Payables and Expenses

1. Payables and Expenses http://www.cc.cec/budg/

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

3. Payablesand Expenses 1. Key concepts and scope of application

4. Scope • 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

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

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

9. 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 Voluntary Imposed

10. 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. 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 Voluntary transfers

12. 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. Exchange transactions • 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 goods Rendering of Interest, royalties services & dividends

14. Payables and Expenses 2. Non-exchange transactions

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

18. 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. Estimate at year-end Cost claim or expense summary received after the reporting date and during the closing period ? Eligible expenses known ? Work in progress information available ? (1) YES NO YES NO YES YES NO NO Separation before/after the reporting date available ? Separation before/after the reporting date available ? 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. YES NO Recognise an expense for each relevant period based on eligible expenses Apply a prorata temporis method on eligible expenses Recognise an expense for each relevant period based on estimation of eligible expenses Apply a prorata temporis method on estimated eligible expenses (1) work in progress information Must be reliable Can be based on beneficiary reporting, budget information, past experience,… Apply thematerialityprinciple

20. 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. Non-exchange transactions - Summary Apply thematerialityprinciple 1Posting of claim received to a suspense account

22. Payables and Expenses 3. Exchange transactions

23. 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. Exchange transactions - Summary Estimate bythe DGs Object-code Apply thematerialityprinciple 1Posting of invoice received to a suspense account

25. 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. 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. 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. 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.

29. Payables and Expenses 4. Measurement

30. 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

31. Payables and Expenses 5. Disclosures

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

33. Payables and Expenses 6. Questions http://www.cc.cec/budg/