Communication from the Commission - Modernisation of the Accounting System of the European Communities
Date: 2002-12-17
Institutions: European Commission
Subjects: European accounting system, business data processing, computer system, institutional reform, international standard, management audit

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 17.12.2002
COM(2002) 755 final

COMMUNICATION FROM THE COMMISSION

Modernisation of the Accounting System of the European Communities

Table of Contents

INTRODUCTION...................................................................................................................... 4

Need for action ........................................................................................................................... 4

The legal framework .................................................................................................................. 4

Changes in international public accounting ............................................................................... 5

Changes in the accounting framework within the European Communities ............................... 5

The current information system ................................................................................................. 6

Purpose of this communication .................................................................................................. 6

I.

I.1.

I.2.

I.3.

I.4.

PART I: THE ACCOUNTING FRAMEWORK......................................................... 8

Current Situation .......................................................................................................... 8

Evolution Needed......................................................................................................... 8

Situation in the Member States .................................................................................. 10

Future System ............................................................................................................ 11

I.4.1.

Dual system................................................................................................................ 11

I.4.2.

Use of existing standards : IPSAS ............................................................................. 11

I.5.

Actions to be taken..................................................................................................... 12

I.5.1.

Devising the new accounting framework................................................................... 12

I.5.2.

Integrating accounting data ........................................................................................ 18

I.5.3.

Organisation of internal control of accounting data................................................... 23

I.5.4.

Training and awareness raising among those concerned ........................................... 26

II.

PART II : IT SYSTEM .............................................................................................. 29

II.1.

Current position.......................................................................................................... 29

II.1.1. Description of the current system .............................................................................. 29

II.1.2. The need to create accrual accounting functionality.................................................. 30

II.1.3. The issue of consistency between sub-systems.......................................................... 30

II.1.4. Management functionality ......................................................................................... 30

II.1.5. Cost of the current system.......................................................................................... 31

II.2.

II.3.

The situation in the Member States............................................................................ 31

Consideration of the options for the future ................................................................ 32

II.3.1. Option 1: Continued use of the current system.......................................................... 34

II.3.2. Option 2: A single standard package ......................................................................... 34

2

II.3.3. Option 3: A new integrated system............................................................................ 35

II.3.4.

Inter-operability of systems ....................................................................................... 37

II.3.5. Evaluation of the system options ............................................................................... 38

II.4.

Action to be taken ...................................................................................................... 41

II.4.1.

Improvement of the current system............................................................................ 41

II.4.2. Development of the new system ................................................................................ 41

II.4.3. Timetable ................................................................................................................... 43

III.

PART III: PROJECT MANAGEMENT.................................................................... 43

III.1.

Project organisation.................................................................................................... 44

III.2.

Project resources ........................................................................................................ 45

III.3.

Timetable ................................................................................................................... 47

CONCLUSION ........................................................................................................................ 52

ANNEX A: THE INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS

(IPSAS) ...................................................................................................................... 53

ANNEX B: INVENTORY....................................................................................................... 57

ANNEX C: How the Communication responds to the points made by the Court of Auditors 58

ANNEX D: Detailed actions to be taken for the modernisation of the accounting framework62

3

INTRODUCTION

Need for action

The Commission has accomplished major improvements of its financial management and
control systems since the adoption of the White Paper on Reform in March 2000. Further
efforts  are  still  necessary  to  achieve  Reform’s  objectives,  in  particular  in  the  area  of
accounting  where  the  recast  Financial  Regulation  requires  the  production  of  accrual
accounts by 2005. This objective, in turn, commits the Commission to undertake a major
change  to  its  information  systems,as  well  as  necessitating  the  development  of  an
integrated  computerised  system  to  provide  the  additional  functionality  required.  The
in
Commission  acknowledges 
undertaking  a  project  of  such  magnitude  and  complexity  and  therefore  managing  these
challenges will be an integral part of the process.

there  are  considerable  challenges 

involved 

that 

Proper  forward  planning  is  fundamental  to  successful    project  management.  This
Communication provides the  basis  for  establishing  a clear and  agreed  understanding  of
the  goals  and  objectives  and  where  possible  how  the  project  will  deliver  them,  the
outcomes, outputs and timescales, the elements for project management and the reporting
lines.

The  Court  of  Auditors,  in  its  Annual  Report  concerning  the  financial  year  2001,
considered that, despite the fact that the accounts reflected faithfully the revenue and the
expenditure as well as the financial situation of the Communities, "urgent in-depth action
in the Commission’s services to cope with the risks arising from the shortcomings in the
accounting  system  is  required  (see  paragraph  9.6  –  9.8)  ".  It  is  important  to  note  that
criticisms  of  the  Court  relate  basically  to  the  general  accountancy  and  only  to  a  lesser
extent to the budget accounting.

For  its  part,  the  Commission  has  committed  itself  to  improve  and  modernise  the
Community  accounting  system.  Thus,  in  its  reply  to  points  9.7-9.8,  the  Commission
"recognises the accounting problems still present as highlighted by the Court. A reform
of  accounting  will  be  launched  as  a  matter  of  urgency.  The  Commission  is  strongly
committed  to  the  modernisation  of  the  accounting  system.  By  the  end  of  2002  the
Commission will take a decision on the options for development, the proposed calendar
for  implementation  and  the  projected  costs  and  allocation  of  resources.  Furthermore,
given that the new  Financial  Regulation  requires the production of accrual accounts by
2005; urgent and wide-ranging action is necessary to ensure that the Commission has the
necessary rules and procedures in place."

The legal framework

The Commission obligations on accounting rise directly from the EC Treaty. Article 275
lays down: "The Commission shall submit annually to the Council and to the European
Parliament the accounts of the preceding financial year relating to the implementation of
the  budget.  The  Commission  shall  also  forward  to  them  a  financial  statement  of  the
assets  and  liabilities  of  the  Community."  These  provisions  are  of  particular  importance
because,  in  the  context  of  the  Discharge  procedure,  Article  276,  the  Council  and  the
European Parliament shall examine the accounts, the  financial statements referred to in
Article 275 and the annual report by the Court of Auditors.

4

The basis for the new accounting system has been established in Article 125 of the new
Financial Regulation: “In accordance with the principle of accrual-based accounting, the
financial statements shall show the charges and income for the financial year, regardless
of  the  date  of  payment  or  collection”.  According  to  Article  181,  “These  provisions  …
shall apply gradually … in order to be fully effective for the budgetary year 2005”.

