Conseil d'administrationAdministrative CouncilVerwaltungsrat

EuropeanPatentOrganisation

Organisation européenne des brevets

EuropäischePatent-organisation CA/20/15

CA/20/15 e

Report of the Board of Auditors of the European Patent Organisation on the 2014 accounting period

CA/20/15

Orig.: de, en, fr

Munich, 08.05.2015

SUBJECT: Board of Auditors' report on the 2014 accounting period Explanations and reasons supplied by the President of the Office

SUBMITTED BY: 1. Board of Auditors of the European Patent Organisation2. President of the European Patent Office

ADDRESSEES: 1. Supervisory Board of the RFPSS (for opinion, Article 80 FinRegs)2. Budget and Finance Committee (for opinion, Article 80 FinRegs)3. Administrative Council (for approval and discharge, Article 80

FinRegs and Article 49(3) and (4) EPC)

CA/20/15 e LT 0720/15 - 150560004

- - I

TABLE OF CONTENTS

Subject Page

I. SUMMARY.............................................................................................................. 1 A. Our task in Brief .................................................................................................... 1 B. OPINION ON THE ACCOUNTS ............................................................................. 1

1. accounting rules ...................................................................................................... 12. opinion .................................................................................................................... 1

C. Opinion on management ...................................................................................... 2 1. FINANCIAL SITUATION ......................................................................................... 2

1.1. Financial reporting ............................................................................................ 2 1.2. Balance-sheet figures ....................................................................................... 2 1.3. Economic situation, factoring in the present value of future national renewal

fees .................................................................................................................. 2 1.4. Income statement ............................................................................................. 3 1.5. Statement of cash flows ................................................................................... 3 1.6. Budget and forecasting accuracy ..................................................................... 4

2. Operations............................................................................................................... 42.1. Comments on the accounts .............................................................................. 4 2.2. Internal control system ..................................................................................... 5 2.3. Business administration ................................................................................... 6 2.4. IT ...................................................................................................................... 9 2.5. Buildings ......................................................................................................... 11

II. DETAILED REPORT ............................................................................................ 13A. Preliminary remarks ............................................................................................ 13 B. Audit opinion ....................................................................................................... 14 C. Comments on the accounts ............................................................................... 15

1. The organisation's Financial and economic position ............................................. 151.2. Introductory remarks ...................................................................................... 15 1.3. Financial-statement figures in brief ................................................................. 16

2. Specific Accounting Remarks................................................................................ 222.1. Post-employment benefit obligations .............................................................. 22 2.2. Repurchase value Caisse Nationale de Prévoyance (CNP) ........................... 31 2.3. IT Roadmap .................................................................................................... 32 2.4. Negative equity of the EPO ............................................................................ 33 2.5. Unitary Patent ("UNIP") .................................................................................. 34 2.6. Calculation of employee-related notes disclosures ........................................ 35

3. General comments on budget implementation ...................................................... 353.1. Forecast income statement ............................................................................ 35 3.2. Forecast balance-sheet figures ...................................................................... 36 3.3. Comparison of budget as adopted and as implemented ................................ 36

CA/20/15 e 150560004

- - II

D. Internal Control System ...................................................................................... 38 1. Internal auditing (Directorate 0.6.1) ....................................................................... 382. Governance of The RFPSS................................................................................... 39

2.1. Control system ............................................................................................... 39 2.2. Compliance system ........................................................................................ 39 2.3. Risk management/assurance and compliance management/assurance ........ 41 2.4. Management system and practice for Fund assets ........................................ 43 2.5. Update from past findings ............................................................................... 44

E. Reports on selected areas.................................................................................. 45 1. Review and Internal Appeals Procedure ............................................................... 45

1.1. Procedures ..................................................................................................... 45 1.2. Facts and figures ............................................................................................ 46 1.3. Recommendations ......................................................................................... 48

2. Patent grant process ............................................................................................. 482.1. Overview ........................................................................................................ 48 2.2. Processing time of the different steps ............................................................ 50 2.3. Backlog of products under Priority 1 ............................................................... 50 2.4. Findings and recommendations ..................................................................... 51

3. Tender procedures ................................................................................................ 533.1. Best practice comparison ............................................................................... 54 3.2. Findings and recommendations – general procurement process ................... 55 3.3. Findings and recommendations – IT procurement process ............................ 56

4. IT 584.1. IT Roadmap .................................................................................................... 58 4.2. IT security ....................................................................................................... 61

5. Building projects .................................................................................................... 635.1. New building project in The Hague ................................................................. 63 5.2. Other building activities .................................................................................. 65 5.3. Benchmarks for building cost ......................................................................... 66

III. STATUS OF FINDINGS FROM PREVIOUS YEARS ........................................... 67A. OFFICE'S FOLLOW-UP REPORT ON CA/20/14 (STATUS 31.01.2015), AND

AUDITORS' REACTION ..................................................................................... 67 B. OFFICE'S FOLLOW-UP REPORT ON CA/20/13 (STATUS 31.01.2015), AND

AUDITORS' REACTION ..................................................................................... 74 C. OFFICE'S FOLLOW-UP REPORT ON CA/20/12 (STATUS 31.01.2015), AND

AUDITORS' REACTION ..................................................................................... 81 D. OFFICE'S FOLLOW-UP REPORT ON CA/20/11 (STATUS 31.01.2015), AND

AUDITORS' REACTION ..................................................................................... 87 E. SUMMARY AND PRIORITY OF OUR RECOMMENDATIONS ............................ 89

IV. EPO PRESIDENT ADDITIONAL EXPLANATIONS AND REASONS ................ 102

CA/20/15 e 150560004

- - III

V. ANNEXES ........................................................................................................... 103ANNEX I Year-on-year comparison, balance sheet and income and expenditure account

(in EUR '000s) ............................................................................................... 104 Annex I/1 Income statement ................................................................................... 104 Annex I/2 Balance sheet ......................................................................................... 105 Annex I/3 Statement of cash flows ......................................................................... 106

ANNEX II Comparison of budgeted and actual income and expenditure (in EUR '000s)107

Annex II/1 Income .................................................................................................... 107 Annex II/2 Expenditure ............................................................................................ 108 Annex II/3 Implementation of the budget of the Pension and Social Security Schemes

............................................................................................................... 109 Annex II/4 Comparison between original and amended budgets............................. 111

ANNEX III Financial forecast and actual income and expenditure.................................. 113 Annex III/1 Income .................................................................................................... 113 Annex III/2 Balance sheet ......................................................................................... 114

ANNEX IV Audit expenditure .......................................................................................... 115 ANNEX V List of abbreviations ...................................................................................... 116

CA/20/15 e 150560004

I. SUMMARY

A. OUR TASK IN BRIEF

1) The Board of Auditors performs its tasks in accordance with Articles 49 and 50 EPC,its rules of procedure and professional audit principles.

2) Under Article 50 EPC in conjunction with Article 79 FinRegs, our report contains inparticular:

• an audit opinion on the accounts

• the results of our audit carried out to ascertain whether the financialmanagement of the Office is sound

• whatever observations we consider necessary as to the appropriateness of theexisting budgetary and financial arrangements.

B. OPINION ON THE ACCOUNTS

1. ACCOUNTING RULES

3) In 2005, the EPO introduced IFRS, albeit subject to an exception in Article 1(3)FinRegs enabling it to net out its social-security liabilities against RFPSS assets.

4) In view of the revision of IFRS 9 (financial instruments) and IFRS 19 (employeebenefits), the EPO did away with the Article 1(3) FinRegs exception with effect from1 January 2011 (CA/D 5/11).

2. OPINION

5) We have been able to give an audit opinion without any reservations on the 2014accounts.

CA/20/15 e 1/118 150560004

6) The notes to the financial statements shed further light on specific aspects of the balance sheet.

C. OPINION ON MANAGEMENT

7) Our audit included not only the annual accounts but also management audits concerning in particular the financial situation, operations and the RFPSS. These have given rise to the following main findings.

1. FINANCIAL SITUATION

1.1. Financial reporting

8) The EPO revised its financial reporting procedure with effect from 1 January 2011, doing away with the exception under Article 1(3) FinRegs. As a result, its accounts as from 2011 are comparable under IFRS. As set out in CA/84/11, discontinuing the corridor approach and not netting out social-security assets and liabilities in the balance sheet mean that the annual result is subject to greater volatility.

1.2. Balance-sheet figures

9) As at 31 December 2014, non-current assets were approx. EUR 8 016m. Of the EUR 991m increase, EUR 855m came from RFPSS net assets and EUR 137m from bonds.

10) As at 31 December 2014, non-current liabilities amounted to some EUR 20 536m, including EUR 19 741m for defined benefit liabilities (for pensions and similar obligations). They were up EUR 8 721m on 2013, with defined benefit liabilities rising by EUR 8 667m.

11) Current assets fell by EUR 5m, while current liabilities went up by EUR 20m.

1.3. Economic situation, factoring in the present value of future national renewal fees

12) The present value of future national renewal fees cannot be shown under IFRS because there is no legal obligation to pay them.

CA/20/15 e 2/118 150560004

13) With no eligible future income to set against the EPO's long-term liabilities from its future business, its balance sheet looks rather lopsided. To counteract that, the present value of future national renewal fees needs to be borne in mind. The figures are taken from CA/60/15.

14) Each year up to 2011, net business assets and pension liabilities were in balance. The imputed shortfall is now EUR 9.8bn, reduced 2014 discount rates alone leading to a EUR 8.4bn increase in liabilities.

15) For a long-term view, see the actuarial valuation as at 31 December 2012 (CA/61/13) and the Office's comments on it (CA/62/13). An updated valuation is expected for 2015.

1.4. Income statement

16) At EUR -5m, the operating result is slightly negative but up EUR 36m on the 2013 figure. The main reason for this year's figure is that, while revenue rose by EUR 81m, employee benefit expenses increased by EUR 40m.

17) The financial result was EUR 156m, i.e. EUR 41m higher than in 2013.

18) The loss of EUR 7 907m under other comprehensive income can be attributed almost exclusively to the reduced discount rates (e.g. the discount rate for pension obligations fell from 3.89% to 1.61%).

1.5. Statement of cash flows

19) The inflow from operating activities is EUR 447m, the outflow from investing activities EUR 410m. Taking into account the EUR 6m outflow from financing activities, there has been a net increase of EUR 31m in cash and cash equivalents, i.e. up EUR 93m on the 2013 figure.

CA/20/15 e 3/118 150560004

1.6. Budget and forecasting accuracy

20) In CA/D 1/13, the AC adopted an authorisation budget within the meaning of Article 25(1)(a) FinRegs totalling EUR 2 079m. The actual outturn was EUR 2 048m, i.e. just 1.5% lower than the forecast value.

21) For the RFPSS, income is EUR 26m (7.9%) and expenditure EUR 21m (10.2%) under plan. The transfer to the RFPSS is nearly EUR 5m (3.9%) below the budgeted figure.

2. OPERATIONS

2.1. Comments on the accounts

22) The changes in schemes (return to tax adjustment, new career scheme, invalidity allowance) come into force after 2014 and so have no actual impact on the 2014 financial statements for accounting purposes.

23) Although the EPO is not a party to the legal proceedings, it is providing legal support to pensioners who have been approached by national tax authorities claiming taxes on partial compensation. In total, it knows of and is providing support in 361 cases (out of 1 149 recipients of partial compensation).

By re-introducing the former tax adjustment scheme, the Office has limited its risk exposure for future years.

24) In 2011, the IT Roadmap project was initiated to develop and implement improvements in the patent-granting process through integrated IT tools. The capitalised costs are EUR 33m (EUR 16.5m for IT systems and EUR 16.6m for construction in progress).

25) UNIP: the Office's costs at the current stage mainly comprise costs for IT set-up and administrative costs. These are accounted for in line with the Office's general accounting policies on capitalisation of development costs.

CA/20/15 e 4/118 150560004

The total costs of IT set-up for administration of requests and renewal fees, Micado adjustment and IT development for the unitary patent procedure are estimated to amount to EUR 2 533k. All other costs relating to process set-up, administration of the Select Committee and any other costs incurred by the Office are considered to be part of its ordinary business within its tasks under the EPC and are currently not separately measured by the Office.

26) To derive accurate and precise values for employee-related accruals, certain automated standard procedures and documentation should be in place. The information underlying related party disclosures should be documented in a consistent, reliable and auditable way.

2.2. Internal control system

(a) Internal Auditing

27) Internal Auditing (D 0.6.1) was the subject of an external quality assessment exercise, carried out by the German Institut für Interne Revision (internal audit institute - DIIR), which found that, in the main, its activities meet the standards laid down in the International Professional Practices Framework (IPPF) developed by the Institute of Internal Auditors (IIA).

(b) Governance of the RFPSS

28) On 23 December, a data import failure resulted in the Fund not becoming aware of a downgrade of a specific bond and thus in a passive breach. No procedures were in place to detect the consequence of the failure. Due to the failure on the 23 December, followed by the Office's closure over the Christmas holidays and on local public holidays, the portfolio managers only became aware of the downgrade and the passive breach on 7 January.

29) All other passive breaches during the year were minor and corrected in accordance with the relevant rule in the Code of Procedure.

30) Two years after introduction of the new governance framework, the roles of risk management and compliance management within the RFPSS Fund Administration and the Risk Assurance Officer / Compliance Assurance Officer are still evolving.

31) The strategic asset allocation including setting benchmarks gives a framework but also contributes to stability and long-term thinking. The maximum tracking error (as compared to the benchmark) is restricted by the Fund Administrator by asset class and is not often changed.

CA/20/15 e 5/118 150560004

2.3. Business administration

Review and internal appeals procedures

32) The Administrative Council asked the Board of Auditors to audit the Office's review and internal appeal procedures and how these had been implemented up to now.

33) The findings and recommendations are summarised in this report (CA/20/15). Report CA/21/15 gives more detailed information.

34) In 2013 and 2014 (until 24 November 2014) 535 cases with 3 777 requesters were registered for management review. 55% of the cases and 92% of the requesters are focused on regulations and/or policies.

The Appeals Committee registered 186 cases with 492 appellants in 2013 and 142 cases with 438 appellants in 2014 (until 24 November 2014). The list of registered cases includes 369 appellants in 2011 and 617 in 2012.

In 2013-2014 (up to 24 November 2014), final decisions taken by the President covered 170 cases and 573 requesters. 94% of the cases were rejected.

In 2013-2014 (up to 24 November 2014) 133 cases with 200 appellants were submitted to the ILOAT.

35) The average time between the start of an internal appeal and the final decision is 46 months for decisions taken in 2013 and 44 months for decisions taken in 2014.

36) The backlog of pending appeals as at 20 November 2014 covers 759 cases with 5 761 requesters. Most of the pending cases (356 cases with 1 542 requesters) are waiting for the position paper.

CA/20/15 e 6/118 150560004

37) The complexity of the system leads to duplicate work through registration in the Conflict Resolution Unit and in the Administrative Council.

There is no common tool and so a lack of interface with other units and a lack of harmonised categories.

There is a considerable backlog of internal appeals, as it takes a long time to draft the position paper.

The reasons for most requests and appeals concern policy decisions and regulations. The EPO's complaints management process was created for individual cases, not for mass requests / appeals. We recommend having separate procedures for individual cases for cases relating to policy decisions or regulations.

Patent grant process

38) The result of the "Early Certainty from Search" procedure, implemented on 1 July 2014, was a change in product prioritisation for DG 1. The key element of the procedure is that search files need to be processed in time (Priority 1 files).

There is a downward trend in the backlog of products under priority 1 files, even if not all clusters had met the backlog-reduction target by the end of 2014.

39) In most areas, the number of new requests is greater than the number of examiner products.

40) The average patent grant time of the different clusters cannot be easily compared due to individual problems, complexity and sector-related differences that have to be taken into account.

41) The examiners receive different PAX points for the different products. These points are required in order to meet individual targets. Search files obtain a value of 0.6 points while examination files receive 0.4 points, which promotes the reduction of the backlog for search files.

However examination files are needed in order to meet the target of the Office, which is measured in publications.

CA/20/15 e 7/118 150560004

Since many examination files need more time and also bring fewer points for the examiners than search files, the search files may be preferred.

42) The quality dashboard is well suited as a management system for promoting positive development of the key performance indicators (KPIs) as the transparency is given.

43) Furthermore, a new performance management system is planned. Currently there is no linkage between the new performance system and the KPIs. It should be considered whether files with a long processing time should receive more points.

Tender procedures

44) The best practice comparison shows that EPO procurement is mainly focused on the "how" (the process) and not on the "what". The EPO procurement organisation (CP) is mainly focused on the selection and contracting process while limited attention is paid to the more strategic processes of the Strategic Sourcing Cycle. The contract management function is scattered throughout the organisation without the support of clear KPIs and relevant systems.

45) There is no standardised process for approvals or a workflow procedure which states what approvals are needed and what kind of documents have to be used.

46) Currently, a strategic supplier performance management process to manage the risk, quality and performance of the suppliers is only partially in place.

47) There is no common system used for purchasing. Co-ordination between the business units and procurement takes place through various systems.

IT procurement

48) The EPO is in the process of professionalising its procurement function. Currently the procurement function is partially decentralised in terms of categories (e.g. IT, buildings, HR, etc.).

CA/20/15 e 8/118 150560004

Currently, a strategic supplier performance management process to manage the risk, quality and performance of the suppliers is only partially in place.

Supplier risk evaluation is performed during the tender only, and Finance is not involved in this evaluation.

Responsibility for licence management lies with PD Service Operations but seems to be scattered throughout the organisation.

49) There is a realistic possibility that the current supplier base does not offer the most effective solutions for the EPO (mismatch of the current supplier base) for the following reasons.

• There is limited alignment between the EPO's business, procurement and IT strategies

• Central Procurement has a limited focus on strategic sourcing processes such as performing supply market analyses, developing category strategies, etc., in order to create the best fit with the supplier base.

• The complex and rigid selection processes and the rigid terms and conditions seem to deter some potentially suitable suppliers because the risks and the cost of sales are too high in comparison with the value that can be generated from the projects. This could lead to a narrow selection of potential suppliers and a mismatch of the current supplier base.

2.4. IT

(a) IT Roadmap

50) The IT Roadmap 2011-2015 (CA/46/11) was presented at the Administrative Council's June 2011 meeting and set out the strategic directions for IT at the EPO.

In addition to achieving efficiency gains, the IT roadmap objectives include provision of services to external users and a reduction in the running and maintenance costs of IT. As a result, (further) implementation of the new case management (CMS) system to facilitate the re-engineered patent grant process is a key element. Compared with the original schedule in the IT roadmap, CMS implementation is facing a delay of approximately 18 to 24 months. At this point, further delay will start to jeopardise the scheduled completion date of late 2017.

CA/20/15 e 9/118 150560004

51) The quality of the IT Roadmap is periodically assessed and reported on by "Project Services". The QA report of October 2014 shows that the projects within stream I are facing challenges, with 7 out of 10 assessed projects reported to have quality issues or be outside tolerance. Additionally, 5 out of 10 projects are beyond their planned stage end date.

We noted that executive reports on the status of the individual projects are being issued every two weeks. Detailed project status reports are applied for most projects (and especially for projects running in exception), but not for all projects within the IT roadmap.

52) It is indicated that the IT Roadmap programme is an effective and efficient structure for developing and managing enhancements from a business perspective. However, the goals set within IT roadmap ("leading edge" technology) may limit the ability to determine a fixed end goal.

Current financial figures do not include all costs incurred during the transition phase (as clearly highlighted in CA/46/14).

The forecasts and expenditures are budgeted and accounted for in the yearly budget cycle and agreed within the Council. As a result, the financial expenditure is principally managed from a "year-to-year" perspective rather than a "program" perspective.

(b) IT security

53) Escalation rules and clear guidelines on responsibilities are not formally defined. Drafted documentation of the current IT security project may address the deficiency.

The risk assessment process is only applied to newly initiated projects, thus not considering security requirements for the existing systems and information unless they are further developed or replaced within a project.

Inconsistencies and uncertainties in terms of classification exist between the policies and the completed risk assessment templates.

