Draft COMMISSION REGULATION laying down detailed rules for the implementation of Council Regulation (EC) No ... on the Financial Regulation applicable to the general budget of the European Communities

TABLE OF CONTENTS

EXPLANATORY MEMORANDUM

1. INTRODUCTION

2. ASPECTS OF THE PROPOSAL RELATING TO FORM

3. ASPECTS OF THE DRAFT RELATING TO SUBSTANCE

COMMISSION REGULATION (EC) No ..... laying down detailed rules for the implementation of Council Regulation (EC) No ... on the Financial Regulation applicable to the general budget of the European Communities

PART ONE COMMON PROVISIONS

TITLE I SUBJECT

TITLE II BUDGETARY PRINCIPLES

Chapter 1 Principles of unity and budget accuracy

Chapter 2 Principle of annuality

Chapter 3 (Chapter 4 of the Financial Regulation) Principle of unit of account

Chapter 4 (Chapter 5 of the Financial Regulation) Principle of universality

Chapter 5 (Chapter 6 of the Financial Regulation) Principle of specification

Chapter 6 (Chapter 7 of the Financial Regulation) Principle of sound financial management

Chapter 7 (Chapter 8 of the Financial Regulation) Principle of transparency

TITLE III ESTABLISHMENT AND STRUCTURE OF THE BUDGET

CHAPTER 1 ESTABLISHMENT OF THE BUDGET

CHAPTER 2 STRUCTURE AND PRESENTATION OF THE BUDGET

TITLE IV IMPLEMENTATION OF THE BUDGET

CHAPTER 1 GENERAL PROVISIONS

CHAPTER 2 METHODS OF IMPLEMENTATION

Section 1 General provisions

Section 2 Special provisions

CHAPTER 3 FINANCIAL ACTORS

Section 1 Rights and obligations of the financial actors

Section 2 Authorising officer

Section 3 Accounting officer

Section 4 Imprest administrator

CHAPTER 4 LIABILITY OF THE FINANCIAL ACTORS

Section 1 Rules applicable to authorising officers by delegation and subdelegation

CHAPTER 5 REVENUE OPERATIONS

Section 1 Own resources

Section 2 Estimate of amounts receivable

Section 3 Establishment of amounts receivable

Section 4 Authorisation of recovery

Section 5 Recovery

CHAPTER 6 EXPENDITURE OPERATIONS

section 1 Commitment of expenditure

Section 2 Validation of expenditure

Section 3 Authorisation of expenditure

Section 4 Payment of expenditure

Section 5 Time limits for expenditure operations

CHAPTER 7 IT SYSTEMS

CHAPTER 8 INTERNAL AUDITOR

TITLE V PROCUREMENT

CHAPTER 1 GENERAL PROVISIONS

Section 1 Scope and award principles

Section 2 Publication

Section 3 Procurement procedures

Section 4 Guarantees and control

CHAPTER 2 SPECIFIC PROVISIONS APPLICABLE TO CONTRACTS AWARDED BY THE COMMUNITY INSTITUTIONS ON THEIR OWN ACCOUNT

TITLE VI GRANTS

CHAPTER 1 SCOPE

CHAPTER 2 AWARD PRINCIPLES

CHAPTER 3 AWARD PROCEDURE

CHAPTER 4 PAYMENT AND CONTROL

CHAPTER 5 IMPLEMENTATION

TITLE VII KEEPING AND PRESENTATION OF THE ACCOUNTS

CHAPTER 1 PRESENTATION OF THE ACCOUNTS

CHAPTER 2 (CHAPTER 3 OF THE FINANCIAL REGULATION) ACCOUNTING

Section 1 Organisation of the accounts

Section 2 Accounting ledgers

Section 3 Chart of accounts

Section 4 Registration

Section 5 Reconciliation and verification

Section 6 Budget accounts

CHAPTER 3 (CHAPTER 4 OF THE FINANCIAL REGULATION) PROPERTY INVENTORIES

PART TWO SPECIAL PROVISIONS

TITLE I (TITLE II OF THE FINANCIAL REGULATION) STRUCTURAL FUNDS

TITLE II (TITLE III OF THE FINANCIAL REGULATION) RESEARCH

TITLE III (TITRE IV OF THE FINANCIAL REGULATION) EXTERNAL ACTIONS

CHAPTER I GENERAL PROVISIONS

CHAPTER 2 IMPLEMENTATION OF ACTIONS

CHAPTER 3 PROCUREMENT

CHAPTER 4 GRANTS

CHAPTER 5 IMPREST ACCOUNTS

TITLE IV (TITLE V OF THE FINANCIAL REGULATION) EUROPEAN OFFICES

TITLE V (TITLE VI OF THE FINANCIAL REGULATION) ADMINISTRATIVE APPROPRIATIONS

PART THREE TRANSITIONAL AND FINAL PROVISIONS

TITLE I TRANSITIONAL PROVISIONS

TITLE II FINAL PROVISIONS

EXPLANATORY MEMORANDUM

1. INTRODUCTION

The Commission has made administrative reform and reform of financial management an essential priority. The recasting of the Financial Regulation is inextricably linked to this process of administrative reform as the Financial Regulation contains rules on the presentation of the budget, the responsibility of the authorising officers, financial management, controls and audits.

The new Financial Regulation resulting from this recasting exercise was adopted by the Council on 25 June 2002. It is to enter into force on 1 January 2003.

The current Regulation laying down detailed rules for the implementation of certain provisions of the Financial Regulation, hereinafter referred to as the "implementing rules", is an essential accompaniment, especially as the text of the Financial Regulation has been simplified so that now it merely sets out the basic principles and definitions and consigns all details and measures for practical implementation to the implementing rules. The Financial Regulation cannot therefore really be applied with full effect on 1 January 2003 without the implementing regulation.

Because of this principle of simplification, the new draft implementing rules are far more developed than Regulation No 3418/93 of 9 December 1993 which is currently in force. This trend has been accentuated by the inclusion in the Financial Regulation of new provisions relating, for example, to grants or the Structural Funds and by editorial choices such as the decision to transpose the directives on the coordination of procedures for the award of public contracts.

As it stated during discussion of Article 183 of the Financial Regulation, the Commission will send this draft Regulation for the opinion of the other institutions before its final adoption.

2. ASPECTS OF THE PROPOSAL RELATING TO FORM

A. Impact of the simplification of the Financial Regulation

The Financial Regulation concentrates on the basic regulatory framework and it has entrusted the Commission with the task of determining the technical rules and the operational details needed, in consultation with the other institutions. It also improves the readability of the text and reduces the risk of duplication or contradictory rules.

In addition to a good many new provisions or provisions adapted from the Regulation in force, the draft Regulation laying down detailed rules for implementing the Financial Regulation thus includes a number of provisions from the current Financial Regulation.

B. Improvement of the presentation and clarity of the text

The draft Regulation is divided into three parts. Part One contains the provisions constituting the ordinary law (budgetary principles, establishment, implementation and control of the budget, procurement, grants, and the keeping and presentation of accounts) while the specific provisions (Structural Funds, research, external action, offices, administrative appropriations) are in Part Two. Part Three contains the transitional and final provisions.

3. ASPECTS OF THE DRAFT RELATING TO SUBSTANCE

As regards the substance, the draft Regulation amends the current implementing rules across the board.

A. Confirmation of the principles of budget law (Part One, Titles I and II of the draft)

A. 1. The issue

In addition to the principle of transparency which underlies several provisions of the Treaties, the Financial Regulation sets out the seven principles of budget law in the Treaty which specifically govern the establishment and implementation of the budget. These principles are as follows:

(a) unity and budget accuracy (Article 268: "All items of revenue and expenditure of the Community (...) shall be shown in the budget"). This principle means that there is only one budget for the Communities.

(b) annuality (Article 271: "The expenditure shown in the budget shall be authorised for one financial year").

(c) equilibrium (Article 268: "The revenue and expenditure shown in the budget shall be in balance").

(d) unit of account (Article 277: The budget shall be drawn up in the unit of account (..)").

(e) budget universality (Article 268: "All items of revenue and expenditure of the Community (...) shall be shown in the budget"). This principle means that total revenue covers total expenditure.

(f) specification (Article 271, third paragraph: "Appropriations shall be classified under different chapters (..) and subdivided, as far as may be necessary").

(g) sound financial management (Article 274: "The Commission shall implement the budget (..) having regard to the principles of sound financial management. Member States shall cooperate with the Commission to ensure that the appropriations are used in accordance with the principles of sound financial management").

However, the Treaty usually allows exceptions to these principles, except for the principle of sound financial management, which cannot be overridden.

The recast Financial Regulation thus clearly sets out the principles and the exceptions to them which must be interpreted restrictively. The draft implementing rules establish the corresponding provisions, in particular as regards the exceptions, so that their scope is well defined. Only the principle of equilibrium does not require any implementing provisions.

A. 2. The draft Regulation

(a) Principle of unity

Article 5(4) states that interest yielded by the funds which are the property of the European Communities are to be entered on the revenue side of the general budget. The implementing rules explain in this connection that the pre-financing type of payment remains in principle the property of the Communities, unless the basic act provides otherwise, and where such payments are made to Member States, staff or under procurement contracts, and in connection with joint management. The implementing rules therefore lay down the rules governing interest yielded by such pre-financing and the accounting arrangements applying to it.

(b) Principle of annuality

The carryover of appropriations, an indispensable management instrument recognised by the Treaties, is a management tool available to the Commission under Article 9 of the Financial Regulation.