Changes in international public accounting

As most of the other accounting systems in the public sector, the Community system was
not designed to comply with accrual accounting principles. However, with the new rules,
the Commission will join the group of  governments and  public  institutions  which  have
undertaken important efforts in order to improve their accounting practices.

In  recent  years, the modernisation of public management  has  become  a  major  concern.
Public  accounting  practices,  most  often  oriented  towards  recording  payments  and
receipts,  must,  on  the  one  hand,  become  a  genuine  management  tool  and  on  the  other
hand  make  the  government’s  or  public  organisation’s  financial  situation  more  readily
understandable and reliable.

The  Commission  is  not  alone  in  moving  towards  the  respect  of  generally  accepted
accrual  accounting  principles.  Many  developed  countries  are  also  engaged  in  the  same
process and, encouraged by international bodies and organisations such as the OECD and
IFAC1,  have  begun  to  modernise  their  accounting  systems  over  the  past  few  years,
switching from a cash-based to an accrual-based system.

Experience  in  the  Member  States  shows  that  reforming  public  accounting  systems
represents  a  major  upheaval  both  in  terms  of  the  introduction  of  new  practices  and  in
human terms, not to mention the financial resources required.

Changes in the accounting framework within the European Communities

The  Commission,  too,  has  felt  the  need  to  swing  into  line  with  this  international
accounting reform and some years ago decided to develop its accounting system from a
mere  record  of  budgetary  expenditure  and  revenue  operations  (cash-based  accounting)
into an accrual accounting system with the objective of providing a fuller picture of the
Communities’  financial  situation,  showing  all  its  assets  and  liabilities  as  well  as  the
expenditure and revenue for the financial year.

The  Commission  launched  a  multi-annual  plan  in  2000  for  the  modernisation  of  its
accounting framework, which comprised:

– 

– 

– 

1 

a  study  on  the  establishment  and  presentation  of  the  accounts  of  the  EU
delivered in mid-2000 by high-level experts on public accounting;

drawing up in June 2001, an action plan for modernisation, which was discussed
with the Court of Auditors. The Court has welcomed the document orientations;

introducing  elements  of  accrual  accounting  in  the  presentation  of  the  financial
statements and calculating the economic out-turn since 2000, which “represents

IFAC: International Federation of Accountants

5

                                                
a  step  forward,  which  is  in  line  with  the  general  trend  observed  in  the  public
sector  at  international  level”2,  and  adopting  an  accounting  and  consolidation
manual for all the Institutions;

– 

– 

– 

analysing  several  Member  States’  experience  (United  Kingdom,  France,
Sweden, Spain, Netherlands);

adopting  the  new  Financial  Regulation,  including  the  introduction  of  new
accrual based accounting principles;

on  24  July  2002  the  Member  of  the  Commission  responsible  for  the  budget
presented  a  memorandum  (SEC(2002)853)  to  the  Commission  describing  the
wide-ranging  work  to  modernise  the  accounting  framework  and  information
system.

The current information system

The  architecture  of  the  Commission’s  central  financial  management  and  accounting
system is complex and comprises three different systems which are inter-linked and are
also linked with the sectorial systems of  the  spending  services  which exist  primarily to
meet sectorial management needs. The system does not meet the requirements of the new
Financial Regulation as it was not designed to include accrual accounting data which are
essential from the 2005 financial year under the new provisions.

It  has  to  be  stressed  that  first  the  accounting  rules  need  to  be  defined  and  then  the
information system will be designed accordingly.

Purpose of this communication

The steps set out in the memorandum of 24 July 2002 constitute the building blocks for
moving  from  a  system  based  on  cash  accounts  towards  an  integrated  accrual-based
accounting system, required by the Financial Regulation for the financial year 2005.

The Commission is aware that further analysis and evaluation will still need to be carried
out as part of the normal project management process.

The purpose of this communication is twofold:

– 

– 

2 

to  adopt  a  detailed  proposal  to  allow  the  Commission  to  decide  on  the
accounting  framework,  in  particular  on  how  generally-accepted  accrual
accounting principles can be implemented;

to  set  out  the  action  to  be  taken  as  regards  project  organisation,  resources  and
the  timing  of  the  work  to  develop  an  integrated  computerised  system.  The
system options are appraised in detail, identifying a preferred solution.

Court of Auditors - Annual report concerning the financial year 2000 (2001/C 359/01)- 9.36

6

                                                
The aim is to embark on detailed development of both the accounting framework and the
testing  and
the  beginning  of  2003,  with 
information  system 
2004.
implementation 

the  relevant 
way 

in 
phases 

getting 

under 

from 

7

I.

PART I: THE ACCOUNTING FRAMEWORK

I.1.

Current Situation

The  Commission’s  accounts  are  kept  in  accordance  with  the  Financial  Regulation  of
21 December 19773.

The  accounts  comprise  the  budget  accounts  and  the  general  accounts.  The  budget
accounts give a detailed picture of implementation of the annual budget. They are based
on a modified form of cash accounting (carryovers are included). The budget out-turn for
the year is calculated on the basis of amounts actually disbursed and collected (including
carryovers).

Several elements of accrual accounting have already been introduced by the Commission
for  the  presentation  of  the  financial  statements  via  annual  adjustments.  These  mainly
relate  to  fixed  assets  (acquisitions,  disposals,  withdrawals),  stocks,  debts,  loans,  share-
holdings, depreciations, provisions and  write-downs. They  allow  the economic  out-turn
to be calculated.

The economic  result aims to  make the  link  between the budgetary cash-based  accounts
and  the  general  accounts,  which  are  moving  towards  accrual  accounting.  It  reveals  the
impact on the balance sheet of expenditure and revenue not originating from budgetary
accounting.

However, all the information used to make a balance sheet on accrual basis is not based
directly on the accounting entries but comes from extra accounting information, based on
provisions of the Accounting and Consolidation Manual, and transmitted to DG Budget
by the other DGs of the Commission. In order to assure completeness and reliability, the
collection of all this information at source, within the DGs, is a priority.

In its most recent annual reports, the Court of Auditors has stressed the efforts made by
the Commission to improve its accounting system, but has also urged it to make further
progress  and  adopt  an  integrated  accounting  framework,  in  line  with  international
accounting standards.