CA/20/15 e 10/118 150560004

54) The EPO has no complete documented overview of information assets and the logical (e.g. applications) and physical assets (e.g. servers) containing / dealing with the information assets. Thus, related risks may not have been identified to their full extent.

2.5. Buildings

(c) Building investments in The Hague

55) Project Organisation

• The President has delegated the chair of the Steering Committee to VP 4 and will only participate when important aspects arise.

• The project is regularly audited by an external Quality Assurance. The complex process for obtaining EPO-internal authorisation for a variation order (11 working days) is going to be simplified for minor cases.

56) Progress of project and time schedule

57) There is a delay of approx. four months due to asbestos and a late delivery of planning. The building is expected to be completed in August 2017 (or even earlier) and the project is expected to be completed in May 2019.

58) Project risks

• Project risks have been identified and documented in the risk log, which is updated regularly. Responsibilities are defined and mitigation actions are assigned.

(d) Other building activities

59) Vienna

• The planned completion date is April 2015 for interior work and May 2015 for work outside the building. The expected costs are line with the amounts in the contracts (EUR 2.3m).

CA/20/15 e 11/118 150560004

60) Berlin

• Interior renovation and improvements concerning room climate, security and the entrance area are necessary (see building roadmap, CA/73/11). Most of the costs will be paid by the Federal Republic of Germany. The costs for the EPO are limited to EUR 6m (excluding VAT).

61) Other

• No major projects. Surveys of the roof of the Isar building and the underground car park in the PschorrHöfe are planned. The lease contract for the Capitellum building in Munich was terminated in 2015.

(e) Benchmarking building cost

62) The expenses for offices used by the EPO are in line with previous years, and no new material information was obtained as a result of the audit. As the approach used was identical to the approach in 2012, we have chosen not to include the full report this year.

CA/20/15 e 12/118 150560004

II. DETAILED REPORT

A. PRELIMINARY REMARKS

63) The Board of Auditors of the European Patent Organisation (hereinafter "the Board") reports herewith under Article 79 of the Financial Regulations (FinRegs) on the 2014 accounting period.

64) The accounts reached us in good time before 31 March 2015, in compliance with Article 70 FinRegs.

65) Under Article 75 FinRegs and following a public invitation to tender the Board also commissioned certain work from the following audit firms:

• KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, D - Munich (for audit of EPO accounts, business administration and IT)

• BDO AG Wirtschaftsprüfungsgesellschaft, D - Hamburg (for buildings and RFPSS)

66) Pursuant to Article 76(2) FinRegs the checks were intended in particular to establish whether:

• the terms of the budget and other budgetary provisions were adhered to • the annual accounts as defined in Article 69 FinRegs were properly

substantiated and all transactions properly recorded • securities and cash on deposit and in hand accorded with the amounts in the

cash accounts • procedures were efficient and economical and whether work could be

performed more efficiently with fewer staff or other resources, or in other ways.

67) Pursuant to Article 7(1)(c) of the Regulations for the Reserve Funds for Pensions and Social Security (RFPSS), we recommend that the Fund Administrator be discharged in respect of the 2014 accounting period. For our comments on the RFPSS, see Section I.C.2.1 in the Executive Summary and Section II.D.2 in the detailed report below.

68) In accordance with Article 76 FinRegs, the Board or the above firms carried out checks on the EPO premises in Munich, The Hague, Berlin and Vienna. Petty cash at all sites was closed before 1 January 2014.

69) We would like to take the opportunity to thank the President and the EPO staff consulted for their help and constructive co-operation.

CA/20/15 e 13/118 150560004

B. AUDIT OPINION

We have audited the financial statements, comprising the statement of financial position, statement of comprehensive income, statement of changes in equity, statement of cash flows and notes (Article 69(1)(a) of the Financial Regulations), together with the bookkeeping system of the European Patent Organisation (EPO), Munich, for the accounting period 1 January to 31 December 2014 – as disclosed in CA/60/15. Responsibility for maintaining books and records and preparing the financial statements in accordance with Article 50(g) of the European Patent Convention (EPC) and the Financial Regulations (FinRegs), as described in Section 2.1 of CA/60/15 ("Basis of Preparation"), lies with the President of the Office. Under Article 1(3) FinRegs, the EPO's generally accepted accounting principles are the International Financial Reporting Standards (IFRS) as promulgated by the International Accounting Standards Board (IASB).

We conducted our audit of the financial statements in accordance with Article 49 EPC and the appropriate regulations of the FinRegs – especially Article 79 FinRegs – and drawing on the audit principles adopted by Germany's Institut der Wirtschaftsprüfer (= institute of auditors). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the financial statements in accordance with the applicable accounting provisions of the FinRegs are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the EPO and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the books and financial statements are examined primarily on the basis of sample checks within the framework of the audit. The audit includes assessing the accounting principles used and significant estimates made by the President of the EPO, as well as evaluating the overall presentation of the annual financial statements. We believe that our audit provides a reasonable basis for our opinion.

Our audit has not led to any reservations.

In our opinion, based on the findings of our audit, the financial statements comply with IFRS as promulgated by the IASB and give a true and fair view of the net assets, financial position and results of operations of the EPO in accordance with these standards.

Munich, 20 April 2015

The Board of Auditors

H. Schuh O. Hollum F. Angermann

CA/20/15 e 14/118 150560004

C. COMMENTS ON THE ACCOUNTS

1. THE ORGANISATION'S FINANCIAL AND ECONOMIC POSITION

1.2. Introductory remarks

70) Every BoA report analyses the EPO's financial situation. Our task under Article 79 FinRegs of ascertaining whether its financial management is sound involves not only verifying compliance with the "three Es" (efficiency, effectiveness and economy) but also scrutinising the EPO's specific self-financing model. The EPO has to manage its resources in such a way that it does not need to call on the member states' guarantee.

71) In CA/D 5/11 the Administrative Council did away with the Article 1(3) FinRegs exception, with retroactive effect from 1 January 2011. So the EPO now has to apply in their entirety the accounting principles issued by the International Accounting Standards Board.

72) This change in its financial-reporting procedure has two major effects: (a) the RFPSS assets (now valued according to IFRS 9) are shown as assets and the DBO as a liability, which leads to significantly higher total assets and liabilities; (b) the "corridor" approach, used when accounting for financial and actuarial fluctuations in the liabilities and assets of the social-security schemes, has been discontinued, making the annual accounts much more volatile.

A third change relates to the valuation of some of the Office's assets under IFRS 9, but this has had little impact on the accounts.

73) In order to show, nevertheless, the long-term trend in the EPO's financial position, we have based our report on restated (and therefore unaudited) annual accounts for 2005-2009 provided by the Office. This takes account of discontinuing the corridor approach and no longer offsetting the DBO against RFPSS assets, but not of revaluations of the Office's assets under IFRS 9.

CA/20/15 e 15/118 150560004

74) The 2014 estimates and figures are based on CA/60/15 (financial statements) and CA/10/15 (budget implementation statement).

75) For the detailed balance-sheet and income-statement figures, see Annexes I/1 and I/2 taken from CA/60/15. Annex III compares the budget estimates as adopted in 2012 and subsequently restated ("IFRS forecast") with actual income and expenditure as per CA/10/15.

1.3. Financial-statement figures in brief

(a) Balance sheet

-25.000.000

-20.000.000

-15.000.000

-10.000.000

-5.000.000

0

5.000.000

10.000.000

15.000.000

EQUITY ASSETS LIABILITIES

(EUR '000) 2010 2011 2012 2013 2014Non-current assets 5.262.222 5.427.877 6.256.840 7.024.503 8.015.868Current assets 546.811 577.364 673.345 772.878 767.374Assets 5.809.033 6.005.241 6.930.185 7.797.381 8.783.242Non-current liabilities -7.220.781 -7.447.778 -11.513.459 -11.814.884 -20.535.860Current liabilities -570.070 -547.745 -559.382 -567.353 -587.538Liabilities -7.790.851 -7.995.523 -12.072.841 -12.382.237 -21.123.398Equity -1.981.818 -1.990.282 -5.142.656 -4.584.856 -12.340.156

CA/20/15 e 16/118 150560004

76) Non-current assets rose by EUR 991m from 2013 to 2014. RFPSS net assets accounted for EUR 855m, bonds for another EUR 137m.

77) Non-current liabilities were up by EUR 8 721m, an exceptionally large increase over the 2013 figure, with defined benefit liabilities (for pensions and similar obligations) rising by EUR 8 667m.

78) Current assets fell by EUR 5.5m, financial assets going down by EUR 35m and cash assets up by EUR 30m.

79) Current liabilities were up by EUR 20m.

80) The combined effect of these changes is that negative equity increased by EUR 7 755m, from EUR -4 549m to EUR -12 340m.

Non-current liabilities

81) As at 31 December 2014, non-current liabilities amounted to some EUR 20 536m, including EUR 19 741 for defined benefit liabilities.

82) The latter can be shown as follows:

(EUR '000) Active staffStaff entitled to deferred pension Pensioners Total

Pension liability 12.976.454 59.057 3.915.240 16.950.751LTC insurance 540.746 4.724 230.150 775.620Health insurance 1.363.917 506.641 1.870.558Death and invalidity 144.027 144.027Total 15.025.144 63.781 4.652.031 19.740.956

CA/20/15 e 17/118 150560004

83) The pension liability (EUR 16 951m) breaks down as follows:

84) The considerable increase in defined benefit liabilities is almost entirely attributable to heavily reduced discount rates.

85) The calculations in CA/60/15 (section 20.1) show that a 1% increase in the discount rate would reduce defined benefit liabilities by EUR 4 451m, whereas a 1% reduction would increase them by EUR 6 277m.

86) Despite heavily reduced discount rates, the following parameters were the same as in 2013, except that for medical costs, which increased only very slightly:

(EUR '000) 2010 2011 2012 2013 2014Pensions 4.402.511 4.611.919 7.371.651 7.415.948 13.344.298Tax adjustment / partial compensation 971.533 1.006.295 1.598.686 1.602.267 2.851.942Invalidity allowances 237.574 202.042 281.424 270.498 389.299Familiy allowances 150.925 159.310 231.978 230.877 365.211Total 5.762.543 5.979.566 9.483.739 9.519.590 16.950.750

Discount rate 2010 2011 2012 2013 2014Pension liability 5,33% 5,38% 3,57% 3,89% 1,61%LTC insurance 5,44% 5,55% 3,77% 4,10% 1,75%Health insurance 5,34% 5,51% 3,55% 3,90% 1,61%Death and invalidity 4,75% 4,56% 2,89% 3,17% 1,32%

(EUR '000) Liability 1% increase 1% decreasePensions 16.950.751 13.219.586 22.198.320LTC insurance 775.620 568.800 1.082.339Health insurance 1.870.558 1.370.893 2.577.539Death and invalidity 144.027 130.714 159.591Total 19.740.956 15.289.993 26.017.789

Difference 0 -4.450.963 6.276.833

Inflation 2010 2011 2012 2013 2014Future salary increases 2,50% 2,50% 2,50% 2,50% 2,50%Future pension increases 2,50% 2,50% 2,50% 2,50% 2,50%Medical costs 3,20% 3,10% 3,10% 3,20% 3,10%

CA/20/15 e 18/118 150560004

(b) Economic situation, factoring in the present value of future national renewal fees

87) The present value of future national renewal fees cannot be shown under IFRS, because there is no legal obligation to pay them.

88) With no future income to set against long-term liabilities from future business, the balance sheet looks rather lopsided. To counteract that, the present value of future national renewal fees needs to be borne in mind. The figures below are from CA/60/15.

89) Until 2011, net business assets and pension liabilities were more or less in balance. The shortfall, which was between EUR 2 and 3bn in 2012 and 2013, increased in 2014 to almost EUR 10bn.

0,00%

1,00%

2,00%

3,00%

4,00%

5,00%

6,00%

Pension liability Future salary increases

(EUR '000) 2010 2011 2012 2013 2014RFPSS net assets 3.978.966 3.934.618 4.622.017 5.229.485 6.084.859Present value of future national renewal fees 2.839.901 3.142.273 3.490.544 3.647.126 3.876.977Net business assets 6.818.867 7.076.891 8.112.561 8.876.611 9.961.836Defined benefit liabilities -6.625.315 -6.808.831 -10.825.416 -11.074.231 -19.740.956Balance 193.552 268.060 -2.712.855 -2.197.620 -9.779.120

CA/20/15 e 19/118 150560004

90) Compare the present value of future national renewal fees with equity, and a similar picture emerges:

91) For a long-term view, see (as in the 2013 report) the joint report of the Actuarial Advisory Group to the EPO President - actuarial valuation as at 31 December 2012 (CA/61/13) and the Office's comments on it (CA 62/13). Estimates based on actuarial studies have shown that net payments from the RFPSS to pensioners are not expected before 2023. These studies are expected to be updated in 2015.

(c) Income statement

(EUR '000) 2010 2011 2012 2013 2014Equity -1.981.818 -1.990.282 -5.142.656 -4.584.856 -12.340.156Present value of future national renewal fees 2.839.901 3.142.273 3.490.544 3.647.126 3.876.977

858.083 1.151.991 -1.652.112 -937.730 -8.463.179

-2.000.000

-1.500.000

-1.000.000

-500.000

0

500.000

1.000.000

Profit / loss Operating result Financial result

CA/20/15 e 20/118 150560004

92) The 2014 operating result, whilst remaining slightly negative, is up by EUR 37m on the 2013 figure, with income increasing by EUR 83m and expenditure by EUR 46m.

93) The positive financial result of EUR 156m is around EUR 41m higher than the 2013 figure, with revenue increasing by around EUR 87m and expenses by around EUR 46m.

94) The loss of EUR 7 906m under other comprehensive income is down to heavy reductions in discount rates for valuation of DBOs and can be broken down as follows:

(d) Statement of cash flows

95) The inflow from operating activities is EUR 447m, the outflow from investing activities EUR 410m. Taking into account the EUR 6m outflow from financing activities, there has been a net increase of EUR 31m in cash and cash equivalents, i.e. up EUR 93m on the 2013 figure.

(EUR '000) 2010 2011 2012 2013 2014Operating result 89.788 89.232 110.824 -42.028 -5.180Financial result 57.370 -463.905 215.762 115.479 156.247Profit / loss for year 147.158 -374.673 326.586 73.451 151.067Other comprehensive income -295.630 366.209 -3.478.960 484.349 -7.906.367Total comprehensive income -148.472 -8.464 -3.152.374 557.800 -7.755.300

(EUR'000)

Revised financial assumptions

Revised demographic assumptions

TotalPension obligation -7.050.830 262.493 -6.788.337LTC insurance -387.702 25.866 -361.836Sickness insurance -943.939 197.769 -746.170Death and invalidity -23.155 13.131 -10.024Total -8.405.626 499.259 -7.906.367

2011 2012 2013 2014Cash flows from operating activities 379.269 407.370 376.721 446.953Cash flows from investing activities (299.867) (401.558) (436.117) (410.439)Cash flows from financing activities (13.272) (9.824) (3.344) (5.964)NET INCREASE/DECREASE IN CASH AND CASH EQUIVALENTS 66.130 (4.012) (62.740) 30.550

CA/20/15 e 21/118 150560004

2. SPECIFIC ACCOUNTING REMARKS

FOLLOW UP OF ISSUES CARRIED FORWARD FROM PRIOR YEAR

2.1. Post-employment benefit obligations

96) The following paragraphs should be read in connection with BoA management letters issued on the financial statements for the reporting periods from 2008 to 2013 and note 28 "Contingencies and risks" to the financial statements.

97) As at 31 December 2014, the Office's post-employment benefit obligations amount to EUR 19 741m and exceed total assets by EUR 10 958m. They can be broken down as follows:

Source: 2013 - CA/60/14; 2014 - draft CA/60/15 (based on pension report)

Post-employment benefit obligations 2013 2014

in EURm

Gross DBO (undis-

counted)

As per financial

statements

Gross DBO

(undis-counted)

As per financial

statements Present value pension obligation

26 039 9 520 26 458 16 951

Present value LTC insurance

1 449 385 1 411 776

Present value health insurance

1 466 1 047 1 503 1 870

Present value death and invalidity

169 122 165 144

Total 29 123 11 074 29 537 19 741

CA/20/15 e 22/118 150560004

98) We draw attention to the following major assumptions and uncertainties:

(a) Decrease in interest rate

99) According to IAS 19, the interest rate used for discounting the defined benefit obligations ("DBO") is determined by reference to market yields at the end of the reporting period. In the case of the Office, it is based on the "iBoXX EURO Corporates AA" index and therefore subject to general market fluctuations. The determination of the discount rate applied by the Office is in line with the requirements of IAS 19.

100) The discount rate used as of 31 December 2014 amounts to 1.61% for pension obligations and has decreased from 3.89% in 2013. This net decrease is the main reason for the actuarial losses / remeasurements of EUR 7.906m that have caused a further decline in equity. We consider the discount rate used by the Office appropriate. The method used for determining the rate has been applied consistently. Nonetheless it is at the lower end of the range of acceptable rates. Benchmark studies of the discount rates used by listed companies in Germany as at 31 December 2014 indicate a range between 1.6% and 2.4%.

101) These movements in equity are triggered by market parameters outside the EPO's control (accounting "mechanics"). Since 2013, it has no longer been possible to choose how to recognise actuarial losses for accounting purposes, i.e. these have to be recognised in the comprehensive income ("below net income") and, consequently, in equity.

(b) Increase of service costs 2015

102) The decrease in the discount rate does not have any impact on the 2014 operating result. However, due to the mechanics of IAS 19, in 2015 current service costs are projected to increase by EUR 416m to EUR 845m, which might lead to a negative operating result under IFRS for 2015. Obviously, the low discount rate will have a positive impact on the 2015 financial result as the interest costs are projected to decrease from EUR 367m to EUR 272m.

CA/20/15 e 23/118 150560004

(c) Update of mortality tables

103) The Office's actuary, SIRP, has drawn up updated mortality tables based on actual mortality rates of twelve international organisations located in Europe during the observation period 2008 – 2012 as well as mortality tables for four European countries. These updated tables have been used by the Office to determine its pension obligation at the end of 2014. The 2014 actuarial gain of EUR 499m from changes in demographic assumptions mainly relates to this update in the mortality tables. In line with the requirements of IAS 19, the change in mortality tables has been treated as actuarial gain / loss presented as "remeasurement of defined benefit obligations" in the statement of comprehensive income.

(d) Medical cost inflation

104) Medical cost inflation has to be included in the calculation of health insurance. Based on the actuarial report, there has been a change in the estimate of long-term medical cost expectations. The overall impact of the change in estimate is not material. However, the Office could improve the documentation on development and trend of medical cost inflation.

2013 2014

in EURm

As per financial

statements

One month increase in

life expectancy

As per financial

statements

One month increase in life

expectancy Present value pension obligation

9 520 9 555 16 951 16 963

Present value LTC insurance

385 387 776 777

Present value health insurance

1 047 1 049 1 870 1 873

Present value death and invalidity

122 - 131 -

Total 11 074 10 991 19 741 19 613

CA/20/15 e 24/118 150560004

(e) Impact from changes in schemes

(i) Return to tax adjustment

105) The Office proposed the replacement of the partial compensation scheme by the former tax adjustment (CA/95/14 Rev. 1) in place until 31 December 2008. The proposal was approved by the BFC and Administrative Council at their meetings in November and December 2014, respectively. It will apply from 1 January 2015 onwards to all pensioners who took up active service before 1 January 2009. There has no impact on the financial statements as, for accounting purposes, the Office had treated the partial compensation in accordance with the former tax adjustment rules (in place until 31 December 2008).

106) We concur with the accounting treatment applied by the Office and draw attention to the disclosures in note 28 describing the contingent liability and uncertainties. Moreover, we highlight that the matter is primarily a legal and political issue.

107) Regarding the measurement of the tax adjustment, please refer to paragraph (f) below.

