSTEMS UK 1 HS MARSTON AEROSPACE UK 1 ROLLS ROYCE UK 25 UTC AEROSPACE SYSTEMS UK 8 TOTAL 766 The maximum total value (i.e. historical purchase cost) of write offs is estimated at 4,000K. B08: Intangible Assets NEFMO does not hold any intangible assets. Development costs are expensed by NEFMO and the intangible assets are held on the balance sheets of the benefiting Nations. CY-PY B09: Short Term Borrowings NEFMO does not have any short term loans from any organisation with all funds being provided by Nations and the generation of miscellaneous revenue such as Commercial Exploitation Levies. CY-PY %age B10: Payables 1,451,574 2,192,027 (740,453) (33.78) - Germany 95, ,635 29, Italy 14, ,933 (141,592) (90.80) - Spain 67, ,854 (312,801) (82.35) - United Kingdom 32,202 7,150 25, Translation of Foreign Currency Payables - Germany 1 5 (4) (80.00) - Italy (496) (99.80) - Spain 3 (145) 148 (102.07) - United Kingdom 2 69 (67) (97.10) Manual Accrual (inc Aircraft Retentions) - Germany 343, ,703 (26,244) (7.10) - Italy 293, ,846 (50,711) (14.75) - Spain 146, ,315 (64,725) (30.63) - United Kingdom 456, ,725 (249,319) (35.33) Bank Interest - Italy (108) (75.52) 21

111 - Spain , UK 3 8 (5) (62.50) Commercial Exploitation Levies - Austrian Levy - Italy 0 1,326 (1,326) (100.00) - SALAM Levy - Germany 0 15,948 (15,948) (100.00) Loan Fees - EFA40 Rolls Royce - Italy Spain Other - IPA 6 Spares to support Austrian Fleet (Italy portion) - Tranche 1 Spares to support Austrian Fleet - (UK only) 1, , Transportation Settlement Recovery - Italy (122) (100.00) - Spain (189) (100.00) Amounts payable to suppliers represents invoices for work undertaken but not yet paid. This account is reconciled to the Payables sub-ledger within the financial system operated by NEFMO on a monthly basis. Any outstanding currency liabilities have been translated at the respective closing exchange rates as promulgated by NATO. The decrease in payables from 2012 is due to funding provided during the year by Spain and Italy which resulted in the payment of a significant amount of outstanding invoices in The manual accrual has been assessed by the business and based on the same process applied in the previous year. The accrual is assessed against open purchase orders and historic milestones. The work completed has been estimated and does not include any invoices already validated and included within the Accounts Payable figure. The accrual does include aircraft retentions which have not changed materially from Industry has, in the past been approached with a view to validating the accrual but information has not been forthcoming. Similar to the approach adopted last year, Technical and Commercial sections have been involved in providing their assessments to estimate the accrual within NETMA. Compared to 2012, the overall accrual has decreased significantly as a result of the formal revision of milestone payment plans and Tranche 2/Tranche 3A payment reconciliations. Cash in transit reflects invoices that have been paid but not cleared from the bank. Such transactions have been shown as accrued expenditure and are consistent with prior years accounting. Bank interest earned on the Italian, Spanish and UK bank accounts throughout the year is payable to national treasuries and is repaid in the year following that in which the interest was earned. Where accounts have been closed any interest earned has been returned to nations in year. Commercial Exploitation Levies payable to Nations are those levies generated by the export programmes to Austria and Saudi Arabia. All revenue generated from levies is payable to national treasuries. The SALAM levy reflects the export of aircraft to Saudi Arabia. There were no payables outstanding at the end of 2013 as remaining amounts due to Germany and Italy were fully paid. At the end of 2013, work was on-going to assess and agree the first portion of the levies due for support activities for the Austrian Export Campaign. At the time of submitting these financial statements there remained no formal agreement on the amounts due and funding keys to be applied for reimbursements to Nations. Revenue from loan fees arise when industry makes use of NEFMO owned equipment on other programmes. The majority of loan agreements do not attract charges as they tend to be in support of export programmes such as the SALAM agreement and have a benefit to NEFMO over and above the financial revenue which could be generated from the loan. In terms of revenue loan fees are low in value. Transportation Settlements are non-budgetary transfers made to reimburse one nation for the work done by another, as at 31 December 2013 there were no outstanding reimbursements due to nations. 22 B11: Advances 125,726 82,202 43,