I.2.

Evolution Needed

The main objective of the Commission’s new accounting framework and system will be
to  produce  financial  information  that  is  useful  to  interested  parties,  and  to  dispose  of
better management tools.

The principal users of the European Communities’ accounting reports are:

– 

3 

Internal  users:  Senior  managers  and  authorising  services  need  access  to
detailed internal financial reports as a tool for decision making and to improve
the management of projects and to perform internal controls.

Together  with  the  Rules  of  Implementation,  the  Regulation  on  Non-Financial  Fixed  Assets  and
the Accounting and Consolidation Manual.

8

                                                
– 

External  users:  the  European  Parliament,  the  Council,  the  Court  of  Auditors,
the  public  and  other  users,  such  as  governments,  rating  agencies,  economic,
political and financial analysts, including the media.

Taken as a collective group, users expect that financial reporting should demonstrate the
accountability  of  the  European  Communities  for  the  financial  affairs  and  resources
entrusted to it, and provide them with information useful for economic decision making.

The quality of the information provided in financial reports determines the usefulness of
those reports to  users.  Basic  requirements are:  understandability,  relevance, materiality,
reliability, 
form,  neutrality,  prudence,
completeness, comparability and timeliness.

representation,  substance  over 

faithful 

Cash accounting provides information, which meets some of the  objectives of  financial
reporting.  However,  it  is  not  the  most  informative  way  of  presenting  financial
information.  With  cash  accounting  there  is  no  requirement  to  match  expenditure  with
revenue for the period to which they relate, and capital spending is booked in total in the
year in which the capital purchase or disposal is made. Cash based accounts also lack any
framework for accounting for assets and liabilities.

The accrual basis4 should provide users with financial information about such matters as
the resources controlled by the entity, the cost of its operations (cost of providing goods
and  services),  enhanced  cash  flow  information  and  other  financial  information  useful
both  in  assessing  the  financial  position  and  changes  in  it,  and  in  assessing  whether  the
reporting  entity  is  operating  economically  and  efficiently.  Users  may  use  financial
reports  to  assess  the  Commission’s  stewardship  of  resources,  compliance  with
legislation, and the EC’s financial position.

Accrual  accounting  requires  organisations  to  maintain  complete  records  of  assets  and
liabilities  as  well  as  identifying  and  recording  any  off-balance  sheet  transactions.  To
enable the Commission to fulfil the obligations under accrual accounting principles and
standards  it  will  be  necessary  to  identify  all  appropriate  assets  and  liabilities,  which
should be recorded as part of the balance sheet.

To  achieve  these  objectives  of  providing  reliable  financial  information,  the  accounting
framework will change on several fronts. These changes will involve:

– 

– 

– 

4 

adopting generally accepted accrual based accounting principles;

developing  an  integrated  accounting  system  containing  all  the  information
necessary 
this
Communication);

the  accrual  accounts 

for  presenting 

(see  part 

II  of 

developing  a  general  accounting  system  based  on  accrual  accounting  and
maintenance of cash-based budget accounting;

Accrual  basis  means  a  basis  of  accounting  under  which  transactions  and  other  events  are
recognised  when  they  occur  (and  not  only  when  cash  or  its  equivalent  is  received  or  paid).
Therefore,  transactions  and  events  are  recorded  in  the  accounting  records  and  recognised  in  the
financial  statements  of  the  periods  to  which  they  relate.  The  elements  recognised  under  accrual
accounting are assets, liabilities, revenue and expenses" ( IPSAS 1)

9

                                                
– 

– 

– 

adopting  accounting  methods  and  valuation  rules  that  flesh  out  the  accounting
principles adopted;

improving  the  financial  statements  so  that  they  give  an  accurate  picture  of  the
financial situation in terms of assets and liabilities, budget implementation, the
out-turn and the cash flow;

extending the scope of consolidation.

I.3.

Situation in the Member States

Traditionally,  public  sector  accounting  has  been  cash  based.  No  change  was
contemplated until recently when the demands of good governance and the New Public
Management (NPM) postulates have spread throughout the OECD countries.

This new movement has led  to a  broad range  of  changes,  such as replacement of input
result  control,  performance  measurement,  devolution,  outsourcing,
control  by 
empowerment of employees and accrual accounting. This approach is being supported by
international  bodies  such  us  the  International  Federation  of  Accountants  (IFAC),  the
World Bank and OECD.

In this context, several EU member states have started to produce their financial reports
on an accrual basis. Nevertheless they are proceeding unevenly and there are still many
governments,  such  as  Germany  or  Denmark,  which  are  presenting  their  financial
statements on a cash basis. Most Member States are not presenting consolidated financial
statements  for  the  whole  of  the  government.  Even  the  UK,  one  of  the  most  advanced
countries,  only  adopted  the  accrual  basis  of  accounting  in  the  2000/2001  fiscal  year;  it
will not present consolidated statements until 2005/2006.

There is also a diversity of transition paths towards the accrual basis. Some governments,
such as the UK, the  Netherlands and Sweden, have moved first to accruals in  financial
statements and then, in a second stage, have based their budgets on the  same principle.
Others, such as France and Spain, have decided to adopt this basis just for the financial
statements, keeping the budget on a cash basis.

According  to  an  IFAC  survey5,  the  periods  over  which  reform  occur  differ  from
jurisdiction  to  jurisdiction  and  depend  on  the  resources  available  and  the  extent  of
political commitment. Reform periods may be short (one to three years), medium (four to
six years) or long (over six  years). In the UK, for instance,  where resources and strong
political commitment existed, it took 6 years to adopt full accruals for the majority of the
UK government accounts. According to the  UK National Audit  Office report of March
2002, there are still problems for some accounts.

A  2002  OECD  survey6  conducted  by  its  Public  Management  Committee  revealed  that
only 3 EU Member States present all their Government financial statements using the full
accrual basis of accounting. When Departmental / Agency level financial statements are

5 
6 

IFAC Public Sector Committee Study 14 April 2002
PUMA/SBO  (2001)  3/  ANN2.  OECD  Public  Management  Service.  The  OECD  budgeting
management database

10

                                                
considered, 3 additional member states are added. Therefore,  only 6 out  of  15 Member
States are using full accruals at some level.