(ii) New career scheme

108) In CA D/10/14, the Administrative Council decided to amend the Service Regulations on remuneration. The new scheme will apply from 1 January 2015 onwards and is relevant for financial reporting in the following respects:

• The actuarial calculation of the DBO includes an estimate of future salary increases (estimating the salary of the employee upon retirement) which takes account of promotions, as these are considered "regular" at the EPO. Under the proposed new career scheme, regular promotions based on seniority will be replaced by a more performance-based scheme. The Office currently assesses the impact on the DBO as low, because under the new career scheme, salary increases might only slow down but not significantly change the salary upon retirement for the active employees as at 31 December 2014. No past experience is available regarding actual promotion patterns and therefore no sufficiently reliable estimate - better than the already observable pattern under

CA/20/15 e 25/118 150560004

the old scheme - is possible. According to IFRS, such a change in plan must be immediately recognised through P/L. However, based on the arguments above, any change (through P/L) would be too aggressive. We consider this an acceptable estimate of the Office.

• Moreover, a bonus scheme will be implemented to reward exceptional performance. The bonus will not give rise to any pension entitlement and will therefore not increase any pension obligation. The bonus element does not have any impact on the 2014 financial statements but has to be analysed for the purposes of recognising an accrual at the end of 2015.

109) We concur with the approach taken by the Office for the 2014 accounts. In the long run, the change in scheme might lead to a decrease in pension obligations and payments to the RFPSS.

(iii) Invalidity allowance

110) At its meeting in March 2015, the Administrative Council approved the amendments to the Service Regulations (ServRegs) and Pension Regulations (PenRegs) on invalidity and sick leave (CA/14/15). In accordance with the requirements of IFRS, the Office has appropriately disclosed this event in its notes to the financial statements (note 32). The change in the invalidity and sick-leave scheme does not have an adjusting impact on the measurement of the defined benefit obligations recognised in the statement of financial position. In the long run, it will impact on the estimate of invalidity probabilities and therefore potentially reduce the liability for post-employment benefit obligations, as entitlement to an invalidity allowance has been restricted.

(f) Tax adjustment on invalidity allowance and partial compensation

111) The Office faces several uncertainties in connection with the taxability of pensions and invalidity allowances. By re-introducing the former tax adjustment scheme in place until the end of 2008, the Office has taken measures to limit its risk exposure. The future treatment and therefore the reflection in the defined benefit obligation is described in section (e)(i) above. The risk exposure for the periods from 2009 until

CA/20/15 e 26/118 150560004

2014 has not been accounted for in the financial statements as at 31 December 2014. It is limited to cases of pensioners / invalids who have been subject to national taxation in their country of residence and are claiming reimbursement from the Office. The different categories can be summarised as follows:

(i) Taxation of invalidity allowance

112) In 2007 (CA/D 30/07) the EPO decided to significantly change its PenRegs and ServRegs with regard to invalidity benefits, with effect from 1 January 2008 to 31 December 2014. In substance the obligation for invalidity benefits due to invalids ("non-active staff") did not include any specific rules on tax adjustments on invalidity allowance.

113) For accounting purposes, the invalidity allowance and its corresponding tax adjustment were treated as post-employment benefit plan, as – based on past experience – there were very few exceptional cases of invalids coming back to work once the invalidity status was granted. A tax adjustment (for measurement, please see paragraph g) below) had been included in the provision recognised, however no such tax adjustment had been paid.

114) The taxability of the invalidity allowance is governed by the national tax laws in the country in which non-active staff are resident for tax purposes and might therefore be taxable. Some non-active staff in receipt of an invalidity allowance have been approached by tax authorities that consider the allowances to be taxable income. The EPO is supporting such staff in 84 cases, 58 of them in Germany and 26 in the Netherlands. In Germany, two court cases are still pending. In both cases, there was an adverse judgment at first instance which is now under appeal (one appeal lodged with the Bundesfinanzhof, the supreme German tax court), i.e. the courts of first instance have endorsed the tax authorities' classing of invalidity allowances as taxable income.

115) In the Netherlands, a judgment of the Hague District Court published in February 2015 declared the invalidity allowance paid to a Dutch claimant from 1 January 2008 to be an emolument within the meaning of Article 16(1) PPI and consequently exempt from national income tax. The tax office lodged an appeal in March 2015.

CA/20/15 e 27/118 150560004

116) Further actions depend on the outcome of the negotiations with the national tax authorities and of pending legal proceedings between invalids and national tax authorities.

117) We concur with the approach taken by the Office for the end of the 2014 accounting period. The overall risk exposure is not expected to be material for the Office (in total only 149 recipients of an invalidity allowance and risk exposure limited to period from 2009 to 2014).

(ii) Obligation of the EPO to reimburse the invalid for any tax paid under national tax regulations:

118) Contrary to the pension scheme (as stipulated in the PenRegs), which lays down a right to reimbursement and a formula for the amount of tax adjustment for employees recruited before 1 January 2009, the invalidity allowance plan applicable from 2009 until 2014 (as stipulated in the ServRegs) remained silent on tax adjustments. However, triggered by the requests from national tax authorities, invalids have contacted the Office in this matter and the Office assumes that there is a significant risk that a majority of the well-interconnected invalids will claim a tax reimbursement from the Office if the local tax authorities prevail in their assessment that the invalidity allowance is taxable. Precedents have been set since 2009, when the Office began supporting invalids in their negotiations with tax authorities.

119) The Office has taken countermeasures by changing the scheme (see paragraph (e)(iii) above), as it considered the risk exposure to be very high that all current invalids and all potential future invalids with a date of entry before 1 January 2009 will actually have to pay national income tax and then claim reimbursement.

120) The Office has continued to support invalid staff in legal and court proceedings and has paid them advances on their current tax payments. It has paid approximately EUR 206k to invalids in 2014. The amount is presented in the line item "Other receivables – staff and related accounts". These payments have neither been charged as expenses nor presented as utilisation of provisions, but have been capitalised as other assets.

CA/20/15 e 28/118 150560004

121) The Office will deal with all cases for the period 2009 to 2014 on an individual, i.e. case-by-case, basis. We concur with the approach taken by the Office for the end of the 2014 accounting period. The overall risk exposure is not expected to be material for the Office (in total only 149 recipients of invalidity allowance and risk exposure limited to period from 2009 to 2014).

(iii) Taxation of partial compensation

122) Although the EPO is not a party to the legal proceedings, it provides legal support to pensioners who have been asked to pay taxes on partial compensation by national tax authorities. In total, the Office knows of and is supporting pensioners in 361 cases (out of 1 149 recipients of partial compensation). These mainly concern pensioners resident in Germany (186), the Netherlands (104), Belgium (68) and, to a lesser extent, Luxembourg. Legal proceedings are pending in all these countries. Only in Luxembourg has a final court decision has been published concluding tax exemption. In Belgium and Germany, court proceedings are pending either at first instance or on appeal. In a judgment of 26 February 2015, concerning a Dutch pensioner, the Hague District Court found the partial compensation payment to be exempt from national tax in the member states according to Article 16(1) PPI. The Office maintains its position that no reimbursement of taxes paid on partial compensation will be made to pensioners, as there is no legal or constructive obligation. The Office is currently analysing whether agreements with the respective member states can be reached to settle the period from 2009 to 2014. Discussions are ongoing with all major countries concerned. As in previous periods, the Office has not recognised any liability regarding the potential risk of pensioners claiming reimbursement for national taxes paid on partial compensation when relying on Article 16(1) PPI, i.e. the non-taxability of partial compensation.

123) The Office considers the risk of any obligation remote and not reliably measurable at this stage, because it depends on:

• first, the outcome of legal proceedings between pensioners and national tax authorities, and

• second, an assessment regarding the obligation of the Office based on then prevailing regulations and measures.

CA/20/15 e 29/118 150560004

124) The proceedings could continue for several years. It cannot be excluded that liability might have to be recognised in future.

125) By re-introducing the former tax adjustment scheme, the Office has limited its risk exposure for future years. The Office will deal with cases for the period from 2009 to 2014 on an individual basis.

(iv) Salary savings plan

126) All staff joining the Office from 1 January 2009 are compulsorily members of the "salary savings plan", a deferred compensation model. The contributions are paid by the Office (two thirds) and the employees themselves (one third) and are subject to internal tax under Article 16(1) PPI. Consequently, the Office takes the position that no national tax can be additionally levied and has not provided for any potential risk for reimbursement of taxes as at 31 December 2014. The Office aims to reach an agreement on the taxability of the salary savings plan in the context of overall discussions with national tax authorities. Given that the corresponding obligation as at 31 December 2014 amounts to EUR 30 166k, any potential impact from tax adjustment is considered immaterial, but may become material over time and as more and more employees join the scheme.

(v) Summary

127) Regarding all three cases (tax adjustment on invalidity allowance, partial compensation for pensioners and salary savings plan), we concur with the accounting position taken by the Office. No provision has been recognised, as the risk is considered remote (probability below 50%), but extensive and appropriate descriptions of the risks have been provided in note 28 "Contingencies and Risks" to the financial statements in line with requirements stipulated in IAS 37.86 for contingent liabilities.

(g) Valuation of the tax adjustment / partial compensation

128) For valuation purposes regarding the tax adjustment on invalidity allowance, the Office has not undertaken a detailed assessment regarding the country of tax-residence of non-active staff/pensioners and their marital status, but has taken a "loading factor" of 19% and 21% on the defined benefit obligation regarding current and future invalids/pensioners respectively. In 2008, these factors have been derived

CA/20/15 e 30/118 150560004

by using past experience of tax adjustments actually paid in relation to retirement pensions. No update of these factors has been undertaken since 2008 as they are still considered valid. So, for accounting purposes, the Office assumes that the country of residence in the case of invalidity/retirement mirrors the country of residence of EPO's retired workforce and the amount of tax adjustments to be reimbursed corresponds to the amount that would have to be paid on a corresponding retirement pension. A sanity check of the actual payments for partial compensation made in 2014 (based on most recent information for actual payments from 2009 until 2014) versus the basis pension payments lead to a factor of 20.9% (2013: 21.4%). The actual payment for partial compensation is based on PenRegs and derived from theoretical national income tax according to the Inter-Organisations Section of the Co-ordinated Organisations, considering the fiscal situation of the beneficiaries regarding marital status and country of residence.

129) We concur with the position taken by the Office, but highlight the level of estimate involved and recommend an annual analysis of the appropriateness of the loading factor for both invalids/pensioners and active staff.

2.2. Repurchase value Caisse Nationale de Prévoyance (CNP)

130) In its capacity as legal successor of the Institut International des Brevets ("IIB"), the Office accounts for the repurchase value of funds of former IIB-members for pension payments as well as outstanding interest thereon of EUR 55.7m (31 December 2013: EUR 54.4m). The increase is due to accrued interest for 2014. Since July 2007 no payments or reimbursements have been made by CNP to the Office. The amount is confirmed by CNP in its yearly statement provided to the EPO. Since 2000, the EPO has aimed to have these funds transferred from Caisse Nationale de Prévoyance ("CNP") to the Office, with a subsequent contribution to the RFPSS. The Office has terminated the contract with CNP, negotiations have been held and a conclusion had almost been reached in 2007, subject to all ex-IIB members concerned approving the transfer (condition set by CNP). Progress has been made and approval has been obtained from all relevant ex-IIB members in the meantime. An internal legal analysis performed by the Office in 2010 has not revealed any concern regarding the Office's entitlement to these assets. Administrative procedures for the transfer are ongoing and a draft protocol has been prepared, but not signed yet. The Office expects that the payment might be received in the course of 2015.

CA/20/15 e 31/118 150560004

2.3. IT Roadmap

Background:

131) In 2011, the IT Roadmap project was initiated to develop and implement improvements in the patent grant process through integrated IT tools.

132) For accounting purposes the EPO has performed an initial analysis of the three streams of the project to define the intangible assets which will be generated and qualify for recognition under IFRS (IAS 38). Stream 1 comprises short-term efficiency projects as well as reengineering of the patent grant process. Stream 2 involves investments designed to improve the efficiency and quality of the tools used by the examiners. Both streams are eligible for capitalisation. Stream 3 mainly deals with a new infrastructure. No eligible costs incurred in 2014 financial year (i.e. no costs capitalised as at 31 December 2014 for stream 3).

133) Costs capitalised under IFRS are summarised below:

in EUR '000

2011 2012 2013 2014 Total

Incl. for IT systems

Incl. for construction in

progress Stream I 269 8 280 9 337 9 428 27 314 14 337 12 977 Internal costs 87 3 369 1 955 2 443 7 854 5 370 2 484 External costs 182 4 911 7 382 6 985 19 460 8 967 10 493

Stream II 389 1 985 2 019 1 423 5 816 2 172 3 644 Internal costs 74 1 010 486 493 2 063 904 1 159 External costs 315 975 1 533 930 3 753 1 268 2 485

CA/20/15 e 32/118 150560004

Recommendation:

134) We concur with the accounting treatment applied by the Office, but recommend the following:

135) Performing a sanity check of internal costs incurred against planning in order to identify any excess costs, which would have to be expensed immediately (internal costs are not budgeted).

2.4. Negative equity of the EPO

136) As in 2013, the EPO's negative equity is not covered by the net present value of potential future renewal fees for granted European patents:

In EURm 2014 2013 2012 Equity -12.340 -4.585 -5.143 Potential future renewal fees 3.877 3.647 3.491 "Not covered" -8.463 -938 -1.652

Source: CA/60/15; CA/60/14

137) In 2014, the EPO generated a negative operating result compensated by a positive financial and therefore an overall positive net result in 2014. The negative operating result has been expected and is mainly caused by a high level of service costs on defined benefit obligations (current and past service cost of EUR 521m). Despite the positive net result, the actuarial losses of EUR 7.050m recognised in comprehensive income led to an increase in the EPO's negative equity from EUR -4.585m to EUR -12.340m. The expected charges from current service costs in 2015 are forecasted to amount to EUR 1.011m (actual 2014 figure: EUR 511m).

138) The actuarial losses on defined benefit obligations mainly result from decreased interest rates (from 3.89% in 2013 to 1.61% for the pension obligation in 2014), i.e. the equity is mainly impacted by general market developments outside the control of the EPO. The accounting treatment is in line with IAS 19 and consistent to prior year.

CA/20/15 e 33/118 150560004

139) We recognise that the Office has taken measures and is closely monitoring the development of equity through regular controlling reports, balanced scorecard and actuarial forecasts as well as Finance Study, regularly updated contribution rates, efficiency attempts, new career scheme, invalidity scheme, Salary Savings Plan and pension reform. Moreover, from an accounting perspective there are no consequences from negative equity as - according to article 40 of the EPC - the EPO cannot become insolvent. Therefore the going concern assumption for preparation of the financial statements is appropriate.

NEW ISSUES

2.5. Unitary Patent ("UNIP")

140) The European Parliament set the prerequisites for a European patent with unitary effect ("UNIP"). It will be the task of the Office to grant these patents as well as to administer the granted patents. The UNIP will be a European patent granted by the Organisation under the provisions of the EPC to which unitary effect for the territory of the participating states is given after grant, at the patentee’s request. The UNIP will thus be treated as normal application. After grant, the Organisation will administer the patent, collect the renewal fees and remit their share of these fees to the participating states. Regulation (EU) 1257/2012, in Recital 20, states that all costs of the tasks entrusted to the Office should be fully covered by the resources generated by the European patents with unitary effect and that, together with the fees to be paid to the Office during the pre-grant stage, the revenues from the renewal fees should ensure a balanced budget of the Office.

141) The costs of the Office at current stage mainly comprise costs for IT Set-up as well as administrative costs. These are accounted for in line with general accounting policies of the office regarding capitalisation of development costs. Entire IT Set-up costs for administration of requests and renewal fees (i.e. software cost and implementation of SAP PSCD module), Micado adjustment and IT development for the Unitary Patent Procedure are estimated to amount to EUR 2 533k. All other costs relating to process set-up, administration of the Select Committee as well as any other cost incurred by the Office are considered to be part of its ordinary business within its tasks under the EPC and are currently not separately measured by the Office.

CA/20/15 e 34/118 150560004

142) We concur with the accounting treatment as under IFRS costs are not eligible for capitalisation if costs cannot be reliably measured. The question if this is in line with Part IX of the EPC (cf. Art. 142, Art. 147) is irrelevant for accounting purposes.

2.6. Calculation of employee-related notes disclosures

Background:

143) To derive accurate and precise values for employee related accruals, relating notes disclosures and disclosures on related party transactions with key management, certain automated standard procedures and documentation should be in place. Relevant information should be available directly in SAP or derived from SAP in due course using standardised reporting formats. These include amongst others working hours, usage of flexi time or vacation as well as other time budgets and other information relevant for determining cost rates or related party notes disclosures. The information underlying related party disclosures shall be documented in a consistent, reliable and auditable way.

Recommendation:

144) In light of good practice of financial reporting we recommend completing timesheets in due course and freezing the time budgets in SAP within a reasonable timeframe. For financial reporting as well as for auditing purposes, such information should be readily available in the SAP-system and reproducible at any time, i.e. allow static reporting as of a selected date. Moreover, any HR information relevant to financial reporting should be well documented and provided in a standard format on a timely basis (i.e. on time for preparing the financial statements) suitable also for audit purposes.

3. GENERAL COMMENTS ON BUDGET IMPLEMENTATION

3.1. Forecast income statement

145) The IFRS plan figures as per CA/D/13 and CA/10/15 and the actual ones as per CA/60/15 are juxtaposed in Annex III/1.

CA/20/15 e 35/118 150560004

146) The 2014 operating result is negative (EUR -5m) and so EUR 70m below the forecast figure of EUR +65m. Whilst income was forecast very accurately and deviated by just 0.8%, the forecast for employee benefit expenses was EUR 127m (9.9%) too low and that for other operating expenses around EUR 44m (14%) too high.

147) At EUR 156m, the financial result was EUR 260m higher than forecast (EUR 267m due to higher finance income and EUR 7m to higher finance costs).

148) Other comprehensive income was EUR 7 906 under the forecast of zero.

3.2. Forecast balance-sheet figures

149) The IFRS plan figures as per CA/D/13 and CA/10/15 and the actual ones as per CA/60/15 are juxtaposed in Annex III/2.

150) Assets deviated from plan by EUR 628m (7.7%), with non-current assets EUR 925m (13.1%) over plan and current assets EUR 298m (28%) under plan. Overall, RFPSS net assets were EUR 691m and current and non-current securities EUR 391m over plan, while cash and cash equivalents were EUR 414m under plan.

151) Liabilities were EUR 10 583m (100.4%) over plan. This is attributable to the higher defined benefit liability of EUR 10 638m.

3.3. Comparison of budget as adopted and as implemented

152) The basic figures (as per CA/10/15) for comparing the budget as adopted and as implemented are given in Annex II.

153) In CA/D 1/13, the AC adopted an authorisation budget within the meaning of Article 25(1)(a) FinRegs totalling EUR 2 079m. The actual budget outturn was EUR 2 048m, i.e. EUR 31m less (-1.5%).

154) Income from designation and renewal fees (Chapter 53) was EUR 37m over budget (3.7%). Income from filing and search (Chapter 50) was EUR 29m below budget (7.5%); likewise general operating income by EUR 19m (8.7%).

CA/20/15 e 36/118 150560004

155) There were underspends in all operating expenditure chapters. They totalled EUR 152m, including EUR 110m for staff, EUR 11m for co-operation and meetings, EUR 10m for IT equipment maintenance and EUR 14m for general operating expenditure.

156) There was a budget surplus (Chapter 49) of EUR 332m, which is EUR 172m higher than budgeted (EUR 160m).

157) For the pension and social security schemes, income and expenditure were both below budget, at EUR 26m (7.9%) and EUR 21m (10.2%). The transfer to the RFPSS was just under EUR 5m (3.9%) below budget.

Appropriation transfers

158) The appropriation transfers under Article 34 FinRegs are shown in Annex II/4. The figures are taken from CA/10/15.

159) Transfers under Article 34(1) FinRegs (within the same chapter) totalled EUR 1m.

160) Those under Article 34(2) FinRegs (between chapters and not exceeding 20% of the appropriations of the chapters concerned) amounted to EUR 3m.

