Accounting Officer's Status Report to the European Parliament and the Council 30 June 2015 Article 150(4) of the Financial Regulation
Page 2 of 10 INDEX 1. Purpose and scope... 3 2. 2014 EU annual accounts & audit... 3 2.1 Introduction... 3 2.2 Key elements of the 2014 EU annual accounts... 3 2.3 2014 audit... 5 3. Main developments and topics during 2015... 6 3.1 Introduction... 6 3.2 Treasury situation... 6 3.3 Borrowing and lending activities... 6 3.4 Pre-financing situation: half-year report at 30 June 2015... 7 3.5 Galileo and Copernicus... 7 3.6 Information on recoveries and financial corrections: Quarterly report at 30 June 20158 3.7 Fines... 8 3.8 Validation of the local systems... 9 3.9 EU Trust Funds... 9 3.10 Payment plan... 9 4. Annexes... 10
Page 3 of 10 1. Purpose and scope Article 150(4) of the Financial Regulation states: "By 15 September of each year, the accounting officer shall send to the European Parliament and to the Council a report containing information on current risks noted, general trends observed, new accounting issues encountered, progress on accounting matters, including those raised by the Court of Auditors, and information on recoveries." It is thus the purpose of this status report to provide the reader with a high-level overview of the main issues concerning the EU accounting environment at 30 June 2015. It includes information on the evolution of major situations up to 15 September 2015. 2. 2014 EU annual accounts & audit 2.1 Introduction The following paragraphs provide an overview of the key elements of the previous annual accounts and serve as a comparative basis for chapter 3 on the developments and the progress made since the last balance sheet date. 2.2 Key elements of the 2014 EU annual accounts Borrowing & lending activities Balance of Payments (BOP): Between November 2008 and the end of 2014, financial assistance amounting to EUR 18 billion was granted to Hungary, Latvia and Romania, of which only EUR 13.4 billion had been actually disbursed. Since 2012, no new loans have been disbursed under the BOP facility: the BOP assistance programme for Hungary expired in 2010 and both assistance programmes for Latvia and Romania expired in 2012. Additionally, the first precautionary EU BOP assistance programme for Romania expired at end-march 2013 without being drawn down. A second precautionary EU BOP assistance programme to Romania was granted on 22 October 2013 and it will be available for activation until 30 September 2015. So far, it has not been activated. The EU budget was at 31 December 2014 exposed to a maximum possible risk of EUR 8.4 billion (nominal value) regarding BOP loans. European Financial Stabilisation Mechanism (EFSM): On 8 February 2014 the Irish financial assistance programme under EFSM expired and on 29 June 2014 the same happened to the Portuguese programme. During the course of 2014, the three last instalments were disbursed (EUR 0.8 billion was disbursed to Ireland and EUR 1.8 billion to Portugal and an additional last instalment of EUR 0.4 billion was disbursed to Portugal on 12 November). Loans totalling EUR 46.8 billion (nominal value) have been disbursed under the EFSM to Portugal and Ireland at 31 December 2014, with the three last disbursements occurring during 2014. At 31 December 2014, the EU budget was therefore
Page 4 of 10 exposed to a maximum possible risk of EUR 46.8 billion. As the borrowings under the EFSM are guaranteed by the EU budget, the European Parliament and the Council scrutinise the Commission's EFSM actions and exercise control in the context of the budget and discharge procedure. The European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) are not EU bodies and have therefore no impact on the EU accounts or the EU budget. The following information is given for information purposes only: European Financial Stability Facility (EFSF) transactions Since 1 July 2013 the EFSF no longer provides new lending and will no longer engage in new financing programmes or enter into new loan facility agreements. It will however remain active for the repayment of the financial assistance received by Portugal, Ireland and Greece. Since 2011, the EFSF has provided financial assistance of EUR 17.7 billion to Ireland, EUR 26 billion to Portugal and EUR 130.9 billion to Greece. During 2014, the EFSF disbursed EUR 1.2 billion to Portugal on 28 April and EUR 8.3 billion to Greece (EUR 6.3 billion on 28 April, EUR 1 billion on 9 July and EUR 1 billion on 14 August). European Stability Mechanism (ESM) transactions The ESM became operational in October 2012 and has assumed the tasks previously fulfilled by the EFSM and, as from 1 July 2013, the tasks previously fulfilled by the EFSF. Thus it represents the sole and permanent mechanism for responding to new requests for financial assistance to Eurozone Member States. So far, the ESM has provided financial assistance to Spain, Cyprus and Greece. For Spain, the ESM disbursed, in two instalments, a total of EUR 41.3 billion in 2012 and 2013. The Spanish programme expired on 31 December 2013. During 2014, Spain repaid EUR 1.6 billion and in 2015 the country has voluntarily repaid an additional EUR 4 billion. For Cyprus, the ESM has disbursed EUR 5.8 billion since May 2013. During 2014, EUR 1.1 billion was disbursed in three instalments (EUR 0.15 billion on 4 April, EUR 0.6 billion on 9 July and EUR 0.35 billion on 15 December), while in 2015, a sole disbursement of EUR 0.1 billion has occurred until now (disbursed on 15 July). EUR 3.17 billion remain available to be requested by Cyprus until 31 March 2016. Galileo and Copernicus Assets: Included under property, plant and equipment at 31 December 