Revenues and expenses recording

ERICs are positioned as non-profit organizations set up by the European Commission (EC). In order to accomplish their mission, their main sources of revenues are

• membership fees
• grants from government
• European Commission funding
• in-kind contributions provided by Member States or donors
• in some limited cases, they could provide their services upon the payment of fees.

Many of these items are non-exchange revenue, that is, funds received where the provider of funds does not expect to personally receive goods or services of equal value in return.

The distinction between exchange and non-exchange revenue is not simple. A significant difficulty is in the area of valuing and recognizing in-kind contribution items/services.

Two critical aspects of Revenue recording are:

• given that all changes in assets and liabilities must pass through the revenue and expenditure statements, when non-exchange revenue is received, the recognition of revenue in one year may not provide information to a user as to the likely revenue for the following year, thus reducing the decision-usefulness.
• also, when incomes are received in one period for use in another, an obligation to repay or allocate those funds or assets is required before these funds can be recognized as a liability and in effect, carried forward to the next year. Often such an communicating obligation is overlooked: as a consequence income statements may show swings from a large surplus one year to a large deficit in another, which can cause difficulties when communicating with resource providers.

When ERICs prepare a Statement of Cash Flows, they should show to the stakeholders the cash received for operating purposes separately from the non-cash in-kind contributions received.  It would be appropriate to specify the use of the in-kind contributions.

Assets held by ERICs are “a resource, with the ability to provide an inflow of service potential or economic benefits that an entity presently controls, and which arises from a past event”. This would allow preparers to value an asset at a ‘value in use’ rather than an ‘open market’ value when assets are used for a purpose other than their best purpose.

Further difficulties occur with the recognition and valuation of provided assets by third parties to ERICs:

• control of assets may be shared (as for example, if the ERIC must care for an infrastructure provided by a member State which is readily accessible to the public) and the control criterion may not be met;
• costs of obtaining a fair value (including impairment) may outweigh the benefits
• valuation may not meet the underlying concepts of financial reporting (for example, to be understandable, reliable, relevant).

Residual Cash carry-over typically does not return to members of an ERIC. In case of liquidation, ERIC assets should be transferred to another ERIC, so neither the Member States, nor the current beneficiaries may be the residual holders.

However, it is often the case that the equity of an ERIC comprises a number of funds subject to different conditions as a consequence of grants or fees received for specific purposes.

For instance, European Commission projects funds (LINK) account contains money that can only be used for specific purposes (a grant, an investment). These funds provide reassurance to stakeholders that the received contributions are used in the manner they have chosen and should be highlighted in the financial statements. Therefore, European Projects accounting assists the objective of financial reporting, as it allows members to track their inputs.

Possible options that could be used by ERICs include:

• Preparation of separate financial statements for each fund/source of grant.
• Provision of a separate income statement for each fund/source of grant, but with all funds of the entity brought together on a single balance sheet.
• Presentation only of unrestricted fund movements through financial statements with movements on restricted funds not regarded as part of the reporting entity for either the income statement or balance sheet but disclosed as ‘funds held on trust’ through notes to the accounts.
• Provision of a balance sheet showing restricted funds as current liabilities (creditors) but with no recognition in the income statement.
• Showing different classes of funds in columns with a total

Amalgamation of funds in a single income statement and balance sheet, with no distinction between restricted and unrestricted revenue except by way of notes to the accounts.

All contributions received by an ERIC should be recorded as revenue upon receipt, including in-kind contributions. The standard for recording in-kind contributions implies that contributed services/items are recognized in financial statements if :

• Are non-financial assets, or specialized skills/ competencies , provided by Entities possessing those skills/ capacities/ infrastructures. The ERICs would need to purchase those if not provided through in-kind contributions procedures .

In-kind contribution can include Materials and Supplies, Services, Property. Recording the in-kind contribution as an expense and income does not change the bottom line (Cash carry over/ income) on the ERICs financial statements.  However, by recording the in-kind contribution, what an ERIC has done in this process is accurately recorded and reflected what it takes to operate.

The requirements related to in-kind contributions, and the required accounting treatment of in-kind contributions as a match in the general ledger are:

• Grantees should record in-kind contribution as they do cash expenses in their accounting systems
• If this is not the practice of the ERIC, there should be a written policy in place that describes the system to record the transactions.
• Given the specific purpose of the contribution- the in-kind contributions should be specifically targeted to reinforce the ERIC capability to accomplish its mission. Therefore, the implications of reporting of the in-kind contribution as a cost within EC project grants or any other funded initiative should be carefully considered by the ERIC if this reporting generates a financial benefit for the ERIC.

The most common liabilities for the ERICs include the following:

• Accounts Payable: amounts owed to vendors or creditors for goods or services rendered
• Unpaid bills
• Unpaid wages, taxes or grants can be included reported separately if significantly large
• Deferred revenue: for instance grants received from the EC that have not been recognized as revenue because the conditions of the grant have not been met yet
• Due to Third Parties: certain ERICs collect contributions from one Member State and transfer them to another Service or Public Agency. When these ERICs are operating as a transfer agent with no variance power to change the recipient, then the associated cash receipts are not recorded as revenues by the ERIC, rather they are carried as liabilities
• Long Term Debt: the principal and interest owed to a creditor. These debts can be in the form of bank loans, publicly traded bonds, or privately arranged debt financing: these debts are not common among the ERICs.

An ERIC shall be liable for its debts. However, the financial liability of the Members for the debts of the ERIC is normally limited to the respective contributions provided to the ERIC. The Members may specify in the Statutes that they will assume a fixed liability above their respective contributions or unlimited liability.

It is recognized that some endowments represent a net liability to ERICs as stated in the ERICs Regulation (LINK) whereas “an ERIC shall be liable for its debts” and that “the financial liability of the members for the debts of the ERIC shall be limited to their respective contributions provided to the ERIC” though “the Members may specify in the Statutes that they will assume a fixed liability above their respective contributions or unlimited liability.”. However, “if the financial liability of the members is not unlimited, the ERIC shall take appropriate insurance to cover the risks specific to the construction, operation and governance of the infrastructure.”

On the other hand, since an ERIC is liable for its debts, it has no immunity from seizures of its assets in case of forced recovery of debts. It also is not immune from insolvency proceedings, which will in general be governed by the law of the statutory seat applicable insolvency law.

The liability of the members for the ERIC’s debts is limited to each member’s contribution provided to the ERIC. Contributions may be financial or “in kind” which has been paid or promised in a legally binding way.