I.4.

Future System

The choices realised for the future system are the application of a dual system and the use
of IPSAS accounting standards.

I.4.1. Dual system

There are two main options when making the transition to accrual accounting:

– 

– 

either the principle of accrual-based accounts is applied for both the budget and
general  accounts,  in  which  the  budgetary  balance  will  correspond  to  the
difference  between  the  budgetary  entitlements  established  in  the  course  of  the
financial  year  and  the  obligations  established  in  the  course  of  that  year,
irrespective of what may be disbursed or collected. This is not the structure laid
down in the Financial Regulation.

or  the  accrual  principle  is  applied  to  the  general  accounts  only,  while  budget
implementation  remains  subject  to  the  cash  principle,  in  which  case  a  “dual”
system exists.

The  new  Financial  Regulation  lays  down  an  accounting  framework  based  on  such  a
“dual” system. The dual system requires budget implementation to be based on different
principles (budget consumption occurring at the time of disbursement or collection) than
the general accounts (based on accrual principles).

This system requires:

– 

– 

– 

definition  of  the moment  when  an  accounting  event  must  be  recognised  in  the
various financial reports;

reconciliations between budget implementation and out-turn;

comparison  between  the  financial  reports  drawn  up  according  to  the  accrual
principle and those based on cash-flow accounting.

I.4.2. Use of existing standards : IPSAS

The new Financial Regulation specifies in Article 133 that the Commission's Accounting
Officer,  when  adopting  the  accounting  rules  and  methods,  shall  be  guided  by  the
internationally accepted accounting standards for the public sector but may depart from
them where justified by the specific nature of the Communities' activities.

The Commission’s Accounting Officer intends  consequently  to prepare  and  publish the
financial statements in accordance with International Public Sector Accounting Standards
(IPSAS  -  see  annex  A),  derived  from  International  Accounting  Standards  (IAS)7  and

7 

IAS are issued by the International Accounting Standards Board (IASB). IASB is an independent,
privately-funded  accounting  standard  setter,  committed  to  developing,  in  the  public  interest,  a
single set of high quality, understandable and enforceable global accounting standards that require

11

                                                
issued  by  the  Public  Sector  Committee  (PSC)  of  the  International  Federation  of
Accountants (IFAC - an organisation of national professional accountancy organisations,
with member bodies in 114 countries, representing 2 million accountants).

The  PSC  is  the  standing  committee  formed  to  address,  on  a  co-ordinated  worldwide
basis,  the  needs  of  those  involved  in  public  sector  financial  reporting,  accounting  and
auditing,  in  order  to  develop  a  core  set  of  accounting  standards  for  the  public  sector.
IPSAS are considered central to initiatives directed at strengthening the transparency and
accountability  of  governments.  Agencies  and  public  sector  entities  have  been  strongly
encouraged  by  the  PSC  to  adopt  IPSAS  and  actively  participate  in  their  development
process, within a vast world-wide process for convergence and harmonisation.

The importance of the IAS has been recognised by the Regulation (EC) No1606/2002 of
the  European  Parliament  and  of  the  Council  of  19  July  2002  on  the  application  of
international  accounting  standards.  This  Regulation  requires  EU  listed  companies  to
prepare their consolidated accounts in accordance with IAS from 2005 onwards.

However, the Commission recognises that IPSAS standards will need to be adapted and
supplemented  in  some  respects  to  obtain  a  framework  of  accounting  principles
appropriate  to  the  European  Communities.  The  accounting  events  not  still  covered  by
IPSAS will be disclosed following the IAS.

I.5.

Actions to be taken

I.5.1. Devising the new accounting framework

I.5.1.1. Establishing 
Communities

the  accounting  standards 

to  be  applied  by 

the  European

The  IPSAS  set  out  the  requirements  for  accounting  and  financial  reporting  by
governments  and  other  public  sector  organisations.  However,  not  all  IPSAS  are
applicable  to the specific  situation  of  the  Communities.  Presently,  there  are  20  IPSAS8
issued,  and  two  others  are  expected  to  be  published  shortly,  already  covering  a  wide
range of accounting and financial reporting issues. The first IPSAS was adopted in May
2000, the last one in October 2002.

Both IPSAS and IAS refer often to very technical terms and concepts. They will not be
an  “accounting  manual”  with  rules  and  explanation  applicable  to  every  particular
accounting  transaction  or  event  of  a  DG,  but  a  source  of  general  guidance  and  a
conceptual framework.

On  the  basis  of  the  standards,  accounting  policies  to  be  followed  for  each  kind  of
transaction will be developed. It will be necessary:

(cid:1)  to  identify  those  responsible  (the  Accounting  Officer’s  services  with  consultation  of
the other Institutions and agencies) for developing and reviewing the policies prior to

transparent and comparable information in general purpose financial statements. In addition, the
Board cooperates with national accounting standard setters to achieve convergence in accounting
standards around the world. All members of IFAC are members of IASB.
IPSAS standards in Annex

8 

12

                                                                                                                                                
final approval. The standard setting committee (point I.5.1.2.) has an important role in
this matter;

(cid:1)  to establish time frames for development and approval;

(cid:1)  to  identify  the  authoritative  accounting  standards.  Where  there  is  no  IPSAS  on  a

particular topic, other sources must be identified;

(cid:1)  to develop a full set of accounting policies for internal use as follows:

– 

– 

– 

– 

to identify the transactions and balances for which accounting policies will
be required both for the consolidating and the consolidated entities;

to  determine  the  level  of  guidance  that  will  be  required  on  the  policies.
Minimal  guidance  is  appropriate  when  employees  are  familiar  with
accrual accounting and the standards applied. Detailed guidance includes a
summary of the key requirements of an accounting standard and examples
of the application of that standard to particular transactions;

to  review  the  existing  accounting  policies  to  determine  if  they  will  be
appropriate under the new basis of accounting;

to apply the relevant accounting standards or other sources of authoritative
guidance for specific accounting transactions and events.

(cid:1)  to develop guidance and education on the application of policies

Implications for DGs

The accountant's services will identify and will write the standards to be established.

The  DGs  will  have  to  familiarise  themselves  fully  with  the  accounting  standards  to
ensure they are properly applied.

