6Key conceptsAssets 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 entityExpenses 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)« Controlled by the entity »: the E.C. can use or otherwise benefit from the asset in the pursuit of their objectives« Past event » = the transfer of funds to the beneficiary
7Key conceptsAmounts paid as pre-financing are an asset of the EU until eligible expenses are incurred by the recipientA financing deviceA balance sheet itemTo be « cleared » by interim/final paymentsBased on the justification of eligible expensesOtherwise to be refunded to the EU
8Key conceptsAn 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, […] 1The 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 11 Art. 105 IR
9Specific aspectsPre-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-financingThey do not affect the principal characterisation of the pre- financing – pre-financing remains an asset of the EU until eligible expenses are accepted1 Art. 3 IR
11Expense recognition Cash basis Budgetary Accrual basis IPSAS The processing of the payment to the recipient triggers the recognition of expenseCash basisBudgetaryAccrual basisThe acceptation by the EU of eligible expenses incurred by the recipient triggers the recognition of expenseIPSAS
12General accounting events Commitment-Signature of grant agreement- 1Receipt of request for pre-financing2Payment authorisation by the A.O.Payment of pre-financingReceipt of cost claimValidation of eligible expensesInterim payment/Payment of the balanceRecovery authorisation by the A.O.Notification of recoveryPayment collectionSignature of the grant agreement: no accounting entries in the pre-financing cycle – however refer to Payables and Expenses session: the total amount committed is recorded off-balance sheetIf the beneficiary notifies the E.C. of a pre-financing payment request, this will be translated into a balance sheet entry (Dr. Pre-financing / Cr. Pre-financing payable) for audit trail purposes – both balances are to be off-set at the time of preparation of the financial statements1 Off-BS posting of the total amount of the grant2 Balance sheet entry for traceability purposes only
14Worked exampleThe 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.
15General accounting debits and credits Before execution of the pre-financing paymentNo entries 11 May 200N - Execution of the pre-financing paymentDr.Pre-financing (Vendor: SJ)3,000Cr.BanksIf a guarantee is received a contingent right is additionally to be recorded at the time of payment of the pre-financing amount 2A debtor liability (= an asset); a sub-account of the recipient’s account2 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 SJ2 Refer to « Provisions, Contingent Liabilities and Contingent Rights » session
16Worked 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.
17General accounting debits and credits 1 October 200N – Receipt of the cost claimDr.Cost claims to be checked2,700Cr.Vendor SJ1 November 200N – Cost statement verified Expense recognition & Partial clearing of the pre-financingP&L - expendituresPre-financing (Vendor: SJ)A suspense accountThe contingent right from the guarantee is partially extinguished
18General accounting debits and credits 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 compensation1 December 200N – Execution of the second pre-financing paymentDr.Pre-financing (Vendor: SJ)2,000Cr.BanksThe balance in the pre-financing account is now € 2,300 = € 3,000 - € 2,700 + € 2,000
19Worked 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.
20General accounting debits and credits 31 December N – The cut-off date1 March 200N+1 – Receipt of the final cost claimDr.Cost claims to be checked2,300Cr.Vendor SJAccruing eligible expenses is neglected here –Refer to « Expenses and Payables » session
21General accounting debits and credits 1 April 2000 N+1 – Cost statement verified (a) Full clearing of the pre-financing and (b) Recovery orderDr.P&L - expenditures2,000Vendor SJ300Cr.Cost claims to be checked2,300Pre-financing – repayment requestedPre-financing (Vendor: SJ)Full extinguishment of the contingent rightInternal/pro forma to the extent that the recipient will not formally issueTo be credited against the bank account when SJ refunds the excess pre-financing received
225. Additional considerations and issues Pre-financing5. Additional considerations and issues
23Similarity 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 practiceThe 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.
24Pre-financings « property » of the E.C. 1 Initial recognition at the nominal amount of amounts paidInterest income should be accrued forBased 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 measurable1 Art. 3 IR
25Pre-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 debtorsThe difference between the amount paid and the fair value is an expenseThis expense will reverse over time through the recognition of interest income using the market interest rate1 Art. 3 IR
26Value reductionsPre-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).
27Non 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.
28Presentation 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 dateReported for under “long-term assets” otherwise