161) There were no transfers under Article 34(3) FinRegs (decision by the BFC or AC).

CA/20/15 e 37/118 150560004

D. INTERNAL CONTROL SYSTEM

1. INTERNAL AUDITING (DIRECTORATE 0.6.1)

162) In accordance with the International Professional Practices Framework (IPPF) for internal audit (issued by the Institute of Internal Auditors – IIA), heads of internal audit units must develop and maintain a quality assurance and improvement programme covering all their unit's activities and including an independent quality assessment at least every five years.

163) In 2014, Internal Auditing (D 0.6.1) was the subject of an external quality assessment conducted by the German Institut für Interne Revision (internal audit institute - DIIR), which certified that the directorate's practices meet the IPPF standards.

164) The DIIR assesses quality on the following scale:

165) The results of the DIIR's assessment were as follows:

166) We will especially monitor implementation of recommendations relating to practices which scored 1 or 0 at a more detailed assessment level.

Target achievement Points Assessment> 90% 3 Fully achieved

75%-90% 2 Slight improvement potential50%-75% 1 Significant improvement potential

<50% 0 Deficient

Requirements AssessmentOrganisation of internal audit activity 87,3%Audit planning and preparation 85,7%Audit performance and reporting 84,4%Audit rework and follow-up 95,8%Internal Auditing's personnel and quality assurance 95,0%

CA/20/15 e 38/118 150560004

2. GOVERNANCE OF THE RFPSS

2.1. Control system

167) We have selected 80 transactions from the year 2014 and checked the proper functioning of the internal control system including segregation of front office and back office and the proper documentation of controls. We also have checked the proper recording of all transactions by the custodian (=physical delivery). We found no exceptions.

168) Corporate actions such as share split are formally documented with electronic signatures in the trading system (Antares).

169) We recommend considering a move generally away from paper proof of control to electronic documentation only. The costs of changing to electronic documentation need to be considered.

2.2. Compliance system

170) We have reviewed 100% of the daily compliance checks for the year 2014. There were a few minor passive breaches of rules. All passive breaches were corrected within the given rule of 30 days in the Code of Procedures (active breaches will generally be corrected within the given rule of 3 days).

Rating information is imported from a rating agency (Bloomberg) to CAMRA just once a week on Monday. One use of this information is to detect if bonds have been downgraded, thus creating a passive breach.

171) Due to a change in the data describing the grade, the data import failed, and the new, lower rating was not imported to CAMRA. Even if the import failure was detected, there was no procedure in place to determine the consequence of the failure.

Because of the annual closing of EPO from 24 December 2014 to 5 January 2015 and another holiday in Munich on 6 January 2015, the specific problem with the data import was only resolved on 7 January 2015. The portfolio managers became aware of the downgrading on 7 January 2015.

CA/20/15 e 39/118 150560004

The passive breach was first recorded in the daily compliance check on 12 January 2015. The Compliance Officer's weekly report (5 to 11 January 2015) also included the data import issue.

172) The failed data import seems to be an event which no internal control procedures adequately detected and responded to. As a consequence, the Fund did not have the opportunity to determine a cause of action until the 7 January. In our opinion, this increases the risk of financial losses, as the response of the Fund is delayed. Also, a total closing of the Fund for almost two weeks seems to increase the risk.

173) We recommend that procedures are in place to ensure that the cause for data import failures are identified, so an informed decision can be taken by management in a timely manner on how to react.

174) The Head of Internal Audit and Oversight analysed the risks for RFPSS during the Office closure over the Christmas period (report RFPSS/SB 35/13 dated 2 May 2013). Because of very low trading volume and the long investment horizon of RFPSS, the impact of closure on the investment risk was regarded as low.

175) The Fund Administrator has developed an internal rule (Risk Policy) for handling of market risk related breaches (ex-ante Value at Risk; ex-post tracking error). It states that any such breach should be removed within 10 days unless the Fund Administrator, upon request, has granted a grace period of not more than 3 months. We recommend analysing the reason for different rules for active / passive breaches.

176) Based on a specific EU Directive any shareholder has to notify the company, in which a certain percentage of common shares is held, plus the respective Regulator, if certain minimum holdings are exceeded. The European minimum is set at 5% which due to the regulations of the EPO is not allowed to be exceeded by the RFPSS Fund Administrator anyhow. However, certain countries have set lower limits for that duty (e.g. Germany 3%, Italy 2%), which are not monitored by the current compliance monitoring system. Other countries outside the EU might have even lower limits or other notification requirements, but that issue is not addressed by the regulations of the EPO or the internal rules of the Fund Administrator.

CA/20/15 e 40/118 150560004

An analysis of the shareholdings indicated that the minimum was not exceeded and the risk of exceeding is low. For the real estate portfolio due to the smaller companies the gap to the minimum is more critical. The Portfolio Manager monitors the regulation.

177) We recommend implementing standard procedures and specific compliance checks for all notification requirements related to direct investments in shares.

178) EPO-Regulations require a minimum rating of bonds issues or of the issuer. They do not recognise the alternative of bonds being guaranteed by a third party and the rating of that third party.

179) We recommend enhancing the current regulations in order to recognise guarantors.

2.3. Risk management/assurance and compliance management/assurance

180) In March 2013 a new governance framework was implemented within the EPO. A new function of independent Risk Assurance Officer and Compliance Assurance Officer was implemented. The Risk Assurance Officer / Compliance Assurance Officer (one person) reports to the Supervisory Board of RFPSS and administratively to the Head of Internal Audit. After two years of the new implemented governance framework the roles of risk management and compliance management within the RFPSS Fund Administration and the Risk Assurance Officer / Compliance Assurance Officer are still evolving.

181) The common standards of the role of a Risk Assurance Officer and a Compliance Assurance Officer state that the Risk / Compliance Assurance Officer is responsible for developing the basic principles of risk management / compliance, supporting the implementation of appropriate procedure, monitoring the proper functioning of risk management / compliance management, reporting to the Board on a regular basis about the status of the risk management / the compliance management systems. He may also, in addition, give a summary of the risk position and the compliance position of the RFPSS Fund Administration, based on the results produced by the risk management and the compliance management within the Fund Administration.

182) Whether within the EPO the Risk Assurance Officer and Compliance Assurance Officer and the Supervisory Board have such an understanding is unclear.

CA/20/15 e 41/118 150560004

183) From the quarterly reports of the Risk Assurance Officer and the Compliance Assurance Officer they seem to understand their role as operational rather than principle oriented.

184) Currently there is little interaction between the Risk Assurance Officer and the Risk Manager within the Fund Administration. The latter is reporting on a daily basis to the Portfolio Managers and to the Fund Administrator, whereas the Risk Assurance Officer is doing his own research and an independent review of the assets and the related risks and reports on a quarterly basis to the Supervisory Board. Consequently, there is no filtering and no delay in the information flow to the Risk Assurance Officer and to the Supervisory Board, which is positive. However, the Risk Assurance Report is duplicating widely the information of the quarterly report of the Fund Administrator and adding a risk element on it instead of commenting on the risk management procedures and identifying gaps and opportunities for improvement.

185) The Compliance Assurance Officer currently is just ensuring the daily compliance checks are performed and summarising the results of that checks, but is not evaluating the appropriateness and completeness and accuracy of the compliance checks. He currently is not focusing on identifying any gaps and any opportunities for improvement.

186) We recommend defining precisely the role of the Risk Assurance Officer and the Compliance Assurance Officer in line with common standards, appropriately adjusted to the specific needs of the EPO, as follows:

The Risk Assurance Officer has to ensure proper risk management in line with common standards or best practice. This includes the following functions:

• identify the appropriate goals and principles of risk management • support the risk manager in developing a comprehensive risk map including

regular updates • develop and improve procedures for the strategic and the daily risk

management • monitor the implementation and the ongoing functioning of the risk management

procedures • identify gaps and opportunities for improvement • report quarterly on the proper and effective functioning of the risk management

system to the Supervisory Board.

CA/20/15 e 42/118 150560004

The Compliance Assurance Officer has to ensure proper compliance management in line with common standards. This includes the following functions:

• identify any significant compliance issues related to the administration of the funds

• develop or enhance procedures to assure the full compliance with all external and internal regulations related to the administration of the funds

• support the implementation of those procedures • monitor the proper functioning of the compliance procedures throughout the

year • identify gaps and opportunities for improvement • report quarterly on the proper and effective functioning of the compliance

management system to the Supervisory Board.

187) It may be a consideration to have separate sections for Risk Management and Compliance Management in the Quarterly Report of the Fund Administrator. Those could be used by the Risk Assurance / Compliance Assurance Officer to draw his conclusions from instead of writing his own comprehensive report.

188) Internal Auditing report No. 140 (RFPSS/SB 9/15), dated 5 February 2015, analysed the coherence of RFPSS Risk Management (which is in the responsibility of Fund Administrator) and Risk Assurance Officer in Internal Audit and Oversight (independent from Fund Administrator). Internal Audit identified some areas for improvement (see report). The definition of the role, the clarification of the tasks and responsibilities are in progress. All recommendations were endorsed by the Supervisory Board at its 86th meeting on 24 February 2015.

189) The coherence of RFPSS Compliance Management and Compliance Assurance Officer will be audited by Internal Audit in 2016.

2.4. Management system and practice for Fund assets

190) The Fund Administrator is holding short daily meetings and a more intense weekly meeting (“investment committee”; Code of Procedure Section I) with the Portfolio Managers, extensively supported by his (research and) support unit. Those meetings are documented in formal minutes.

CA/20/15 e 43/118 150560004

The meetings are designed to provide the opportunity to exchange information and views, but each Portfolio Manager is responsible for his portfolio without any interference by the Fund Administrator.

191) The quarterly rebalancing of the assets in order to bring it closer to the predefined benchmarks is decided by the Fund Administrator.

192) The strategic asset allocation including setting benchmarks gives a framework but also contributes to stability and long term thinking. The maximum tracking error (to the benchmark) is restricted by the Fund Administrator by asset class and is not often changed.

The review of that strategic allocation is an expensive exercise, which requires a lot of input from outside experts. The past long term results of the Fund Management show that the system is appropriate to generate sufficient performance to meet the long term target with acceptable risk taken.

2.5. Update from past findings

193) Allocation of total investments and returns between sub-funds (pension, long-term care, etc.) is strictly in line with the historical split of payments by the EPO into the RFPSS. Each sub-fund has a specific share of total assets and returns derived from all past payments of the EPO.

194) Rules on the timing of the removal of active, passive and market risk related breaches of rules are implemented. We believe that the rules are appropriate. We recommend preparing a summary for breach reaction.

195) The software currently used (CAMRA for accounting and Antares for trading) are going to be upgraded to versions 8 (in the test phase). That upgrade contains functionality to log all changes of user profiles. After completion of the implementation we recommend that the compliance officer reviews and documents all changes of user profiles.

CA/20/15 e 44/118 150560004

E. REPORTS ON SELECTED AREAS

196) Under Article 76(2) FinRegs, our audit also covers whether procedures are efficient and economical. For the present audit, we looked at the following different areas.

1. REVIEW AND INTERNAL APPEALS PROCEDURE

197) The Administrative Council asked the Board of Auditors to audit the Office's review and internal appeal procedures and how these had been implemented up to now.

198) The findings and recommendations are summarised in this report (CA/20/15). Report CA/21/15 gives more detailed information.

The audit approach is focused more on business administration than on legal perspectives.

1.1. Procedures

199) The procedures are defined mainly in Title VIII – Settlement of disputes – of the Service Regulations for permanent employees of the European Patent Office (ServRegs).

200) In principle the procedures are as follows:

201) As of 1 January 2013, a reform of the internal appeals procedure entered into force. One of the main changes is the introduction of a management review. The employee may submit a request for this within a period of three months. The Conflict Resolution Unit forwards the incoming request after registration to the appointing authority, who is usually the requester's superior. The requester has to receive a decision within two months after registration of the request.

202) After the requester has received a decision taken by the reviewer, he/she may challenge this decision within three months by sending an internal appeal to the secretariat of the Appeals Committee for forwarding to Directorate Employment Law (Dir. 5.3.2) for a position paper. The appellant has the possibility to reply to the position paper. If so, Directorate Employment Law may draw up a second position paper, which again will be sent to the employee. The Appeals Committee then invites the requester to a hearing. As a result, the Appeals Committee drafts an opinion

CA/20/15 e 45/118 150560004

which is regarded as a recommendation for the President. The opinion is sent to the President, who is responsible for taking the final decision. Once the final decision is taken by the President, the appellant is informed of the outcome and thus the final decision. The appellant receives the Appeals Committee’s opinion along with the President’s final decision.

203) There are also exceptions whereby an employee can directly lodge an internal appeal without having to go through the management review process first.

204) After receiving the Office’s final decision, the appellant has the opportunity to challenge it before the ILO's Administrative Tribunal (ILOAT) by filing a complaint within three months after receiving the decision.

1.2. Facts and figures

205) In 2013 and 2014 (until 24 November 2014) 535 cases with 3 776 requesters were registered for management review. 55% of the cases and 92% of the requesters are focused on regulations and/or policies.

206) The outcome of the cases in 2013 and 2014 shows that 375 cases (70%) with 3 124 requesters (83%) have the status "decision maintained". Of these 375 cases, 221 cases with 2 933 requesters related to regulations and/or policies.

207) The Appeals Committee registered 186 cases with 492 appellants in 2013 and 142 cases with 438 appellants in 2014 (until 24 November 2014). The list of registered cases includes 369 appellants in 2011 and 617 in 2012.

208) The Secretary of the Appeals Committee defines subjects for every appeal. There are a total number of 226 subjects. The main subjects are Investigation Guidelines, strike, salary reduction due to strike and the prohibition of mass mailing.

209) In 2013 and 2014 the Appeals Committee drew up opinions on about 155 cases with 2 211 appellants, of which 108 cases with 2 131 appellants were rejected.

CA/20/15 e 46/118 150560004

210) In 2013-2014 (up to 24 November 2014), final decisions taken by the President covered 170 cases and 573 requesters. 94% of the cases were rejected.

211) For 84% of the requesters the President followed the opinion of the Appeals Committee. Of 92 appeals where he had a different opinion to the Appeals Committee the President rejected 85 (92%) and allowed 7 in part (8%).

212) In 2013-2014 (up to 24 November 2014) 133 cases with 200 appellants were submitted to the ILOAT.

213) The average time between the start of an internal appeal and the final decision is 46 months for decisions taken in 2013 and 44 months for decisions taken in 2014.

214) The Appeals Committee’s backlog as at 20 November 2014 covers 759 cases with 5 791 requesters. Most of the pending cases (356 cases with 1 542 requesters) are waiting for the position paper.

215) In 2013-2014 (until 24 November 2014) 995 requests were sent to the Administrative Council. 626 requests were referred to the CRU for management review and 369 cases were rejected due to formal or substantive errors.

216) In principle, the Appeals Committee works chronologically in the order of receipt. There are exceptions to this practice for urgent cases and for mass complaints. As of 20 November 2014 there are 759 pending cases with 5 791 requesters. Most of the pending cases (55% - 356 cases with 1 542 requesters) are waiting for the position paper, which has to be drawn up by Directorate Employment Law, Dir. 5.3.2. The oldest case in the backlog dates from June 2007. The backlog of internal appeals in Dir. 5.3.2 increased constantly from 1 076 appeals in 2010 to 5 791 in 2014.

CA/20/15 e 47/118 150560004

1.3. Recommendations

217) In detail, we would recommend the following actions for the EPO:

• One common tool for the whole process for requests and internal appeals should be implemented.

• A central function (single-owner process) for the registration of requests as well as appeals should be implemented.

• A standardised approach to registering requests and adequate communication of the process should be introduced.

• Direct dialogue within the Office as pre-litigation for individual cases should be reinforced in order to reduce the number of internal appeals.

• The settlement of old cases should be taken into consideration.

• The position paper should be more concise and standardised where possible.

• The creation of clusters (topics) for appeals should be implemented as early as possible.

• Hearings concerning the same topic areas should be clustered.

• Hearings concerning more trivial cases could be reshaped, for example with fewer participants or less time during the hearings.

• The Employment Law Directorate should be strengthened in terms of resources and/or organisational redesign to increase output.

• The work of lawyers could be more focused in specific areas and supported by training in specific areas (specialisation).

• Measures to separate the procedures for individual cases (reviews and appeals) from policy should be addressed.

2. PATENT GRANT PROCESS

2.1. Overview

218) Files which go through the European patent grant procedure have to pass a number of different stages.

CA/20/15 e 48/118 150560004

219) European patent applications coming into the Office are classified by pre-classification. The filing and examination formalities, i.e. assigning of a date of filing and a check of all formal requirements, are the first step in the patent grant process. If all fees have been paid and all formal requirements are met, the file goes to the next step, called "search". During this process a search report is drawn up which contains a preliminary opinion on patentability. If the application is patentable, the next step is substantive examination. In this phase all issues related to the application are assessed. The final outcome of this examination could be the grant of a patent or refusal of the application.

220) There are then three post-grant procedures. First, opposition; second, revocation and limitation; and thirdly, appeal. In revocation and limitation procedures, patent proprietors can revoke their own patent or limit its scope. The last post-grant procedure is an appeal.

221) The result of the "Early certainty from Search" procedure, implemented on 1 July 2014, was a change in the product prioritisation for DG1. According to the procedure the key element is that search files need to be done in time (Priority 1 files). When all search files are finalised the examination can be started.

CA/20/15 e 49/118 150560004

222) Search files should be handled with first priority as they provide legal certainty at an early stage of the process and give the applicant an initial assessment. Priority 1 files are files which “must be done in time” and they include searches and already started examinations. Those files should be finished before starting new cases. Files related to the fast track examination for 3rd parties (not anonymous) should also be treated as priority 1 files. Priority 2 – 4 are files which should be done “as far as possible” and includes first and further examination actions as well as the backlog files.

223) During our interviews we obtained the information that the number of priority 1 files is tracked, but that in fact every examiner can select the file he would like to work on without facing consequences in the first instance.

224) In February 2013, the quality dashboard was launched, which allows to monitor the progression throughout the year and it delivers different KPIs. For the Principal Directors it is possible to control the performance of each Director, as well as each examiner. Moreover the objectives are shown in the system.

2.2. Processing time of the different steps

225) The time needed for the different steps in the patent grant process depends on the clusters. In 2013 the average time needed between receipt of the application and final grant (direct and indirect grant) was 43 months from filing of the application. The average time needed by the clusters ranges from a minimum of 36 months to a maximum of 56 months

2.3. Backlog of products under Priority 1

226) The backlog of products under priority 1 could be described as follows (status 16 January 2015):

Backlog of products under priority 1 according to ECfS 35 030 Target for the end of 2014 33 350

Even if not all clusters meet the target to reduce the backlog until the end of 2014, the trend is going down. This means that the backlog of priority 1 files is reducing.

227) Civil Engineering and Thermodynamics (CET) and Electrical and Electronic Technology (EET) have a noticeable backlog with more than 4 000 priority 1 files.

CA/20/15 e 50/118 150560004

228) The following shows the number of incoming files and examiner products in 2014.

New in directorates 344 976 New search 213 494 New examination 131 482 Examiner products 320 080

229) In some clusters there were more than 30 000 new files, while other clusters had fewer than 20 000 files. In most areas, the number of new requests is higher than the number of examiner products.

2.4. Findings and recommendations

230) An evaluation of current files was not possible since the new prioritisation system has first to be completely implemented in the working methods of employees. It takes some time for the effect of the new system to show in the processing of files.

231) During our audit we put the focus on those clusters with striking deviations from the average. During the interviews we obtained some reasons why the performance of specific clusters deviates from the EPO average. For example the mechanics cluster (CET) has a capacity problem. As a specific kind of technical knowledge is needed, it is difficult to find suitable people.

232) Due to the prioritisation of search files, examination files are treated with a lower priority. Thus means that new examiners need more time for examination-training, as the focus is on search files and examination files are done less.

233) Furthermore each cluster has different areas which may vary greatly in themes. The need for resources and the backlog could be in one area very high while in other areas the number of incoming files is decreasing. A transfer of resources is not possible due to the specification of topics. A shifting of files or employees within the areas is not possible.