Article 6 of the implementing rules explains the concept of preparatory stages which have to be completed by 31 December of year N, in line with the new provisions relating to global commitments and the obligation to use the appropriations before 31 March of the following year.

(c) Principle of unit of account

As the Financial Regulation allows an exception to the principle of unit of account for the accounting officer in the case of the duly substantiated cash requirements, and for the imprest administrators, the implementing rules lay down the rules of conversion to be applied in these cases (rates, entry in the account at the end of the year). However, these rules do not prevent application of specific sectoral rules, particularly in the agricultural sector.

These provisions are consistent with current legislation; they clarify certain provisions, particularly as regards the rate to be used for conversion.

(d) Principle of universality

The implementing rules specify the treatment to be given to two exceptions to the principle of universality:

- assigned revenue resulting in particular from the contributions by Member States of EFTA States to certain Community programmes and from sanctions imposed on Member States declared to have an excessive deficit;

- the offsetting of revenue and expenditure in the budget in accordance with Article 20 of the Financial Regulation.

(e) Principle of specification

The implementing rules spell out the rules governing transfers and notification of the budgetary authority, in particular for the emergency aid reserve.

(f) Principle of sound financial management

The implementing rules confirm the policy which has been conducted for a number of years in connection with the evaluation of the economy, efficiency and effectiveness of Community policies by means of two instruments:

- evaluation throughout the programme cycle. Evaluation has to be carried out not only ex ante, but also mid-term and ex post to define the objectives and the cost of the various activities more effectively; this task should be made easier by the new activity-based budgeting (ABB) presentation;

- the financial statements accompanying each legislative proposal and containing all the information necessary, including that on the prevention of irregularities and measures to combat fraud.

(g) Principle of transparency

In addition to the publication of the budget in the Official Journal of the European Communities, a summary of the budget figures will be published in January so that the public will have early access to the main budget information.

B. Establishment and structure of the budget (Part One, Title III of the draft)

As well as the usual details about presentation and budget remarks, Article 26 of the implementing rules gives a new definition of administrative expenditure in preparation for the transition to ABB.

C. Implementation of the budget (Part One, Title IV of the draft)

Articles 29 to 31 of the implementing rules take over the provisions of the Interinstitutional Agreement of 6 May 1999 on budgetary discipline and improvement of the budgetary procedure as regards the Commission's specific powers, the rules for pilot schemes and preparatory actions and the possible forms of basic acts.

C. 1. Budget implementation arrangements

For the purposes of sound financial management and in order to resolve the difficulties relating to the technical and administrative assistance offices, the Financial Regulation clearly identifies three possible methods for implementing Community appropriations for both internal policies and external action:

(a) centralised management by the Commission, performed directly by its departments or indirectly by delegating powers to certain types of agency providing specific management guarantees, within the institutions' public authority prerogatives involving a wide power of discretion,

(b) shared management with the Member States or decentralised management with the beneficiary third countries in the case of external action,

(c) finally joint management, when funds are pooled with international organisations.

The implementing rules provide essential details in this respect in relation to:

(a) the checks to be carried out before any kind of externalisation of budget implementation; the main purpose is to ascertain the existence, quality and smooth operation of management and control systems in the agencies in question with respect to the principle of transparency and the need for sound management of Community funds;

(b) the principles governing the procedure for the clearance of accounts in the case of joint or decentralised management, in particular the declarations of expenditure by the Member States or third countries, determination of the expenditure to be charged to the Community budget after Commission scrutiny, and the calculation of financial corrections;

(c) the conditions for exercising joint management, available only to those international organisations on the list in Article 41 of this draft;

(d) and, in particular, the procedures for indirect centralised management exercised by means of the delegation of powers or agreement setting out each party's obligations:

- through executive agencies, Community law bodies whose status is set out and explained in a separate proposal for a regulation under the ongoing administrative reform (COM (2001) 808 final of 28 December 2001). These new structures will be entrusted with all or part of the implementation of a programme cycle as the Commission's authorising officer by delegation, while the Commission will be left in overall control of operations. The Commission will thus continue to assume its responsibilities of budget implementation;

- through national public-sector bodies or bodies with a public-service mission, provided that they satisfy certain requirements, particularly as regards compliance with the rules of sound financial management, and offer adequate financial guarantees;

- finally, in accordance with traditional market rules, in favour of external private-law entities which will carry out technical assistance tasks and administrative, preparatory or ancillary tasks (technical expertise or work of a repetitive nature) involving neither the exercise of public authority nor the use of discretionary powers of judgment, nor any form of participation in budget implementation.

C. 2. Role of the financial actors (authorising officers and accounting officer)

A key element of the Commission's internal reform is the improvement and modernisation of financial management and the development of a new culture with the focus on the results obtained from the use of Community funds.

(a) The purpose of the changes made to the Financial Regulation is to give authorising officers exclusive responsibility for internal controls within their departments and for the financial decisions they take in the exercise of their duties.

The authorising officers must assume full responsibility for the regularity, legality, efficiency and effectiveness of their management in accordance with the risks presented by the operations concerned. This means that the duties to be carried out must be defined in advance and that these controls must be integrated in the management process. For this purpose and in accordance with the recommendations of the Court of Auditors, Article 45 of the implementing rules sets out the objectives to be attained by the management and internal control systems and procedures established by the authorising officer.

The implementing rules also supplement the Financial Regulation as regards definition of the duties and tasks of the various financial actors, which, for the authorising officers in particular, requires the organisation of financial operations and the ex ante and ex post verifications to be introduced (Article 44) and the transmission of an annual activity report to their institution.

Article 44 gives a precise definition of the concepts contained in Article 60 of the Financial Regulation, in particular the initiation and verification of operations and the independence of the officials responsible for ex ante verifications in relation to those engaged in preparations for the adoption of acts of budgetary management.

All operations in preparation for the adoption of an act of budget implementation must be verified ex ante to ensure that the expenditure is in order and complies with the rules and that the principles of sound financial management have been applied.

This machinery is supplemented by ex post verifications organised, where necessary, on a sample basis using risk analysis.

The officials responsible for the verifications will be chosen on the grounds of their knowledge, skills and particular qualifications as evidenced by diplomas or appropriate professional experience. They will also be subject to a specific code of professional standards drawn up by each institution (Article 47). This code determines, particularly on matters such as internal control, inspection and audit:

- the level of technical and financial competence required of these officials, the missions and tasks assigned to them;

- the rules of conduct, and in particular the standards of ethics and integrity that they must comply with;

- the methods, techniques and control standards that they must apply.

Because of the risks involved, the implementing rules also call for an annual report listing contracts resulting from negotiated procedures and obliges each institution to send a report on the matter to the discharge authority.

(b) The implementing rules lay down the minimum requirements for each institution to set up, in accordance with its own organisation, the special financial irregularities panel provided for in Articles 60 and 66 of the Financial Regulation.

The implementing rules specify in particular:

- the conditions for referring matters to this panel, which deals only with cases where there is no suspicion of fraud (which come under OLAF's jurisdiction), irrespective of whether the matter is referred by the institution or directly by an official or other member of staff,

- the purely consultative role of this panel in relation to the appointing authority or, where appropriate, the authority responsible for concluding contracts of employment.

(c) Role of the accounting officer

The draft implementing rules confirm that the accounting officer is appointed by the institution from the officials on the grounds of his particular competence. An interim statement of accounts is drawn up and signed in acceptance by the new accounting officer.

The draft implementing rules lay down the accounting officer's duties as regards cash management, the management of bank accounts and the keeping of supporting documents relating to the accounts. They stress that payments may be made by bank transfer only if the bank account details of the payment beneficiary have previously been entered in a common file kept by each institution.

Finally, it is pointed out that the accounting officer must be consulted on the introduction and modification of the inventory systems kept by the authorising officers. He must give his agreement to the introduction and modification of the financial management systems set up by the authorising officer when these systems are intended to provide data for the accounts.

C. 3. Role of the internal auditor

Each institution appoints an internal auditor to ensure that the systems of management, control and internal audit set up by the authorising officers responsible are operating smoothly. To cater for the requirements of institutions with only a small operating budget, this auditor may be appointed jointly by a number of institutions.

The implementing rules also make arrangements for the dissemination of best practices between the institutions.

In addition, they set out the guarantees of functional independence given to the internal auditor, viz. control over his work programme, freedom from instructions of any kind or restrictions in the performance of his functions, a special system of liability and the possibility of bringing an action before the Court of Justice of the European Communities.

C. 4. Revenue management

(a) The implementing rules give details of the individual stages for all the financial actors from the estimate of an amount receivable to final collection. The revenue operations involving the authorising officer (estimate of amount receivable, establishment of the amount receivable, drawing up of the recovery order, copy of the debit note to be sent to the debtor) are set out in the same way as for expenditure operations. The recovery measures at the accounting officer's disposal, in particular the rules on the offsetting of debts, are spelled out.

(b) The provisions applicable to default interest have been amended in order to incorporate on this point Directive 2000/35/EC on combating late payment in commercial transactions for commercial relations between the Communities and undertakings within the meaning of that directive.

(c) The implementing rules also specify the cases in which debts may be waived in view of the cost of recovery, the age of the debt or the insolvency of the debtor or in accordance with the principle of proportionality.

Finally, the waiving of a duly established debt is distinguished from the cancellation of an unduly established debt and the technical and accounting adjustment to alter the actual amount to be recovered which does not imply any abandonment of the Communities' established entitlements.