2014 were: EUR 1 478 million of Galileo assets, constituting the EU's Global Navigation Satellite System, and EUR 1 524 million of assets relating to the Copernicus - the European Earth observation programme. The Galileo system, being built with the assistance of the European Space Agency (ESA), is recognised as an asset under construction in the EU accounts since 2011. When completed, the system will comprise 30 satellites, 2 control centres and 16 ground stations. At the date of this report four In-Orbit Validation phase satellites ('IOV') and four Full Operational Capability ('FOC') satellites relating to the FOC have been launched. The assets related to the Copernicus programme have been recognised for the first time in the 2014 EU Annual Accounts, following signature of the Copernicus delegation agreement with ESA including commitment to transfer the ownership of the Copernicus satellites upon their lift-off. The ownership of the Sentinel 1A satellite (launched in April 2014) was transferred to
Page 5 of 10 the EU at the time of the signature of the delegation agreement in October 2014. Therefore, EUR 297 million relating to this satellite has been recognised as assets in the 2014 EU Annual Accounts, while the remaining satellites and instruments have been recognised as assets under construction (EUR 1 228 million). Copernicus consists of a space component including six series of earth observation satellites and instruments (Sentinel 1A&B, 2A&B, 3A&B, 5P and 6A&B satellites and 4A&B and 5A,B&C instruments), an in situ component (composed of numerous sensors on the ground, at sea and in the air), and a service component. The following services are to be provided by Copernicus: atmosphere monitoring, climate change monitoring, land monitoring, marine monitoring, and emergency management and security applications. Valuation of Pension and employee benefits liability The economic result (deficit) of the period increased from EUR 4 365 million in 2013 to EUR 11 280 million in 2014. The main reason for this development was a significant actuarial loss (EUR 9 170 million) recognised under accrual accounting in 2014 relating purely to the decrease of interest rates. These rates are used in the valuation of the pension and employee benefits liability for pension rights acquired by Commissioners, MEPs and staff when rates decrease, the liability will increase, and vice-versa. Such fluctuations must be expected due to the, internationally applied, accounting rules in place and the current economic environment. If and when interest rates increase, a reverse impact would be expected in future periods. Furthermore, as this is an actuarial estimate of the value of the total liability at one point in time, 31 December 2014, and is based on various assumptions valid at this time, this loss does not indicate actual charges to the EU budget, nor does it impact the amounts to be paid to pensioners from the EU budget in the immediate coming years. These payments are already estimated in the MFF 2014-2020 and will be implemented via the annual budgetary process. 2.3 2014 audit The ECA's audit of the EU and EDF accounts is completed but the related opinions and annual reports have not yet been published. No major issues remain following the contradictory processes.
Page 6 of 10 3. Main developments and topics during 2015 3.1 Introduction This chapter provides an overview of the main topics, developments and progress made up to 15 September of the financial year 2015. 3.2 Treasury situation In the first months of 2015 the treasury situation was very tight. The level of cash resources available at the beginning of 2015 included substantial amounts of GNI/VAT balances received in December 2014, which were returned to Member States in February as a result of the Amending 5/2014 adopted in December 2014. The high payment needs in early 2015, resulting from the stock of outstanding payment claims at the end of 2014 and the size of the EAGF payments, started to exceed the monthly cash resources available as from February 2015. In February 2015 the Commission therefore called from Member States the maximum amount of own resources allowed in accordance with Council Regulation 1150/2000, which corresponds to an advance of two twelfths. Furthermore, the amount of competition fines definitely cashed and the part of postponed payments of GNI/VAT balances (received in 2015 and thus not yet included in Amending s) provided some additional liquidity to the general treasury. Despite these additional cash inflows, limitations to payment authorisations had to be imposed in the areas of rural development and cohesion until May 2015. A significant amount (EUR 4.5 billion) of the postponed GNI/TVA balances was received from Member States in September. Therefore, although the timing of any remaining Amending s remains uncertain, no treasury shortage is expected in the final months of 2015. 3.3 Borrowing and lending activities BOP transactions On 27 January 2015, Latvia and Romania repaid two more capital instalments of EUR 1.2 billion and EUR 1.5 billion, respectively. The current total outstanding amount under this facility is EUR 5.7 billion. EFSM transactions On 17 July 2015, a bridging loan was granted to Greece under the EFSM as a temporary loan prior to the loan agreement signed between Greece and the ESM. The first and only disbursement occurred on 20 July 2015 and was fully repaid on 20 August 2015 after the ESM agreement was ratified by national parliaments of the Euro area Member States. EFSM remains active for the repayments of the financial assistance received by Portugal and Ireland (EUR 24.3 billion and EUR 22.5 billion, respectively).