234) The main problem in the Computers cluster is that the industry is very dynamic and technology is developing very fast. This cluster has the highest recruiting target in 2015 (target: 49 employees).

CA/20/15 e 51/118 150560004

235) The workflow and processing times in the different technologies is also very different. For example there are areas with a very high refusal rate and other with almost no refusals.

236) Thus, the average patent grant time of the different clusters cannot be easily compared due to individual problems, complexity and industrial differences that have to be taken into account.

237) Looking at the backlog of products under priority 1 the above mentioned problems, like the lack in capacity, have also an influence on this figure. Moreover we received the information that the examiners receive different PAX-points for the different products. These points are required in order to meet individual targets. Search files obtain a value of 0.6 points, while examination files receive 0.4 points, which promotes the reduction of the backlog for search files. However, since examination files are needed in order to meet the Office target, which is measured in publications, these files have a high importance. Since examination files need more time and also bring fewer points for the examiners than search files, the search files may be preferred. Directors need a good management and communication system to organise the workload.

238) Not only the KPIs should be taken into account because also other factors, like efficiency, are important for the prioritisation of files.

239) Due to the quality dashboard specific key indicators can be seen even on examiner level and they are used by the directors to manage the examiners, but at the moment there is no action plan in place for the improvement of the performance of examiners. It is the responsibility of the director to talk to the individual person and find the reason why he or she is not working as expected. The quality dashboard is well suited as a management system to promote the positive development of the KPIs as the transparency is given.

240) Currently there is no linkage between the new (future) performance system and the KPIs. A corresponding concept has yet to be implemented. It should be considered whether files with a long processing time should receive more points.

CA/20/15 e 52/118 150560004

241) The promotion system at EPO is going to be changed. From July 2015 the principal director of each department may decide over the steps, promotions and bonus, which are then linked to the individual performance of the employees. Here the figures of the quality dashboard can be a good basis for the assessment. However, it is important to note that also other factors are involved in the assessment.

242) In detail, we would recommend following actions:

The quality dashboard should be used as a management system to promote the positive development of the KPIs.

Mandatory regular meetings for principal directors and directors should be introduced to improve the management and communication system and so improve efficiency.

The PAX system should be harmonised with the overall targets of the Office and the new performance system.

3. TENDER PROCEDURES

243) The procurement process is divided into several steps. Depending on the type of award procedure different process and authorisation steps are necessary. In general there are three award procedures: tender, direct placement and direct placement owing to urgency. The difference between those procedures is that the tender procedure requires more steps then the direct placement. The reason for that is that there is no request for proposal, evaluation and comparison of offers for the direct placement. According to Tender Guideline 2.4.1 (1) direct placements are justified for reasons of efficiency or because of a limited selection of suppliers. Direct placements owing to urgency are justified in urgent cases when it is not possible to go through the tender procedure (TG 2.4.1 (2)).

CA/20/15 e 53/118 150560004

3.1. Best practice comparison

244) The best practice comparison shows that EPO procurement is mainly focused on the "how" (the process) and not on the "what".

Best-in-class procurement processes are structured as follows:

245) Best-in-class procurement organisations in the public sector are in the lead of all process steps of the Strategic Sourcing Cycle supported by relevant tools and management information such as spend analytics and e-sourcing tools to support these processes.

246) Finance is mostly responsible for the process steps in the Transactional Procurement Cycle supported by a user-orientated P2P system.

247) Contract management is a function which, due to segregation of duties, is strongly linked to the business according to the better practices of contract management to ensure deliverables are in line with the agreed contracts.

CA/20/15 e 54/118 150560004

The following deviations from best practices are observed:

248) The EPO procurement organisation (CP) is mainly focused on the selection and contracting process while limited attention is paid to the more strategic processes of the Strategic Sourcing Cycle. At the same time CP could bring its tools and systems to support the Strategic Sourcing Cycle to a higher maturity level.

249) CP is involved in the process of the Transactional Procurement Cycle while one would expect that this would be run by Finance supported by a P2P system.

250) The contract management function is scattered throughout the organisation without the support of clear KPIs and relevant systems.

251) In best practice CP should have the maturity and skills in order to gain the responsibility to decide on what type of procurement procedure (direct placement, restricted invitation to tender, open invitation to tender) will be used.

3.2. Findings and recommendations – general procurement process

252) There is no standardised process for approvals available, or a workflow procedure which states what approvals are needed and what kind of documents have to be used. Two manual forms (Form A and B) are used within the approval process.

CA/20/15 e 55/118 150560004

We recommend to create a guideline which makes clear which approvals for purchasing are necessary for the different award procedures and to use standardised forms for that.

The purchasing approval process should be included in SAP (e.g. via authorisation workflow), rather than a manual process.

253) There is no common system used for purchasing. The co-ordination between the business units and procurement is done through various systems.

SAP should be the leading system for the whole purchasing process and all documents should be stored in SAP. Through the use of SAP as the main system in the purchasing process, the procedures would be clear shown, an evaluation of the processing time of the different procedures would be possible and an increase in efficiency would be made.

254) We identified the wrong deposit number of the award procedure in SAP. This leads to incorrect evaluations of the used procedures.

We recommend that instructions about the process and training in the different award procedures be given to procurers.

255) There is no transparency about the amount of the sub-delegations / authorisations in the system, as it is not possible to see the value of the authorisation directly in SAP.

We recommend making values visible in SAP or creating one central list with all sub-delegations for purchasing approvals including the corresponding issues in order to make the process more efficient.

3.3. Findings and recommendations – IT procurement process

256) EPO is in the process of professionalising its procurement function. Currently the procurement function is partially decentralised in terms of categories (e.g. IT, Building, HR etc.). Central Procurement has been set up and strives to become an acknowledged equal partner among the business units and functions

257) Currently, a strategic supplier performance management process to manage the risk, quality and performance of the suppliers is only partially in place. Criteria of control, compliance and spend excellence are currently not safeguarded due to the decentralised contract management and supplier performance processes.

CA/20/15 e 56/118 150560004

We recommend setting up a central function for the screening of suppliers (on a recurring basis) including a structured follow up on risk evaluations of contracted suppliers.

258) Supplier risk evaluation is performed during the tender only and finance is not involved in this evaluation. The vendor solvency is documented (Extract CIOO CVM Contract Repository document). For 25% of the vendors, the solvency risk is not evaluated. The suppliers are not being evaluated on a periodic basis in terms of supplier risk management (proactively monitoring and assessing the risk of supplier failure to the business by current systems and processes). It seems that there is no clear contract ownership procedure in place.

We recommend the creation of a supplier evaluation system in order to evaluate suppliers after the order has been placed. Reduce the dependency of some major suppliers by increasing the focus on the strategic sourcing cycle processes (e.g. supplier/market analyses), simplifying the selection processes and embed supplier innovation within the selection process.

259) Responsibility for licence management lies with PD Service Operations, but it seems to be scattered throughout the organisation. There seems to be no link between the number of licences that have been contracted, the number of licences that are actively being used and the number of licences that are needed within EPO. It seems that a mature licence-management process is lacking (e.g. no automatic expiration date alert, no professional procurement tools; IM keeps its own overview of the licences).

Design and embed a professional "floating" licence-management process in order to be compliant and to maximise the value of the number of licences contracted, used and needed.

260) There is a realistic possibility that the current supplier base does not offer the most effective solutions for EPO (mismatch of the current supplier base) due to following reasons.

• There is limited alignment between the EPO business strategy, procurement strategy and the IT strategy

CA/20/15 e 57/118 150560004

• Central Procurement has a limited focus on strategic sourcing processes, e.g. performing supply market analyses, developing category strategies, etc., in order to create the best fit with the supplier base.

• The complex and rigid selection processes and the rigid terms & conditions seems to deter some potential appropriate suppliers because the risks and the cost of sales are too high in comparison with the value that can be generated from the projects. This could lead to a narrow selection of potential suppliers and a mismatch of the current supplier base.

Recommendation: The Central Procurement strategic roadmap should be enriched with a market and supplier analysis and in-depth procurement category plans.

4. IT

4.1. IT Roadmap

261) The IT Roadmap 2011-2015 (CA/46/11), was presented at the Administrative Council's June 2011 meeting, sets out the strategic directions for IT at the EPO.

Since the beginning the IT Roadmap has evolved to include aspects that were not contained in the original mandate in June 2011:

• Inclusion of the Security Roadmap implementation as part of the IT Roadmap; • Other activities such as the Stream III IM Transformation, Ergonomics Support,

Change Management and further benefits improvement transformation projects.

262) In addition to achieving efficiency gains, the goals of the IT roadmap also include provisioning of services to external users and a reduction of the running and maintained costs of IT. As a result, (further) implementation of the new case management (CMS) system to facilitate the re-engineered patent grant process is a key element. In respect to the original planning of the IT roadmap, the implementation of CMS is facing a delay of approximately 18-24 months. At this point, further delay will start to jeopardise the schedule to meet the completion date of end of 2017. Project UNIP has been defined and included within the IT roadmap to manage the implementation of the unitary patent process in line with the efforts for

CA/20/15 e 58/118 150560004

re-engineering the patent grant processes. Based on a feasibility study, it was decided to develop the UNIP functionality on the CMS platform, being the future solution of the EPO. As the CMS implementation is being delayed, the timely delivery of the UNIP project may be jeopardised in case no timely agreement will be reached with the consortium regarding CMS.

We recommend assessing the (financial) implications of not achieving the 2017 deadline for the CMS system and determine potential scenario’s including a back-out plan in case the EPO is confronted with additional capacity requirements, overspending or timeline delays. We also recommend shifting the focus of benefits realisation from further reducing patent administration support towards realising "external" and indirect benefits. We recommend performing a critical path analysis on program and project level, showing all the steps needed to complete the IT Roadmap ("program") and individual projects, the time it will take to complete each project and the relationships between the projects.

263) The quality of the IT Roadmap is periodically assessed and reported on by “Project Services”. The QA report of October 2014 shows that the projects within stream I are facing challenges as 7 out of 10 assessed projects were reported with quality issues or outside tolerance. Additionally, 5 out of 10 projects are beyond their planned stage end date. As such, the risk exists that projects within stream I will not be delivered on time and within applicable standards. The progress reports as reported by the project managers in November 2014 are often missing tangible business benefits that will be gained when completing the projects (Stream I) or are missing a paragraph with regard to the business benefits (Stream II). We recommend "closing the loop" by ensuring that observations made by QA are given follow up by the projects by defining remediation actions and that they are reported on in e.g. the progress reports. In addition we recommend reporting tangible benefits.

CA/20/15 e 59/118 150560004

We recommend conducting substantive reviews of critical project deliverables (PID, budgets, progress reports, etc.) and/or documenting the results of performed substantive procedures to gain a better insight into and better control the scope, budget and timeline of the program.

264) We noted that executive reports on the status of the individual projects are being generated every two weeks. In line with its purpose (status reports for executive management), these reports are generally high level. Detailed project status reports including status, risks and actions are applied for most projects (and especially for projects running in exception), but not for all projects within the IT roadmap.

A more formalised risk management approach should be adopted into the projects with more detailed assessment of risks and issues by (monitoring of) mitigation action plans with milestones, actions, due dates and action owners.

265) It is indicated that the ITR program structure is an effective and efficient structure to develop and manage enhancements from a business perspective. However, the goals set within IT roadmap ("leading edge" technology) may limit the ability to determine a fixed end goal. Especially, the search tools in stream II are likely to include continuous improvements over time. This takes along the risk that the program is extended in scope and timeline.

More tangible goals should be set within the IT roadmap to mitigate the risk of (further) extending the program in scope and timeline and to facilitate managing the program from a program sponsor’s perspective rather than from a business perspective.

266) Current financial figures do not include (as clearly highlighted in CA/46/14):

• Costs for running the CMS and the legacy systems simultaneously during the transition period (after completion of the IT roadmap);

• Costs of decommissioning the current legacy systems.

CA/20/15 e 60/118 150560004

A clear and traceable cost monitoring should be implemented to have high transparency of all costs related to the IT Roadmap and its sub-projects. Clear definitions should be defined regarding which costs should be included in IT Roadmap and which costs are running costs.

267) The forecasts and expenditures are budgeted and accounted for into the yearly budget cycle and agreed within the council. As a result, the financial expenditure is principally managed from a ‘year to year’ perspective rather than a ‘program’ perspective. As such, the overall overview with detailed insight in the key drivers and root causes for the extended program timeline and budget from a program perspective is limited.

A comprehensive and in-depth analysis from "a program perspective" should be performed on the financial performance of the IT roadmap in order to gain insight in how the IT roadmap expenditure developed from the start in 2011 until to date and assess the key root causes of the increased IT roadmap envelope.

4.2. IT security

268) A formal definition of escalation rules and clear guidelines on responsibilities are not defined. Drafted documentation of the current IT security project may address the deficiency. We did not receive evidence on guidance for security incident handling of 1st level support. This may result in security incidents not correctly identified or categorised by 1st level support. Incident impact classification is performed twice by 1st and 2nd level support with different classification schemes. No clear documentation of the interfaces between 1st, 2nd and 3rd level support has been defined. Drafted documentation may address the deficiency.

Escalation rules and responsibilities for IT security incidents should be clearly defined.

Clear guidance on Security Incident Handling and a unique classification scheme for 1st, 2nd and 3rd level support should be defined to reduce the risk that Security Incidents are not classified correctly from the beginning, which might result in additional overhead in reclassification of incidents and an increased resolution time.

CA/20/15 e 61/118 150560004

269) The risk assessment process is only applied to newly initiated projects, thus not considering security requirements for the existing systems and information as long as they are not developed any further or replaced within a project. Approx. 25% of the systems currently used are not reviewed within the risk assessment process, as no projects for these systems have been performed.

A risk assessment should be performed for existing legacy systems and older systems which had not been renewed within projects recently to ensure, that a system classification and risk assessment has been conducted for all systems.

270) Inconsistencies and uncertainties in terms of classification exist between the policies and the completed risk assessment templates.

We recommend providing clear guidance for the classification of assets in particular in terms of EPO’s security objectives.

271) The EPO has no complete documented overview of information assets and the logical (e.g. applications) and physical assets (e.g. servers) containing / dealing with the information assets. Thus related risks may not have been identified to its full extent. Identified assets within the Security Assessment form are not linked to ISMS (information asset) and/or CMDB asset inventories (physical/logical asset), thus possibly resulting in inconsistent classification of the same assets. In addition Information asset register (ISMS tool) and physical/logical asset inventory (CMDB) are not yet linked, thus information security risks related to physical/logical assets may not be fully transparent.

A detailed analysis of all relevant information assets and subsequent creation of information asset register should be performed to have full transparency on critical/sensitive information. The information asset register should be linked to the asset inventory database to have a transparent overview of all relevant information and the corresponding systems and servers processing and storing the information.

CA/20/15 e 62/118 150560004

5. BUILDING PROJECTS

5.1. New building project in The Hague

(a) Project organisation

272) The general project organisation has not changed but the President has delegated the chair of the Steering Committee to VP4 and will only participate when important aspects arise.

273) The project is still regularly audited by an external Quality Assurance (Ernst & Young). An important aspect in their latest report (08.01.2015) is the complex process for obtaining EPO-internal authorisation for a variation order. They analysed an average of eleven working days to get all necessary signatures for a variation order. During the construction phase of the project, variation orders (unforeseen aspects, changes by EPO, e.g. material changes, etc.) will usually be necessary, as huge projects cannot be planned in every single detail in advance.

274) Although the agreed internal approval process is appropriate to get decisions it could be a bottleneck that leads to delays the EPO is liable for.

275) It is necessary to make changes not too easy and implement controls within the project processes but the internal authorisation process could be varied according to the importance of the variation. Up to a certain amount the project manager could get the mandate for decision with involvement of only the necessary functions (legal, finance, etc.). Above the defined limit the authorisation process should remain unchanged.

276) The external quality assurance recommends a threshold of EUR 250k for the necessity of the currently defined internal approval process. With consideration of the goal to speed up the approval process and to ensure an appropriate financial control this amount seems to be too high and EUR 100-150k would be sufficient for the limit for single decisions on the project manager level.

CA/20/15 e 63/118 150560004

(b) Progress of project and time schedule

277) Compared with the time schedule at the beginning of the project there is currently a delay of approx. four months. Reasons are a late delivery of the final design by the contractor and additional asbestos which was found during the first demolition phase in the existing building and prolonged the demolition.

278) The first delivery of the final design was incomplete and had to be rejected due to quality reasons.

279) The amount of additional asbestos in the existing building was unforeseen and could only be revealed during the demolition process.

280) Looked at it separately, the responsibilities of these aspects (additional asbestos: EPO, late delivery of planning: contractor) are obvious but the concurrency may lead to the result that both sides have to bear certain costs for the delay. Although it can be stated that the late delivery of the planning is the major reason and is on the critical path of the timeline, the discussion is still ongoing.

281) A new binding time schedule has not been agreed yet but the completion of the building can now be expected in 8/2017 and the completion of the project in 5/2019. This means that the temporarily rented buildings Rijsvoort and Le Croisé have to be used longer than planned.

282) Negotiations to achieve a more flexible termination of these contracts are planned but have not started yet. The additional costs may be in the range of one or two million Euros

283) Additional asbestos in the existing building (in the parts which will be demolished in the future) will cause additional costs and delay of the completion of the project but will have no effect on the completion of the new building and the termination of the lease contracts.

(c) Project costs

284) Beside minor change orders there is a larger one concerning the additional asbestos. Direct costs of EUR 501k have already been accepted. Negotiations to finalise this claim are ongoing.

CA/20/15 e 64/118 150560004

285) Because of the discovery of additional asbestos in the existing building during the first demolition phase, more asbestos than currently planned has to be expected in the building parts to be demolished after completion of the new building at the end of the project. Based on the sizes of the demolished parts and the building parts to be demolished in future, costs for additional asbestos can be projected to approx. EUR 4-5m. This is only a preliminary estimate which is very uncertain and cannot be used for budgetary planning. Cost certainty can only be achieved during or after completion of the demolition process, because the complete quantity of asbestos can only be detected with destructive measures that cannot be carried out while the building is in use, due to health risks.

(d) Project risks

286) The project risks (e.g. quality variations, technical problems, delays of decisions) have been identified and documented in the risk log, which is updated regularly. Risks concerning the following are evaluated:

• probability of occurrence • time • money • quality • safety • surrounding buildings • user aspects.

287) Responsibilities are defined and mitigation actions are assigned.

5.2. Other building activities

(e) Vienna

288) The renovation project in Vienna comprises

• enlargement of entrance area and reception • installation of physical access controls • additional driveway

289) The planned completion date is April 2015 for interior work and May 2015 for work

outside the building. The expected costs are in line with the amounts in the contracts (approx. EUR 2.3m).

CA/20/15 e 65/118 150560004

(f) Berlin

290) The building in Berlin needs interior renovation and improvements to room climate, security and the entrance area (see building roadmap, CA/73/11). Most of the costs will be paid by the Federal Republic of Germany. The EPO only has to bear the costs of specific security installations, the canteen and a conference room with translation booths. The costs for the EPO are limited to EUR 6m (including 20% contingency, excluding VAT).

291) The project is being organised and executed by the BImA (Bundesanstalt für Immobilienaufgaben), a German public authority. Planning is currently ongoing. Construction work is due to start at the end of 2015 and be completed in 2018.

(g) Other

292) There are currently no other major projects under way or planned. Surveys of the roof of the Isar building and the underground car park in the PschorrHöfe are planned.

293) The lease contract for the Capitellum building in Munich will be terminated in 2015 and staff are currently being moved into other buildings. All other buildings in Munich are owned by the EPO.

5.3. Benchmarks for building cost

294) Based on surveys of the last years we performed a benchmark comparison of essential operating costs of EPO buildings (energy costs, cleaning costs, maintenance costs and lease costs). Last year’s survey (2011 to 2013) was added with data of 2014. Special characteristics in comparison to benchmark data have been discussed with PD 4.4 and described in the report or commented as in the last years. There are no major changes in the data from the last years report.