C. 5. Management of expenditure

(a) The Financial Regulation now gives a clearer definition of the terms "budget commitment" (reservation of appropriations) and "legal commitment" (obligations entered into towards third parties) by making a further distinction between global, individual and provisional budget commitments.

The implementing rules specify the conditions for implementing global and provisional budget commitments by setting out the measures to be taken before and after. In particular, the draft implementing rules state that the global commitment may be implemented by means of a financing agreement or individual legal commitments. The provisional commitment is implemented either by the conclusion of individual legal commitments or, in cases of expenditure on staff, directly by payments. There are now rules for the time limit for adopting the global commitment: this must occur at the latest before the decision on the selection of beneficiaries is taken and, where implementation of the appropriations involves the adoption of a work programme, at the earliest after that programme has been adopted.

In accordance with Article 77 of the Financial Regulation, the draft implementing rules allow decommitment of a budget commitment corresponding to a legal commitment for which no payment has been made in a period of three years following the signing of the legal commitment.

The draft Regulation also sets out the rules for the registration of legal commitments under a global commitment and the implementation of provisional commitments.

In addition, the implementing rules contain provisions for cases where the rule that there be a single signatory for the budget and legal commitment does not apply.

(b) The implementing rules then provide the necessary clarifications about the validation of expenditure by linking the "certified correct" endorsement in the authorising officer's department and the signing of a "passed for payment" by the authorising officer himself.

(c) The implementing rules also lay down the time limits for validation, authorisation and payment in line with the communication of 28 June 2000 (SEC(2000)1094). Under these rules, payment must be made within 45 days from the date when an admissible payment request is registered. The authorising officer responsible may suspend this payment period, provided that he informs the creditors, if the amount is not due or if the appropriate supporting documents have not been produced. For contracts or agreements where payment is conditional on approval of a report, the payment request cannot be deemed admissible until the report is approved. The time limit for approving this report is set out in the implementing rules.

On expiry of this 45-day time limit, default interest will be due from the institution at the same rate as that applying to overdue debts, except for amounts due to Member States.

The implementing rules also state that the authorising officer responsible, depending on the basic act and in compliance with the principle of sound financial management, will lay down in the contracts and agreements the nature of the documents used in support of payments. It also specifies that the implementation reports constitute supporting documents.

Finally, the implementing rules define the various types of payment and the supporting documents required. They specify that the entire pre-financing and interim payments count against the payment of balances.

(d) Finally, for the purposes of sound management and in line with developments in the management tools available, the implementing rules strictly limit the use of imprest accounts to operations which involve small amounts and which cannot be carried out efficiently through budgetary channels.

D. Procurement and grants (Part One, Titles V and VI of the draft)

D. 1. Procurement

(a) In addition to the principles laid down in the Financial Regulation, the Title relating to procurement mainly consists of a full transposition of the Directives currently applicable to the coordination of procedures for the award of public service, supply and works contracts, pending adoption of the new consolidated directive by the Council and Parliament. This title will have to be amended once that directive has been adopted.

Depending on the specific needs of the Community institutions, these rules can go beyond what the Directives lay down, particularly as regards sanctions. To protect the Communities' financial interests, a database is to be set up of tenderers or candidates who have been excluded because of convictions for fraud, corruption or money-laundering or because of serious violations of contractual provisions in earlier relations with one of the institutions.

(b) As in the Financial Regulation, this Title first defines its scope and then the general principles and procedures applicable to all procurement (Chapter I) before listing the provisions applicable to institutions acting on their own account, particularly as regards thresholds and time limits for procedures (Chapter II).

Procurement relating to external action is specifically dealt with in the derogations in Title III of Part Two.

(c) The basic principles of transparency or non-discrimination and the equality of treatment between tenderers or candidates also apply to contracts beyond or outside the scope of the Directives, such as building contracts.

The implementing rules thus institutionalise the procedure for calling for the expression of interest for contracts involving EUR50 000 or more and a certain type of ex post publicity for all procurement by the institutions, in addition to the obligation to inform the economic operators who have taken part in a specific award procedure.

They also clarify the role and responsibility of the authorising officers as awarding authorities, particularly in respect of the committees for the evaluation of tenders and requests to participate, whose opinion is advisory.

(d) The implementing rules also cover management options such as framework contracts, whose legal status has so far been uncertain.

Progress has been slow in the award of contracts by electronic means, except for publicity of the transmission of requests to take part or the provision of documents calling for tenders, pending adoption of the consolidated Directive mentioned above. However, the Commission is currently examining the new possibilities introduced by methods of electronic communication.

Sound financial management also justifies the development of instruments such as financial guarantees to protect Communities' financial interests when tenders are submitted, when the pre-financing is made available and also as a performance guarantee. The period of these guarantees, to be supplied preferably by a bank or financial institution, must be sufficient for them to be activated; they will be released, as appropriate, on:

- award of the contract,

- consolidation of the pre-financing in the interim payments,

- performance of the contract, in accordance with its terms.

Finally, in the general context of giving authorising officers greater responsibility, the implementing rules confirm that the Advisory Committee on Procurement and Contracts (ACPC) will no longer act as an ex ante control body for acts of budget implementation.

D. 2. Grants

Grants have gradually become an important instrument for Community assistance both inside and outside the European Union. However, so far the Financial Regulation and its implementing rules have not contained any specific provisions relating to the award of grants. Grants have therefore developed without any precise regulatory framework, although the Commission did draw up a guide for its departments in 1998. [1]

[1] Vademecum on grant management, 14 July 1998.

The recasting of the Financial Regulation and its implementing rules provides an opportunity for remedying these shortcomings by creating a specific title for grants.

The purpose of this Title is to set out the rules for implementing the principles for the award, control and payment of grants and the exceptions and instruments of flexibility necessary for sound management of Community funds listed in the Financial Regulation:

(a) principles of transparency and equality of treatment, through:

- the annual programming of activities and use of calls for proposals, except in cases of emergency, particularly involving humanitarian aid, or in duly substantiated monopoly situations,

- publication of grants paid, except where there may be a threat to the safety of the beneficiaries or to business interests,

- the collective nature of evaluation, but with clarification of the role and responsibility of the authorising officers, particularly with regard to the evaluation committees whose opinions are advisory,

- justification of award decisions and the obligation to notify applicants who have replied to a call for proposals;

(b) statement of the principles of no-cumulation, no-profit and obligatory co-financing for the purposes of sound financial management; however, the implementing rules introduce the flexibility needed to avoid unduly cumbersome management by allowing partial or total transition from reimbursement of actual costs to flat-rate financing of part of an action; this approach focuses more on the results with regard to Community objectives than on a detailed check of financial statements with regard to the initial forecasts. The external co-financing requirements are relaxed by the authorisation to authorising officers to accept contributions in kind;

(c) statement of the principle of non-retroactivity, subject to the necessary flexibility in such fields as humanitarian aid;

(d) application of the same exclusion criteria as for contracts, particularly in the case of fraud or corruption, to protect the Communities' financial interests.

Finally, the implementing rules provide the necessary details about the course of the procedure for awarding grants and the instruments of sound financial management constituted by:

(a) grant agreements, possibly under a long-term partnership,

(b) compulsory external audits of the accounts for the largest grants in order to increase the Commission's capacity for analysing the financial viability of potential beneficiaries and checking financial statements after the operation or work programmes agreed have been carried out,

(c) the guarantees demanded for pre-financing to protect the Commission against the burden of final recovery if the budget for the operation is less than initially planned or against the risk of default by the beneficiary.

E. Keeping and presentation of the accounts (Part One, Title VII of the draft)

During the recasting of the Financial Regulation, the transparency of the economic and financial information produced by the Communities for the audit bodies and the public was increased so that all the information on the use of public funds and the institutions' assets and liabilities would be available in a clear and understandable form.

This assumes that the accounting information underlying the Communities' accounts is drawn up in line with internationally accepted accounting methods, that all the institutions and bodies responsible for presenting accounts for consolidation by the Commission use the same methods and that the composition and structure of the financial statements and the budget implementation statements are appropriate for each set of readers.

This harmonisation is undertaken by the Commission's accounting officer. These are the principles on which the draft implementing rules are based. It is therefore the task of the implementing rules to set out, by reference to the generally accepted accounting principles, the principles on which the financial statements are based:

- the going-concern principle, which generally requires that the accounts assume that the institutions are established for an indefinite duration;

- the principle of prudence, which means that assets are not overstated and liabilities are not understated;

- the principles of consistent accounting methods and the comparability of information, which lead to the same rules being applied in all fields, with no changes from one year to the next, apart from duly substantiated exceptions;

- the principle that the information presented must be accurate, exhaustive, relevant and comprehensible in order to give the reader a true and fair view of assets and liabilities, the financial situation and the year's outturn.

The implementing rules also set out the principles of materiality, no-netting, the entry of transactions in the accounts and substance over form.

The implementing rules supplement these principles with rules on the valuation of assets and liabilities and the principle that provisions may be constituted.

The implementing rules also have to specify the content and presentation of each of the documents constituting the financial statements. For the financial statements, these are the balance sheet and the economic outturn account, the cash flow table, the statement showing changes in capital and the annex to these statements. For the budget implementation statement, they consist of the budget outturn account and an annex.

Finally, the implementing rules cover the property inventory and the procedure for the sale of fixed assets contained in the inventory.