112 Advance Contributions - Germany LwM 124,740 81,231 43, Bank Interest not transferred to Treasury - Germany LwM Advance contributions for Germany represent contributions received for the next financial year. There is an advance contribution for Germany due to funds received in the LwM bank account that was based on a higher level of forecasted invoice payments than actual invoices received, therefore will not be disbursed until validated invoices are received in Germany currently retain bank interest and loan fee revenue within NETMA and do not have it returned to their respective Treasury. As such this revenue is treated as an advance contribution against future payments. For greater transparency and comparability, Advances are offset against Contributions Receivable upto the value of accrued expenditure yet to be called for (i.e. Accounts Payable and Manual Accruals). B12: Long Term Borrowings NEFMO does not have any long term loans from any organisation with all funds being provided by Nations and the generation of miscellaneous revenue such as Commercial Exploitation Levies. B13: Provisions 17,170 18,700 (1,530) (8.18) - Germany 4,984 5,429 (444) (8.18) - Italy 3,352 3,650 (299) (8.18) - Spain 2,409 2,624 (215) (8.18) - United Kingdom 6,425 6,998 (572) (8.18) A 17,170K provision has been recognised as a liability for 2013, a decrease on 1,530K from the previous year, due to an updated formal claim submitted by EUROJET in December 2013 to NETMA for interest due to them as a result of default on payment obligations, caused by Spanish funding difficulties. The provision is subject to negotiations with EUROJET to settle the claim. At the time of submitting these financial statements it is uncertain when the liability, if any, will be paid. The aircraft offtake funding key has been used to calculate the likely obligation by Nation pending further discussion and agreement with Nations. There is a contingent liability estimated at 101,600K associated with a potential liability resulting from an interest claim from EUROFIGHTER for the industrial funding of the outstanding Spanish debt. Although indicative values have been provided on an interim basis from EUROFIGHTER, no formal claim for payment has been submitted at the time of publishing these financial statements. The contingent liability is based on an indicative estimate from EUROFIGHTER and it is uncertain at the time of submitting the financial statements whether EUROFIGHTER will formally request reimbursement for default interest. 23 Restated B14: Accumulated Surplus / (Deficit) 12, , PP&E Additions 14, , Depreciation charge (1,732) 0 (1,732) There is an accumulated surplus balance due Property, Plant and Equipment capitalised in 2013, this was reduced by the in year depreciation charge. Any surplus or deficit is transferred to PP&E Reserves at close of each financial year. Restated B15: Reserves PP&E Asset Reserve NAMMO does not have any reserves at this time. If there are PP&E assets capitalised then these are transferred to the PP&E Assets Reserve in the following year and reflects Nations Equity in PP&E Assets During 2013, the organisation changed its accounting policy on the treatment of PP&E due to issues with valuing assets acquired before 1 st January 2013 and the implementation of tailored IPSAS 17 under the NATO Accounting Framework. This resulted in a restatement of 2012 PP&E balances and associated transactions to reflect the removal of pre-2013 assets from the financial statements (see page 12 for details).

