PwC Revenues and Receivables

2 PwC Overview of session 1. Key concepts and scope of application 2. Recognition 3. Illustration 4. Measurement 5. Disclosures 6. Questions

PwC Revenues and Receivables 1. Key concepts and scope of application

4 PwC Key definitions and concepts Revenue = the gross inflow of economic benefits or service potential during the reporting period when those inflows result in an increase in net assets/equity –Either collected revenue –Or gains (out-of-scope) Borrowings do not result in an increase of net worth They are budgetary, but not financial accounting revenue

5 PwC Revenue arising from exchange transactions (based on IPSAS 9) Revenue arising from non-exchange transactions (based on Exposure Draft by the Public Sector Committee of the IFAC) Scope

6 PwC Outside of scope Revenues from lease agreements Dividends arising from investments accounted for under the equity method Gains from the sale of Property, Plant & Equipment Changes in the fair value of financial assets and liabilities on their disposal Changes in the value of other current assets

7 PwC The major EC revenues Traditional own resources: customs and agricultural duties; sugar levies Resources from Member States: VAT resource; GNI resource; the UK correction Fees and fines Sale of publications Interest on loans, on “propriety” pre- financings and on bank accounts

8 PwC The major EC revenues Non-exchange transactions: Exchange transactions: Traditional own resources: customs and agricultural duties; sugar levies Resources from Member States: VAT resource; GNI resource; the UK correction Fees and fines Sale of publications Interest on loans, on “propriety” pre- financings and on bank accounts Surplus from the prior year

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. ( Direct and indirect) taxes Use of sovereign powers:DutiesDonations FinesGrants

10 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 Revenues and Receivables 2. Recognition

12 PwC Key issue Key issue = the timing of revenue 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) Cut-off: revenue should be accounted for in the period to which it relates

13 PwC Revenue recognition - Non-exchange transactions Revenue can be measured reliably Probable that economic benefits will flow to the European Communities Recognise revenue

14 PwC Revenue recognition – VAT and GNI resources Generating event Recording during the year Reporting date / Cut-off VAT and GNI resources Financial adjustments Voting of the budget / amended budget Acceptation of the adjustment bases by the European Communities Call for funds Amounts voted by the budgetary authority, not yet called N/a Call for funds that are not related to the current reporting period should be deferred Amounts voted related to the current reporting period but not yet called should be accrued VAT and GNI bases should be revised based on the latest information available

15 PwC Revenue recognition - TOR Generating event Recording during the year Reporting date/Cut-off Traditional own resources (A) Revenues established and collected by the Member States Monthly statement sent by the Member States If material and reliable information is available, estimate of the portion of amounts receivable Traditional own resources (B) Revenues established and not yet collected by the Member States Quarterly statement sent by the Member State Record amounts net of collection costs retained by the M.S.

16 PwC Revenue recognition – Special calls for reserves Generating event Recording during the year Reporting date/Cut-off Special calls for reserves Decision of the budgetary authority Call for fundsAmounts decided by the budgetary authority but not yet called

17 PwC Revenue recognition – Donations and grants Generating event Recording during the year Reporting date/Cut-off Unconditional donations and grants Cash received N/A Conditional donations and grants Conditions fulfilledRecovery orderAccording to stage of completion of the E.C.s’ obligations

18 PwC Revenue recognition - Fines Generating event Recording during the year Reporting date/Cut-off Fines imposed by the European Communities Notification to the undertaking Recovery orderAmounts notified to the undertaking but no recovery order sent Any deposit paid by the undertaking awaiting judgement by the Court of Justice is a liability of the E.C. until the judgment If the E.C. decision is appealed, an assessment should be made of the need for a write-down of the receivable Any reduction of the fine by the Court of Justice should be recorded as a reduction of revenue

19 PwC Claims relating to transfers Correction of irregularities or errors in cost claims submitted by beneficiaries – refer to Payables and Expenses training: –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)

20 PwC Revenue recognition - Sale of goods Significant risks and rewards transferred No continuing managerial involvement / effective control Revenue can be measured reliably Probable that economic benefits will flow to the entity Costs can be measured reliably Sale has occurred Recognise revenue

21 PwC Revenue recognition - Rendering services Percentage of completion method Reliable estimate of outcome Outcome not estimable Recognise expected loss immediately Recognise revenue according to stage of completion Recognise revenue to extent of recoverable costs

22 PwC Revenue recognition – Other exchange transactions Rendering of services Percentage-of-completion method (refer to Payables and Expenses training) InterestTime proportion basis to take into account effective yield on the asset (refer to Financial Instruments training) RoyaltiesAccrual basis

PwC Revenues and Receivables 3. Illustration

24 PwC Worked example – Sale of goods On 15 December 2004, the E.C. receive an order for 5,000 publications. The price of a publication is € 5. On 16 December 2004, the E.C. deliver 2,000 publications. On 17 December 2004, they invoice 2,500 publications. 1,000 publications are delivered on 20 December 2004 (but not invoiced), and the final balance of 2,000 publications is delivered on 5 January What are the accounting entries to be recorded in the 2004 financial statements ?

25 PwC Worked example - Sale of goods 1) 16/12: Initial delivery of 2,000 publications Balance sheet and P&L Invoices to be issued10,000 Revenue 10,000 2) 17/12: Invoicing of 2,500 publications Balance sheet Trade accounts receivable12,500 Invoices to be issued 10,000 Deferred income 2,500 3) 20/12: Delivery of 1,000 publications Balance sheet and P&L Invoices to be issued2,500 Deferred income2,500 Revenue 5,000

PwC Revenues and Receivables 4. Measurement

27 PwC Initial measurement Revenue and the corresponding receivable should initially be measured at the fair value of the consideration received or receivable

28 PwC Subsequent measurement The European Communities need to perform a regular assessment of the recoverability of receivables The expected uncollectible amount, or the amount in respect of which recovery has ceased to be probable, is recognised as a value reduction (a charge in the economic outturn account) rather than as a negative adjustment to the amount of revenue originally recognised. The corresponding credit decreases the balance of receivables. change in estimate

29 PwC Subsequent measurement The uncollectible portion of a valid receivable should be charged to expense when recoverability becomes doubtful E.g. if the client having bought 5,000 publications for a total price of € 25,000 paid € 15,000 but then goes bankrupt, a value reduction of € 10,000 will have to be recorded The negative revision of a previously estimated revenue should be recorded as a decrease in the initially recorded revenue E.g. the process for estimating VAT and GNI bases involves judgement; a negative difference between amounts voted and the actual amounts due to the E.C. by M.S. based on final data should be recorded against revenue

PwC Revenues and Receivables 5. Disclosures

31 PwC Disclosures Analysis of each significant category of revenue Revenue on exchanges of goods or services Methods used to determine stage of completion for services Accounting policies for revenue recognition Current periodPrior period

PwC Revenues and Receivables 6. Questions