Accounting methods will differ in line with the information which they are intended to supply.

On the other hand, the general accounts, which record operations for entry in the balance sheet of the Communities, are based on accrual accounting and the implementing rules set out procedures in respect of the organisation of the accounts, the content of the accounting ledgers, the chart of accounts, registration and verification of operations. Attention should be drawn in particular to the principle that all accounting records must specify the origin, content and booking reference of each item and the references of the relevant supporting documents so that they can be traced.

F. External action (Part Two, Title IV of the draft)

Article 162 of the Financial Regulation states that Parts One and Three apply to external action, save as otherwise provided in the specific Title for external action in Part Two.

The implementing rules therefore lay down derogations to take account of the specific operational features of external action, above all for procurement and grants.

(a) As regards procurement in particular, the implementing rules are designed to give effect to Article 167 of the Financial Regulation. This article offers the possibility of including in the implementing rules specific provisions only for thresholds and arrangements for awarding external contracts. These specific provisions must therefore lay down the various thresholds and certain operational arrangements for awarding contracts (in particular, advertising and time limits) adapted to external action. These rules take into account the specific practices for external action procurement set out in the manual of instructions adopted by the Commission in 1999. [2] As a result of the new arrangements introduced by the recast Financial Regulation and these implementing rules, the manual of instructions in question will have to be brought into line.

[2] Commission Decision of 10 November 1999 on the simplification of the management systems for the award of contracts in the framework of the cooperation programmes implemented by the Directorates-General for external relations (SEC(1999)1801).

(b) For grants, under Article 169 of the Financial Regulation the co-financing requirement can be waived in the field of external action alone, with the provision that an action may be financed in full by the budget if this proves essential for it to be carried out.

Article 251 of the implementing rules lists the types of operation for which co-financing has proved by experience to be extremely difficult, if not impossible, because of their nature and provides a restrictive list for the purposes of sound management.

In particular, this involves humanitarian aid and aid in crisis situations and actions for the protection of health or fundamental rights of peoples.

Operations resulting from the implementation of financing agreements with third countries or operations with international organisations may also be financed in full.

G. Other issues

G. 1 Structural Funds (Part Two, Title I)

The sectoral rules for structural and cohesion operations contain financial provisions introducing specific rules compared with the general system established by the Financial Regulation. This applies, in particular, to the repayment of payments on account, for which the implementing rules contain a specific provision.

G. 2. Agencies

The implementing rules list the bodies referred to in Article 185 of the Financial Regulation which are subject to the framework Financial Regulation for the agencies, granting of discharge by Parliament, authority of the Commission's internal auditor and the accounting standards laid down by the Commission's accounting officer.

G. 3. European Offices (Part Two, Title IV)

A new Title covers the operation of existing offices such as the Office for Official Publications and offices being set up such as the Recruitment Office.

G. 4. Part Three

Part Three (Transitional and final provisions) contains a final provision calling for the regular updating, mainly through indexation to inflation in the European Union, of the various thresholds and amounts stipulated in the Regulation laying down rules for implementing the Financial Regulation.

Draft

COMMISSION REGULATION (EC) No .....

of [...]

laying down detailed rules for the implementation of Council Regulation (EC) No ... on the Financial Regulation applicable to the general budget of the European Communities

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community,

Having regard to the Treaty establishing the European Atomic Energy Community,

Having regard to Council Regulation (EC) No .... .of ... on the Financial Regulation applicable to the general budget of the European Communities, [3] and in particular Article 183 thereof,

[3] OJ L [...], [...], p. [...].

Having consulted the European Parliament, the Council, the Court of Justice, the Court of Auditors, the Economic and Social Committee, the Committee of the Regions, the Ombudsman and the European Data Protection Supervisor,

Whereas:

(1) The provisions of Regulation (EC) No ... (hereinafter "the Financial Regulation") have been simplified to confine the Regulation to the basic principles and definitions relating to the establishment, execution and control of the budget (hereinafter "the budget").

(2) These implementing rules must therefore not only supplement the Financial Regulation in respect of the provisions for which it expressly refers to the implementing rules but also in respect of the provisions whose application requires the implementing measures to be determined in advance.

(3) To ensure that sectoral rules are consistent with the budgetary principles set out in the Financial Regulation, an inventory must be produced of all regulatory instruments relating to budget execution and provision made for this inventory to be drawn up by the Commission and submitted to the budgetary authority.

(4) As regards the budgetary principles, in particular the principle of unity, the requirement that interest on pre-financing to be repaid to the budget must be identified means that any pre-financing which remains the property of the Communities must be identified. Such pre-financing remains the property of the institution unless provided otherwise in the basic act and unless it is paid under a procurement contract, or to staff or to the Member States. This rule must be spelled out according to the type of management (direct or indirect centralised management and shared management). It does not apply to joint management since in such cases the Community funds are merged with the funds of the international organisation. Pre-financing which remains the property of the institution is entered on the assets side of the institution's balance sheet if this is technically possible, and by no later than for the 2005 financial year any interest it yields is paid to the budget as miscellaneous revenue.

(5) For the principle of annuality, it is important to clarify the meaning of annual appropriations and the preparatory stages of the commitment procedure which, if completed by 31 December, may allow the carryover of commitment appropriations which will then have to be used by 31 March of the following year.

(6) As regards the principle of the unit of account, the rates to be used for conversion between the euro and the other currencies for the requirements of the management of the cash flow and the accounts must be specified.

(7) As regards the derogations to the principle of universality, the budget treatment to be given to certain types of assigned revenue, in particular contributions by Member States or third countries to certain Community programmes, must be specified along with the limits on the offsetting of expenditure against revenue.

(8) As regards the principle of specification, a precise definition must be given of the calculation of the percentage of appropriations which the institutions are authorised to transfer by virtue of the autonomy they enjoy and provision must be made for the budgetary authority to be given full information through a detailed explanation of the requests for transfers which have to be submitted to it.

(9) As for sound financial management, the objectives should be identified along with the minimum frequency for the ex ante, interim and ex post evaluations of the programmes and actions and the information to be given on the legislative financial statement.

(10) As for the establishment and presentation of the budget, it is necessary to determine the contents of the general introduction to the budget, the working documents backing up the budget and the budget remarks to ensure that the budgetary authority is fully informed. In the new activity-based budgeting (ABB) presentation, the definition and classification of administrative appropriations are also set out.

(11) As regards implementation of the budget, the possible forms of basic acts in the Community field and under the two other pillars of the European Union must first be clarified. The maximum amounts of appropriations which can be implemented for preparatory actions and pilot schemes without the existence of a basic act must be determined and the provisions of the Treaties conferring specific powers directly on the Commission must be listed.

(12) Acts likely to constitute a conflict of interests must also be defined, together with the procedure to be followed in such cases.

(13) As for the different methods of implementing the budget, it must be laid down that, when the Commission does not implement the budget directly in its departments, it must first ascertain that the entities to which it plans to entrust implementing tasks have management procedures and control and accounting systems which are adequate and appropriate with regard to the requirements of sound financial management.

(14) As for indirect centralised management, i.e. management delegated by the Commission to executive agencies or to Community law bodies or national public-sector bodies or bodies with a public-service mission, it is also necessary to lay down the framework and the implementing arrangements, by an act of delegation or agreement, for this delegation of powers. The executive agencies, which remain under Commission control, must be recognised as authorising officers by delegation of this institution for implementation of the Community budget. Where national bodies have to carry out acts of budget implementation, they must offer adequate financial guarantees and be chosen in a transparent manner following a cost-effectiveness analysis showing the reasons for delegating management to such a body. The Commission will seek the opinion of the relevant committee, in accordance with the basic act for implementing the appropriations concerned, before delegating powers to national bodies. Private-law entities performing preparatory or ancillary tasks on the Commission's behalf must be selected in accordance with procurement procedures.

(15) For shared management with the Member States or decentralised management with third countries, the stages and objectives of the procedure for the clearance of accounts must be laid down without prejudice to the specific provisions contained in the appropriate sectoral regulations.

(16) Finally, for joint management, it must be stated that the share contributed by each donor to each type of expenditure is not identified and the international organisations eligible for this type of management must be identified.

(17) As regards the role of the financial actors, the reform of financial management, together with the dropping of centralised ex ante controls, increases the responsibilities of the authorising officers in all revenue and expenditure operations, including in terms of internal control systems. The tasks, responsibilities and principles of the procedures to be observed must therefore be laid down. The internalisation of ex ante controls requires, in particular, a clear distinction between initiation tasks and the verification of budget implementation and each institution must also adopt a code of professional standards applicable to staff responsible for ex ante and ex post verifications. Provision must then be made for accounting for the responsibilities assumed in an annual report to the institution covering the results of the ex post verifications; arrangements must also be made for keeping the supporting documents relating to the operations carried out. Finally, as they represent derogations, negotiated procedures for the award of public contracts must be covered by a special report to the institution which is to be sent to the discharge authority.

(18) In order to clarify responsibilities, a precise definition must also be given of the tasks and responsibilities of the accounting officer in connection with the accounting systems, treasury management, the management of bank accounts and third-party files. The arrangements for the termination of the accounting officer's duties are also spelled out.

(19) The conditions for the use of imprest accounts, a system of management which forms an exception to normal budgetary procedures, are also laid down and the tasks and responsibilities of the imprest administrators, as well as the authorising officer and accounting officer in connection with the control of imprest accounts, are set out.