113 ANNEX C Notes to the Statement of Financial Performance CY-PY %age C01: Operating Revenue 2,706,354 4,692,990 (1,986,636) (42.33) National Contributions - Germany BAAINBw (ex BWB & MOD) 527,038 1,182,374 (655,336) (55.43) - Germany LwM 278, ,706 23, Italy 688, ,627 (236,130) (25.54) - Spain 745,131 1,002,320 (257,189) (25.66) - United Kingdom 1,119,985 1,562,592 (442,607) (28.33) National Contributions to be called for - Germany BAAINBw (ex BWB & MOD) 49,034 (372,386) 421,420 (113.17) - Germany LwM (43,510) 81,324 (124,834) (153.50) - Italy (26,331) 141,852 (168,183) (118.56) - Spain (400,547) (359,203) (41,344) United Kingdom (224,096) 274,600 (498,696) (181.61) Commercial Exploitation Levies - SALAM - Germany 0 1,585 (1,585) (100.00) - Germany transferred to Treasury 0 (1,585) 1,585 (100.00) - Italy 0 1,326 (1,326) (100.00) - Italy transferred to Treasury 0 (1,326) 1,326 (100.00) - Spain 0 1,168 (1,168) (100.00) - Spain transferred to Treasury 0 (1,168) 1,168 (100.00) - United Kingdom 0 1,022 (1,022) (100.00) - United Kingdom transferred to Treasury 0 (1,022) 1,022 (100.00) IPA 6 Spares Sale - Germany 2, , Germany transferred to Advances (2,049) 0 (2,049) (100.00) - Italy 1, , Italy transferred to Treasury (1,378) 0 (1,378) (100.00) - Spain Spain transferred to Treasury (990) 0 (990) (100.00) - United Kingdom 2, , United Kingdom transferred to Treasury (2,641) 0 (2,641) (100.00) Other Reimbursements - Germany Germany transferred to Treasury (8,274) 0 (8,274) (100.00) - Italy Italy transferred Treasury 0 (122) 122 (100.00) - Spain Spain transferred Treasury (184) (293) 109 (37.20) - United Kingdom (282) (34.18) - United Kingdom transferred to Treasury (822) (1,227) 405 (33.01) National contributions represent the funds provided by Nations to support NEFMO in fulfilling its objectives. Funding is normally called for in arrears upon the presentation of valid invoices from industry. The national contributions above represent the calls made on Nations during The exception is Italy where contributions 24

114 have been matched to invoiced expenditure. Contributions to be called for Germany and Spain have been reduced due to advance contributions received for the financial year which were not processed for payment in 2013 and are therefore due to be disbursed against validated invoices in Compared to 2012, operating revenue has decreased significantly due to lower accruals and revised milestone payment plans and Tranche 2/Tranche 3A payment reconciliations which resulted in a large amount of credit notes processed in National contributions to be called for represent the funds required to fulfil the obligation to industry to pay for invoiced expenditure not yet paid for and the estimated work completed by industry and not yet invoiced. A credit balance represents unexpended budget (unearned revenue) and credit notes. Revenue from Commercial Exploitation Levies was generated in the main by the SALAM and Austrian Export Campaign programme. Revenue for all four nations is transferred back to respective national treasuries accordingly. At the end of 2013, work was on-going to assess and agree the first portion of the levies due for support activities for the Austrian Export Campaign. At the time of submitting these financial statements there remained no formal agreement on the amounts due and funding keys to be applied for reimbursements to Nations. Revenue from Loan Fees is generated when NEFMO-owned equipment is loaned to other programmes. Revenue earned is apportioned across the participating nations (normally based on the Main Development Contract funding keys) and in the case of Italy, Spain and UK, transferred back to the national treasuries. Revenue for Germany is retained within the programme and treated as advance contributions. Other Reimbursements include ad hoc income from either industry or nations (e.g. refunds, liquidated damages) which is transferred to respective national treasuries accordingly Transportation Settlements of 200K are non-budgetary transfers made to reimburse one nation for the work done by another and in accordance with IPSAS 23 - Revenue from Non-Exchange Transactions, NEFMO excludes such transactions from operating revenue. Restated C02: Operating Expenses 2,670,394 4,684,334 (2,013,940) (42.99) Accrued Expenditure - Germany BAAINBw (ex BWB & MOD) 594, ,490 (279,412) (31.99) - Germany LwM 234, ,917 12, Italy 712,233 1,080,482 (368,249) (34.08) - Spain 409, ,456 (245,217) (37.47) - United Kingdom 1,125,643 1,549,072 (423,429) (27.33) Manual Accrual Movement - Germany (26,244) 48,345 (74,589) (154.28) - Italy (50,710) (14,635) (36,075)