European Union Accounting Rule 5: Pre-Financing PDF

**EUROPEAN UNION** **ACCOUNTING RULE 5** **Pre-Financing** **I N D E X** 1\. Objective 3 2\. Scope 3 3\. Definitions 3 4\. Recognition 3 4.1 Pre-financing 3 4.2 Other advances to Member States 4 5\. Measurement 4 5.1 Initial measurement 4 5.2 Subsequent measurement 4 6\. Impairment 5 7...

**EUROPEAN UNION** **ACCOUNTING RULE 5** **Pre-Financing** **I N D E X** 1\. Objective 3 2\. Scope 3 3\. Definitions 3 4\. Recognition 3 4.1 Pre-financing 3 4.2 Other advances to Member States 4 5\. Measurement 4 5.1 Initial measurement 4 5.2 Subsequent measurement 4 6\. Impairment 5 7\. Disclosures 5 8\. Effective date 5 9\. Reference to other rules 5 Objective ========= The objective of this EU Accounting Rule is to prescribe the accounting treatment of pre-financing transactions of EU institutions and bodies. Pre-financing is most commonly used to implement non-exchange transactions such as transfers (e.g. subsidies, structural funds) and less so in the process of procurement of goods or services (exchange transactions). It corresponds to the payment of cash advances, i.e. the payments are made before the expenditure is declared eligible or before the delivery of goods or services. This type of cash advance is a significant asset of the European Union and is included in the financial statements under the heading \"Pre-financing\". Scope ===== This accounting rule prescribes the accounting treatment of pre-financing transactions of the EU institutions and bodies. It applies to the classification, presentation, recognition and measurement of pre-financing. Definitions =========== The following terms are used in this accounting rule with the meanings specified: 1. **Pre-financing** is a payment intended to provide the beneficiary with a float. It may be split into a number of payments in accordance with the provisions of the underlying contract, decision, agreement or the basic legal act. The float or advance is either used for the purpose for which it was provided during the period defined in the agreement or it is repaid. 2. **Other advances to Member States** refers to reimbursement of amounts paid as advances by the Member States to their beneficiaries. As a rule, the EU reimburses expenditure incurred (i.e. supported by invoices) and not advances. However, specific sector regulations may entitle the Member States to claim the reimbursement of advances (for instance: contributions to financial instruments, advances in the context of state aid, advances for market measures of EAGF). Recognition =========== Pre-financing ------------- Pre-financing is a cash advance. If the recipient does not incur eligible expenditures, he has the obligation to return the pre-financing advance to the EU institution or body. This right or claim of the EU entity towards the beneficiary is shown as an asset. The counterpart of the recognition of the asset is the cash transaction only and thus has no impact on the statement of financial performance. Pre-financing is recognised on the balance sheet when cash is transferred to the recipient. If awarding a pre-financing requires that the recipient presents a guarantee, then this guarantee should be disclosed in the notes to the financial statements (see point 7 below). A distinction should be made between long-term and short-term pre-financing and the relevant amounts be shown under non-current or current assets on the balance sheet. Long-term pre-financing should not be discounted at initial recognition. Other advances to Member States ------------------------------- Other advances to Member States are recognised as an asset on the EU entities balance sheet when the Commission reimburses the claim submitted by the Member State. The asset corresponding to \'other advances to Member States\' will be included under the \'prefinancing\' heading on the balance sheet of the EU; these advances are also subject to the distinction between long-term and short-term, and will therefore be shown under non-current and current assets on the balance sheet. Measurement =========== Initial measurement ------------------- *[Pre-financing]* Pre-financing is initially measured for the amount of the consideration given. *[Other advances to Member States]* Other advances to Member States are initially measured at the best estimate of the consideration given, calculated on the basis of reasonable and supportable assumptions regarding its utilisation. *[Foreign currency translation ]* If the amount of the pre-financing paid by an EU entity is expressed in a foreign currency, the pre-financing should be recorded, at its initial recognition, in the reporting currency (Euro), by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. Subsequent measurement ---------------------- *[Pre-financing]* Pre-financing is, on subsequent balance sheet dates, measured at the amount initially recognised on the balance sheet less eligible expenses, including estimated amounts where necessary, incurred during the period. Long-term pre-financing should not be discounted at subsequent balance sheet dates. *[Interest on pre-financing]* According to article 8(4) FR, as a general rule, interest on pre-financing is not due to the EU, except when otherwise foreseen in specific delegation agreements. Where interest on pre-financing is due, the relevant delegation agreement will contain provisions to allow for the identification of the amount of the interest (article 2 RAP). In these cases, interest should be recognised as a revenue as it is earned in accordance with the provisions of the delegation agreement. *[\ ]* *[Other advances to Member States]* Other advances to Member States are subsequently measured at the amount initially recognised on the balance sheet less a best estimate of the eligible expenses incurred by final beneficiaries, calculated on the basis of reasonable and supportable assumptions. Where possible this estimate shall be based on a confirmation from the final beneficiary for the most material amounts. *[Foreign currency translation ]* As explained in EU accounting rule 13, "The effects of changes in foreign exchange rates", at each reporting date, it is necessary to recognise both realised and unrealised exchange gains or losses in the balance sheet and the statement of financial performance. Foreign currency monetary items, such as pre-financing that are denominated in a foreign currency, should be translated into Euros at the spot exchange rate prevailing at the reporting date. The unrealised exchange differences (positive or negative) are recognised in the statement of financial performance. Impairment ========== In all cases, the EU will attempt to recover any unused pre-financing. The the impairment loss related to a recovery order for unused pre-financing will be determined in accordance with EU accounting rule 18 \"impairment of assets\". The risk of non-recoverability of pre-financing should be assessed at each balance sheet date. *[Non-recoverable pre-financing, covered by a guarantee]* If the pre-financing is supported by a third party guarantee and it is certain that the pre-financing cannot be recovered, the guarantee materialises and is recorded as an asset to be recovered from the third party by the EU institution or body. Generally, only the difference between the fair value of the guarantee and the unrecoverable pre-financing should be recognised as a loss in the statement of financial performance. If the guarantee covers the same amount as the pre-financing, then there should be no impact on statement of financial performance. Disclosures =========== In accordance with EU accounting rule 1, \"Financial Statements\", the detail provided in sub-classifications, either displayed on the face of the balance sheet or disclosed in the notes depends mainly on the size and nature of the amounts involved. Guarantees received in respect of the transactions described in this accounting rule shall be disclosed in the notes to the financial statements. Effective date ============== This rule shall be effective for annual financial statements covering periods beginning on or after 1 January 2015. Reference to other rules ======================== EU accounting rule 1 \"Financial Statements\" EU accounting rule 3 \"Expenses and payables\" EU accounting rule 13 \"*The effects of changes in foreign exchange rates*\" EU accounting rule 18 \"Impairment of assets\"