Page 7 of 10 EFSF transactions On the 27 February 2015, EFSF bonds not used totalling EUR 10.9 billion were redelivered by Greece to EFSF. ESM transactions For Greece, the ESM will provide up to EUR 86 billion in financial assistance over the next three years. An agreement between Greece and the ESM was reached on 13 July 2015. The ESM Board of Governors approved the Memorandum of Understanding and the loan agreement on 19 August 2015 following its endorsement by ESM members according to their national procedures. A disbursement of EUR 13 billion was disbursed on 20 August 2015. EUR 73 billion remain available under ESM financial assistance programme to Greece until 20 August 2018. 3.4 Pre-financing situation: half-year report at 30 June 2015 The half year report at 30 June 2015 is included in annex 4.1. The main points to note regarding the variations occurred in the first half of the year are: Slight increase in direct management amounts: EUR 3.8 billion have been paid out as new pre-financing, mainly under Research and external actions, however clearings done until mid-year reach almost the same amounts (EUR 3.2 billion); Increase in indirect management: during the first six months of 2015 nearly EUR 3.6 billion was paid out relating mainly to Research and external actions; Increase in shared management: EUR 6.6 billion relating to the programming period 2014-2020 has been paid during the first semester of 2015, while EUR 3.3 billion relating mainly to programming period 2007-2013 has been cleared. The increase in pre-financing amounts paid out was to be expected since the 2014-2020 multiannual financial framework (MFF) has just started. 3.5 Galileo and Copernicus Galileo satellites 5 and 6, being originally launched to an erroneous orbit in August 2014, were consequently moved to their improved orbits in November 2014 and March 2015 respectively. The subsequent in-orbit testing of both satellites has been completed in first semester 2015 with positive results. Furthermore, Galileo satellites 7 & 8 were successfully launched in March 2015 and satellites 9 & 10 in September 2015. Until early 2016, another two FOC satellites are planned to be launched, allowing the programme to move towards delivery of initial services in 2016. The IOV phase of the Galileo project (including launch of the first four satellites in 2011 and 2012) is currently in the closing stage. This phase has been jointly funded by the EU and ESA and according to the grant agreement concluded between the two parties, ESA shall make an official transfer of the constructed assets to the EU.
Page 8 of 10 In June 2015, the second Copernicus satellite Sentinel 2A was launched, and, in accordance with the EU-ESA Copernicus delegation agreement, the satellite became EU's property. Sentinel 2A is a land monitoring satellite contributing to several Copernicus services such as: climate change, emergency management and security. The launch of Sentinel 3A satellite is foreseen in autumn 2015, while Sentinel 1B, 2B and 5P are to be launched in the first semester of 2016. Other Sentinel A&B units are under development and will be launched in the following years. The procurement of the Sentinel recurrent C&D units (to be delivered after 2020 in order to replace the A&B units) has been delegated to ESA under the Copernicus delegation agreement and is ongoing. 3.6 Information on recoveries and financial corrections: Quarterly report at 30 June 2015 The quarterly report on financial corrections under Cohesion policy at 30 June 2015 is included in annex 4.2. The main points to note are: Total financial corrections confirmed (accrual basis) in the six months to 30 June 2015 amounted to EUR 877 million (EUR 616 million for the same period in 2014) which is a slight increase as compared to the comparative period. Financial corrections implemented (cash basis) for the six months to 30 June 2015 were EUR 1 212 million (EUR 664 million for the same period in 2014). Financial correction implemented almost doubled as compared to the first half of 2014. This is due mainly to financial corrections reported for the 2007-2013 programming period for ERDF and the Cohesion Fund, for which Member States accepted to deduct financial corrections amounts from cost claims sent to the Commission services, and financial corrections at source. Cumulative financial corrections confirmed at 30 June 2015 amounted to EUR 14.2 billion of which EUR 1.1 billion have not yet been implemented. It should be noticed that during 2015, Court of Justice judgements were issued annulling a number of regional policy financial corrections' decisions taken between 2008 and 2010. These corrections totalled almost EUR 0.5 billion and related to the programming period 1994-1999. The judgements received reflect procedural issues arising from Regulation 1083/2006. The Commission is analysing the impact. 3.7 Fines Fines totalling EUR 199 million have been imposed by the Commission on various companies in different sectors in the first six months of 2015. For the same period, fines amounting to EUR 902 million (interest included) became definitive. Most of these fines were imposed in previous years. The total amount of the financial guarantees provided by the fined companies up to June 2015 has slightly increased (EUR 1 945 million at 30 June 2015 compared to EUR 1 920 million at the end of 2014).
