Pre-financing

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

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Overview of session

1. Scope of application

2. Key concepts

3. Life cycle

4. Worked example

5. Additional considerations and issues

6. Questions

Pre-financing

1. Scope of application

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Scope of application

Pre-financing is a means for the EU to « provide the beneficiary with a float » 1

EAGGF

Structural funds

Emergencyfund

Etc.

Grants

1 Art. 105 IR

Pre-financing

2. Key concepts

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Key concepts

• Assets 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 entity

• Expenses 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)

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Key concepts

Amounts paid as pre-financing are an asset of the EU until eligible expenses are incurred by the recipient

A balance sheet item

To be « cleared » by interim/final payments

A financing device

Based on the justification of eligible expenses

Otherwise to be refunded to the EU

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Key concepts

• An 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, […] 1

• The 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 1

1 Art. 105 IR

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Specific aspects

• Pre-financings « property » of the European CommunitiesV. Pre-financings « property » of third parties 1:

– These definitions only specify who is entitled to the interests

generated by the pre-financing

– They do not affect the principal characterisation of the pre-

financing – pre-financing remains an asset of the EU until eligible

expenses are accepted

1 Art. 3 IR

Pre-financing

3. Life cycle

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Expense recognition

Cash basis

Budgetary

Accrual basisIPSAS

The processing of the payment to the recipient triggers the recognition of expense

The acceptation by the EU of eligible expenses incurred by the recipient triggers the recognition of expense

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General accounting events

Event General accounting

Commitment -Signature of grant agreement - 1

Receipt of request for pre-financing 2

Payment authorisation by the A.O. -Payment of pre-financing Receipt of cost claim Validation of eligible expenses Payment authorisation by the A.O. -Interim payment/Payment of the balance Recovery authorisation by the A.O. -Notification of recovery Payment collection

1 Off-BS posting of thetotal amount of the grant

2 Balance sheet entry fortraceability purposes only

Pre-financing

4. Worked example

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Worked example

• The 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.

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General accounting debits and credits

Before execution of the pre-financing payment

No entries 1

1 May 200N - Execution of the pre-financing payment

Dr. Pre-financing (Vendor: SJ) 3,000

Cr. Banks 3,000

If a guarantee is received a contingent right is additionally to be

recorded at the time of payment of the pre-financing amount 2

A debtor liability(= an asset);

a sub-accountof the

recipient’s account

2 Refer to « Provisions, Contingent Liabilities and Contingent Rights » session

2 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 SJ

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Worked 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.

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General accounting debits and credits1 October 200N – Receipt of the cost claim

Dr. Cost claims to be checked 2,700

Cr. Vendor SJ 2,700

1 November 200N – Cost statement verified

Expense recognition & Partial clearing of the pre-financing

Dr. P&L - expenditures 2,700

Cr. Cost claims to be checked 2,700

Dr. Vendor SJ 2,700

Cr. Pre-financing (Vendor: SJ) 2,700

A suspenseaccount

The contingent rightfrom the guarantee

is partiallyextinguished

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General accounting debits and credits

1 December 200N – Execution of the second pre-financing

payment

Dr. Pre-financing (Vendor: SJ) 2,000

Cr. Banks 2,000

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 compensation

The balance in the pre-financing account is now € 2,300= € 3,000 - € 2,700 + € 2,000

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Worked 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.

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General accounting debits and credits

31 December N – The cut-off date

1 March 200N+1 – Receipt of the final cost claim

Dr. Cost claims to be checked 2,300

Cr. Vendor SJ 2,300

Accruing eligible expenses is neglected here –Refer to « Expenses and Payables » session

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General accounting debits and credits

1 April 2000 N+1 – Cost statement verified

(a) Full clearing of the pre-financing and (b) Recovery order

Dr. P&L - expenditures 2,000

Dr. Vendor SJ 300

Cr. Cost claims to be checked 2,300

Dr. Pre-financing – repayment requested 300

Dr. Vendor SJ 2,000

Cr. Pre-financing (Vendor: SJ) 2,300

Full extinguishment of the contingent right

Internal/pro forma to the extent that the recipient will not formally issue

To be credited against the bank account when SJ refunds the excess pre-financing received

Pre-financing

5. Additional considerations and issues

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Similarity 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 practice

• The 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.

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Pre-financings « property » of the E.C. 1

• Initial recognition at the nominal amount of amounts paid

• Interest income should be accrued for

• Based 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 measurable

1 Art. 3 IR

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Pre-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 debtors

• The difference between the amount paid and the fair value is an expense

• This expense will reverse over time through the recognition of interest income using the market interest rate

1 Art. 3 IR

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Value reductions

• Pre-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).

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Non 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.

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Presentation 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 date

• Reported for under “long-term assets” otherwise

Pre-financing

7. Questions

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