I.5.1.2. Setting up an Accounting Standards Committee

The Financial Regulation of 25 June 2002 sets out the accounting principles that serve as
the  basis  for  drawing  up  the  financial  statements.  However,  the  principles  need  to  be
fleshed out in accounting standards and rules applicable to the activities of the European
Communities. In this connection, Article 133 of the Financial Regulation states that the
Commission’s Accounting Officer is adopting the accounting rules and methods and the
harmonised chart of accounts to be applied by all the institutions.

It would be inappropriate for those responsible for preparing financial statements to have
the sole responsibility for deciding on the standards such statements should follow. The
Accounting Officer should have a major role in the development of accounting standards.
However,  other  users  of  the  accounts,  should  also  play  a  part  in  the  setting  of  these
requirements.

To this end, an advisory committee for accounting standards will be set up. Its tasks will
be:

13

– 

– 

to  deliver  an  independent  professional  judgement  on  the  accounting  standards
and rules proposed by the Commission’s Accounting Officer;

to  advise  the  Accounting  Officer  on  the  application  of  financial  reporting
principles and standards.

The  committee  will  play  an  important  role  in  defining  and  harmonising  accounting
standards  and  rules  as  well  as  in  defining  the  conceptual  accounting  framework.  The
Commission’s  Accounting  Officer  will  adopt  the  accounting  standards  and  rules  after
consulting  the  Accounting  Officers  of  the  other  institutions  and  bodies  and  the
Committee.

This advisory committee would comprise at the very least the following representatives :

– 

– 

– 

– 

– 

– 

– 

the Commission's Accounting Officer ;

the Accounting Officer of one other institution ;

the Accounting Officer of one agency within the scope of consolidation9;

a representative of the Central Financial Service, expert in financial regulations
and trained in accountancy;

a  representative  of  Unit  DG  MARKT/F3  “Financial  reporting  and  company
law” ;

a representative of the Internal Audit Service;

two external persons who are recognised experts in public accounting.

The  Legal Service can  be  consulted  for  advice.  The  network  of  responsible  accounting
people within the DGs is consulted before presenting the standards to the committee for
approval.

It will be proposed to the Court of Auditors that it participates in this Committee because,
although it is essential that auditors maintain their independence, there are many benefits
to be obtained from establishing a co-operative working relationship with the auditor at
the beginning of the transition process. An auditor would be unlikely to give an absolute
assurance that a particular system  or process would meet audit requirements. However,
the  auditor  may  be  able  to  provide  helpful  advice  regarding  the  criteria  that  would  be
used in assessing the system or process10.

I.5.1.3. Adapting the chart of accounts

A  chart  of  accounts  is  a  systematic  coding  system  for  the  classification  and  coding  of
transactions and events within the accounting system.

9 
10 

Art. 185 Financial Regulation (1605/2002 of 25 June 2002)
IFAC Study 14 chapter 2, point 2.30

14

                                                
The chart  of  accounts  will  be  analysed  to  determine  what  adjustments  are  necessary  to
accommodate all the accounting events and so reflect all the new items in terms of assets
and liabilities, costs and revenue and contingencies.

15

The new central chart of accounts will have to:

– 

– 

– 

– 

meet the needs of both individual and central entities;

provide a uniform coding structure for coding financial transactions;

permit  flexibility  for  individual  entities  to  adapt  it  to  their  particular
requirements;

contain all the necessary elements to calculate the economic result.

Implications for DGs

The  different  accounting  events  identified  within  operational  DGs  will  determine  the
adaptation of the structure of the chart of accounts.

The  Accounting  Officer  will  adopt  the  new  chart  of  accounts  applicable  for  all  DGs,
institutions and agencies

I.5.1.4. Defining the event giving rise

The event giving rise is the key element in the transition to accrual accounting.

Transactions must be recognised when they occur and not merely when a sum of money
is received or paid. In the accounting records, accounting events are entered against the
financial  year  to  which  they  relate.  Items  recognised  in  this  way  in  the  accounts
constitute assets and liabilities, costs and income, and contingent assets and liabilities.

In terms of the volume of transactions, it is expenditure where recognition of the event
giving rise and hence its definition are especially important. The aim is to harmonise the
relevant rules.

An initial analysis has shown different practices within the public sector. However, there
are  common  strands.  These  common  strands  are  that  transfers  should  be  authorised,
eligibility criteria met and that it should be possible to estimate amounts reasonably.

The  replies  to  the  questionnaire  sent  to  DGs  (see  point I.5.2.1)  will  make  it  easier  to
define the event giving rise. Initial talks between accounting departments and authorising
services  have  shown  that  the  interpretation  of  the  standards  varies  considerably
depending on the department concerned, area of activity and type of management (direct
or shared).

Summarised, the event giving rise for the registration of receivables and revenues and for
debts and charges will be defined.

The  link  between  the  event  giving  rise  for  expenditure  and  the  accounts  is  discussed
further  in  point  I.5.2.5:  “Creating  a  link  between  the  Central  Invoice  Register  and  the
accounts”.

16

Implications for DGs

If the scope of the concept deserves particular emphasis in connection with expenditure,
for the DG Budget, in collaboration with the other DGs, it involves adopting the content
of  the  standards  for  all  the  accounting  items  that  constitute  assets,  liabilities,  costs  and
income as well as contingent assets and liabilities.

Besides defining the concept, the DGs will in future  have to input all  the data required
into  the  central  accounting  system,  either  directly  or  via  their  local  systems,  when  the
various events giving rise are constituted.

I.5.1.5. Extending the scope of consolidation

The  scope  of  consolidation  is  defined  as  all  the  companies  or  bodies  included  in  the
group to be consolidated.

Consolidation  is  the  process  of  presenting  the  financial  statements  of  all  entities  that
make up the reporting entity as if they were the financial statements of a single entity. It
involves adding together all items on a line-by-line basis and eliminating any transactions
or balances between members of the reporting  entities.  The  entities  need to  conform to
the  standard  policies  and  classifications  when  providing  financial  information  for
consolidation.  The  consolidated  statements  currently  comprise  the  accounts  of  the
European  Parliament,  the  Ombudsman,  the  Council,  the  Commission,  the  Court  of
Justice, the Court of Auditors, the Economic  and Social Committee and the Committee
of the Regions. The criterion used to define the scope of consolidation is basically that of
the single budget, with the expenditure and revenue of the above-mentioned institutions
contained in one budget, that of the European Union. The current definition of the scope
of consolidation does not comply with international standards. Agencies have been set up
to carry out some of the tasks entrusted to the EU's activities. They are financed in full or
in part by Community general budget. It is therefore logical to say that it is the European
Union,  which  benefits  from  their  activities  and  that  these  agencies  ought  to  be
consolidated,  as  stated  in  Article  121  of  the  new  Financial  Regulation  which  stipulates
that the consolidated accounts shall comprise the financial statements of the institutions
and of the agencies.