Page 9 of 10 3.8 Validation of the local systems The Commission's validation activities continued to concentrate on specific risk areas, in order to ascertain if the services selected still comply with the validation criteria. A number of recommendations for improvement were issued and their implementation is being followed up on yearly basis. In 2014/2015, the reports for European External Action Service (EEAS) and DGs ENV/CLIMA, COMP, ECFIN and the offices OIL, OIB and PMO were issued. The evaluations of DG GROW, DG MARE and OP are progressing well and draft reports were issued in June. Other evaluations included in the validation team's 2015 annual work programme have been started and are in different phases of completion. These include the evaluations of DG AGRI, DG EAC, DG HR, DG REGIO, DG RTD and DG SANTE. 3.9 EU Trust Funds Since 1 January 2013, the updated Financial Regulation allows the Commission to create and manage EU Trust Funds (EUTFs) that pool funds from the EU budget with contributions of Member States and other donors. The same provisions have been foreseen in the amended Financial Regulation 1 of the European Development Fund (EDF). As at 30 June 2015, two EU Trust Funds have been created. A first post-emergency EU Trust Fund - called Bêkou, was created for the Central African Republic on 15 July 2014. This multidonor fund received an amount of EUR 52 million of contributions by 30 June 2015. The first financial statements have been prepared for the period 15 July 2014 to 31 December 2014 but the activities of the Trust Fund were very limited at that time. A second EU regional Trust Fund, called Madad, was created in response to the Syrian crisis on 10 December 2014. This multi-donor fund has received a contribution of EUR 3 million from Italy as at 30 June 2015. 3.10 Payment plan Unpaid payment claims must be financed by future budgets. With this in mind, in May 2015 the EP, the Council and the Commission agreed on a Joint statement on a payment plan 2015-2016, whose analytical basis is a report Elements for a payment plan to bring the EU budget back onto a sustainable track prepared by the Commission. The document examines the main reasons for the building up of the unprecedented 'backlog' of unpaid bills at year-end, despite the mitigating measures taken by the Commission to actively manage the authorised payment appropriations. Moreover, it defines the path whereby such a backlog can be phased out by the end of 2016, and draws some lessons on budget management for the future. As a follow-up of this document, in July 2015 the Commission presented to the ary Authority a report on Active Monitoring and Forecast of Implementation. This report provides updates on the implementation of payment appropriations as of 30 June 2015, comparing it with the monthly forecast established in April 2015 as well as the implementation of last year at the same period. The report analyses also the impact of the draft budget 2016 in terms of evolution of the outstanding commitments (RAL) and backlog. It also includes the analysis of 1 Council Regulation (EU) No 2015/323 of 2 March 2015 on the Financial Regulation applicable to the 11th EDF, OJ L 58, 2.3.2015, p. 32.
Page 10 of 10 the payment schedules for 2015 and 2016 and the expected situation for interest on late payments. For the EU it is crucial to consider the long-term needs of budgetary payment appropriations since it is these which are decided on by the ary Authority and without these, no payments can be made or cash transferred. Once agreed, appropriations are automatically transformed into available cash of the EU through the monthly own resource collection process. Within the Commission, short-term cashflow forecasting is done weekly (sometimes daily) to ensure that the immediate payment obligations of the EU can be met, respecting the limits of the payment appropriations available in the budget. This short term forecast is the basis used to estimate the amount of own resources to be called monthly from Member States. On the first working day of each month Member States must credit to the Commission s own resource accounts one-twelfth of the total amount of the VAT and GNI-based resource entered in the Union's budget. Depending on the Commission's cash position, Member States may be asked in the first quarter of the year to bring forward, by one or two months, the VAT and GNI based resources. Those advances have to be deducted from calls for funds in later months, depending on the forecasted cash needs. For the medium and long-term, the Commission monitors in detail the payment requirements of the EU as part of its regular activities. For example, this is required for the preparation of Commission proposals on the MFF, as part of the annual budget preparation and when preparing amending budgets. In the negotiation phase of the MFF, the models used and the assumptions underlying are monitored regularly and updated when necessary. The results of the model simulation are channelled into the budgetary negotiations establishing the MFF payment ceiling. 4. Annexes 4.1: Pre-financing half-year report at 30 June 2015 4.2: Quarterly report on recoveries at 30 June 2015 4.3: implementation reports at 30 June 2015