(20) Once the tasks and responsibilities of each actor are laid down, they may be held liable only under the conditions set out in the Staff Regulations of Officials of the European Communities and the Conditions of Employment of Other Servants. However, a new Financial Irregularities Panel has to be set up in appropriate manner in each institution to determine whether irregularities of a financial nature may have occurred. The procedure by which an authorising officer may seek confirmation of an instruction and thus be released from any liability is also set out.

(21) As regards revenue, except for the special case of own resources covered by Council Regulation (EC, Euratom) No 1150/2000 of 22 May 2000 implementing Decision 94/728/EC, Euratom on the system of the Communities' own resources [4], it is necessary to set out the tasks and controls falling within the responsibility of the authorising officers at the different stages of the procedure: establishment of the estimate of amounts receivable and then the recovery order and dispatch of the debit note informing the debtor that the amount receivable has been established, calculation of any default interest due and, finally, decision, where necessary, to waive a debt subject to criteria guaranteeing compliance with sound financial management. The accounting officer's role in collection of revenue and in allowing any additional time for payment is also set out.

[4] OJ L130, 31.5.2000, p. 1.

(22) As regards expenditure, the first step is to establish the link between the financing decision, global commitment and individual commitment and the nature of these different stages. The distinction between a global commitment and individual commitment depends on the extent to which the beneficiaries are identified and the amounts involved. Provisional commitments are limited to routine administrative expenditure and EAGGF expenditure. To restrict the volume of dormant commitments, appropriations corresponding to commitments for which no payment has been made for three years will be decommitted.

(23) The link must then be established between validation, authorisation and payment operations and the controls to be carried out by the authorising officer when validating expenditure, with the endorsement "passed for payment", and when authorising payment by checking the validity of the release from all liability, for which this financial actor now has sole responsibility. Reference must be made to the documents to be produced in support of payments and rules must be laid down for clearing pre-financing and interim payments. Finally, rules are established for the validation and payment operations.

(24) For the internal audit, it is necessary to set out the procedure for appointing the auditor and to guarantee his independence within the institution which has appointed him and to which he must report on his activities.

(25) In the case of procurement, the option taken is to transpose Council Directives 92/50/EEC, 93/36/EEC and 93/37/EEC relating to the coordination of procedures for the award of public service, supply and works contracts, as amended by Directive 97/52/EEC of the European Parliament and of the Council of 13 October 1997 amending Directives 92/50/EEC, 93/36/EEC and 93/37/EEC relating to the coordination of procedures for the award of public service, supply and works contracts respectively. [5] This first requires definition of the various types of contract, the advertising and publication measures applicable, appeals and the main features of existing procedures, the specification of selection criteria and the possible award arrangements, rules for access to tender documents, communication with tenderers and candidates and, when the Commission awards contracts on its own account, the various thresholds applicable and the rules for estimating the value of the contracts to be awarded.

[5] OJ L 209, 24.7.1992, p.1; OJ L 199, 908.1993, p.1; OJ L 111, 30.4.1994, p.115 and OJ L 328, 28.11.1997, p.1.

(26) For the sake of transparency of procedures and equal treatment of candidates, as well as the full responsibility of authorising officers in the final choice, the procedure for opening and then evaluating tenders and requests to participate is then described, from the appointment of a committee up to the substantiated and documented award decision, which ultimately falls to the contracting authority. The financial guarantees needed to protect the Communities' financial interests are also described.

(27) Finally, rules are provided for the contracting authorities' powers to impose administrative penalties in order to ensure their proportionate and dissuasive nature and a certain equality of treatment between the various institutions and between departments.

(28) The scope of the title on grants must also be clarified, particularly with regard to the different methods for implementing the budget, but also with regard to the type of action or body of general European interest eligible for a grant. The characteristics of the annual work programme and the calls for proposals are set out, together with possible exceptions to this procedure and concerning retrospective effect, particularly for humanitarian aid and crisis management situations, for which the constraints are very specific.

(29) Again with regard to the requirements of transparency, equal treatment for applicants and the liability of authorising officers, the award procedure is described from the application for the grant to its evaluation, by a committee, in the light of previously specified selection and award criteria, before the authorising officer takes his final, appropriately documented decision.

(30) Sound financial management then requires that the Commission demands guarantees at the application stage, through the provision of financial audits for the larger amounts, and then on payment of the pre-financing, through the demand for advance financial guarantees, and finally on final payment, through the provision of financial audits for the requests which present most risk. Sound management and control of the no-profit and co-financing principles also require rules to be laid down for the possible use of flat-rate payments. Finally, the sound management of Community funds means that the grant beneficiaries themselves must comply with the principles of transparency and the equal treatment of potential contractors and the award of the contract to the tender offering best value for money when the action is partly sub-contracted.

(31) Finally, penalties in this matter are based on what exists for procurement.

(32) As regards the keeping and presentation of the accounts, each of the generally accepted accounting principles on which the financial statements have to be based must be defined, with the exception of the principle of accrual accounting which, in view of its importance and its innovatory nature, is defined in the Financial Regulation. It is also necessary to specify the conditions for entering a transaction in the accounts and the rules for valuing assets and liabilities and the constitution of provisions.

(33) It should be specified that the institutions' accounts must be accompanied by a report on budgetary and financial management and details should be given of the content and presentation of the elements making up the financial statements (balance sheet, economic outturn account, cash-flow table) and their annex and the budget implementation statements (budget outturn account plus annex).

(34) On accounting matters, it should be specified that each institution's accounting officer should produce documents describing the organisation of the accounts and the accounting procedures of his institution and set out the conditions to be respected by the computerised accounting systems.

(35) As for the keeping of the accounts, it is necessary to specify the principles applicable to the accounting ledgers, the trial balance, the periodical reconciliation of the totals in this balance and the inventory and to specify the components of the chart of accounts adopted by the Commission's accounting officer. The rules applicable to the registration of operations, in particular the double-entry method, the rules for the conversion of operations which are not denominated in euro and the supporting documents for accounting entries, must be laid down. The content of the accounting records must also be specified.

(36) Finally, the rules relating to the property inventory are laid down and the respective responsibilities of the accounting officers and authorising officers in this field are clarified, together with the rules applicable to the resale of property entered in the inventory.

(37) As regards the Structural Funds, it should be specified that the repayment of payments on account in respect of a given operation does not have the effect of decommitting the corresponding appropriations or of reducing the contribution from the Fund to this operation.

(38) The types of action, direct and indirect, which may be financed in the research sector must be specified.

(39) For external actions, the implementing rules, like the Financial Regulation itself, are intended to set out the exceptions resulting from the specific operational features of this sector, mainly as regards the award of contracts and grants.

(40) For procurement, the implementing rules take over the substance of the provisions of the Commission Decision of 10 November 1999 on the simplification of the management systems for the award of contracts in the framework of the cooperation programmes implemented by the Directorates-General for external relations, [6] resulting in procurement rules which differ from the standard rules by virtue of the different thresholds and the management procedures which have been adapted to external action.

[6] (SEC(1999)1801).

(41) As for grants, the implementing rules list the types of action for which a derogation is possible from the co-financing requirement referred to in Article 109 of the Financial Regulation. This applies in particular to humanitarian aid and aid in crisis situations and actions for the protection of the health or fundamental rights of peoples.

(42) To guarantee the sound management of Community appropriations, it is also necessary to specify the pre-conditions and the rules to be contained in the agreements when the management of appropriations is decentralised or if use is made of imprest accounts.

(43) The provisions of the Financial Regulation relating to European Offices must be supplemented by specific rules for the Office for Official Publications of the European Communities and by provisions authorising the Commission's accounting officer to delegate some of his tasks to staff in these Offices. Operational procedures must also be laid down for the bank accounts which the European Offices may be authorised to open in the Commission's name.

(44) As regards administrative appropriations, each institution must inform the budgetary authority of significant building projects which are under way, i.e. those increasing the building stock.

(45) It is necessary to identify the bodies which may receive subsidies from the budget and which have to be given a set of rules in accordance with the conditions laid down in Article 185 of the Financial Regulation.

(46) The various thresholds and amounts referred to in this Regulation must be regularly updated by linking them with the inflation recorded in the European Union, with the exception of the thresholds applicable to procurement.

(47) Regulation (Euratom, ECSC, EC) No 3419/93 laying down detailed rules for the implementation of the Financial Regulation of 21 December 1977, [7] as last amended by Regulation (EC) No 1687/2001, [8] should therefore be repealed,

[7] OJ L 315, 16.12.1993, p. 1.

[8] OJ L 228, 24.8.2001, p. 8.

HAS ADOPTED THIS REGULATION:

PART ONE COMMON PROVISIONS

TITLE I SUBJECT

Article 1 Subject (Article 1 of the Financial Regulation)

This Regulation sets out the rules for implementing certain provisions of the Financial Regulation [...]/2002 (hereinafter "Financial Regulation) which lays down the rules for the establishment and implementation of the general budget of the European Communities, hereinafter "budget".

The institutions concerned by this Regulation are the institutions within the meaning of the second paragraph of Article 1 of the Financial Regulation.

Article 2 Inventory of legislative instruments concerning the implementation of the budget (Article 2 of the Financial Regulation)

The Commission shall keep an inventory of the instruments referred to in Article 2 of the Financial Regulation. It shall update this inventory each year and inform the budgetary authority.

