Financial report

Financial statements and accounting principles

The following is a summary of the European Patent Organisation’s consolidated income and expenditure account and consolidated balance sheet as at 31 December 2004.

The financial statements are based partly on the financial provisions set out in Chapter V of the EPC and partly on the Organisation’s Financial Regulations.

The figures for 2004 have not yet been checked and certified by the auditors. The financial statements are concerned with two areas:

  • Operations relating to patents and other activities feature in the Office’s accounts.
  • Management of assets for future payment of pension and long-term care benefits is covered in the part dealing with the Reserve Funds for Pensions and Social Security (RFPSS). 

As the Organisation is a single legal entity, the financial statements presented here are consolidated, eliminating balances and transactions between the Office and the RFPSS.

These separate financial statements for the Office and the RFPSS may be consulted on the EPO’s website (www.epo.org).

Income and expenditure account 2004

Having remained stable for some time, filings began to grow again during 2004, with 19 000 or 11.8% more than in 2003. On the income side, fees from the patent grant procedure rose by 13.49%, compared with 5.9% in 2003. Renewal fee income increased by 6.03%, as against 4.8% in 2003.

Under its Mastering the Workload programme, the Office continued to recruit examiners and formalities officers to bring staffing levels up to those needed to cope with the workload and reduce backlogs in the grant procedure. As a result, staff costs rose by 6.9% over 2003, compared with 8.7% in 2003 over 2002.

Expenditure on buildings and equipment was up by 24.5% because the full effects of rental charges for buildings leased as from 2003 were not felt until 2004 and also because of building renovation work; the other categories of expenditure were practically unchanged.

In 2004 RFPSS net income amounted to EUR 104.9m thanks to the sustained recovery of the financial markets.

In the consolidated statements, the results include unrealised losses, but they exclude unrealised gains on RFPSS assets (totalling EUR 113.6m as against EUR 87.2m in 2003) and adjustments for the Office’s contributions (EUR 74.9m as against EUR 70.0m in 2003). Without these two factors the RFPSS result was EUR 293.5m, slightly down on 2003 (by 2.5%). (Fig. 13)

Balance sheet

Growth in non-current assets was limited to EUR 3.4m, with investments worth EUR 39.8m mainly in real estate and IT being offset by depreciation totalling EUR 36.4m. The investments were financed entirely from the Office’s own funds.

Financial assets increased by EUR 184.1m, largely because RFPSS assets rose by EUR 179.8m.

Current assets increased by EUR 21.4m to total EUR 521.1m.

On the liabilities side, short-term debt fell by EUR 9.7m.

Net current assets rose to EUR 421m, an increase of EUR 31.1m. This includes cash totalling EUR 432.8m compared with EUR 404.6m in 2003.

Equity grew by EUR 218.6m, the sum of increases in the net assets available for pensions and long-term care (EUR 179.8m) and in reserves (EUR 38.8m).

Under Article 38(b) EPC, RFPSS resources constitute a special class of asset of the Organisation, designed to support its pension and social security schemes by providing the appropriate reserves.

The market value of these assets rose to EUR 2 226.7m, an increase of EUR 293.5m. (Fig. 14)

Under the Organisation’s accounting policy, various commitments and contingencies are not disclosed in the balance sheet:

  • The 2004 reserves amounted to EUR 1 233.2m, including estimated income of EUR 616.2m booked while procedures were still pending.
  • For staff benefits related to pensions, allowances, sickness and long-term care insurance and untaken leave, the estimate as at 31 December 2004 was EUR 3 893.2m, compared with EUR 2 817.8m in 2003. This major increase is the consequence of adjusting some of the parameters for assessing these liabilities.
  • The EPO’s expenditure is not fully covered by procedural fees and is partly financed from renewal fees for patents granted and validated in the member states (Article 39 EPC). 

On 31 December 2004, the net present value of future renewal fees was estimated at EUR 1 685.4m, as against EUR 3 168m in 2003. The considerable difference is due to a fundamental change in the very cautious method used to calculate the current value. Further details can be found in the notes on the financial report published on the Office’s website.

Income and expenditure account (in EUR millions)
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Balance sheet (in EUR millions)
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Reserve Funds for Pensions and Social Security (RFPSS)

The RFPSS produced a positive return of 11.2% in 2004, as equity markets continued the recovery started in 2003 and, against all expectations, bond yields mostly ended the year at a lower level than they began it. There was also a positive contribution from real estate, an asset class in which the Funds started to make indirect investments during 2004 under the new strategy approved by the Supervisory Board at the end of 2003.

World stocks, supported by a global expansion of 3.8%, mostly driven by the USA and by new economic powers such as China and to a lesser extent India, recorded a performance of 12.3% in dollar terms, thus reaching levels not seen since before September 2001. Translated into euro terms, the results have been less exciting, ie a modest 4.7%; but the well-considered move initiated by the RFPSS at the beginning of the year, establishing strategic hedging for the most important currencies in which the Funds invest (USD, GBP, JPY), managed to curb this potentially negative impact on the Funds’ results.

Having started the year on a strong note helped by accommodating monetary policies, equity markets weakened in expectation of subdued economic growth before Federal Reserve tightening started around mid-year. In the last quarter of the year, positive (or rather non-negative) news for the global economy and the clear-cut result of the US presidential election, which cleared up much uncertainty hovering over investor decision-making, produced a strong rally for equities. More specifically, there was a 12.9% return on domestic equities, 3.7% on foreign developed markets and 16.8% on emerging markets (all returns in euro terms).

The RFPSS result was well above the long-term objective of 3.5% above inflation (which in 2004 turned out to be 5.7%). Looking at longer-term results, if the worst bear market for decades (between March 2000 and March 2003) badly affected the last five years’ return, over a period of ten years – a more appropriate time horizon for the RFPSS – the results have been very satisfactory: the Funds’ return has been an average 8.0% against an actuarial objective of 5.1% (German inflation +3.5%). Even more reassuringly, over the last twenty years the RFPSS have returned an average 7.1% against an actuarial objective of 5.5%.

As mentioned above, in 2004 the RFPSS Administration put in place the new strategic asset allocation for the Funds, which now invest 9% of their assets in (indirect) real estate. Of the remainder of the Funds, 59% continued to be invested in equities and 30% in fixed income (the last 2% being cash). Also, the contract with the supplier of the new management information system was eventually signed in December, and the system (which replaces the present one installed in 1997) is expected to become fully operational some time this year, possibly already in the first half of 2005.

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