PwC Payables and Expenses .
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Transcript of PwC Payables and Expenses .
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Payables and Expenses
http://www.cc.cec/budg/
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Overview of session
1. Key concepts and scope of application
2. Non-exchange transactions
3. Exchange transactions
4. Measurement
5. Disclosures
6. Questions
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Payablesand Expenses
1. Key concepts and scope of application
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• 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
Scope
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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.
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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)
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The major EC expenses
Short term employee benefits
Services
Capital asset use (depreciation)
Imposed transfers
Voluntary transfers
Interest
Goods
Tax
Travel expenses
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The major EC expenses
• Non-exchange transactions:
• Exchange transactions:
Short term employee benefits
Services
Capital asset use (depreciation)
Imposed transfers
Voluntary transfers
Interest
Goods
Tax
Travel expensesP, P & E training
Inventories training
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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
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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.
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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
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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)
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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
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Payables and Expenses
2. Non-exchange transactions
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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”)
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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 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.
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Non-exchange transactions -Grants under agreements
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
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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)
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Estimate at year-end
NOYESNOYES
Cost claim or expense summary received after the reporting date and during the closing period ?
NOYESEligible expenses known ?
NOYES
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)
NOYES
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
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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
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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
RAL
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
Apply thematerialityprinciple
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Payables and Expenses
3. Exchange transactions
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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
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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
Apply thematerialityprinciple
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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
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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?
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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
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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.
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Payables and Expenses
4. Measurement
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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
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Payables and Expenses
5. Disclosures
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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
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Payables and Expenses
6. Questions
http://www.cc.cec/budg/