TITLE II BUDGETARY PRINCIPLES

Chapter 1 Principles of unity and budget accuracy

Article 3 Scope of pre-financing remaining the property of the institutions (Article 5(4) of the Financial Regulation)

1. Pre-financing within the meaning of Article 102 shall remain the property of the institution, save where otherwise provided by the basic act. This provision does not concern pre-financing paid under a contract within the meaning of Article 88 of the Financial Regulation, to staff or to Member States, or under the agricultural and structural pre-accession instruments.

It shall not apply to joint management within the meaning of Article 53 of the Financial Regulation.

2. In the case of direct centralised management within the meaning of Article 53 of the Financial Regulation involving a number of partners, the rule referred to in paragraph 1 shall apply solely to the principal contractor.

3. In the case of decentralised management and in the case of indirect centralised management within the meaning of Article 53 of the Financial Regulation, the rule referred to in paragraph 1 shall apply only to the entity receiving pre-financing direct from the Commission.

4. The rule referred to in paragraph 1 shall apply to pre-financing decided after the entry into force of this Regulation under contracts or agreements.

Article 4 Entry in the budget of interest yielded by Community funds (Article 5(4) of the Financial Regulation)

1. Pre-financing which remains the property of the institution in accordance with Article 3 shall be entered as an asset in the institution's balance sheet. Where this same pre-financing yields interest or equivalent benefits, these shall be paid to the budget as miscellaneous revenue.

2. Authorising officers shall supply to the accounting officer details enabling him to identify pre-financing which remains the property of the institution in accordance with Article 3. They shall ensure that contracts and agreements concluded with beneficiaries stipulate that:

(a) this pre-financing is paid to accounts which allow the funds paid by the Communities to be identified, and

(b) the beneficiaries inform the authorising officer responsible of the amount of interest or equivalent benefits which may be yielded by these funds at least once a year if such interest represents significant amounts and at all events when requests are made for interim payments or payments of balances.

3. In accordance with Chapter 5 of Title IV, the authorising officer responsible shall, upon payment of the pre-financing, draw up an estimate of amounts receivable covering the interest or equivalent benefits which may be yielded by the pre-financing.

The authorising officer responsible shall draw up a recovery order for the amount of interest referred to in paragraph 1 as stipulated in paragraph 2(b).

4. Where pre-financing is paid from the same budget line, under the same basic act and to beneficiaries covered by the same award procedure, the authorising officer may draw up a single estimate of amounts receivable for a number of debtors.

Chapter 2 Principle of annuality

Article 5 Appropriations for the year (Article 8(3) of the Financial Regulation)

The commitment appropriations and payment appropriations entered in the budget for a financial year and which have to be used during that year shall consist of the appropriations authorised for the year. The appropriations authorised for the year are:

(a) appropriations provided in the budget, including by amending budgets;

(b) appropriations carried over;

(c) appropriations made available again;

(d) appropriations arising from payments on account which are repaid in accordance with Article 229;

(e) appropriations provided following the receipt of assigned revenue.

Article 6 Carryover of appropriations (Article 9(2)of the Financial Regulation).

1. The commitment appropriations referred to in Article 9(2)(a) of the Financial Regulation may be carried over only if the commitments could not be made before 31 December of that financial year for reasons not attributable to the authorising officer and if the preparatory stages are sufficiently advanced to make it reasonable to judge that the commitment may be made before 31 March of the following year.

2. The preparatory stages referred to in Article 9(2)(a) of the Financial Regulation which should be completed by 31 December of the financial year in order to allow a carryover to the following year are in particular:

(a) for global commitments within the meaning of Article 88, the adoption of a financing decision or the closing by that date of the consultation of the departments concerned within each institution for the adoption of the decision;

(b) for individual commitments within the meaning of Article 88, the advanced stage of preparation of the contracts or agreements. This advanced stage of preparation of the contracts or agreements shall mean the completion of the selection of potential contractors or beneficiaries.

3. Appropriations carried over in accordance with Article 9(2)(a) of the Financial Regulation which have not been committed by 31 March of the following year shall be automatically cancelled.

4. Appropriations carried over in accordance with Article 9(2)(b) of the Financial Regulation may be used until 31 December of the following year.

5. The accounts shall identify appropriations carried over in this way.

Chapter 3 (Chapter 4 of the Financial Regulation) Principle of unit of account

Article 7 Rate of conversion between the euro and other currencies (Article 16 of the Financial Regulation)

1. Without prejudice to specific provisions arising from the application of sectoral regulations, conversion between the euro and another currency shall be made using the daily euro rate published in the C series of the Official Journal of the European Communities.

2. If no daily rate is published in the Official Journal of the European Communities for the currency in question, the Commission shall use the accounting rate referred to in paragraph 3.

3. For the purposes of the accounts provided for in Articles 132 to 137 of the Financial Regulation, conversion between the euro and another currency shall be made using the monthly accounting rate of the euro. This accounting rate shall be established by the Commission by means of any source of information it regards as reliable on the basis of the rate on the penultimate working day of the month preceding that for which the rate is established.

Article 8 Rate to be used for conversion between the euro and other currencies (Article 16 of the Financial Regulation)

1. Without prejudice to specific provisions deriving from the application of sectoral regulations, the rate to be used for converting between the euro and other currencies shall be that of the day when the payment order or recovery order is drawn up by the authorising department.

2. In the case of euro imprest accounts, the rate to be used shall be determined by the date of the payment by the bank.

3. In the case of imprest accounts in national currencies referred to in Article 16 of the Financial Regulation, the rate to be used shall be that of the day on which the imprest is settled.

4. For expenditure financed by the European Agricultural Guidance and Guarantee Fund (EAGGF), Guarantee Section, the rate to be used for month "n" in respect of which this expenditure has been declared, in accordance with Article 3 of Commission Regulation (EC) No 296/96, [9] shall be that for the tenth day of month "n+1" or the first preceding day for which a rate is quoted.

[9] OJ L 39, 17.2.1996, p.5.

This rate shall also be used for the corresponding advances provided for in Articles 4 and 5 of Regulation No 296/96.

Article 9 Conversion into euro of expenditure committed at the end of the budget year (Article 16 of the Financial Regulation)

The December euro rates shall be used to calculate the obligations outstanding at the end of the financial year.

Article 10 Information on cash transfers between different currencies carried out by the Commission (Article 16 of the Financial Regulation)

Each quarter the Commission shall send the Member States a statement of transfers carried out between different currencies.

Chapter 4 (Chapter 5 of the Financial Regulation) Principle of universality

Article 11 Contributions from Member States to research programmes (Article 18(1)(a) of the Financial Regulation)

1. The Member States' contributions for financing certain supplementary research programmes, provided for in Article 5 of Regulation (EC) No 1150/2000, shall be paid as follows:

(a) seven twelfths of the sum entered in the budget shall be paid by no later than 31 January of the current year,

(b) the remaining five twelfths shall be paid by no later than 15 July of the current year.

2. Where the budget is not finally adopted before the start of a financial year, the contributions provided for in paragraph 1 shall be based on the sum entered in the budget for the previous financial year.

3. Any contribution or additional payment owed by the Member States to the budget must be entered in the Commission's account or accounts within thirty days of the call for funds.

4. Payments made shall be entered in the account provided for in Regulation (EC) No 1150/2000 and shall be subject to the conditions laid down by that Regulation.

Article 12 Assigned revenue resulting from the participation of EFTA States in certain Community programmes (Article 18(1)(d) of the Financial Regulation)

1. The budget structure to accommodate the participation of the EFTA States in certain Community programmes shall be as follows:

(a) in the statement of revenue, a line with a token entry (p.m.) shall be entered to accommodate the full amount of the EFTA States' contribution for the year in question. The estimated amount shall be shown in the budget remarks;

(b) in the statement of expenditure:

(i) the remarks for each line relating to the Community activities in which the EFTA States participate shall show "for information" the estimated amount of the participation,

(ii) an annex, forming an integral part of the budget, shall set out all the lines covering the Community activities in which the EFTA States participate.

This annex reflects and is part of the structure to accommodate the appropriations corresponding to this participation, as provided for in paragraph 2, and to allow the expenditure to be implemented.

2. Under Article 82 of the Agreement on the European Economic Area, the amounts of the annual participation of the EFTA States - as confirmed to the Commission by the EEA Joint Committee in accordance with Article 1(5) of Protocol 32 annexed to that Agreement - shall give rise to the provision, at the start of the year, of the full amounts of the corresponding appropriations for commitments and appropriations for payments.

3. If, in the course of the year, additional appropriations are provided on the budget lines with EFTA State participation without the EFTA States being able, during that year, to adjust their contributions in order to comply with the "proportionality factor" provided for in Article 82 of the Agreement on the European Economic Area, the Commission shall be authorised, as a provisional and exceptional measure, to use its cash resources to pre-finance the share of the EFTA States. Whenever new appropriations are provided, the Commission shall, as soon as possible, call in the corresponding contributions from the EFTA States. The Commission shall inform the budgetary authority each year of the decisions taken.

The pre-financing shall be regularised as soon as possible in the budget for the following year.

4. In accordance with Article 18 (1)(d) of the Financial Regulation, the financial contributions of the EFTA States shall constitute assigned revenue. The accounting officer shall adopt appropriate measures to ensure that use of the revenue arising from these contributions and of the corresponding appropriations is monitored separately.

In the report provided for in Article 131(2) of the Financial Regulation, the Commission shall show separately the implementation, in both revenue and expenditure, corresponding to EFTA State participation.

