PwC

Financial Statements
http://www.cc.cec/budg/
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Overview of session
1. Introduction
3. Questions
2. Components and elements
of financial statements
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Financial statements
1. Introduction
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Framework
for preparing F/S

Why have a framework? Purpose

What does it cover? Scope

Does it have constraints? Limitations

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Framework
for preparing F/S

Qualitative characteristics
of
financial statements
Components and
elements of
financial statements
Objectives of financial
statements
Net assets and
net assets maintenance
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Section 2
This section
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Purpose of F/S
F/S are a structured representation of the financial position and
of the transactions undertaken by an entity that is useful to a
wide range of users in making and evaluating decisions about
the allocation of resources.
Specifically, the objectives of F/S in the public sector are to
provide information useful for decision-making, and to
demonstrate the accountability of the entity for the resources
entrusted to it.
F/S can also have a predictive/prospective role, providing
information useful in predicting the level of resources required
for continued operations and the resources that may be
generated by them.
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Scope of the E.C. F/S
The E.C. financial statements will:
Consolidate those of entities controlled (e.g. Agencies and
institutions)
Proportionately consolidate those of jointly controlled entities
(e.g. Galileo)
Report its share in the result and net assets of entities in which it
has a significant influence using the equity method of accounting
(e.g. European Investment Fund)
All entities concerned will have to report to the E.C. using the
E.C. accounting rules
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Qualitative characteristics
of F/S
Main objective of FS: Provide reliable information on financial position,
performance and changes in financial position

Main characteristic: Decision usefulness

Major qualitative Understandability Comparability
characteristics:
Relevance Reliability
(Materiality)

Substance over form Prudence



True and fair view

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Constraints
Main objective of FS: Provide reliable information on financial position,
performance and changes in financial position

Main characteristic: Decision usefulness

Major qualitative Understandability Comparability
characteristics:
Relevance Reliability
(Materiality)

Substance over form Prudence

Constraints: Timeliness Cost-benefit
balance
True and fair view

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Financial statements
2. Components and elements
of financial statements
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Components of F/S

IPSAS European Communities (FR)
Statement of financial position Balance sheet
Statement of financial performance Economic outturn account
(including segment reporting)
Statement of changes in net assets Statement of changes in net
assets
Cash flow statement Cash flow table
Accounting policies and notes to the
financial statements
Notes to the financial statements
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Balance sheet elements
Assets Net assets and Liabilities
Net assets
Liabilities
Total Assets Total Net Assets and Liabilities
Resources
Controlled as a result from past events
Embodying future economic benefits
or service potential
The residual interest
Present obligations
Resulting from past events
The settlement of which is expected to
result in an outflow of resources
embodying economic benefits or
service potential
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Balance sheet
Assets Net assets and Liabilities
Non-current assets Net assets
Non-current liabilities
Current assets Current liabilities
Total assets Total net assets and liabilities
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To be realised in the normal course of the E.C.s operating
cycle or within 12 months + cash and cash equivalents
Aggregated
Detailed
in the notes
This year +
prior year
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Balance sheet
Detailed structure
See financial report 2005 page 15
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Economic outturn account
elements


Income Expenses
Increases in economic
benefits
Decreases in economic
benefits
- =
Economic
result
of the year
The net assets maintenance concept:
The excess of income over expense
translates into an increase
in the residual interest
(the excess of assets over liabilities)
and vice-versa
Where assets and liabilities are not equal, a
residual figure for net assets/equity will be
reported;
If > 0, can be interpreted as the net resources
that may be applied for the provision of goods
or services in the future (= the communitys
investment in the entity);
If < 0, may be viewed as the amount of future
taxation or other revenues which are already
committed to paying off debt and other
liabilities.
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Economic outturn account
Detailed structure
See financial report 2005 page 19
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Extraordinary items
Net Surplus or Deficit

= Surplus or Deficit from ordinary activities and extraordinary items

Extraordinary =

Rare
Unusual
Outside control of entity
Material

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Statement of changes in
net assets
Detailed structure
See financial report 2005 page 33
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Cash flow table
Detailed structure
See financial report 2005 page 29
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Notes to the financial
statements
1. Accounting policies
2. Impact of the transition to accrual accounting
3. Notes to the Balance Sheet
4. Notes to the Economic Outturn Account
5. Notes to the Cashflow table
6. Off-Balance Sheet and notes
7. Financial risk management
8. Related party disclosures
9. Events after the balance sheet date
10. Consolidated entities
11. Non-consolidated entities
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Accounting policies
IPSAS-compliant when ruled out by IPSAS

Options retained when an IPSAS allows one or more
alternative accounting policies

Internally-developed when no specific requirement exists

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Changes in accounting
policies
Changes in accounting policies = change from one allowed
basis of accounting to another allowed basis of accounting

Example: the initial adoption of a policy to carry assets at
revalued amounts

Normally applied retrospectively (restate comparative
information)

Fundamental errors

Changes in accounting estimates

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Fundamental errors
Significant errors in a prior years financial statements as a
result of mathematical mistakes, mistakes in applying
accounting policies, misinterpretation of facts, fraud or
oversights
Example: omission of a major class of expenses in the financial
statements
Normally correct retrospectively: restate comparative
information

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Changes in accounting
estimates
Many financial statement items cannot be measured with
precision but can only be estimated. The estimation process
involves judgments based on the latest information available.
Estimates may be required, for example, of GNI-based revenue
revenue due by Member States, bad debts arising from
uncollected receivables, or the useful lives of depreciable assets
Accounting estimates by their nature are approximations that
may need revision as additional information becomes known
Recognise the effect in the period of the change

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Segment information
A distinguishable activity or group of activities of an entity for
which it is appropriate to separately report financial information
for the purpose of evaluating past performance and for making
decisions about the future allocation of resources
Service segments are naturally aligned with activities
identified in budget documentation
E.g. At a national whole-government level financial
information is generally aggregated and reported in a manner
which reflects major economic classifications of activities
undertaken and/or portfolio responsibilities of individual ministers:
health, defence, education,
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The E.C.s segment
information
Expenses
Operating assets
Operating liabilities
Reconciliation to total amounts
reported
Accounting policies
Agriculture
Regional policy
Humanitarian Aid
Internal Market
External Relations
Others
Current Prior
E.C. policy areas e. g.
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Financial statements
3. Questions
http://www.cc.cec/budg/