pwc revenues and receivables

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


1. Key concepts and scope of application

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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

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• 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)

Scope

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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

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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

Sale of publications

Interest on loans, on “propriety” pre-

financings and on bank accounts

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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

Sale of publications

Interest on loans, on “propriety” pre-

financings and on bank accounts

Surplus from the prior year

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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.

(Direct and indirect)taxes

Use of sovereign powers:Duties DonationsFines Grants

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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


2. Recognition

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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

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Revenue recognition- Non-exchange transactions

Revenue can be measured reliably

Probable that economic benefits will flow to the European Communities

Recognise revenue

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Revenue recognition – VAT and GNI resources

Generating event Recording during the

year

Reporting date /

Cut-off

• VAT and GNI

resources

• Financial

adjustments

• Voting of the budget /

amended budget

• Acceptation of the

adjustment bases by

the European

Communities

• Call for funds

• Call for funds

• Amounts voted by the

budgetary authority,

not yet called

• N/a

Call for funds that are not relatedto the current reporting period

should be deferred

Amounts voted related to thecurrent reporting period but not yet

called should be accrued

VAT and GNI bases should berevised based on the latest

information available

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Revenue recognition - TOR


year

Reporting date/Cut-off

Traditional own

resources (A)

Revenues established

and collected by the

Member States

Monthly statement sent

by the Member StatesIf material and reliable

information is available,

estimate of the portion

of amounts receivable

Traditional own

resources (B)

Revenues established

and not yet collected by

the Member States

Quarterly statement sent

by the Member State

Record amounts net of collection costs retained by

the M.S.

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Revenue recognition – Special calls for reserves


year


Special calls for

reserves

Decision of the

budgetary authority

Call for funds Amounts decided by the

budgetary authority but

not yet called

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Revenue recognition – Donations and grants


year


Unconditional

donations and grants

Cash received Cash received N/A

Conditional donations

and grants

Conditions fulfilled Recovery order According to stage of

completion of the E.C.s’

obligations

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Revenue recognition - Fines


year


Fines imposed by the

European

Communities

Notification to the

undertaking

Recovery order Amounts notified to the

undertaking but no

recovery order sent

Any deposit paid by the undertakingawaiting judgement by the Court of Justice is a liability of the E.C. until the judgment

If the E.C. decision is appealed,an assessment should be made of

the need for a write-down ofthe receivable

Any reduction of the fine by theCourt of Justice should be recorded

as a reduction of revenue

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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)

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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

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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

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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


3. Illustration

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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 ?

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Worked example- Sale of goods

1) 16/12: Initial delivery of 2,000 publications

Balance sheet and P&LInvoices to be issued 10,000 Revenue 10,000

2) 17/12: Invoicing of 2,500 publications

Balance sheetTrade 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&LInvoices to be issued 2,500Deferred income 2,500 Revenue 5,000


4. Measurement

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Initial measurement

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

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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

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Subsequent measurement

• 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


5. Disclosures

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Disclosures

Analysis of each significant category of revenue

Revenue on exchanges of goods or

services

Methods used to determine stage of

completion for services

Accounting policies for revenue recognition

Current period Prior period


6. Questions

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pwc revenues and receivables

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