PwC Payables and Expenses

2 PwC Overview of session 1. Key concepts and scope of application 2. Non-exchange transactions 3. Exchange transactions 4. Measurement 5. Disclosures 6. Questions

PwC Payables and Expenses 1. Key concepts and scope of application

4 PwC No specific IPSAS is applicable The E.C. accounting rule was drafted falling back on IPSAS 1, Presentation of financial statements, and on studies published by the IFAC and IAS/IFRS Scope

5 PwC Key definitions and concepts Expenses = decreases in economic benefits or service potential during the reporting period in the form of: –Outflows; or –Consumptions of assets; or –Incurrences of liabilities that result in decreases in net assets. Liabilities = present obligations arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits or service potential.

6 PwC Key definitions and concepts (cont’d) Key issue = the timing of expense recognition: 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) –The event triggering expense (and liability) recognition is generally when the service is rendered (or the supplies are delivered)

7 PwC The major EC expenses Short term employee benefits Services Capital asset use (depreciation) Imposed transfers Voluntary transfers Interest Goods Tax Travel expenses

8 PwC The major EC expenses Non-exchange transactions: Exchange transactions: Short term employee benefits Services Capital asset use (depreciation) Imposed transfers Voluntary transfers Interest Goods Tax Travel expenses P, P & E training Inventories training

9 PwC Non-exchange transactions Non-exchange transactions = Non-reciprocal transfers Transactions in which an entity receives assets or services, or has liabilities extinguished, without directly giving approximately equal value to the other party in exchange. Transfers VoluntaryImposed

10 PwC Voluntary transfers Entered into willingly by one or two parties Frequently, the provider establishes purpose restrictions and eligibility requirements. In many cases, the provider may require the return of the resources if the purpose restrictions or eligibility requirements are contravened after recognition of the transaction. The principal characteristics of voluntary transfers are: –they are not imposed on the provider or the recipient and –fulfilment of eligibility requirements is essential for a transaction (other than the provision of cash or other assets in advance) to occur.

11 PwC Voluntary transfers Transfers under agreements (including grants under agreements): –The recipient acquires the right to the transfer when he meets eligible requirements Discretionary grants, contributions and donations: –Application or meeting eligibility requirements by the recipient does not necessarily award the right to the transfer

12 PwC Imposed transfers Entitlements –The E.C. are required to transmit resources to recipients who meet the requirements set-out by the Regulations (e.g. agricultural subsidies)

13 PwC Exchange transactions Transactions in which an entity receives assets or services, or has liabilities extinguished, and directly gives approximately equal value (primarily in the form of goods, services or use of assets) to the other party in exchange. Sale of goodsRendering ofInterest, royalties services& dividends

PwC Payables and Expenses 2. Non-exchange transactions

15 PwC Non-exchange transactions - Grants under agreements Grants under agreements = a voluntary transfer = direct contractual financial contributions, by way of donation, from the budget in order to finance: –Either an action intended to help achieving an objective part of an E.U. policy (“grant agreement for an action”); or –The functioning of a body which pursues an objective of general European interest or an objective part of an E.U. policy (“operating grant agreement”)

16 PwC Non-exchange transactions - Grants under agreements « Reimbursement-type » or « expenditure-driven » programmes: the E.C. as provider stipulate that a recipient cannot qualify for resources without first incurring allowable costs under the E.C.'s program the eligibility requirement Until the eligibility requirements are met, the E.C. as provider do not have a liability (and the recipient does not have a receivable), and the recognition of expenses for resources transmitted in advance should be deferred –Invoices/cost statements received are recorded as payables but offset by a corresponding asset until they are verified/checked The E.C. should recognise expenses from action grants when all applicable eligibility requirements are met.

