Financial Reporting
The purpose of accounting is to communicate an organization’s financial position to managers, investors, banks, and the government. Accounting provides a system of rules and principles that prescribe the format and content of financial statements. Through this consistent reporting, managers and stakeholders can assess the financial standing.
Accounting standards cover topics such as how to account for inventories, depreciation, research and development costs, income taxes, investments, intangible assets, and employee benefits. Assembly of members can use these financial statements to determine whether to increase or decrease their support and to identify possible risks.
As countries have different cultures, languages, and social and economic traditions, they developed different accounting practices as well. In an increasingly globalized world, however, these differences are not optimal for the smooth comparisons of financial reporting in particular for international, cross-border activities by ERIC’s. Read more about GAAP and IFRS on the Accounting page of the Toolkit.
The rules of consistency
The consistency principle holds high importance the ERICs for two main reasons.
1) By using a consistent accounting method from one accounting period to the next, the financial reports will all hold a similar structure. This makes it easier for the public stakeholders (notably: Member States, European Commission) to compare the performance of the ERICs over different financial years.
2) Following the consistency principle, auditors will demand reasons for any changes that could affect the interpretation of the financial statements of the ERIC.
ERICS are not legally required to, but being GAAP compliant implies the fulfillment of 4 major rules:
- Recognising. Crucial items like liabilities, assets, and expenses destination, revenue recognition, liability tracking, homogeneous financial data communication, In-Kind contributions transactions, funds and physical contributions accounting issues should be easily recognized in ERICs various financial statements.
- Measuring. The specific amounts need to be reported for each part of ERICs statements including assets ownership of intangible (IP, service design, data, know-how) and tangible assets (inventories, equipment)
- Presenting. Subtotals and totals need to be properly displayed and line items should be aggregated clearly to facilitate assessment by the member States delegates and the Stakeholders.
- Disclosing. The most important information for the Member States should be highlighted in easy-to-understand terms and make it easier to explain accounting items and supplement the numbers provided.
Accounting compliance can make the financial reporting process transparent and standardises assumptions, terminology, definitions, and methods. External parties should easily compare financial statements issued ERICs and safely assume consistency, which may allow for quick and accurate cross-ERIC comparisons .
INFO: Social accounting
Social accounting is process of communicating the social and environmental effects of organizations’ economic actions to particular interest groups within society and to society at large is very important for ERICs. Some ERICs are already engaged in social accounting, intended here as the determination of those to whom the ERIC is accountable for its performance and the development of appropriate reporting techniques implying social impact and economic sustainability assessments.
Financial reporting for the ERICs
ERIC are legal entities with legal personality and full legal capacity recognised in all EU Member States. The members are free to define in the statutes, case by case, membership rights and obligations, the bodies of the ERIC and their competences. The liability of the ERIC’s members is generally limited to their respective contributions.
An ERIC is recognised by the country hosting its seat as an international body or organisation. It should be highlighted that IFRS6 is a principle of the standard-based approach and is used internationally, for purposes of the directives on value-added tax (VAT) and excise duties. It also qualifies as an international organisation for the purpose of the directive on public procurement.
An ERIC may, under certain limits and conditions, benefit from exemptions from VAT and excise duties on its purchases in all EU Member States and it may adopt procurement procedures respecting the principles of transparency, non-discrimination and competition but not subject to the directive on public procurement as implemented in national law. See more information on the VAT exemption page.
The financial statements of ERICs should provide relevant information to meet the common interest of Member States, and the stakeholders who provide resources in most of the criteria thereby listed. The most important use of ERICs accounting data is to communicate meaningful information, with allows management and Member Countries to make good decisions. ERICs should use templates for internal reports to communicate information in a matter that is familiar and easy to use by the stakeholders.
It is necessary for an ERIC to carry out its activities according to sound budgetary principles for the exercise of its financial responsibility. Therefore, ERICs accounting data should include:
- Income statements that reflect the income is to be replaced by cash-carryover
- Statements of cash-flows
- Accounting data referred to goals: L/T society, scientific, environment and also economic sustainability
- All relevant non-financial information and narrative notes ( see separate abstract: WP3-Reporting to ERICs stakeholders)
This is all confirmed by the COUNCIL REGULATION No 723/20097 whereas in art. 13 (Budgetary principles, accounts and audit) it is stated that “All items of revenue and expenditure of an ERIC shall be included in estimates to be drawn up for each financial year and shall be shown in the budget. The revenue and expenditure shown in the budget shall be in balance.”