Presentation on theme: "PwC Pre-financing 2 PwC Overview of session 1. Scope of application 2. Key concepts 3. Life cycle 4. Worked example 5. Additional."— Presentation transcript:
2 PwC Overview of session 1. Scope of application 2. Key concepts 3. Life cycle 4. Worked example 5. Additional considerations and issues 6. Questions
PwC Pre-financing 1. Scope of application
4 PwC Scope of application Pre-financing is a means for the EU to « provide the beneficiary with a float » 1 EAGGF Structural funds Emergency fund Etc. Grants 1 Art. 105 IR
PwC Pre-financing 2. Key concepts
6 PwC Key concepts Assets are resources controlled by an entity as a result of past events and from which future economic benefits or service potential are expected to flow to the entity Expenses are decreases in economic benefits or service potential during the reporting period in the form of outflows or consumption of assets or incurrences of liabilities that result in decrease in net assets/equity (other than those resulting to distribution to owners) Under the accrual basis of accounting transactions or events are recognised when they occur (which is not necessarily when cash or its equivalent is received or paid)
7 PwC Key concepts Amounts paid as pre-financing are an asset of the EU until eligible expenses are incurred by the recipient A balance sheet item To be « cleared » by interim/final payments A financing device Based on the justification of eligible expenses Otherwise to be refunded to the EU
8 PwC Key concepts An interim payment, which may be repeated, is intended to reimburse expenditure incurred by the beneficiary on the basis of a statement of expenditure when the action is in progress. It may clear pre-financing in whole or in part, […] 1 The closure of the expenditure shall take the form of the payment of the balance, which may not be repeated and clears all preceding payments, or a recovery order 1 1 Art. 105 IR
9 PwC Specific aspects Pre-financings « property » of the European Communities V. Pre-financings « property » of third parties 1 : –These definitions only specify who is entitled to the interests generated by the pre-financing –They do not affect the principal characterisation of the pre- financing – pre-financing remains an asset of the EU until eligible expenses are accepted 1 Art. 3 IR
PwC Pre-financing 3. Life cycle
11 PwC Expense recognition Cash basis Budgetary Accrual basis IPSAS The processing of the payment to the recipient triggers the recognition of expense The acceptation by the EU of eligible expenses incurred by the recipient triggers the recognition of expense
12 PwC General accounting events EventGeneral accounting Commitment - Signature of grant agreement - 1 Receipt of request for pre-financing 2 Payment authorisation by the A.O. - Payment of pre-financing Receipt of cost claim Validation of eligible expenses Payment authorisation by the A.O. - Interim payment/Payment of the balance Recovery authorisation by the A.O. - Notification of recovery Payment collection 1 Off-BS posting of the total amount of the grant 2 Balance sheet entry for traceability purposes only
PwC Pre-financing 4. Worked example
14 PwC Worked example The E.C. are subsidising SJ (the Swedish railways) for the construction of a high speed railways infrastructure network. The grant agreement is signed on 1 April 200N. The E.C. receive a letter of credit from SJ’s bankers to secure pre- financing. A pre-financing of € 3,000 is paid on 1 May 200N.
15 PwC General accounting debits and credits Before execution of the pre-financing payment No entries 1 1 May 200N - Execution of the pre-financing payment Dr.Pre-financing (Vendor: SJ) 3,000 Cr. Banks3,000 If a guarantee is received a contingent right is additionally to be recorded at the time of payment of the pre-financing amount 2 A debtor liability (= an asset); a sub-account of the recipient’s account 2 Refer to « Provisions, Contingent Liabilities and Contingent Rights » session 2 Off-BS posting of the total amount of the grant at the time of signature of the contract + Dr. Pre-financing (Vendor SJ) / Cr. Pre-financing payable - pm entry in case a payment request is received from SJ
16 PwC Worked example (cont’d) On 1 October 200N, SJ introduces a cost claim detailing expenditures of € 2,700. On 1 November 200N, expenses have been verified and found eligible. Interim payment is approved after clearing of initial pre-financing. A second pre-financing of € 2,000 is paid on 1 December 200N.