Article 13 Proceeds of sanctions imposed on Member States declared to have an excessive deficit (Article 18(1)(b) of the Financial Regulation)

The budget structure to accommodate the proceeds of the sanctions referred to in Section 4 of Council Regulation (EC) No 1467/97 [10] shall be as follows:

[10] Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure (OJ L 209, 2.8.1997, p.6).

(a) in the statement of revenue, a line carrying a token entry (p.m.) shall be entered to accommodate the interest on such amounts;

(b) at the same time, and without prejudice to Article 74 of the Financial Regulation, entry of these amounts in the statement of revenue shall give rise to the provision, in the statement of expenditure, of commitment appropriations and payment appropriations. These appropriations shall be used as stipulated in Article 17 of the above Regulation.

Article 14 Passing for payment of the net amount (Article 20(1) of the Financial Regulation)

Pursuant to Article 20 of the Financial Regulation, the following deductions may be made from payment requests, invoices or statements, which shall then be passed for payment of the net amount:

(a) penalties imposed on a party to a contract;

(b) adjustments of amounts paid unduly, which may be set off against payments of the same type to the same payee under the title, chapter, article and financial year in respect of which the excess payment was made.

Discounts, refunds and rebates on individual invoices and payment requests shall not be recorded as Community revenue.

Article 15 Account for recoverable taxes (Article 20(2) of the Financial Regulation)

Any taxes borne by the Communities under Article 20(2) of the Financial Regulation shall be entered in a suspense account until they are refunded by the States concerned.

Chapter 5 (Chapter 6 of the Financial Regulation) Principle of specification

Article 16 Rules concerning transfers (Article 23 of the Financial Regulation)

1. The percentages referred to in points (b) and (c) of the first subparagraph of Article 23(1) of the Financial Regulation shall be calculated at the time the request for transfer is made.

2. For the purposes of the limit referred to in points (b) and (c) of the first subparagraph of Article 23(1) of the Financial Regulation, the amount to be taken into consideration shall be the sum of the transfers to be made on the line from which the transfer is being made after adjustment for earlier transfers made.

Article 17 Administrative expenditure (Article 23 of the Financial Regulation)

The expenditure referred to in point (b) of the first subparagraph of Article 23(1) of the Financial Regulation shall cover, for each policy area, the items referred to in Article 26.

Article 18 Grounds for requests for transfers of appropriations (Articles 22 and 23 of the Financial Regulation)

Proposals for transfers and all information for the budgetary authority concerning transfers made under Articles 22 and 23 of the Financial Regulation shall be accompanied by appropriate and detailed supporting documents showing the implementation of appropriations and estimates of requirements up to the end of the financial year, both for the lines to which the appropriations are to be transferred and for those from which they are taken.

Article 19 Grounds for requests for transfers from the emergency aid reserve (Article 26 of the Financial Regulation)

Proposals for transfers to allow the utilisation of the emergency aid reserve referred to in the first subparagraph of Article 26(2) of the Financial Regulation shall be accompanied by appropriate and detailed supporting documents showing:

(a) for the line to be which the transfer is being made, the most recent information available for the utilisation of appropriations and the forecast of requirements up to the end of the year;

(b) for all lines relating to external action, the utilisation of appropriations up to the end of the month preceding the request for transfer and a forecast of requirements up to the end of the year, including a comparison with the initial forecast;

(c) an analysis of the possibilities of reallocating appropriations.

Chapter 6 (Chapter 7 of the Financial Regulation) Principle of sound financial management

Article 20 Evaluation (Article 27 of the Financial Regulation)

1. Proposals for all programmes and actions occasioning additional expenditure or a reduction in revenue for the budget shall be the subject of an ex ante evaluation, which shall identify:

(a) the need to be met in the short or long term;

(b) the objectives to be achieved;

(c) the results expected and the indicators needed to measure them;

(d) the added value of Community involvement;

(e) the risks, including fraud, linked with the proposals and the alternative options available;

(f) the lessons learned from similar experiences in the past;

(g) the volume of appropriations, human resources and other administrative expenditure to be allocated with due regard for the cost-effectiveness principle;

(h) the monitoring system to be set up.

2. All programmes or actions shall then be the subject of an interim and/or ex post evaluation in terms of the human and financial resources allocated and the results obtained in order to verify that they were consistent with the objectives set, as follows:

(a) the results obtained in carrying out a multiannual programme shall be periodically evaluated in accordance with a timetable which will allow the findings of this evaluation to be taken into account for any decision on the continuation, modification or suspension of the programme;

(b) actions financed on an annual basis shall have their results evaluated at least every six years. This requirement may also be met by the final reports sent by the bodies which carried out the action.

Article 21 Financial statement (Article 28 of the Financial Regulation)

1. Any proposal for an act submitted to the legislative authority which may have an impact on the budget, including changes in the number of posts, shall include a financial statement.

The financial statement shall contain the financial and economic data for the assessment by the legislative authority of the need for Community action. It shall provide appropriate details of coherence and any synergy with other financial instruments.

In the case of multiannual operations, the financial statement shall contain the foreseeable schedule of annual requirements in appropriations and posts and an evaluation of their medium-term financial impact.

2. In order to prevent any risk of fraud or irregularity which might adversely affect the protection of the Communities' financial interests, the financial statement shall provide information regarding existing and planned fraud prevention and protection measures.

Chapter 7 (Chapter 8 of the Financial Regulation) Principle of transparency

Article 22 Provisional publication of a summary of the budget (Article 29 of the Financial Regulation)

Pending official publication, a summary of the budget figures shall be published on the Internet site of the institutions, on the Commission's initiative, within four weeks of the date of the final adoption of the budget.

TITLE III ESTABLISHMENT AND STRUCTURE OF THE BUDGET

CHAPTER 1 ESTABLISHMENT OF THE BUDGET

Article 23 General introduction to the preliminary draft budget (Article 33 of the Financial Regulation)

The Commission shall draw up the general introduction to the preliminary draft budget.

Each of the sections of the preliminary draft budget shall be preceded by an introduction drawn up by the institution concerned.

The general introduction shall comprise:

(a) financial tables covering the entire budget;

(b) as regards the titles in the Commission section:

(i) a description of the policies for which the appropriations are requested, with due account for the principles and requirements set out in Articles 27 and 33(2)(d) of the Financial Regulation,

(ii) an explanation of the changes in appropriations from one financial year to the next.

Article 24 Working documents in support of the preliminary draft budget (Articles 30 and 33 of the Financial Regulation)

The preliminary draft budget shall be accompanied by working documents containing the following information:

(a) in respect of staff of the institutions:

(i) a statement of the policy for permanent and temporary staff;

(ii) for each category of staff, an organisation chart of budgetary posts and persons in post on the date of the presentation of the preliminary draft budget, indicating their distribution by grade and administrative unit;

(iii) where a change in the number of persons in post is proposed, a statement justifying such change;

(iv) a list of posts broken down by policy area;

(b) a detailed statement of borrowing and lending policy.

(c) in respect of subsidies to the bodies referred to in Article 32 of the Financial Regulation, an estimate of revenue and expenditure prefaced by an explanatory statement drawn up by the bodies concerned and, for the European Schools, a statement showing revenue and expenditure prefaced by an explanatory statement.

Article 25 Preliminary draft amending budgets (Article 37(1) of the Financial Regulation)

Preliminary draft amending budgets shall be accompanied by statements of grounds and the information on the implementation of the budget for the preceding and current financial years available at the time of their establishment.

CHAPTER 2 STRUCTURE AND PRESENTATION OF THE BUDGET

Article 26 Administrative appropriations (Article 41 of the Financial Regulation)

Within the respective chapters, administrative appropriations shall be divided into separate headings by title according to the following classification:

(a) expenditure on staff authorised in the establishment plan: there shall be an amount of appropriations and a number of posts corresponding to this expenditure;

(b) expenditure on external staff (including auxiliary staff and agency staff) and other management expenditure (including representation expenses and mission expenses);

(c) expenditure on buildings and other related expenditure, including cleaning and maintenance, rental and hiring, telecommunications, water, gas and electricity;

(d) support expenditure.

The Commission's administrative expenditure of a type common to all titles may also be set out in a separate summary statement classified by type.

Article 27 Actual expenditure in the last financial year for which the accounts have been closed (Article 46(1)(e) of the Financial Regulation)

For the purposes of establishing the budget, actual expenditure in the last financial year for which the accounts have been closed shall be determined as follows:

(a) in commitments: commitments entered in the accounts during the financial year against appropriations for that financial year as defined in Article 5;

(b) in payments: payments made during the financial year, i.e. for which a payment order has been sent to the bank, against appropriations for that financial year as defined in the same article.

Article 28 Budget remarks (Article 46(1)(2) of the Financial Regulation)

The budget remarks shall include:

(a) the references of the basic act, where one exists,

(b) all appropriate explanations concerning the nature and purpose of the appropriations.

TITLE IV IMPLEMENTATION OF THE BUDGET

CHAPTER 1 GENERAL PROVISIONS

Article 29 Possible forms of basic acts (Article 49(1) of the Financial Regulation)

1. In the Community field a "basic act" may take the form of a regulation, a directive or a decision.

2. In the field of the common foreign and security policy a "basic act" may take one of the forms specified in Articles 13(2), 14 and 23(2) of the Treaty on European Union.

3. In the field of police and judicial cooperation in criminal matters a "basic act" may take one of the forms specified in Article 34(2) of the Treaty on European Union.