In addition, article 185 indicates that the Commission shall adopt a framework financial
regulation for the agencies set up by the Communities, and having legal personality, that
actually receive grants charged to the budget. The bodies referred to shall apply the same
accounting rules in order to consolidate their accounts with the Commission's accounts.

Implications for DG Budget, for the institutions and for the agencies

All the institutions and agencies must apply the accounting rules and methods laid down
by  the  Commission’s  Accounting  Officer.  A  discussion  forum  with  the  Agencies  has
been  created,  on the  same  basis  as  the  existing  meetings  of  the  Accounting  Officers  of
the Commission and the other institutions. It should be ensured that the rules for drawing
up  and  presenting  these  bodies'  financial  statements  are  similar  to  those  applied  by  the
consolidating institution.

17

For  the  Commission  and  particularly  for  DG  Budget,  this  means  a  major  effort  to
explain, obtain support for and harmonise the new accounting framework, standards and
rules. Agreement is a basic requirement for success.

Most  of  the  additional  work  in  setting  up  the  accounting  procedures  and  consolidating
the accounts will fall on DG Budget.

The work to be undertaken by the other Institutions and Agencies although similar to that
of the Commission, will be on a smaller scale.

I.5.1.6. Financial statements

The  financial  statements  are  an  important  element  in  the  accounting  system.  Their
purpose  is  to  present  a  faithful  picture  of  the  financial  situation  in  terms  of  assets  and
liabilities, budget implementation, the entity’s results and the annual cash flow.

To meet these objectives, and with the aim of bringing the statements into line with the
IFAC  recommendations,  the  annual  accounts  of  the  European  Communities  will
comprise the following:

(1) 

Budgetary Out-turn Account

(2) 

Balance Sheet

(3) 

Economic Out-turn Account (new)

(4) 

Cash-flow Table

(5) 

Statement of Changes in Capital (new)

(6) 

Explanatory Notes

I.5.2.

Integrating accounting data

I.5.2.1. Analysing accounting events and fixing the opening balances

At  present,  extra-accounting  information  kept  in  accordance  with  the  provisions  of  the
Accounting and Consolidation Manual is sent to the central accounting department at the
end of the year for the presentation of the accounts.

To obtain a complete list of all accounting events (both on and off the balance sheet) for
the  entire  Commission,  DG  Budget  sent  a  questionnaire  to  the  other  DGs  on  17
September  2002  to  identify  the  different  transactions  liable  to  have  an  impact  on  the
accounts. On the basis of the survey, a list of all assets, liabilities and off-balance sheet
items will be drawn up. Using the information supplied by services will allow the data to
be incorporated in the accounts.

This  information-gathering  exercise  is  the  first  step  towards  establishing  the  opening
balance.  This  is  a  major  prerequisite  for  integrating  accounting  movements  relating  to
assets. The fixing of the opening balances will require a complete accounting closure.

18

Implications for DGs

Producing a concrete opening balance will entail a considerable amount of work for DGs
since the internal control procedures - put in place in each DG - will have to guarantee
the accuracy and completeness of the data.

Before  recording  the  DGs’  various  accounting  movements  in  accordance  with  the
principles  of  the  new  integrated  accounting  system,  the  accounts  will  have  to  be  ruled
off,  as  happens  at  the  end-of-year  closure  on  31  December  in  order  to  integrate  the
opening balances in the accounts.

I.5.2.2. Linking the general accounts and the budget accounts via "object codes"

To  obtain  a  new  integrated  accounting  framework,  a  new  coding  will  be  assigned  to
budgetary  transactions  so  that  information  can  be  transferred  directly  to  the  general
accounts. This will be achieved through  “object codes”, which  will be linked to budget
lines, making it possible to enter revenue and expenditure in the accounts correctly and
automatically.

This  transfer  of  information  from  the  budget  accounts  to  the  general  accounts  will
substantially  reduce  the  need  for  extra-accounting  information  and  for  reclassification
and adjustments of accounting entries.

A classification of budget expenditure and revenue will have to be created
For expenditure, this will be based on various criteria, organic (who does the spending?),
economic (what is it spent on?) and functional (what is it spent for?). Revenue will also
have  to  be  classified  on  the  basis  of  economic  and  organic  criteria.  The  economic
classification  is  a  new  element,  the  organic  and  functional  classifications  are  already
available.

The  economic  classification  of  expenditure  and  revenue  will  distinguish  current
expenditure  and  revenue  from  capital  expenditure  and  revenue.  This  classification  will
allow  there  to  be  a  clearer  link  between  the  budget  accounts  and  the  general  accounts,
since current expenditure and revenue will be linked to charges and income for the year,
while capital expenditure will be linked to the balance sheet headings.

The  organic  classification  (who  does  the  spending?)  allows  budget  resources  to  be
allocated to authorising officers and enables DGs to draw up their annual activity reports
(reform  action  82).  The  level  of  detail  in  the  organic  classification  could,  however,  be
refined in the longer term.

The  functional  classification  (what  is  the  spending  for?)  will  make  it  possible  to
evaluate the level of economy, efficiency and effectiveness in achieving the institution’s
objectives.  The  budget  structure  based  on  ABB  (Activity  Based  Budgeting)  could  be
used for functional classification.

Implications for DGs

DG Budget will have to draw up the chart of "object codes" and then the other DGs will
have  to  implement  it  into  the  system.  Managing  officials  and  authorising  officers  will
have to assign and check the coding of all transactions.

19

I.5.2.3.

Integrating contingent assets and liabilities (off-balance sheet items)

A  “contingent  asset  or  liability”  is  a  possible  asset  or  liability  whose  existence  will  be
confirmed  only  by  the  occurrence  of  an  uncertain  future  event  not  wholly  within  the
entity’s control11.

These items must be entered in the accounts and the financial statements, besides those
relating to the balance sheet and the out-turn account.