CA/20/15 e 66/118 150560004

III. STATUS OF FINDINGS FROM PREVIOUS YEARS

The EPO had decided not to issue a CA follow-up document any longer, instead providing the auditors with a follow-up report to be included directly in auditors' annual report CA/20, alongside the BoA's comments. The left column is the recommendation reference and title, the second is the EPO implementation report, the third and last reflects the auditors' comment(s). With regard to the auditors’ comments:

• "No further comments" means the auditors do not expect any further explanations from the Office, although they could, in future audits, come back on the considered issues.

• "Recommendation closed" means the auditors consider the Office's response has solved the raised issue.

A. OFFICE'S FOLLOW-UP REPORT ON CA/20/14 (STATUS 31.01.2015), AND AUDITORS' REACTION

Reference Title Status 31.01.2015 BoA's/expert's comments III.C.2.1(a) Valuation of partial compensation: We highlight the level of

estimate involved and recommend an annual analysis of the appropriateness of the loading factor.

Closed. The next review of the loading factors will take place in 2015.

No further comment

II.C.2.1(d) Collection of national renewal fees: In 2013: The EPO has taken measures by sending out explicit requests to all national offices to resolve open cases and report to the EPO on the actual status. We recommend pursuing these measures and following up any outstanding information.

Closed. These measures are taken as part of our day-to-day business and all outstanding information is being followed up.

Closed.

CA/20/15 e 67/118 150560004

II.C.2.1(c) We concur with the accounting treatment of the IT Roadmap

applied by the Office, but recommend performing a sanity check of costs incurred against budget in order to identify any excess costs, which would have to be expensed immediately.

Closed. An assessment of actual costs has been performed. As at the reporting date, no excess costs have been identified.

Closed. We have not been provided with an analysis of internal staff costs, as these are not budgeted. In order to analyse excess costs for accounting purposes, such an analysis should be performed.

II.C.2.1(c) Since the basis of the internal cost rates of the IT Roadmap (e.g. hourly rates, allowances, office space costs) result from expenses and salaries in the preceding period, special items of the current accounting year are not considered in the calculation. Therefore we recommend taking the average salary increase and inflation rate of the current period as well as special one-off items into account when determining the hourly rate.

Closed. The recommendation has been implemented.

Closed.

II.E.5 The internal IT systems administrator is authorised to make any changes to the user profiles, including his own. No independent check or control is carried out. We recommend installing a control function, e.g. by providing a monthly report to the Compliance Manager.

Ongoing. The administrator of the external services is authorised to make changes to the user profiles. A control function is expected to be implemented in 2015 when published applications are migrated to new versions.

Ongoing.

CA/20/15 e 68/118 150560004

II.E.6 Nearly 30% of all assets are invested in USD investments,

but only about 3% in GBP investments and about 3% in JPY investments. Regulations require all 3 currencies to be hedged by at least 60%. In the long term, restricting foreign currency hedging to USD investments might be considered.

Pending. The next review of the Strategic Asset Allocation, scheduled for 2016, will take hedging strategies into consideration.

Pending.

II.F.1.1 IT expenditure: We recommend that a single rather than multiple data sources be used, to help solve the majority of problems.

Closed. SAP/FIPS (modules FM and PS) is the sole source of information for the budget implementation reports.

Closed.

II.F.1.2(b) Security Roadmap Implementation (Project P0544): We recommend developing and updating all the project management tools with a view to monitoring implementation and avoiding any further delay.

Closed. A dedicated project manager has been appointed and the Project Board composition has been changed. The IM director responsible for security is now Project Executive and steers the Project Board. Project documentation is brought up to date and stored in the IT Roadmap (ITR) project repository.

Closed

CA/20/15 e 69/118 150560004

II.F.1.2(c) Design of IT security policies:

The Office should bring the EAI technical guidelines for the Security Roadmap Implementation Project into line with the high-level policies of the Information Security team.

Ongoing. In 2014 the IT security policies first had to be revised to bring them into line with the new standard ISO/IEC27001:2013 (replacing 2005) in preparation for certification. The Security department subsequently started to work again on the detailed requirements that will feed into the standards and guidelines. The work has been planned and is now progressing based on the priority and relevance set by the security stakeholders. There are weekly meetings with security stakeholders to align the work on standards and guidelines. Progress in this area is monitored in the weekly Security Dashboard report.

Ongoing.

II.F.1.2(e) IT roadmap (FTOSD): We recommend a detailed (open-ended) quality review of the changes to the IT roadmap dashboard.

Closed. The IT Roadmap Dashboard is regularly reviewed by the IT Roadmap Support Office with a view to verifying in detail the accuracy and completeness of the reported data.

Pending There is a detailed review to verify the data, but there is currently no stringent review of the need for the change request from a business perspective.

II.D.2 E-tendering: In our view, it is essential to solve the problems caused by the e-tendering system to improve the electronic procedure for invitations to tender.

Ongoing. The project CP eTendering officially moved into execution phase in early September. Execution is expected to be completed by 31.03.2015 (source: Project Management Information System - PMIS).

Ongoing

CA/20/15 e 70/118 150560004

II.D.1.1(a) Regulations should be introduced to regulate the use of

frequent traveller bonus programmes

Ongoing. Corporate miles accrued under the Lufthansa programme are already used whenever feasible (i.e. seat available in appropriate travel class for travel times required by traveller's work commitments). It must be stressed that trading conditions and limited seat availability makes it difficult to use air miles. Central Procurement is currently exploring the possibility of using KLM air miles and air points. Finally, use of personal miles accrued by individual travellers on various business trips is subject to a legal check and approval.

Ongoing.

II.D.1.1(c) The reason for any changes or deviations from the initially approved travel expenses should be documented.

Closed. Reasons for deviations from initially approved travel expenses can be captured in the travel tool, under "Comments". Also, for monitoring of the travel policy, BCD will provide reports showing bookings deviating from the policy, as instructed by the EPO. Reason codes will be used to show why a booking was made outside the policy. The following reason codes are being considered: Fares outside policy – restricted fares Fares outside policy – higher fare Fares outside policy – airline Fares outside policy – stopover

Closed.

CA/20/15 e 71/118 150560004

II.D.1.1(c) The reason for approving any exception to the travel policy

(Circular No. 319) should be documented.

Closed. The budget holder instructions from April 2011 and March 2014 provide that it is for the budget holder to keep track of any exceptions from the duty travel policy authorised by him. The monitoring system is based on random checks, in accordance with Circular No. 319, as supplemented by internal directives.

Closed.

II.D.3.1(a) Define, clarify and communicate the policy on career development

Closed. The new career system was approved by the Administrative Council in December. Strategy for communicating the new policy is being followed: intranet, brochure, e-learning for staff, training for managers (together with IC).

Closed.

II.D.3.1(b) Position HR as a strategic partner and give them a firm role in career development

Ongoing. Good implementation of the new career system requires a strong partnership between PD 43 and all DGs in the form of continuous working groups (job profiles, competencies, guidelines, training, etc.). HR partners have supported managers in preparing for and communicating on the new career system. Directorate Talent and Recruitment Management will create a new department both to foster management and to support staff in their career and mobility.

Ongoing.

CA/20/15 e 72/118 150560004

II.D.3.1(c) Use the coaching skills of the Talent Department for career

development

Ongoing. The entire Management Development Programme is currently being revised. In future, greater use of HR partners will be made in the "early identification" of talented employees. The review is expected to be completed by June 2015. Additionally, a new programme on early detection, selection and training of managers is under way.

Ongoing.

II.D.3.1(d) Let productivity and quality be leading in the performance system

Closed. See Recommendation II.D.3.1.(b).

Closed.

II.D.3.1(e) Evaluate the (Deloitte) competence model and try to incorporate existing local systems of competence management which have been successful.

Ongoing. This recommendation is in its final stages (training on competency-based interviews to be given from April 2015 to allow interviews to take place around June, within the 2015 performance management cycle).

Ongoing.

CA/20/15 e 73/118 150560004

B. OFFICE'S FOLLOW-UP REPORT ON CA/20/13 (STATUS 31.01.2015), AND AUDITORS' REACTION

Reference Title Status 31.01.2015 BoA's/expert's comments III.B.1 To simplify DBO calculation, provision is also made for tax

adjustments relating to invalidity allowances payable to employees under the new pension scheme. We strongly recommend performing separate calculations from 2013 onwards. BoA comment CA/20/14 For the purposes of calculating the obligation to pay partial compensation for invalidity allowances as at 31 December 2013, employees under the new pension scheme have been excluded.

Ongoing. A new proposal to abolish the invalidity allowance, among other changes to come with the invalidity reform, will be presented to the Administrative Council in March.

Ongoing. Calculation method unchanged to PY; however, figures for tax adjustment on invalidity allowance available.

IV.B.2(a) No comprehensive supplier contracts database with key data or mechanism for reporting procurement trends and KPIs is in place. / This, incl. §22a exceptions, should be implemented under the responsibility of CP. BoA comment CA/20/14 The CP Strategic Roadmap is addressing this observation via the automation initiatives.

Ongoing. Project has been reprioritised and will be developed and implemented in 2015. The revised priorities for CP are captured in the updated CP Automation Roadmap.

Ongoing.

CA/20/15 e 74/118 150560004

IV.B.2(b) The role of Central Procurement in the choice of the award

procedure is not formally regulated, despite CP's sourcing unit. / CP's role should be formally regulated, also for §22a FinRegs exceptions. The business unit should confirm in writing which potential suppliers exist. BoA comment CA/20/14 First draft of Procurement Guidelines will be available 03.2014

Ongoing.

Procurement Guidelines have been drafted. Implementation requires approval at various levels, depending on the scope of the proposed changes. The implementation plan will be subject to overall PTO timeline.

Ongoing.

IV.B.2(c) Justifications for making use of direct placements due to urgency should be available to CP at all times. BoA comment CA/20/14 First draft of Procurement Guidelines will be available 03.2014

Ongoing.

Procurement Guidelines have been drafted. Implementation requires approval at various levels, depending on the scope of the proposed changes. The implementation plan will be subject to overall PTO timeline.

Ongoing.

IV.B.2(c) There is a lack of transparency for §22a exemptions, esp. case-by-case exemptions granted by the President. / Full transparency should be established. BoA comment CA/20/14 Implementation to be verified.

Closed. A plan to clean up, bundle and delete articles from the §22a exemptions has been drawn up and endorsed by the President, and is part of the CP Strategic Roadmap.

No further comments.

CA/20/15 e 75/118 150560004

IV.D.5 Foreign currency hedging should be reviewed and alternative

models / approaches considered BoA comment CA/20/14 Review every 5 years is recommended.

Closed. To be followed up with recommendation II.E.6 of CA/20/14.

The next review of the Strategic Asset Allocation is scheduled for 2016.

Closed.

IV.D.7 As from 1 January 2013 a clause has been implemented by the Administrative Council (Article 3 No. 7 of the Regulations) that the "Administrative Council shall determine the conditions under which a withdrawal may take place." We recommend specifying those conditions in more detail.

Pending. Due to other important HR Roadmap projects, work has not started yet. Given the longer timeframe, this item has been given a lower priority.

Ongoing

V.A.2(c) As part of the Security Roadmap Implementation Project the Office should harmonise the technical guidelines of Enterprise and Architecture with the policies of the Information Security Department BoA comment CA/20/14 This could not be closed with the work on the related guidelines still in progress.

Closed. Reference is made to status update CA/20/14 II.F.1.2(c), which covers same recommendation.

Closed.

CA/20/15 e 76/118 150560004

V.A.2(c) The approval checklist used by R&A and S&A team covers

the relevant security areas in different levels of detail. But use of the checklist is not documented. Document use of the checklist, because the different areas can also be used as hints for further tests or milestones.

Ongoing. The CIO's office, which is responsible for security, has developed a new procedure for obtaining a security assessment from the project manager. This assessment is evaluated by the security team and the findings are documented in the IM Security response.

The templates for the security assessment procedure have been finalised and are used to obtain and document IM Security approval.

IM security approval is already mandatory for entering the execution phase.

Ongoing The mandatory security assessment for each project is in very good shape since the last release. The template forces each manager to assess and make transparent any risks to information security associated with a project and its assets and to set out an approach for handling the risks. The defined approach seems to be suitable for identifying and handling information security risks during projects. Some minor deficiencies have been identified. As to the template, we recommend linking the asset list to the already existing asset register to reduce the risks of redundant assets in the register and of potentially inconsistent assessment. Two completed security assessments for the projects Data Service Layer and e-Tendering have been reviewed; the quality of completion differed.

CA/20/15 e 77/118 150560004

V.A.2(c) Projects are working in milestones, the R&A and S&A team

should be involved more often in the process.

Ongoing. The project milestones are now visible in the Project Management Information System (PMIS) and are subject to change control (including the necessary approvals).

This procedure needs to be further developed in order to ensure standardised recording of meaningful information (also in terms of project assurance) on milestones for all projects. It also needs to be made more visible to the relevant stakeholders.

Ongoing.

V.A.2(d) All IT Roadmap projects in the execution phase had the approval of the R&A and security group. If approval was conditional or the final decision was deferred, this condition should be recorded to ensure that it is not forgotten during the project.

Ongoing. The Project Services department has introduced an additional control in the CR overview (list for monitoring the project lifecycle). In the CR overview, the team will record whether a project is moving into the execution phase with full or conditional approval.

Evidence of the following approvals is mandatory: - PE team (business case) - IM security (CIO-O; security) - EAI (architecture) - Resources (Project services) The Project Board is responsible for ensuring that conditional approvals are addressed in the course of the project. Checks on conditional approvals are applied in practice but should be formally incorporated into the project life cycle. This will be addressed in the new release of the Project Management Operating Manual (PMOM).

Ongoing.

CA/20/15 e 78/118 150560004

V.C.2 Further research on trends in underspending of training

budget

Pending.

The implementation of the new Team Manager and the A5 Technical programmes will require additional training budget. An "early identification" programme will also be implemented. The new career system will be supported by better organisation and refocusing of the training plan. Part(s) of the training budget (underspends) could be used to develop a pro-active mobility policy.

Ongoing.

V.C.2 Reassess the role and mandate of the Training Committee

Ongoing. The Training Committee will be replaced by a sub-committee forming part of the General Consultative Committee. Sub-committee has still to be set up.

Ongoing.

V.C.2 Improve follow-up on training; evaluation of level 2 (employee) and level 3 (manager)

Pending.

The revised Management Development Programme to be implemented in September 2015 will deal with this issue and include a better link between training and competencies and their application on the job.

Ongoing.

CA/20/15 e 79/118 150560004

V.D.3 Recommendation concerning contractors:

- prioritise tasks; - have them performed by Academy staff and limit the number of contractors to that strictly necessary.

Closed. Results of Controlling Office's efficiency study were implemented in 2014.

A stable staffing level has been reached and tasks have been prioritised accordingly The European Patent Academy will be restructured in 2015, which will further facilitate outsourcing of non-core activity. Consultants and other temporary staff should be used only for specific projects of limited duration or as cover for short-term personnel bottlenecks.

No further comments.

CA/20/15 e 80/118 150560004

C. OFFICE'S FOLLOW-UP REPORT ON CA/20/12 (STATUS 31.01.2015), AND AUDITORS' REACTION

Reference Title Status 31.01.2015 BoA's/expert's comments

III.B.3.(1) In-depth analysis of the loading factors (19% and 21% for current and future invalids, respectively) used for the valuation of the tax adjustment on the invalidity allowance, using actual pattern of known cases. BoA comment CA/20/14 Extrapolation of historical data is considered the best proxy for estimating future costs relating to the tax adjustment. Nevertheless, we strongly recommend an annual follow-up of facts and circumstances and actual costs against the estimated loading factor, as well as a corresponding adjustment (if applicable).

Closed. See comment under III.C.1.(a) for CA/20/14.

Closed.

V.A.1.(c) As a first step we recommend, as last year, building up a formalised working group on the different areas to share knowledge about the different approaches in data warehouse techniques in the EPO. This recommendation is also mentioned in the European Patent Office Service Study.

Ongoing. The project on enabling IM efficiency by using the data warehouse (DWH) will move into the execution phase at the beginning of February, 2015. Required (conditional) approvals were given by the relevant teams at the end of 2014 (incl. EA&I; Security; PET).

Ongoing.

CA/20/15 e 81/118 150560004

V.A.2.(b) From a general point of view the IT projects are a step forward in the maturity level of project management. So the general recommendation "lessons learnt" by the IT roadmap projects should be used to improve the maturity level of the "standard" IT projects also. Training should be given on the ongoing "lessons learnt" approach, which should be passed on also to the project managers of other projects.

Closed. The lessons identified in all the projects are being systematically collected and compiled by Project Services. If related to the project process these lessons are being used for process improvement and made available to the user community by means of a template, a procedure, a role description, etc. These lessons are also taken into consideration for scoping a new release of the Project Management Operating Manual (PMOM) and for the tailored Project Management training organised by L&D.

Closed.

V.A.2 (b) In particular, use the experience of and lessons learnt on the IT roadmap projects for other projects also, e.g. installation of a quality support team for OSC projects. The QA ITR status reports should be used for other IT projects, with a follow-up e.g. through an additional quality support team in the OSC environment.

Closed. Following implementation of the new IM Framework contract in 2014, the Project Services department manages the service contract for QA assurance and assigns resources to ITR and OSC projects.

Closed.

CA/20/15 e 82/118 150560004

V.A.2.(b) Change the dashboard to a project management information system in such a way that a cockpit is available to the project manager in dashboard form, as is a functionality to drill down from the key performance indicators to the relevant data.

Ongoing. PD Service Creation is working with the CIO Office on the IM Dashboard to develop KPIs and on capturing available data for further analysis (drill down). The new automation governance which came into effect on 1.01.2015 will entail further alignment and review of the current procedures as applied by the ITR and the OSC projects.

Ongoing.

VI.A Finalise code of conduct

Ongoing. Since the official date for the start of the CP Realignment is now 1.11.2014, the release of the code of conduct has been postponed to 1Q15.

Ongoing

IV.B.2.(b) Define a time schedule with time limits and a project structure to deal with the temporary exceptions of Article 22a, and with justifications documented for each exception. BoA comment CA/20/14 Implementation to be verified.

Closed. The plan is to address articles in 3 waves in agreement with Finance. 1st wave has already been implemented (1Q14); 2nd and 3rd waves are scheduled for 2015.

No further comments.

CA/20/15 e 83/118 150560004

IV.B.3. Ensure that all relevant information deriving from contracts or changes in contracts is communicated throughout the whole organisation, e.g. through an automated workflow in FIPS. BoA comment CA/20/14 The CP Strategic Roadmap is addressing this observation via the automation initiatives.

Ongoing. Project has been reprioritised and will be developed and implemented in 2015. The revised priorities for CP are captured in the updated CP Automation Roadmap.

Ongoing.

V.C.1(e) Add an occupational health physician with an advisory role (no decision-making power) to the Medical Committee. The physician should focus on advising the Medical Committee on the possibilities of alternative jobs. He will be able to advise on the type of job and the amount of hours that the employee is able to work within the EPO. The Medical Committee should only be allowed to take a decision after hearing the advice of the occupational health physician.

Ongoing. Following the invalidity reform to be submitted to the Administrative Council in March 2015, the medical committee will cease to exist. Following an external study, the organisation of medical services (occupational health and medical advisor unit) is under review.

Ongoing.

V.C.1(e) Introduce proactive periodic examinations of the recipient of an invalidity allowance to establish that he still fulfils the conditions for payment of that allowance. If the Invalidity Committee finds that these conditions are no longer fulfilled, the staff member should resume service, providing his contract has not expired. An alternative might be to introduce a stringent policy regarding periodic examination when this is recommended by the medical committee.

Ongoing. The reform of the invalidity scheme will implement this recommendation.

Ongoing.