Article 30 Maximum amounts for pilot schemes and preparatory actions (Article 49(2)(a) and (b) of the Financial Regulation)

1. The total amount of appropriations for the pilot schemes referred to in Article 49(2)(a) of the Financial Regulation may not exceed EUR 32 million a year.

2. The total amount of appropriations for new preparatory actions referred to in Article 49(2)(b) of the Financial Regulation may not exceed EUR 30 million in any budget year, and the total amount of appropriations actually committed for preparatory actions may not exceed EUR 75 million.

Article 31 Specific powers of the Commission under the Treaties (Article 49(2)(c) of the Financial Regulation)

1. The articles of the EC Treaty which directly confer specific powers on the Commission are as follows:

(a) Article 138 (social dialogue);

(b) Article 140 (studies, opinions and consultations on social matters);

(c) Articles 143 and 145 (special reports on social matters);

(d) Article 152(2) (initiatives to promote coordination on health protection matters);

(e) Article 155(2) (initiatives to promote coordination on trans-European networks);

(f) Article 157(2) (initiatives to promote coordination on matters relating to industry);

(g) Article 159, second paragraph (report on progress made towards achieving economic and social cohesion);

(h) Article 165(2) (initiatives to promote coordination on research and technological development);

(i) Article 173 (report on research and technological development);

(j) Article 180(2) (initiatives to promote coordination of development cooperation policies);

2. The articles of the Euratom Treaty which directly confer specific powers on the Commission are as follows:

(a) Article 70 (financial support, within the limits set by the budget, for prospecting programmes in the territories of the Member States);

(b) Articles 77 et seq. (safeguards).

3. Additional items may be added to this list in the presentation of the preliminary draft budget with an indication of the articles in question and the amounts involved.

Article 32 Definition of a conflict of interests (Article 52(2) of the Financial Regulation)

1. Acts that may be tainted by a conflict of interests may include one of the following forms:

(a) granting oneself or others unjustified direct or indirect benefits;

(b) refusing to grant a beneficiary the rights or benefits to which he is entitled;

(c) committing undue or wrongful acts or failing to carry out acts that are mandatory.

2. The competent authority referred to in Article 52 of the Financial Regulation shall be the hierarchical superior of the member of staff concerned. He shall confirm in writing whether or not there is a conflict of interests. If there is, he shall himself take any appropriate decision.

CHAPTER 2 METHODS OF IMPLEMENTATION

Section 1 General provisions

Article 33 Prior checks carried out by the Commission (Articles 53 and 56 of the Financial Regulation)

1. Where the Commission implements the budget by shared, decentralised or indirect centralised management, it shall first carry out document and on-the-spot checks into the existence, relevance and proper operation within the entities to which it entrusts implementation, in accordance with the rules of sound financial management, and, in cases of decentralised management, in full or in part depending on the degree of decentralisation agreed, of:

(a) procedures applied;

(b) control systems;

(c) accounting systems;

(d) procurement and grant award procedures.

2. The Commission shall review such arrangements as necessary whenever there are substantial changes to procedures or systems in order to ensure continued compliance with the conditions set out in paragraph 1.

3. These entities shall provide the Commission, by the date stipulated, with any information it requests and shall inform it without delay of any substantial changes in their procedures or systems. The Commission shall, as appropriate, specify such obligations in the instruments of delegation or agreements concluded with these entities.

4. Where the Commission implements the budget by joint management, the verification agreements concluded with the international organisations concerned shall apply.

Section 2 Special provisions

Article 34 Direct centralised management (Article 53 of the Financial Regulation)

Where the Commission implements the budget on a centralised basis directly in its departments, implementation tasks shall be performed by the financial actors within the meaning of Articles 58 to 68 of the Financial Regulation and as stipulated in this Regulation.

Article 35 Exercise of powers delegated to executive agencies (Articles 54(2)(a) and 55(2) of the Financial Regulation)

1. Decisions to delegate powers to executive agencies shall authorise them, as authorising officers by delegation, to implement appropriations relating to the Community programme the management of which is entrusted to them.

2. The powers delegated to the executive agency shall be exercised by the director of the agency pursuant to Article 55(2) of the Financial Regulation.

3. The Commission's instrument of delegation shall contain the same provisions as are referred to in Article 39(2). It shall be formally accepted in writing by the director on behalf of the executive agency.

Article 36 Eligibility of national public-sector bodies or private-law entities with a public-service mission and conditions for delegation of powers to them (Article 54(2)(c) of the Financial Regulation)

1. The Commission may delegate tasks involving the exercise of public authority to national public-sector bodies or private-law entities with a public-service mission only if they are governed by the law of the Member States of the European Union, the EEA or countries that have applied to join the European Union save where the basic act provides otherwise.

2. The Commission shall ensure that these bodies or entities offer adequate financial guarantees, issued preferably by a public authority, in particular as regards full recovery of amounts due to the Commission.

3. Where the Commission is planning to entrust tasks involving the exercise of public authority, and in particular tasks of budget implementation to a body referred to in Article 54(2)(c) of the Financial Regulation, it shall analyse compliance with the principles of economy, effectiveness and efficiency. If this analysis shows that delegation best satisfies the requirements of sound financial management, it shall, before proceeding to implement the delegation, request the opinion of the competent committee provided for in the basic act, which may also give its opinion on the planned application of the selection criteria.

Article 37 Designation of national public-sector bodies or private-law entities with a public-service mission (Article 54(2)(c) of the Financial Regulation)

1. The national public-sector bodies or private-law entities with a public-service mission shall be set up in accordance with the law of the Member State or the country by which they are governed.

2. Such bodies or entities shall be chosen in an objective and transparent manner to match the implementation requirements identified by the Commission. This choice may not entail any discrimination between the Member States or countries concerned.

3. In cases of management by a network requiring the designation of at least one body or entity by Member State or by country concerned, the body or entity shall be designated by the Member State or the country concerned in accordance with the provisions of the basic act.

In other cases the Commission shall designate these bodies or entities in agreement with the Member States or countries concerned and in accordance with the provisions of the basic acts.

Article 38 Compliance with rules on procurement (Article 57 of the Financial Regulation)

Where the Commission entrusts tasks to private bodies under Article 57(2) of the Financial Regulation, it shall conclude a contract in accordance with the provisions of Title V of Part One of the Financial Regulation.

Article 39 Detailed arrangements for indirect centralised management (Articles 54(2)(b) and (c) of the Financial Regulation)

1. Where the Commission entrusts implementing tasks to agencies, bodies or entities under Article 54(2)(b) and (c) of the Financial Regulation, it shall conclude an agreement with them.

2. Such agreement shall include the following provisions:

(a) a description of the tasks entrusted;

(b) the conditions and detailed arrangements for performing the tasks, including the control arrangements;

(c) the rules on reporting to the Commission on how the tasks are performed;

(d) the conditions under which performance of the tasks is terminated;

(e) the detailed arrangements for Commission control;

(f) the conditions governing the use of separate bank accounts, the beneficiary of the interest yielded and the use made of it;

(g) the provisions guaranteeing the visibility of Community action in relation to the other activities of the body;

(h) an undertaking to refrain from any act which may give rise to a conflict of interests within the meaning of Article 32.

3. The agencies, bodies or entities referred to in paragraph 1 shall not have the status of authorising officers by delegation.

Article 40 Clearance of accounts procedures in decentralised or shared management (Article 53(5) of the Financial Regulation)

1. The purpose of the clearance of accounts procedure referred to in Article 53(5) of the Financial Regulation shall be to ensure that expenditure by the Member States in the context of shared management or by third countries in the context of decentralised management and which may be chargeable to the Community budget is in order and consistent with the applicable Community rules.

2. Without prejudice to specific provisions contained in sectoral rules, the clearance of accounts procedure shall consist of:

(a) the declaration of expenditure by the Member States or non-member countries in the form of accounts certified by a technically competent department or body functionally independent of the spending agency;

(b) document and, where appropriate, on-the-spot checks by the Commission, subject to no limitations or restrictions, on the content of these accounts and on the underlying transactions, including checks on beneficiaries;

(c) establishment by the Commission of the amount of expenditure recognised as chargeable to the budget, following an adversarial procedure and after the Member States or third countries have been notified;

(d) calculation of the financial correction arising from the difference between declared expenditure and expenditure recognised as chargeable to the budget;

(e) recovery or repayment of the balance arising from the difference between recognised expenditure and the sums already paid to the Member States or third countries. Recovery shall be by offsetting as specified in Article 80.

3. The clearance of accounts procedure described in paragraphs 1 and 2 shall apply depending on the degree of decentralisation agreed.

Article 41 Joint management (Articles 53 and 165 of the Financial Regulation)

1. The appropriations used in joint management with international organisations within the meaning of Articles 53 and 165 of the Financial Regulation shall finance actions, performance of which requires the pooling of resources from a number of donors, where it is not reasonably possible or appropriate to assign the share contributed by each donor to each type of expenditure.

2. The international organisations referred to in paragraph 1 are as follows:

(a) international public-sector organisations set up by intergovernmental agreements and specialised agencies set up by such organisations;

(b) the International Committee of the Red Cross (ICRC);

(c) the International Federation of National Red Cross and Red Crescent Societies.

CHAPTER 3 FINANCIAL ACTORS

Section 1 Rights and obligations of the financial actors

Article 42 Rights and obligations of the financial actors (Article 58 of the Financial Regulation)

Each institution shall provide each financial actor with the resources required to perform his duties and a charter describing in detail