At present, most of the data concerning contingent assets and liabilities are supplied by
DGs  at  the  end  of  the  year  for  the  closure  of  the  accounts  and  are  entered  under  the
heading “off-balance sheet commitments”.

Bank guarantees (received or possibly given) deserve special mention because they raise
particular  problems.  Besides  the  problem  of  recording  them,  there  is  the  question  of
monitoring.  A  computerised  system  should  make  it  possible  to  apply  effective
management in this respect, providing the link with current contracts, handling the call-in
of guarantees and their removal from the accounts on expiry or cancellation.

The action required under this heading involves:

– 

– 

– 

analysis of the contingent assets and liabilities to be included in accordance with
international accounting standards,

recording of these transactions in the accounting system by authorising services,
either directly or via their local systems, using “off-balance sheet accounts”,

adapting  the  system  and  accounting  framework  to  accommodate  these  entries,
for which no budget line exists. The new accounting class “0” will be assigned
to these “off-balance sheet accounts”.

Implications for DGs

DGs  will  in  future  be  responsible  for  identifying,  managing,  and  regularly  entering
contingent assets and liabilities into the accounting system.

Management of bank guarantees will entail regular extra work but will make it possible
to use this procedure more systematically for recovering pre-financing.

I.5.2.4. Management  and  entry  in  the  accounts of  pre-financing,  interim  payments  and

final payments

In  the  course  of  their  activities  the  European  Communities  grant  pre-financing  to  third
parties.  Pre-financing  is  meant  to  provide  recipients  with  cash  funds.  They  have  to  be
cleared either through interim  payments,  final-balance payments, or  through  a recovery
order12.

11 
12 

The full definition is given in IAS 37.
Article  81  of  the  Financial  Regulation  and  Article  102  of  the  Regulation  laying  down  detailed
rules for the implementation of the Financial Regulation.

20

                                                
To ensure the sound management of the funds granted in this way and to obtain a clear
and full picture of the situation in terms of the  accounts, the  data  must  be  incorporated
into  the  computerised  accounting  system.  It  should  also  be  pointed  out  that  all  pre-
financing  granted  will  have  to  be  cleared  in  the  budget  accounts.  When  adopting  the
accounting standards, the Accounting Officer will determine pre-financing that has to be
included on the assets side of the balance sheet.

A  link  will  have  to  be  provided  between  the  expenditure  and  the  revenue  environment
when pre-financing is cleared by recovery.

To obtain a full picture of the situation regarding pre-financing, new contracts will have
to include a provision obliging the contractor to send the Commission periodic reports on
the  use  made  of  pre-financing.  The  aim  is  to  be  able  to  determine  changes  in  pre-
financing from the accounts.

Implications for DGs

To  ensure  pre-financing  is  entered  correctly  and  cleared  in  the  accounts,  each  interim
payment  and/or  final-balance  payment  will  have  to  indicate  what  portion  of  the  pre-
financing is being cleared.

A detailed procedure for clearing pre-financing will be drawn up by DG Budget and will
be brought into operation as soon as possible. However, DGs will  have until 1 January
2005 at the latest to draw up the opening inventory of all current pre-financing. This will
allow the accounts to show a complete picture of the position as regards pre-financing for
2005.

I.5.2.5. Creating a link between the Central Invoice Register and the accounts

A Central Invoice Register has been developed under the present system. Each payment
order  is  generated  from  the  invoice  entered.  This  facility,  which  makes  it  easier  to
monitor  payment  deadlines,  will  play  an  important  part  in  the  transition  to  accrual
accounting for charges and debts.

The Central Invoice Register will have to be integrated with the general accounts in order
to record debts in the accounts as soon as they are incurred.

It  should  be  noted  that  the  term  “invoice”  is  used  in  the  Commission’s  context  in  a
broader sense than simply invoices received from third parties. It refers to any request for
payment ultimately giving rise to disbursement of funds.

As a general rule, all expenditure must be recorded in the Central Invoice Register.  No
payment  will  be  authorised  unless  the  payment  request  has  already  been  recorded.
Exceptions to the rule will be defined for specific cases, such as staff salaries13.

Recording  payment  requests  in  the  Central  Invoice  Register  will  allow  there  to  be  full
information  available  concerning  the  total  amount  of  debts  owed  to  third  parties  and

13 

The feasibility of the use of the Central Invoice Register for payments made by delegations has to
be examined.

21

                                                
make it possible for charges recorded in the general accounts (when the event giving rise
occurs) to be reconciled with budget expenditure effected (when payments are made).

The balance of supplier accounts will include unsettled payment requests.

Further, it should be noted in this connection that the current “third-party file” based on
bank accounts  will have to be transformed into a “supplier file” based  on  legal  entities
(see point I.5.2.6).

Implications for DGs

The  general  rule  is  that  an  official  payment  request  must  always  be  sent  to  the
Commission and use of the Central Invoice Register is compulsory.

Rules will have to be laid down as regards what constitutes the equivalent of a “payment
request” in specific areas still to be determined.

DGs will have to ensure that data entered in the invoice register tallies exactly with the
supporting  documents.  They  can  input  the  data  either  directly  into  the  Central  Invoice
Register or via an interface with their local systems.

DG Budget will develop the link between the Central Invoice Register and the accounts.
It  will  provide  DGs  with  the  tools  needed  to  reconcile  budget  implementation  (cash
based)  and  the  general  accounts  (accrual  based)  and  to  determine  outstanding  amounts
payable to each supplier.

Use of the Central Invoice Register for expenditure will be made compulsory, except in
certain special cases where there is very little time gap between the event giving rise for
the expenditure and payment of the debt.

I.5.2.6. Receivables and files of clients and suppliers

Any amount receivable that is identified as being certain, of a fixed amount and due must
be  established  and  accounted  for.  Currently,  this  accounting  entry  is  made  via  the
recovery orders (RO).

Henceforth,  it  will  be  necessary  to  distinguish  the  various  types  of  receivables  and  the
third parties concerned.

A  critical  analysis  is  necessary  since  the  current  accounting  system  leads  to  duplicate
entries, which have to be eliminated at the time of the closure of the accounts.