CA/20/15 e 84/118 150560004

V.C.1(e) An employee is currently considered to have invalidity status based if unable to perform less than 50% of their job on a part-time basis. It should be considered to: a) raise the minimum level to 70% b) allow the employee to work part-time for 30% or more. BoA comment CA/20/14 Original version of recommendation is still valid, especially with regard to adequate monitoring

Ongoing. Under the proposal to be submitted to the Administrative Council in March, the scheme of (permanent or definitive) invalidity will cease to exist. It will be replaced by an incapacity scheme focusing on keeping employees at work or returning them to work. Full discharge of duties will be accepted only in cases of 70% unfitness to work.

Ongoing.

V.C.1(e) Systematically collect and analyse the data regarding invalidity (while keeping the confidentiality of the individual cases intact). BoA comment CA/20/13 The Invalidity Study is very useful. However it is only a small beginning with regard to the Auditors' recommendation on systematically collecting and analysing data. BoA comment CA/20/14 Original version of recommendation is still valid, especially with regard to adequate monitoring

Ongoing. In place in the social report, on an anonymised basis.

Ongoing.

CA/20/15 e 85/118 150560004

V.C.2(b) Set a target and develop a plan for reducing the size of the HR department / stopping the increase in the HR department.

Closed. The staffing of the department is closely monitored and different outsourcing options (e.g. pension administration, salary administration) are currently being explored.

Ongoing.

V.C.2(b) Implement the recommendations made in the final report on support services, regarding: • robust service delivery model with better IT

enablement • focus on clear functional areas • efficiency in service delivery.

Closed. The recommendations have been implemented. Satisfaction with the services is being monitored by various means.

No further comment.

V.C.2(b) The total cost of the HR department should be benchmarked before conclusions can be drawn regarding cost-effectiveness.

Ongoing. Ongoing.

CA/20/15 e 86/118 150560004

D. OFFICE'S FOLLOW-UP REPORT ON CA/20/11 (STATUS 31.01.2015), AND AUDITORS' REACTION

Reference Title Status 31.01.2015 BoA's/expert's comments

III.B.5 Assign responsibilities and budget in order to implement a comprehensive user management for IT systems relevant to the patent grant process across all IT systems and sites as soon as possible (incl. installing a formal process, documentation, monitoring, user inventory as well as eliminating critical combinations of access rights).

Closed. Responsibilities and budget have been assigned as part of the IT Roadmap; see status update 30.09.2014. To be fully implemented when the re-engineered patent granting process is implemented, using the Case Management System. Since all conditions attached to this recommendation have been met and short-term investment in the legacy environment is not worthwhile (a clear split exists between roles and systems used by Patent Admin and Finance staff), this recommendation can be closed until the CMS roll out can be assessed.

No further comment.

IV.A.1 Put an ex-post supplier evaluation system in place.

Ongoing. Project has been reprioritised and will be developed and implemented in 2016. The revised priorities for CP are captured in the updated CP Automation Roadmap.

Ongoing. Ex-post supplier evaluation system is still not in place.

CA/20/15 e 87/118 150560004

V.A.1 Establish a single Data Warehouse system to ensure that a central repository of information will exist for EPO in the future. In our view the change of a more departmental reporting solution to a central repository of information based on the experience and the needs of the different stakeholders would increase the consistency of the reporting without large manual interaction by excel-spreadsheets.

Closed. This is being implemented step by step and the progress made over the years is visible. The DWH scope has been extended to time booking data, HR statistics, PD21 Pat Admin data and, in 2014, CASE reporting and a corporate Quality Dashboard, which was welcomed by the ISO Auditors. A procedure is in place for extending the scope still further, if so required by business and approved by the Data Owners. Reference is also made to CA/20/12, V.A.1.(c).

Closed.

CA/20/15 e 88/118 150560004

E. SUMMARY AND PRIORITY OF OUR RECOMMENDATIONS

295) We list below our main recommendations in the present report, together with our assessment of relative priorities on a three-point scale.

1 = top priority; immediate action required

2 = medium priority; to be resolved within three years

3 = low priority; long-term action required

Recommendation Priority

II.C.2.3 Accounting We recommend performing a sanity

check of internal costs incurred against planning in order to identify any excess costs, which would have to be expensed immediately (internal costs are not budgeted).

2 Agreed.

II.C.2.5 We recommend that any HR information relevant to financial reporting should be well documented and provided in a standard format on a timely basis (i.e. on time for preparing the financial statements) suitable also for audit purposes.

1 Agreed. The Office is drawing up new specifications, with a view to improving the quality of the documentation provided to the Board and aims to find an automated and integrated solution.

II.C.2.1 Tax adjustment/partial compensation: We concur with the position taken by the Office, but highlight the level of estimate involved and recommend an annual analysis of the appropriateness of the loading factor for both invalids/pensioners and active staff.

3 Agreed. Although the loading factors change very slowly over time, the Office agrees with the idea of carrying out an annual analysis of the appropriateness of the estimates for both invalids/pensioners and active staff.

CA/20/15 e 89/118 150560004

RFPSS II.D.2.1 We recommend considering a

move generally away from paper proof of control to electronic documentation only. The costs of changing to electronic documentation need to be considered.

2 Agreed. The Fund Administrator will further investigate how to adapt selected internal processes and integrate available or planned EPO document management systems or services.

II.D.2.2 We recommend that procedures be put in place to ensure that the cause for data import failures are identified, so an informed decision can be taken by management on how to react in a timely manner.

1 Agreed. A manual review procedure was (and still is) in place to deal with data import failures. Due to the extraordinary coincidence of the event with the EPO closure, this manual procedure could not take place until the Office reopened. In order to further minimise any delays, rating information is now updated on a daily basis.

II.D.2.2 We recommend implementing standard procedures and specific compliance checks for all notification requirements related to direct investments in shares.

2 Agreed. The portfolio managers already monitor notification requirements. The current compliance monitoring system uses the 5% limit laid down in the investment guidelines, and this could be further amended to reflect the limits applicable on a country basis. The Fund Administrator will investigate in 2015 how any investment in excess of such limits could be notified to the relevant authorities.

CA/20/15 e 90/118 150560004

II.D.2.2 We recommend enhancing the current regulations in order to recognise guarantors.

2 Agreed. The Fund Administrator will review the investment guidelines and propose a suitable amendment to the RFPSS Supervisory Board.

II.D.2.3 We recommend defining precisely the role of the Risk Assurance Officer and the Compliance Assurance Officer in line with common standards, as appropriately adjusted to the specific needs of the EPO.

1 Agreed. After the Board of Auditors had performed its work, Internal Audit issued a report on the risk assurance and risk management functions (IA Report 140), which covered most of the scope of this recommendation. Any remaining aspects will be dealt with in the context of the current improvement plans.

Appeals reform II.E.1.3 One common tool for the whole

process for requests and internal appeals should be implemented.

1 Agreed. A common tool (IA e-tool) is already in preparation. Current plans estimate that this tool would be in operation by the end of December 2015.

CA/20/15 e 91/118 150560004

II.E.1.3 A central function (single-owner process) for the registration of requests and appeals should be implemented.

1 Agreed. The Office is considering how best to implement this recommendation. The synergy effect created by this measure would make the system more efficient by allowing for a more harmonised approach in grouping, registering and processing review requests and internal appeals.

II.E.1.3 A standardised approach to registering requests and adequate communication of the process should be introduced.

1 Agreed. This is already in place for management review requests, with the requester receiving instructions on rights of appeal when the request is registered. In addition, review decisions are standardised and include the reviewed decision, a summary of the facts of the case, the applicable rules and the means of redress. The application of a similar procedure for internal appeals is under consideration.

CA/20/15 e 92/118 150560004

II.E.1.3 Direct dialogue within the Office as pre-litigation for individual cases should be reinforced in order to reduce the number of internal appeals

2 Agreed. The reviewers are already strongly encouraged to discuss the subject with the requesters; however, there is still room for improvement. The Office is working on raising the awareness of the need for dialogue among managers/reviewers.

II.E.1.3 The settlement of old cases should be taken into consideration.

2 Agreed. A high number of settlements is essential for a substantial reduction of the appeal backlog. Whenever an amicable solution appears possible, the Office prepares a settlement note, so that the services can contact directly the staff members concerned. There were 25 such cases in 2014, which led to 7 withdrawals of the appeals. For the sake of accuracy, it has to be recorded that, according to the Office's files, Legal Services prepared a total of 398 position papers in the period from January 2012 to November 2014 and that the number of cases pending as at November 2014 was 356.

II.E.1.3 The position paper should be more concise and standardised where possible.

2 Agreed.

CA/20/15 e 93/118 150560004

II.E.1.3 The creation of clusters (topics) for appeals should be implemented as early as possible.

1 Agreed.

II.E.1.3 Hearings concerning the same topic areas should be clustered.

2 Agreed. The Appeals Committee is already working towards this. Nevertheless, clustering might not always be possible, for various reasons, such as different delivery dates of the position papers, sickness of an appellant, suspension of an appeal, etc.

II.E.1.3 Hearings concerning more trivial cases could be reshaped, e.g. with fewer participants or less time during the hearings.

2 The recommendation is noted. The Appeals Committee has already reduced the number of support staff attending the hearings to a minimum (one support lawyer only). The number of Committee members is prescribed by the relevant rules and cannot be further reduced as they currently stand.

II.E.1.3 The Employment Law Directorate should be strengthened in terms of resources and/or organisational redesign to increase output.

1 Agreed.

CA/20/15 e 94/118 150560004

II.E.1.3 The work of lawyers could be more focused on specific areas and supported by training in specific areas (specialisation).

1 Agreed. A certain level of specialisation in particularly complex legal areas is useful and is one aim of the new organisational structure of the Office departments dealing with appeals. Nevertheless, some level of generalisation remains necessary, e.g. to be able to cope with the high turnover of lawyers and the need to reassign files to new lawyers.

II.E.1.3 Measures to separate the procedures for individual cases (reviews and appeals) from policy discussions should be addressed.

1 Agreed. This is an aim of the new organisational structure of the Office departments. In practice, it is often difficult to separate cases, since appeals frequently include claims both against general rules and the individual decision applying them to the individual cases.

CA/20/15 e 95/118 150560004

Patent grant process II.E.2.4 The quality dashboard should be

used as a management system to promote positive development of the KPIs.

1 Agreed. KPIs are monitored in various DG 1 management reports and presented to management on a monthly basis. These reports are aligned with the Quality dashboard as they relate to the KPIs which are relevant for the quality-related elements.

II.E.2.4 Mandatory regular meetings for principal directors and directors should be introduced in order to improve the management and communication system and so improve efficiency.

2 Agreed. Mandatory cluster meetings between PDs and directors take place on a regular, monthly basis. They mainly focus on ensuring proper communication between all management levels, with a view to improving efficiency.

II.E.2.4 The PAX-system should be harmonised with the Office's overall targets and the new performance system.

1 Agreed. The individual objectives set as part of the PAX system are synchronised with the overall targets of the Office, which are also reflected in DG 1 planning. The PAX guidelines were amended in December 2014 to bring them into line with the new performance management system .

CA/20/15 e 96/118 150560004

Tender procedures II.E.3.2 We recommend drafting a guideline

which makes clear which approvals for purchasing are necessary for the various award procedures, and using standardised forms for that.

1 Agreed. Central Procurement Guidelines are currently being drafted. They are expected to be finalised in 2Q15 and implemented from 3Q15.

II.E.3.2 We recommend that procurers be given instructions on the process and training on the different award procedures.

1 Agreed. In so far as this relates to the Central Procurement Guidelines, reference is made to the answer to the previous recommendation. In so far as it relates to training, a skills-gap analysis was performed in 4Q14 and the resulting training plan will be implemented in 2015.

II.E.3.2 We recommend making values visible in SAP or creating one central list with all sub-delegations for purchasing approvals, including the corresponding issues, in order to make the process more efficient.

1 Agreed. A report is already available in SAP, although it does not yet contain values. A Central Procurement initiative is under way - as part of the Automation Roadmap - to include the thresholds and define the maintenance roles and responsibilities.

CA/20/15 e 97/118 150560004

II.E.3.3 We recommend setting up a central function for screening suppliers (on a recurring basis) including a structured follow-up for risk evaluations of contracted suppliers.

1 Agreed. A vendor master expert will be appointed in Central Procurement in 2Q15. A mandatory supplier risk assessment chapter will be added to the Assessment & Award (A&A) reports and an evaluation report on the successful supplier will be mandatory for all A&A reports.

II.E.3.2 We recommend the creation of a supplier evaluation system in order to evaluate suppliers after the order has been placed.

1 Agreed. Central Procurement is working on a simplified system and process for yearly supplier evaluation.

II.E.3.3 Design and embed a professional "floating" licences-management process in order to be compliant and maximise the value of the number of licences.

1 Agreed. IM has already initiated an in-depth assessment of the current processes and tools for software asset management, in order to improve the management of licences.

II.E.3.3 The Central Procurement strategic roadmap should be enriched with a market and supplier analysis and in-depth procurement category plans.

2 Agreed. The 2016 procurement plan will be supplemented with provisions on the performance of an adequate market and supplier analysis.

CA/20/15 e 98/118 150560004

IT II.E.4.1 We recommend assessing the

(financial) implications of not achieving the 2017 deadline for the CMS system and determining potential scenarios, including a back-out plan in case the EPO is faced with additional capacity requirements, overspending or timeline delays.

1 Agreed. The total scope of the transformation continues to be unchanged. While the Office is not contemplating a back-out plan, it will continue to revise planning as necessary, in order to ensure that planned and potential new benefits are achieved at a reasonable cost. It will also keep the AC updated on implementation of the IT Roadmap.

II.E.4.1 We recommend performing a critical path analysis at program and project level, showing all the steps needed to complete the IT Roadmap ("program") and individual projects, the time it will take to complete each project and the relationships between the projects.

1 Agreed. Since the IT Roadmap has now moved into the key implementation phase, a critical path analysis will be integrated into the overall operational plan in order to ensure that enough attention is given to the interdependence of the various modules.

II.E.4.1 We recommend performing substantive reviews on critical project deliverables (PID, budgets, progress reports, etc.) and/or documenting the results of performed substantive procedures to better gain an insight into and better control the scope, budget and timeline of the program.

2 Agreed. A substantive review process is currently under way and the related documentation is being updated accordingly.

CA/20/15 e 99/118 150560004

II.E.4.1 More tangible goals should be set within the IT roadmap to mitigate the risk of (further) extending the program in scope and timeline and to facilitate program management from a program sponsor's perspective rather than from a business perspective.

2 Agreed. The Executive Board periodically reviews the sequencing of the various modules ("Plateaux") to ensure focus on the delivery of tangible products bringing concrete benefits to the business processes.

II.E.4.1 A clear and traceable cost monitoring should be implemented to ensure high transparency of all costs related to the IT Roadmap and its sub-projects. It should be clearly defined what costs should be included in the IT Roadmap and which costs are running costs.

1 Agreed. Clear definitions are provided in the context of the New Automation Governance. New requirements are now clearly associated with IT Roadmap deliverables. The IT Roadmap dashboard provides for a comprehensive cost overview of the whole IT Roadmap project portfolio.

II.E.4.1 A comprehensive and in-depth analysis on the financial performance of the IT Roadmap from "a program perspective" should be conducted in order to gain an insight into how the IT Roadmap expenditure has developed from the start in 2011 to date and to assess the key root causes of the increased IT roadmap envelope.

2 Agreed. The annual reports to the Administrative Council present the total IT Roadmap expenditure and envelope. The root causes for IT Roadmap changes are likewise reported to the Administrative Council. The running costs are not part of the IT Roadmap and are being managed separately.

CA/20/15 e 100/118 150560004

Munich, 20 April 2015

The Board of Auditors

H. Schuh O. Hollum F. Angermann

CA/20/15 e 101/118 150560004

IV. EPO PRESIDENT ADDITIONAL EXPLANATIONS AND REASONS

CA/20/15 e 102/118 150560004

V. ANNEXES

CA/20/15 e 103/118 150560004

ANNEX I Year-on-year comparison, balance sheet and income and expenditure account (in EUR '000s)

Annex I/1 Income statement

2014 2013 2012 2011

Revenue Revenue from patent and procedural fees 1.583.595 1.504.505 1.451.895 1.391.816Other revenue 70.762 68.579 65.799 62.578

Other operating income 8.412 7.166 9.996 12.026

Work performed and capitalised 4.031 3.227 4.818 484

Employee benefit expenses (1.408.359) (1.368.203) (1.150.374) (1.133.030)

Depreciation and amortisation expenses (51.894) (54.619) (54.396) (56.960)

Other operating expenses (211.727) (202.683) (192.830) (187.682)

Collective reward authorised in 2012 (24.084) —

OPERATING RESULT (5.180) (42.028) 110.824 89.232

Finance revenue 588.399 501.311 580.892 26.348

Finance costs (432.152) (385.832) (365.130) (490.253)

FINANCIAL RESULT 156.247 115.479 215.762 (463.905)

PROFIT / (LOSS) FOR THE YEAR 151.067 73.451 326.586 (374.673)

Other comprehensive income:Items that will not be reclassified to profit or loss:

Actuarial gains (losses) on defined benefit obligations (7.906.367) 484.349 (3.478.960) 366.209Items that may be reclassified subsequently to profit or loss:

Available-for-sale financial assets

TOTAL COMPREHENSIVE INCOME FORTHE YEAR (7.755.300) 557.800 (3.152.374) (8.464)

EUROPEAN PATENT ORGANISATION

in EUR '000 (CA/60/15)

Statement of Comprehensive Incomefor the year ended 31 December 2014

CA/20/15 e 104/118 150560004

Annex I/2 Balance sheet

2014 2013 2012 2011ASSETS

NON-CURRENT ASSETS Property, plant and equipment 554.105 574.752 596.766 624.021 Intangible assets 54.073 45.036 37.004 31.139 RFPSS financial instruments 5.856.494 5.019.235 4.448.684 3.889.989 RFPSS other assets 15.203 4.667 4.491 3.124 RFPSS restricted cash 244.590 205.835 169.070 64.981 RFPSS financial liabilities (31.381) (172) (127) (23.379) RFPSS other liabilities (47) (80) (101) (97) RFPSS net assets 6.084.859 5.229.485 4.622.017 3.934.618 Bonds 1.136.073 999.092 828.365 629.125 Home loans to staff 100.905 103.701 107.766 108.662 Other assets 85.853 72.437 64.922 100.312

8.015.868 7.024.503 6.256.840 5.427.877

CURRENT ASSETS Trade and other receivables 151.593 154.172 121.852 120.195 Bonds 199.386 220.784 100.727 63.176 Home loans to staff 6.645 6.807 4.447 3.414 Other financial assets 324.372 337.900 331.490 268.220 Prepaid expenses 12.374 10.736 9.586 13.065 Cash and cash equivalents 73.004 42.479 105.243 109.294

767.374 772.878 673.345 577.364

TOTAL ASSETS 8.783.242 7.797.381 6.930.185 6.005.241

EQUITY AND LIABILITIES EQUITY Retained earnings (1.652.211) (1.803.278) (5.142.656) (1.990.282) Other components of equity (10.687.945) (2.781.578) — —

TOTAL EQUITY (12.340.156) (4.584.856) (5.142.656) (1.990.282)

NON-CURRENT LIABILITIES Defined benefit liability 19.740.956 11.074.231 10.825.416 6.808.831 Obligation Salary Savings Plan 30.166 18.022 10.513 5.459 Trade and other payables 11.575 9.265 9.438 6.940 Finance lease liabilities 5.670 9.387 1.148 1.258 Provisions 66 396 608 616 Prepaid fees 747.427 703.583 666.336 624.674

20.535.860 11.814.884 11.513.459 7.447.778

CURRENT LIABILITIES Bank overdrafts — — Other employee-related liabilities 109.300 99.851 97.168 88.559 Trade and other payables 146.190 142.072 141.367 139.613 Finance lease liabilities 5.294 4.784 849 7.093 Provisions 5.907 3.945 3.571 3.428 Prepaid fees 320.847 316.701 316.427 309.052

587.538 567.353 559.382 547.745

TOTAL LIABILITIES 21.123.398 12.382.237 12.072.841 7.995.523

TOTAL EQUITY AND LIABILITIES 8.783.242 7.797.381 6.930.185 6.005.241

EUROPEAN PATENT ORGANISATIONBalance Sheet

as at 31 December 2014in EUR '000 (CA/60/15)