17 PwC Non-exchange transactions - Grants under agreements Post total amount of the contract off-balance sheet at signature of the grant agreement Post cost statement to a balance sheet account for the total amount claimed Determine eligible expenditures Recognise eligible expenditures as expenses (or fixed assets) If not all expenditures reported in the cost statement are eligible, formally notify the recipient Record credit note to be received Estimate eligible expenditures at year-end (DG) Object-code

18 PwC Claims relating to transfers Correction of irregularities or errors in cost claims submitted by beneficiaries: –Normally a reduction of expenses (Dr. Liability / Cr. Expenses) –However, if after the final payment / the end of the contract / the closure of expenditure, a revenue (Dr. Receivable / Cr. Revenue)

19 PwC Estimate at year-end NOYESNOYES Cost claim or expense summary received after the reporting date and during the closing period ? NOYES Eligible expenses known ? NOYES Separation before/after the reporting date available ? Recognise an expense for each relevant period based on eligible expenses Apply a prorata temporis method on eligible expenses Apply a prorata temporis method on estimated eligible expenses Recognise an expense for each relevant period based on estimation of eligible expenses Work in progress information available ? (1) NOYES Record an accrued expense based on the progress information available The information must be reliable The EC have to update their procedures in order to obtain reliable information for material items. (1) work in progress information Must be reliable Can be based on beneficiary reporting, budget information, past experience,… Apply the materiality principle

20 PwC The mechanics of accruals Accruals are posted during the closing of financial year N They get reversed on the first day of financial year N+1 –The “negative” expense created by the reversal will automatically be offset by the recording of eligible expenses during N+1 –So that no manual clearing of accruals will be needed –Differences between estimates and actuals are an expense / a reduction of expenses of financial year N+1

21 PwC Non-exchange transactions - Summary TransactionGenerating eventRecording during the yearReporting date/Cut-off Grants under agreementEligible expenses incurred Eligible cost claim/expense summary 1 Estimated portion of incurred eligible expenses owed to beneficiaries EAGGF GuaranteeExpenses incurred by M.S.Eligible M.S.’s expenses 1 Structural fundsEligible expenses incurredEligible expense summary 1 RAL Not an expense Payment appropriations carried over EntitlementsAcceptance of an applicationPayment order Estimated entitlements due at the reporting date Discretionary grants, contributions and donations Acceptation 1 Posting of claim received to a suspense account Apply the materiality principle

PwC Payables and Expenses 3. Exchange transactions

23 PwC Timing of expense recognition During the year: book at reception of invoice or cost statement Cut-off: expenses should be accounted for in the period to which they relate –If a service was rendered (or supplies were delivered) but the invoice was not received, accrue –If an invoice was received and the service was not rendered (or supplies were not delivered), defer

24 PwC Exchange transactions - Summary Generating eventRecording during the year Reporting date/Cut-off Procurement (goods) Goods deliveredInvoice amount 1 Delivery note Procurement (services) Services receivedInvoice amount 1 Stage of completion method Interest/ Royalties Expenses incurred based on contract Cash paidEstimate of expenses incurred 1 Posting of invoice received to a suspense account Object-code Estimate by the DGs Apply the materiality principle

25 PwC Services: stage-of- completion Estimate costs incurred by reference to total costs to be incurred –Passage of time –Units of service received divided by total units to be received –Other measures of extent of progress toward completion

26 PwC Worked example – Services A contractor has a fixed price contract with the EU for the rendering of IT help desk services. The contract covers the 6-month period from November 1, 200N to May 1, 200N+1. The contract price is € 20,000. The contractor issues quarterly invoices. No invoice was accordingly received at year-end. What are the entries to be recorded at year-end?

27 PwC Worked example – Services Expenses for the services rendered by the contractor in November and December should be accrued for. Monthly cost of the contract: € 20,000 / 6 = € 3,333. Accrual at year-end: 2 * € 3,333 = € 6,666 The following entry will have to be recorded at year-end: Dr. Operating expenses€ 6,666 Cr. Invoices to be received€ 6,666

28 PwC Short term employee benefits Short term employee benefits are paid in exchange of the services rendered – the rendering of this service by the civil servant is the event generating expense recognition An accrual should be recorded for the excess of accumulated benefits over taken and lapsed benefits Non-accumulating benefits do not carry forward – expenses are recognised as incurred.

PwC Payables and Expenses 4. Measurement

30 PwC Measurement Expenses and the corresponding payable are initially measured at their fair value (which generally corresponds to the amount of the original invoice) Changes in estimates made during the accrual process are debited/credited to net accounting surplus or deficit in the period of the change

PwC Payables and Expenses 5. Disclosures

32 PwC Disclosures Analysis of each significant category of expenses Methods used to determine stage of completion for services Accounting policies for expense recognition Current periodPrior period

PwC Payables and Expenses 6. Questions