PwC Payables and Expenses .

transcript

Payables and Expenses

http://www.cc.cec/budg/

Overview of session

1. Key concepts and scope of application

2. Non-exchange transactions

3. Exchange transactions

4. Measurement

5. Disclosures

6. Questions

Payablesand Expenses

1. Key concepts and scope of application

• 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

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.

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)

The major EC expenses

Short term employee benefits

Services

Capital asset use (depreciation)

Imposed transfers

Voluntary transfers

Interest

Travel expenses

The major EC expenses

• Non-exchange transactions:

• Exchange transactions:

Services

Capital asset use (depreciation)

Imposed transfers

Voluntary transfers

Interest

Travel expensesP, P & E training

Inventories training

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

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.

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

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)

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, royaltiesservices & dividends

2. Non-exchange transactions

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”)

• « 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.

Post total amount of the contract off-balancesheet at signature of the grant agreement

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)

Object-code

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)

Estimate at year-end

NOYESNOYES

Cost claim or expense summary received after the reporting date and during the closing period ?

NOYESEligible expenses known ?

Separation before/after the reporting date

available ?

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)

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 thematerialityprinciple

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

Non-exchange transactions - Summary

Transaction Generating event Recording during the year Reporting date/Cut-off

Grants under agreement Eligible expenses incurredEligible cost claim/expense

summary1

Estimated portion of incurred

eligible expenses owed to

beneficiaries

EAGGF Guarantee Expenses incurred by M.S. Eligible M.S.’s expenses1

Structural funds Eligible expenses incurred Eligible expense summary1

Not an expensePayment appropriations

carried over

Entitlements Acceptance of an application Payment orderEstimated entitlements due

at the reporting date

Discretionary grants,

contributions and donationsAcceptation Acceptation Acceptation

1 Posting of claim received to a suspense account

3. Exchange transactions

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

Exchange transactions - Summary

Generating event Recording during the year

Reporting date/Cut-off

Procurement (goods)

Goods delivered Invoice amount1 Delivery note

Procurement (services)

Services received Invoice amount1 Stage of completion method

Interest/Royalties

Expenses incurred based on contract

Cash paid Estimate of expenses incurred

1 Posting of invoice received to a suspense account

Object-codeEstimate by

the DGs

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

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?

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

• 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.

4. Measurement

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

5. Disclosures

Disclosures

Analysis of each significant category of expenses

Methods used to determine stage of

completion for services

Accounting policies for expense recognition

Current period Prior period

6. Questions

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PwC Payables and Expenses .

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