17 PwC General accounting debits and credits 1 October 200N – Receipt of the cost claim Dr.Cost claims to be checked2,700 Cr. Vendor SJ2,700 1 November 200N – Cost statement verified Expense recognition & Partial clearing of the pre-financing Dr.P&L - expenditures2,700 Cr. Cost claims to be checked2,700 Dr.Vendor SJ2,700 Cr. Pre-financing (Vendor: SJ) 2,700 A suspense account The contingent right from the guarantee is partially extinguished
18 PwC General accounting debits and credits 1 December 200N – Execution of the second pre-financing payment Dr.Pre-financing (Vendor: SJ) 2,000 Cr. Banks2,000 Global payments when they occur need to be apportioned between the settlement of eligible expenses/clearing of prior pre- financings and the release of further pre-financings – No compensation The balance in the pre-financing account is now € 2,300 = € 3,000 - € 2,700 + € 2,000
19 PwC Worked example (cont’d) On 1 March 200N+1, SJ introduces a final cost claim detailing additional expenditures of € 2,300. On 1 April 200N+1, expenses have been verified after a final audit took place. Expenses of € 2,000 have been found eligible. Expenses totaling € 300 are disputed and a recovery order is created.
20 PwC General accounting debits and credits 31 December N – The cut-off date 1 March 200N+1 – Receipt of the final cost claim Dr.Cost claims to be checked2,300 Cr. Vendor SJ2,300 Accruing eligible expenses is neglected here – Refer to « Expenses and Payables » session
21 PwC General accounting debits and credits 1 April 2000 N+1 – Cost statement verified (a) Full clearing of the pre-financing and (b) Recovery order Dr.P&L - expenditures2,000 Dr.Vendor SJ 300 Cr. Cost claims to be checked2,300 Dr.Pre-financing – repayment requested300 Dr.Vendor SJ2,000 Cr. Pre-financing (Vendor: SJ) 2,300 Full extinguishment of the contingent right Internal/pro forma to the extent that the recipient will not formally issue To be credited against the bank account when SJ refunds the excess pre- financing received
PwC Pre-financing 5. Additional considerations and issues
23 PwC Similarity and variances between processes The processes and accounting schemes are common to a variety of the EU’s instruments/processes – minor application differences may exist in practice The key point is that throughout all the processes amounts paid in advance of the delivery of the service/the incurrence of eligible expenditures by the recipient are initially an asset of the E.C.
24 PwC Pre-financings « property » of the E.C. 1 Initial recognition at the nominal amount of amounts paid Interest income should be accrued for Based on the most reliable information available, including past experience (need for the definition of processes enabling reliable estimates?) If no information is available, modified accrual basis: interest income is recognised only when it is measurable 1 Art. 3 IR
25 PwC Pre-financings « property » of third parties Initial recognition at the fair value of amounts paid – i.e. discount using the market interest rate for similar maturities for similar debtors The difference between the amount paid and the fair value is an expense This expense will reverse over time through the recognition of interest income using the market interest rate 1 Art. 3 IR
26 PwC Value reductions Pre-financings should be measured at their recoverable amount. The European Communities shall assess at each balance sheet date whether there is any objective evidence that the carrying amount of the asset is not recoverable (also taking into account the existence of guarantees). The expected non-collectible amount, or the amounts in respect of which recovery has ceased to be probable, is recognized as a value reduction (a charge) in the economic outturn account (against a diminution of the pre-financing asset).
27 PwC Non euro-denominated pre-financings Non €-denominated pre-financings shall be reported using the foreign exchange rate at the closing date. Realised and unrealised foreign exchange gains/losses are recognised in the economic outturn account.
28 PwC Presentation in the financial statements A specific line item in the balance sheet (because a material transaction class) Reported for under “current assets” if expected to be cleared within 12 months of the balance sheet date Reported for under “long-term assets” otherwise