Operational Accounting - PowerPoint by vkv75576

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an operational view.
CIPFA Annual seminar

Miguel Gracia on behalf of Brian Gray


                                        14 September 2006
• IPSAS Implementation project description
• EC Accounting rules
• IPSAS Impact on EC accounts
• Most material impacts on the accounts
• Questions

                                             Page 2
IPSAS Implementation project description (I)

The European Commission decided to provide the administration with a modern accounting
system in December 17, 2002
The European Commission adopts an ambitious plan to implement full accrual
accounting by 2005.
"Today's action plan is the latest step in this long term strategy of modernisation: it maps the
Commission's progress towards the wholesale implementation of the most up-to-date public
sector accounting standards by 2005, taking into account all the constraints and necessary
detailed changes. With these measures the Commission will be far ahead of most
administrations in the world."
Commissioner Michaele Schreyer

Basis: Financial Regulation of June 2002, art. 133 (Council Regulation 1605/2002)
1. The Commission's accounting officer shall, after consulting the accounting officers of the other
institutions and bodies, adopt the accounting rules and methods and the harmonised chart of
accounts to be applied by all the EU institutions and bodies.
2. When adopting the rules and methods, the Commission's accounting officer shall be guided
by the internationally accepted accounting standards for the public sector but may depart from
them where justified by the specific nature of the Communities' activities.
TRANSITIONAL PROVISION: 2005 first application.

                                                                                                Page 3
IPSAS Implementation project description (II)
Two types of accounts :

           Budgetary                       General
           Accounts                       Accounts

         Priority: To develop a reference framework for general
          accounting that is in line with the private company
            accounting and that is internationally accepted.
                    Choice: The adoption of IPSAS
                  Consequence: Accrual accounting
             Issue: Cash Budgetary System, dual system

                                                                  Page 4
IPSAS Implementation project description (III)
The 3 levels of the ABAC Project
                                      •   15 New accounting rules
                                      •   Chart of accounts
                                      •   Accounting & Consolidation Manual
                                      •   Financial Statements
                     Rules            •   Closing procedures

                                      • Needs & functional specifications
                                      • Architecture, Developments
          IT Tools                    • Progressive integration into one

                                      • New procedures
                                      • New system
                                      • New information to introduce

                                                                       Page 5
IPSAS Implementation project description (IV)
Actors involved

         Supervisory Board                          Standards

                           Accounting Officer of the
                          Commission – Project leader

     Accounting service             Accounting framework

        IT service                     IT Architecture

   User Service Manager                    Users

                                                                       Page 6
EC Accounting rules (I)

Difficulties involved in the adoption of the accounting framework based on IPSAS

•IPSAS are not very detailed (general principles rather than detailed rules). For instance:

   • debts/expenses for grants
   • pre-financing
   • Cut-off transactions and materiality

•Double contradiction:

   • some EC transactions not covered (non-exchange revenue, employee benefits, financial assets and
   • some IPSAS guidelines are not relevant in EC context (service concessions, heritage assets, leaseback


•To apply IAS when IPSAS were not available
•To draft EC accounting rules which customise IPSAS / IAS to EC environment
•To draft EC "operational" accounting manual that gives detailed explanations on how to apply the
corresponding accounting rules via the chart of accounts
                                                                                                        Page 7
EC Accounting rules (II)
EC accounting rules adoption proccess

•   Analysis of EC transactions to list the areas where accounting standards
    are needed.
•   Analysis of corresponding IPSAS. IAS if IPSAS are not available.
•   DG Budget – General Accounting department drafts an EC accounting rule
•   EC accounting draft submitted to the advisory accounting standards
•   Accounting draft submitted to the accounting officers of all the institutions
•   Final decision of the Accounting Officer of the Commission

                                                                               Page 8
EC Accounting rules (III) : Acccounting rules advisory Committee

• Members of other institutions (CoJ, EP), and Agencies
• IAS and CoA as observers
2 independent accounting experts:
• Prof Montesinos, which study was the basis of the project
• Mr. Hathorn, vice-president IPSASB

                                                                   Page 9
EC Accounting rules (IV): Accounting Rules of the Commission

        Accounting                                  15 new accounting rules on
                                                    various subjects: Consolidation,
                                                    Pre-financing, Provisions,…
     (consultative role)
                        Accounting Officer of the
                           Consolidation                    Stocks

                      Financial statements       Provisions, contingent A&L

                     Payables and expenses      Financial Assets and Liabilities

                    Receivables and revenues          Employee benefits
       BUDG                Pre-financing               Foreign currency
                      Intangible fixed assets          Surplus or deficit

                      Tangible fixed assets       Related party transactions

                                                                                   Page 10
EC Accounting rules (V): Implementation. Objective: The Financial


               IPSAS              A. CAPITAL
                                       Accumulated surplus / deficit
                                       Economic result of the year
                                  TOTAL CAPITAL
                                                                                             Note   20X1   20X0

                                  B.   MINORITY INTEREST

                                  C. NON CURRENT LIABILITIES
                                      Employee benefits
                                      Provisions for risks and liabilities
                                      Financial liabilities
                                         Held-for-trading liabilities
                                      Other long-term liabilities

                                  TOTAL NON CURRENT LIABILITIES

                                  D. CURRENT LIABILITIES
                                      Employee benefits
                                      Provisions for risks and liabilities
                                      Financial liabilities
                                         Borrowings falling due within the year
                                         Held-for-trading liabilities due within the year
                                      Accounts payable
                                         Current payables
                                         Long-term liabilities falling due within the year
                                         Sundry payables
                                                                                                                         for IT
                                  TOTAL CURRENT LIABILITIES


                                Financial statement

                                                                                                                  IT Developments


                                                                                                                                 Page 11
EC Accounting rules (VI): ABAC
High Level Programme Approach

    Accounting rules
  Accounting & Controls
    manuals definition
 Functional Requirements
                           IT Architecture

                                                       Phased roll-out
                                                    Opening Balance Sheet

                            Change Management

                           Programme Management

                                                                       Page 12
IPSAS impact on EC accounts (I)

                        Enlargement in the scope of
                        consolidation. Based in control rather
                        than in former FR (16 additionnal


                             Same accounting rules for all
                             Development of an IT
                              consolidation tool
                             Broad communication with
                              consolidating bodies

                                                                 Page 13
IPSAS impact on EC accounts (II)

                            Main Project objective to produce timely and
                            reliable financial statements based on
     Financial statements   IPSAS.