CA/20/15 e 105/118 150560004

Annex I/3 Statement of cash flows

2014 2013 2012 2011CASH FLOWS FROM OPERATING ACTIVITIES

Profit/loss of the year 151.067 73.451 326.586 (374.673)

Adjustments for: depreciation and amortisation 51.894 54.619 54.396 56.960 disposal of property, plant, equipment 715 1.549 710 2.749 other gains and lossses (11.456) (5.850) (4.848) 3.672 revaluation of RFPSS assets (442.177) (355.672) (431.150) 248.563 net interest (83.959) (82.574) (82.008) (73.329) dividend income (58.189) (60.762) (66.573) (56.416) changes in net defined benefit liability 760.359 733.164 537.626 549.725 changes in Salary Savings Plan obligation 12.144 7.509 5.054 2.482 change in provisions 1.632 162 135 (12.154) changes in prepaid fees 47.990 37.521 49.037 30.946 changes in assets and liabilities carried out as working capital 16.933 (26.396) 18.405 744Cash flows from operating activities 446.953 376.721 407.370 379.269

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from disposal/settlement of: - property, plant and equipment 1 2.433 13 - bonds / cash receipted upon maturity 220.000 100.500 62.975 — Purchases of: - property, plant and equipment (25.324) (15.917) (18.620) (22.838) - intangible assets (13.523) (13.527) (11.678) (5.015) - bonds (352.838) (398.934) (303.791) (288.961)Change in bank deposits > 3 months 13.528 (6.410) (21.270) 98.821Home loans granted to staff (25.704) (21.380) (22.184) (25.183)Repayment of staff home loans 28.916 23.526 22.263 23.562Cash outflow from the purchase of RFPSS assets (2.458.217) (2.485.658) (2.146.431) (3.115.013)Cash inflow from the sale of RFPSS assets 2.088.551 2.272.796 1.995.275 2.894.300Cash inflow (outflow) from decrease (increase) in restricted cash (38.755) (36.765) (104.089) 21.019Interest received 94.499 83.931 78.882 62.939Dividends received 58.427 59.288 67.110 56.489Cash flows from investing activities (410.439) (436.117) (401.558) (299.867)

CASH FLOWS FROM FINANCING ACTIVITIES

Interest paid (757) (497) (293) (894)Repayment of lease liabilities (5.207) (2.847) (9.531) (12.378)Cash flows from financing activities (5.964) (3.344) (9.824) (13.272)

NET INCREASE/DECREASE IN CASH AND CASH EQUIVALENTS 30.550 (62.740) (4.012) 66.130

Cash and cash equivalents net of bank overdrafts at the beginning of 42.479 105.243 109.294 43.164the periodEffect of exchange rate changes on cash and cash equivalents (25) (15) (39) — Cash and cash equivalents net of bank overdrafts at the end of 73.004 42.479 105.243 109.294the period

EUROPEAN PATENT ORGANISATIONStatement of cash flows

for the year ended 31 December 2014in EUR '000(CA/60/15)

CA/20/15 e 106/118 150560004

ANNEX II Comparison of budgeted and actual income and expenditure (in EUR '000s)

Annex II/1 Income

2014 2014 DifferenceChapter Title budget actual absolute as %

Income

Operating transactions50 Filing and search 393.605 364.139 -29.466 -7,5%51 Examination, grant and opposition 289.125 279.890 -9.235 -3,2%52 Appeal and protest 4.550 3.839 -711 -15,6%53 Designation, renewal and extension 1.007.050 1.044.470 37.420 3,7%54 Patent information products 7.255 7.609 354 4,9%55 General operating income 217.820 198.946 -18.874 -8,7%57 Third-party project funding 395 161 -234 -59,2%58 Other income 30.265 29.579 -686 -2,3%

Operating income 1.950.065 1.928.633 -21.432 -1,1%

Capital transactions60 Net income brought forward 232.885 363.623 130.738 56,1%61 Disposal of property and equipment 0 0 062 Disposal of EDP tangible and intangible assets 0 0 064 Borrowings 0 0 065 Repayment of loans and advances 16.800 19.738 2.938 17,5%69 Authorisation budget deficit 0 0 0

Capital income 249.685 383.361 133.676 53,5%

Income total 2.199.750 2.311.994 112.244 5,1%

CA/20/15 e 107/118 150560004

Annex II/2 Expenditure

2014 2014 DifferenceArticle Chapter Title budget actual absolute as %

Expenditures

Operating transactions300 Basic salaries and allowances 1.398.355 1.299.603 -98.752 -7,1%301 Remuneration of other employees 16.760 10.089 -6.671 -39,8%302 General staff costs 11.500 9.938 -1.562 -13,6%303 Training 11.880 9.021 -2.859 -24,1%305 Schools and day-care centres 21.945 21.618 -327 -1,5%

30 Staff 1.460.440 1.350.269 -110.171 -7,5%310 Land and buildings 43.915 41.069 -2.846 -6,5%311 Furniture and equipment 3.260 2.100 -1.160 -35,6%

31 Property and equipment 47.175 43.169 -4.006 -8,5%320 IT maintenance - tangible assets 21.900 18.868 -3.032 -13,8%321 IT maintenance - intangible assets 78.830 70.410 -8.420 -10,7%

32 IT equipment maintenance 100.730 89.278 -11.452 -11,4%33 Co-operation and meetings 21.890 11.302 -10.588 -48,4%34 Patent information and public meetings 17.240 16.158 -1.082 -6,3%

350 Travel 8.900 7.264 -1.636 -18,4%351 Supplies 4.320 2.905 -1.415 -32,8%352 Services 38.985 30.030 -8.955 -23,0%353 Communications 4.315 3.771 -544 -12,6%354 Documentation 11.195 9.709 -1.486 -13,3%359 Other operating expenditure 1.220 789 -431 -35,3%

35 General operating expenditure 68.935 54.468 -14.467 -21,0%37 Project expenditure funded by third parties 395 161 -234 -59,2%38 Financial expenditure 375 205 -170 -45,3%

Total operating expenditure 1.717.180 1.565.010 -152.170 -8,9%

Capital transactions 041 Property and equipment (excluding IT) 57.575 23.031 -34.544 -60,0%42 IT hardware and software 15.500 11.957 -3.543 -22,9%44 Repayment of loans 0 0 045 Loans and advances to third parties 16.800 16.529 -271 -1,6%48 Cash injection to RFPSS 0 0 049 Budget surplus 159.810 331.844 172.034 107,6%

Total capital expenditure 249.685 383.361 133.676 53,5%

Total expenditure 1.966.865 1.948.371 -18.494 -0,9%

CA/20/15 e 108/118 150560004

Annex II/3 Implementation of the budget of the Pension and Social Security Schemes

2014 2014 Difference Article Chapter Title budget actual absolute as %

INCOME

Operating transactionsOffice contributions 123.240 119.370 -3.870 -3,1%Staff contributions 61.620 59.615 -2.005 -3,3%Tax adjustment 0 0 0Payments from insurances 0 178 178Pension rights transferred 10.000 4.250 -5.750 -57,5%Office contributions (recruited after 1.1.2009) 8.270 8.353 83 1,0%Staff contributions (recruited after 1.1.2009) 4.135 4.177 42 1,0%Office contributions (invalids) 2.990 2.831 -159 -5,3%Invalids' contributions 1.495 1.305 -190 -12,7%

5600 Pension contributions 211.750 200.079 -11.671 -5,5%

Office contributions 8.210 5.639 -2.571 -31,3%Staff contributions 4.105 2.820 -1.285 -31,3%

5601 Salary savings plan 12.315 8.459 -3.856 -31,3%

Office contributions 54.500 52.408 -2.092 -3,8%Staff contributions 19.020 18.521 -499 -2,6%Pensioner contributions 3.200 3.065 -135 -4,2%Deferred pension contributions 405 375 -30 -7,4%Invalids' contributions 0 10 10Spouse contributions 1300 1327 27 2,1%Healthcare fund 78.425 75.706 -2.719 -3,5%

Office contributions 7.790 6.951 -839 -10,8%Staff contributions 3.265 3.110 -155 -4,7%Pensioner contributions 560 519 -41 -7,3%Invalids' contributions 70 60 -10 -14,3%Long-term care insurance 11.685 10.640 -1.045 -8,9%

Office contributions 5.710 1.862 -3.848 -67,4%Staff contributions 2.855 401 -2.454 -86,0%Death and invalidity insurance 8.565 2.263 -6.302 -73,6%

5605 Social-security contributions 98.675 88.609 -10.066 -10,2%

56 Operating income 322.740 297.147 -25.593 -7,9%

CA/20/15 e 109/118 150560004

EXPENDITURE

Operating transactions3600 Pension payments 125.185 119.183 -6.002 -4,8%3601 Salary savings plan 680 279 -401 -59,0%

Healthcare insurance 68.715 60.222 -8.493 -12,4%Long-term care insurance 4.010 4.174 164 4,1%Death and invalidity insurance 8.565 2.263 -6.302 -73,6%

3605 Social-security payments 81.290 66.659 -14.631 -18,0%

36 Operating expenditure 207.155 186.121 -21.034 -10,2%

Capital transactions: income and expenditureHealthcare insurance 9.710 15.484 5.774 59,5%Pension scheme 86.565 80.896 -5.669 -6,5%Long-term care insurance 7.675 6.466 -1.209 -15,8%Death and invalidity insurance 0 0 0Salary savings plan 11.635 8.180 -3.455 -29,7%

6600/4610

Surplus for transfer from pension and social-security scheme to RFPSS/balance sheet 115.585 111.026 -4.559 -3,9%

66 + 46 Total (transfer to RFPSS/balance sheet) 115.585 111.026 -4.559 -3,9%

CA/20/15 e 110/118 150560004

Annex II/4 Comparison between original and amended budgets

Transfer under Art. 34 FinOpara. 1 para. 2 para. 3

Article Chapter Title Original budget Intra-chapterInter-chapter (below 20%)

Submission to BFC/AC

Amended budget

3000 Basic salaries 922.025 -370 -1.150 920.5053001 Allowances and other benefits 229.865 229.8653002 Social-security contributions 74.425 74.4253003 Pension contributions 142.710 142.7103004 Partial compensation 29.330 29.330

300 Basic salaries and allowances 1.398.355 -370 -1.150 0 1.396.835301 Remuneration of other employees 16.760 16.760302 General staff costs 11.500 11.500303 Training 11.880

3050 European School 20.415 370 20.7853055 Children's day-care centres 1.530 1.530

305 Schools and day-care centres 21.755 21.75530 Staff 1.460.440 0 -1.150 0 1.459.290

31 Property and equipment maintenance 47.175 47.175

320 IT maintenance - tangible assets 21.900 -1.000 20.9003210 Software 23.270 1.000 -600 23.670

3211 Integrated systems and services 55.560 55.560

321 IT maintenance - intangible assets 78.830 1.000 -600 0 79.23032 IT equipment maintenance 100.730 0 -600 0 100.130

33 Co-operation and meetings 21.890 0 0 0 21.890

34 Patent information and communication 17.240 0 1.150 0 18.390

350 Travel 8.900 8.900351 Supplies 4.320 4.320352 Services 39.985 39.985353 Communications 4.315 4.315

misc. Other items 11.415 11.41535 General operating expenditure 68.935 0 -300 0 68.635

37 Project expenditure funded by third parties 395 3950

38 Financial expenditure 375 375

Operating transactions 1.717.180 0 -900 0 1.716.280Inward transfers 1.370 1.150 0Outward transfers -1.370 -2.050 0

CA/20/15 e 111/118 150560004

410 Land and buildings 55.450 55.450411 Furniture and equipment 2.125 2.125

41 Property and equipment 57.575 0 0 0 57.575

4200 Hardware 3.500 -300 -100 3.1004210 Software 300 300 700 1.3004211 Integrated systems and services 11.700 11.700

42 IT tangible and intangible assets 15.500 0 600 0 16.100

45 Loans and advances 16.800 16.800

48 Transfer to RFPSS 0 0

49 Budget surplus 159.810 159.810

Capital transactions 249.685 0 600 0 250.285Inward transfers -300 600 0Outward transfers 300 0 0

Total 1.966.865 0 -300 0 1.966.565Inward transfers 1.070 1.750 0Outward transfers -1.070 -2.050 0

CA/20/15 e 112/118 150560004

ANNEX III Financial forecast and actual income and expenditure

Annex III/1 Income

Actual DifferenceCA/D 1/13 CA/10/15 CA/60/15 absolute as %

RevenueRevenue from patent and procedural fees 1.570.066 1.570.066 1.583.595 13.529 0,9%Other revenue 73.000 73.000 70.762 -2.238 -3,1%

Other operating income 5.220 5.220 8.412 3.192 61,1%

Work performed by the entity and capitalised 5.000 5.000 4.031 -969 -19,4%

Employee benefit expenses -1.280.926 -1.280.926 -1.408.359 -127.433 9,9%

Depreciation and amortisation expenses -58.638 -58.638 -51.894 6.744 -11,5%

Other operating expenses -248.764 -248.764 -211.727 37.037 -14,9%

Operating result without collective reward authorised in 2012 64.958 64.958 -5.180 -70.138

Collective reward (authorised in 2012) 0 0 0 0

OPERATING RESULT 64.958 64.958 -5.180 -70.138

Finance revenue 321.619 321.619 588.399 266.780 82,9%

Finance costs -424.963 -424.963 -432.152 -7.189 1,7%

FINANCIAL RESULT -103.344 -103.344 156.247 259.591

PROFIT/(LOSS) FOR THE YEAR -38.386 -38.386 151.067 189.453

Others 0 0 -7.906.367 -7.906.367

TOTAL -38.386 -38.386 -7.755.300 -7.716.914

IFRS forecast

CA/20/15 e 113/118 150560004

Annex III/2 Balance sheet

Actual DifferenceCA/D 1/13 CA/10/15 CA/60/15 absolute as %

ASSETS

NON-CURRENT ASSETSProperty, plant and equipment 593.393 593.393 554.105 -39.288 -6,6%Intangible assets 50.321 50.321 54.073 3.752 7,5%Net assets RFPSS 5.393.695 5.393.695 6.084.859 691.164 12,8%Marketable securities 843.365 843.365 1.136.073 292.708 34,7%Home loans to staff 114.061 114.061 100.905 -13.156 -11,5%Other financial assets 0 0 0 0Other assets 95.216 95.216 85.853 -9.363 -9,8%

7.090.051 7.090.051 8.015.868 925.817 13,1%CURRENT ASSETS

Trade and other receivables 156.925 156.925 151.593 -5.332 -3,4%Marketable securities 100.727 100.727 199.386 98.659 97,9%Home loans to staff 4.611 4.611 6.645 2.034 44,1%Other financial assets 316.490 316.490 324.372 7.882 2,5%Prepaid expenses 0 0 12.374 12.374Cash and cash equivalents 486.750 486.750 73.004 -413.746 -85,0%

1.065.503 1.065.503 767.374 -298.129 -28,0%

TOTAL ASSETS 8.155.554 8.155.554 8.783.242 627.688 7,7%

LIABILITIES

EQUITYRetained earnings -2.484.333 -2.484.333 -1.652.211 832.122 -33,5%Other reserves 99.477 99.477 -10.687.945 -10.787.422 -10844,1%

TOTAL EQUITY -2.384.856 -2.384.856 -12.340.156 -9.955.300 417,4%

NON-CURRENT LIABILITIESNet defined liability 9.102.598 9.102.598 19.740.956 10.638.358 116,9%Obligation salary savings plan 36.827 36.827 30.166 -6.661 -18,1%Other employee-related liabilities 6.430 6.430 11.575 5.145 80,0%Finance lease liabilities 7.257 7.257 5.670 -1.587 -21,9%Provisions 3.038 3.038 66 -2.972 -97,8%Prepaid fees 756.722 756.722 747.427 -9.295 -1,2%

9.912.872 9.912.872 20.535.860 10.622.988 107,2%CURRENT LIABILITIES

Other employee-related liabilities 0 0 109.300 109.300Trade and other payables 276.226 276.226 146.190 -130.036 -47,1%Finance lease liabilities 6.664 6.664 5.294 -1.370 -20,6%Provisions 17.223 17.223 5.907 -11.316 -65,7%Prepaid fees 327.426 327.426 320.847 -6.579 -2,0%

627.539 627.539 587.538 -40.001 -6,4%

TOTAL LIABILITIES 10.540.411 10.540.411 21.123.398 10.582.987 100,4%

TOTAL EQUITY AND LIABILITIES 8.155.555 8.155.555 8.783.242 627.687 7,7%

IFRS forecast

CA/20/15 e 114/118 150560004

ANNEX IV Audit expenditure

296) EUR 1.6m was set aside for this under Article 3525 of the 2014 budget.

297) As at 31 March 2015, a total of EUR 278 636 had been committed, and EUR 32 410 already spent. These figures break down as follows:

Expenditure booked in 2014

2015 to date

Committed Spending

Travel expenses and remuneration of auditors and assistants

113 733 32 140 32 410

KPMG AG Wirtschaftsprüfungsgesellschaft 87 300 189 496 0

Berenschot Groep B.V. 27 790 0 0

BDO AG Wirtschaftsprüfungsgesellschaft 131 750 57 000 0

TOTAL 360 573 278 636 32 410

CA/20/15 e 115/118 150560004

ANNEX V List of abbreviations

AC Administrative Council

AM application management

APC Automation Policy Committee (successor to ASG)

APR accounting, portfolio and risk (management)

ASG Automation Steering Group (replaced by APC)

BFC Budget and Finance Committee

BHB Bayerische Hausbau (Munich property developer)

BoA Board of Auditors

BPA business process area

BSC balanced scorecard

CAB Change Advisory Board

CAMRA portfolio management and bookkeeping system from SS&C (London)

CEI call for expression of interest

CERN European Organisation (formerly "Centre") for Nuclear Research

CMDB configuration management database

DBO defined benefit obligation

DG directorate-general

DTH data transfer hub

EDP electronic data processing

EESR extended European search report

EMTP European machine translation programme

EPASYS European Patent Administration System

EPC European Patent Convention

epi Institute of Professional Representatives before the European Patent Office

CA/20/15 e 116/118 150560004

EPO European Patent Organisation (or "Office")

EU European Union

EUR euro

FAMA finance application management

FinRegs Financial Regulations

FIPS finance and personnel system

FTE full-time equivalents (staff numbers)

GFA gross floor area

GTB general terms of business

HOAI German remuneration rules for architects and engineers

HR human resources

IA Internal Audit (EPO PD 0.6)

IAC Internal Appeals Committee

IAS International Accounting Standards

IFRS International Financial Reporting Standards

IGUTEC German environmental engineering association

IIB International Patent Institute

ILO International Labour Organization

IM Information Management (EPO IT department, formerly "IS")

INTOSAI International Organization of Supreme Audit Institutions

IS Information Systems (EPO IT department, now "IM")

ISP internet service provider

ISS Information Systems and Services

IT information technology

ITIL IT Information Library

ITT invitation to tender

LAN local area network

CA/20/15 e 117/118 150560004

LTC long-term care

MAC Management Committee (of European Patent Office)

MTBP (EPO's) medium-term business plan (CA/40/xx)

NO, NPO national (patent) office

NPV net present value

OIO open infrastructure offering (framework agreement)

OSC Operational Steering Committee

PC personal computer

PCT Patent Cooperation Treaty

PD principal director (or "directorate")

PID project initiation document

Prince2 Version 2 of project-management software ("projects in controlled environments")

PSI planning, security and inventory

PV minutes (e.g. CA/PV 113 = minutes of Council's 113th meeting)

PWC PricewaterhouseCoopers

RFPSS Reserve Funds for Pensions and Social Security

SAP German software firm

SEA suite of examiner applications (common user interface for search and examination)

SEPA Single Euro Payments Area

SLA service level agreement

TSD Tivoli service desk

WOISA written opinion of the International Search Authority

WPTI Working Party on Technical Information

CA/20/15 e 118/118 150560004