Revenues and Receivables

1. Revenues and Receivables http://www.cc.cec/budg/

2. Overview of session 1. Key concepts and scope of application 2. Recognition 3. Illustration 4. Measurement 5. Disclosures 6. Questions

3. Revenues and Receivables 1. Key concepts and scope of application

4. Key definitions and concepts • Revenue = the gross inflow of economic benefits or service potential during the reporting period when those inflows result in an increase in net assets/equity • Either collected revenue • Or gains (out-of-scope) Borrowings do not result in an increase of net worth They are budgetary, but not financial accounting revenue

5. Scope • Revenue arising from exchange transactions (based on IPSAS 9) • Revenue arising from non-exchange transactions (based on Exposure Draft by the Public Sector Committee of the IFAC)

6. Outside of scope • Revenues from lease agreements • Dividends arising from investments accounted for under the equity method • Gains from the sale of Property, Plant & Equipment • Changes in the fair value of financial assets and liabilities on their disposal • Changes in the value of other current assets

7. The major EC revenues Traditional own resources:customs and agricultural duties; sugar levies Resources from Member States:VAT resource; GNI resource; the UK correction Fees and fines Interest on loans, on “propriety” pre-financings and on bank accounts Sale of publications

8. The major EC revenues • Non-exchange transactions: • Exchange transactions: Traditional own resources:customs and agricultural duties; sugar levies Resources from Member States:VAT resource; GNI resource; the UK correction Fees and fines Surplus from the prior year Interest on loans, on “propriety” pre-financings and on bank accounts Sale of publications

9. 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. (Direct and indirect) taxes Use of sovereign powers: Duties Donations Fines Grants

10. 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, royalties services & dividends

11. Revenues and Receivables 2. Recognition

12. Key issue • Key issue = the timing of revenue 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) • Cut-off: revenue should be accounted for in the period to which it relates

13. Revenue recognition- Non-exchange transactions • Revenue can be measured reliably • Probable that economic benefits will flow to the European Communities Recognise revenue

14. Revenue recognition – VAT and GNI resources Amounts voted related to thecurrent reporting period but not yet called should be accrued Call for funds that are not relatedto the current reporting periodshould be deferred VAT and GNI bases should berevised based on the latestinformation available

15. Revenue recognition - TOR Record amounts net of collection costs retained bythe M.S.

16. Revenue recognition – Special calls for reserves

17. Revenue recognition – Donations and grants

18. Revenue recognition - Fines If the E.C. decision is appealed,an assessment should be made ofthe need for a write-down ofthe receivable Any reduction of the fine by theCourt of Justice should be recordedas a reduction of revenue Any deposit paid by the undertakingawaiting judgement by the Court of Justice is a liability of the E.C. until the judgment

19. Claims relating to transfers • Correction of irregularities or errors in cost claims submitted by beneficiaries – refer to Payables and Expenses training: • 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)

20. Revenue recognition - Sale of goods • Significant risks and rewards transferred • No continuing managerial involvement / effective control • Revenue can be measured reliably • Probable that economic benefits will flow to the entity • Costs can be measured reliably Sale has occurred Recognise revenue

21. Revenue recognition - Rendering services Percentage of completion method Reliable estimate of outcome Outcome not estimable Recognise expected loss immediately Recognise revenue according to stage of completion Recognise revenue to extent of recoverable costs

22. Revenue recognition – Other exchange transactions Rendering of services Percentage-of-completion method (refer to Payables and Expenses training) Interest Time proportion basis to take into account effective yield on the asset (refer to Financial Instruments training) Royalties Accrual basis

23. Revenues and Receivables 3. Illustration

24. Worked example –Sale of goods • On 15 December 2004, the E.C. receive an order for 5,000 publications. The price of a publication is € 5. On 16 December 2004, the E.C. deliver 2,000 publications.On 17 December 2004, they invoice 2,500 publications. 1,000 publications are delivered on 20 December 2004 (but not invoiced), and the final balance of 2,000 publications is delivered on 5 January 2005. • What are the accounting entries to be recorded in the 2004 financial statements ?

25. Worked example- Sale of goods 1) 16/12: Initial delivery of 2,000 publications Balance sheet and P&L Invoices to be issued 10,000 Revenue 10,000 2) 17/12: Invoicing of 2,500 publications Balance sheet Trade accounts receivable 12,500 Invoices to be issued 10,000 Deferred income 2,500 3) 20/12: Delivery of 1,000 publications Balance sheet and P&L Invoices to be issued 2,500 Deferred income 2,500 Revenue 5,000

26. Revenues and Receivables 4. Measurement

27. Initial measurement • Revenue and the corresponding receivable should initially be measured at the fair value of the consideration received or receivable

28. Subsequent measurement • The European Communities need to perform a regular assessment of the recoverability of receivables • The expected uncollectible amount, or the amount in respect of which recovery has ceased to be probable, is recognised as a value reduction (a charge in the economic outturn account) rather than as a negative adjustment to the amount of revenue originally recognised. The corresponding credit decreases the balance of receivables. • change in estimate

29. The uncollectible portion of a valid receivable should be charged to expense when recoverability becomes doubtful E.g. if the client having bought 5,000 publications for a total price of € 25,000 paid € 15,000 but then goes bankrupt, a value reduction of € 10,000 will have to be recorded The negative revision of a previously estimated revenue should be recorded as a decrease in the initially recorded revenue E.g. the process for estimating VAT and GNI bases involves judgement; a negative difference between amounts voted and the actual amounts due to the E.C. by M.S. based on final data should be recorded against revenue Subsequent measurement

30. Revenues and Receivables 5. Disclosures

31. Disclosures Accounting policies for revenue recognition Methods used to determine stage of completion for services Current period Prior period Revenue on exchanges of goods or services Analysis of each significant category of revenue

32. Revenues and Receivables 6. Questions http://www.cc.cec/budg/