Pre-financing

1. Pre-financing http://www.cc.cec/budg/

2. Overview of session 1. Scope of application 2. Key concepts 3. Life cycle 4. Worked example 5. Additional considerations and issues 6. Questions

3. Pre-financing 1. Scope of application

4. Scope of application Pre-financing is a means for the EU to « provide the beneficiary with a float » 1 Etc. Structural funds Emergency fund EAGGF Grants 1 Art. 105 IR

5. Pre-financing 2. Key concepts

6. 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)

7. Key concepts Amounts paid as pre-financing are an asset of the EU until eligible expenses are incurred by the recipient A financing device A balance sheet item To be « cleared » by interim/final payments Based on the justification of eligible expenses Otherwise to be refunded to the EU

8. 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

9. 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

10. Pre-financing 3. Life cycle

11. Expense recognition The processing of the payment to the recipient triggers the recognition of expense Cash basis Budgetary Accrual basis The acceptation by the EU of eligible expenses incurred by the recipient triggers the recognition of expense IPSAS

12. General accounting events 1 Off-BS posting of thetotal amount of the grant 2 Balance sheet entry fortraceability purposes only

13. Pre-financing 4. Worked example

14. 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.

15. General accounting debits and credits A debtor liability(= an asset);a sub-accountof therecipient’s account 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 2 Refer to « Provisions, Contingent Liabilities and Contingent Rights » session

16. 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.

17. General accounting debits and credits A suspenseaccount The contingent rightfrom the guaranteeis partiallyextinguished

18. General accounting debits and credits 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

19. 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.

20. General accounting debits and credits Accruing eligible expenses is neglected here – Refer to « Expenses and Payables » session

21. General accounting debits and credits 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

22. Pre-financing 5. Additional considerations and issues

23. 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.

24. 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

25. 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

26. 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).

27. 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.

28. 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

29. Pre-financing 7. Questions http://www.cc.cec/budg/