                                   Balance sheet, Economic outturn
                                    account, statement of changes in net
                                    assets, Cash flow table, Notes.
                                   Not only figures, detailed disclosure
                                    requirements in the Notes.
                                   New structure.

                                                                            Page 14
IPSAS impact on EC accounts (III)

                              Main business and most of
                              transactions (EAGGF, structural
                              funds, subventions, Fines, TOR…)
    Payables and expenses     Consequences :
   Receivables and revenues       Event giving rise in general
                                   accounting: good delivered or
            Stock                  service rendered. Subventions,
       Foreign currency            « eligibility check » of cost claim
                                  Cut-off. Assess the services and
                                   goods delivered for which an
                                   invoice/cost claim is not yet
                                   received . Biggest impact
                                   64 billions.
                                  Inventory of entitlements and

                                                                         Page 15
IPSAS impact on EC accounts (IV)

                       Pre-financing not any longer a charge
                       but an asset
                       Consequences :
                            Recognition as asset
                            Clearing functionality
                            Split between the s/t and the l/t
                            Opening balance
                            Closure transactions (cut-off)
                            Related interest recognition

                                                                 Page 16
IPSAS impact on EC accounts (V)

                               EC largely applied already these
                               IPSAS rules but events were not
                               registered in an accrual basis.
     Intangible fixed assets

     Tangible fixed assets
                               Consequences :
                                    Assets are recognised when
            Leases                   they are delivered.
                                    Invoices are linked to the
                                     corresponding assets
                                    Impairement, disposals, financial
                                     lease, under construction when
                                     they occur.

                                                                         Page 17
IPSAS impact on EC accounts (VI)

                                 Under IPSAS there are stricter rules to
    Provisions, contingent A&L   recognise provisions. Nevertheless
                                 disclosure requirements in the Notes
        Employee benefits        are enlarged.
                                 IPSAS confirms the previous practise
                                 of recognising staff pensions
                                 obligations as a provision in the

                                      The enlarged information
                                       requires detailed risks analysis.

                                                                           Page 18
IPSAS impact on EC accounts (VII)

  Financial Assets and Liabilites   Material impact . New concepts such
                                    as Fair value and impairment

                                    Consequences :
                                         Change of valuation methods for
                                          some financial assets
                                         Recognision of new risks
                                         Information much more detailed
                                          in the Notes.

                                                                            Page 19
IPSAS impact on EC accounts (VIII)

                            Consequences :
      Surplus or deficit…

         Related party         additional information to include
                                in the annexes
                               Informations sur le Key

                                                                    Page 20
         BALANCE SHEET                      31.12.2005 (EUR millions)
I. NON CURRENT ASSETS:                                         31.415
  Intangible fixed assets                                           27
  Tangible Fixed Assets                                          4.141
  Investments                                                    1.874
  Loans                                                          2.397
  Long-term pre-financing                                       22.731
  Long-term receivables                                            243
II. CURRENT ASSETS                                             27.291
  Stocks                                                           126
  Short-term investments                                         1.439
  Short-term pre-financing                                       6.633
  Short-term receivables                                         7.237
  Cash & cash equivalents                                       11.853
TOTAL ASSETS                                                   58.706
III. NON CURRENT LIABILITIES                                   38.025
  Employee benefits                                             33.155
  Provisions for risks and charges                               1.096
  Financial liabilities                                          1.920
  Other long-term liabilities                                    1.852
IV. CURRENT LIABILITIES                                        82.825
  Provisions for risks and charges                                 275
  Financial liabilities                                             22
  Accounts Payable                                              82.527
TOTAL LIABILITIES                                            120.851
V. NET ASSETS                                                (62.144)
  Reserves                                                        2.808
  Amounts to be called from Member States                      (64.953)
        Staff pensions                                         (33.155)
        Other ammounts                                         (31.797)   Page 21
Most material impacts on the accounts (I)

•More information for readers – Economic Outturn Account added (segment
reporting), plus cash flow table, statement of changes in net assets and more
detailed disclosures in the notes

•Pre-financing of EUR 29.3 billion included for first time – DGs have thus a
better view of the amounts paid out not yet eligible

•Amounts receivable from Member States to fund pensions no longer meets
accounting criteria to be recognised as an asset (normally would be EUR 32

•Liabilities: year-end accruals (cut-off) introduced (EUR 64 billion) reflecting
charges incurred under EAGGF (EUR 49 billion) and Structural Funds (EUR
14 billion)

                                                                               Page 22
Most material impacts on the accounts (II)

•Negative net assets figure of EUR 58.8 billion – resulting from removal of pension
receivable and inclusion of accruals. It needs to be clearly explained – the EC is not
bankrupt nor does it need to request more money from MS. The net liabilities figure
simply highlights the difference between cash and accrual accounting.

• IAS 32 & 39 requires lerge volume of financial activities disclosures. It could give a
misleading picture of the significance.

                                                                                       Page 23

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