The  accounting  for  amounts  receivable  will  be  analysed.  Various  types  of  RO  will  be
identified, according to whether they involve a claim concerning own resources, a claim
concerning  a  fine  within  the  framework  of  the  free  competition,  the  recovery  of  an
amount from a third party (for example members of staff), or a claim which concerns the
refunding of an asset (for example in the case of the granting of loans).

It will also be necessary to distinguish the type of customer. It could be a true "customer"
who pays money to the Commission (as in the case of the fines), or a "supplier", to whom
the Commission paid an amount for the implementation of a programme, and who has to
transfer excess funds back to the Commission.

22

The treatment of these various types of third parties will be analysed. One or more files
will contain the suppliers and the customers. Within this framework, third parties will be
identified by legal entity. Currently, the third party file is based upon the bank accounts
of the partners.

Implications for DGs

The DGs will have to identify the type of receivables and the type of third party involved
at the time of the introduction of a recovery order.

The current third party file will have to be adapted in order to include the legal partners
of  the  Commission.  The  current  contractors  data  base  (Icon-DB)  will  also  have  to  be
adapted accordingly to avoid duplication of data.

I.5.3.

Organisation of internal control of accounting data

I.5.3.1. Expanding internal control in each DG to include accounting aspects

An  essential  means  for  assuring  the  reliability  of  the  financial  information  is  the
integration  of  the  accounting  transactions  into  the  internal  control  framework.  In  the
context  of  reform,  internal  control  is  defined  broadly,  as  the  globality  of  policies  and
procedures  conceived  and  put  in  place  by  the  organisation’s  management  to  ensure
notably the safeguarding of assets and information, the quality of accounting records and
the timely production of reliable financial and management information.

This quality of accounting records is not only related to the yearly-consolidated accounts
but also to the yearly Declaration and Annual Activity Report. Hereby, Directors General
and  Heads  of  Services  have  to  express  their  reasonable  assurance  that  resources  have
been  used  for  the  intended  purposes  and  in  accordance  with  the  principles  of  sound
financial management (effectiveness, efficiency, economy)  and  that  the  internal  control
systems guarantee the legality and regularity of the underlying transactions.

The  list  of  non-exhaustive  actions  to  include  the  accounting  dimension  in  this  context
will concern:

– 

– 

– 

– 

– 

the  process  handbook  developed  by  the  Central  Financial  Service,  related  to
accounting and financial reporting will have to integrate the issues related to the
modernisation of the accounting framework into these risks and related controls
mitigating them;

the  charts  of  the  Authorising  Officer  by  delegation  and  by  sub-delegation  will
have to be adapted in order to cope with the modernised accounting framework;

the  future  system  must  guarantee  maximum  quality  of  data  introduced  in  the
system and thus reinforce the internal control;

the  exercise  of  self-assessment  in  the  context  of  internal  control  and  risk
assessment  will  have  to  incorporate  these  modified  guidelines,  process
handbooks and all related procedures;

the ex ante controls carried out by the DGs will have to incorporate the context
renewed by the modernisation of the accountancy framework.

23

I.5.3.2. Supporting evidence for balance sheet balances through inventories

With regard to internal controls to ensure the reliability of accounting information, it is
very  important  that  the  accounting  balances  of  all  accounts  should  be  supported  by
inventories.

It is generally accepted in the accounting profession that every entity must, at least once a
year,  conduct  a  faithful  and  prudent  exercise  of  listing,  checking,  examining  and
valuation in order to establish, at the selected date, a complete inventory of all its assets
and entitlements  of  whatever  nature,  of  the  debts,  obligations  and  commitments  of  any
kind  relating  to  its  activities  and  of  its  own  resources  allocated  to  cover  them.  The
inventory should not, therefore, be confined solely to physical stocks and tangible fixed
assets.

Together  with  the  journal  and  the  general  ledger,  the  stock  ledger  is  one  of  the
accounting  books  required  under  the  accounting  directives  and  national  accounting
legislation.

The stock ledger comprises the inventories and the valuation rules. Inventory operations
involve two aspects;

– 

– 

physical: establishing the existence of assets and liabilities; and

qualitative: the value to be assigned to the various items, depreciation or value
adjustments to be recorded, provisions to be constituted, etc.

The information concerning the  institution’s assets  and  liabilities  is  generally  presented
in three distinct dimensions: reality, the management database and the accounts.

– 

– 

– 

reality:  physical  goods  and  the  titles  of  ownership,  contracts  and  agreements,
titles of ownership, Commission decisions, Court judgements, etc.

the  database:  must  contain  all  the  information  required  for  management  and
accounting purposes, such as dates, inventory numbers, suppliers, descriptions,
supporting document, order slips, etc.

the accounts: record day-by-day transactions and the account balances.

A concrete example is given in Annexe B.

The  approach  required  when  performing  the  inventory  involves  reconciling  these  three
dimensions.  An  effective  inventory  is  one  which  periodically  compares  transactions  in
the  three  dimensions  indicated  and  which  will  serve  as  the  basis  for  recording
adjustments to correct any discrepancies found14.

14 

The  implementing  rules  of  the  new  Financial  Regulation  foresee  a  three-year  verification
programme to perform the inventory checks. Article 222 – Inventory checks – (Article 138 of the
Financial Regulation) : Inventory checks carried out by the institutions shall be performed in such
a  way  as  to  ensure  that  each  item  physically  exists  and  matches  the  relevant  entry  in  the
inventory. Such checks shall be carried out under a three-year verification programme.

24

                                                
At  present,  neither  authorising  services  nor  the  accounting  services  have  access  to  all
three dimensions at the same time. Authorising services only have access to “reality” and
the  management  database  (accounting  valuations  are  rarely  recorded  in  the  databases).
The accounting services only have access to the balances and transactions in the general
ledger  and  the  journal  and  are  sometimes  obliged  to  enter  data  in  the  accounts  on  the
basis  of  non-accounting  information  from  the  management  inventories.  Sharing  and
checking data are key factors for ensuring reliable account balances.

Implications for DGs

The  basis  for  laying  down  valuation  rules  for  the  different  assets  and  liabilities  is
described  in  point  I.5.1.1.:  “Establishing  the  accounting  standards  to  be  applied  by  the
European Communities”. DG Budget shall establish a minimum standard internal control
for  performing  inventories:  documents  to  be  drawn  up,  authorised  persons,  double
counting, halting stock entries and exits during the inventory, etc.

Authorising  services  will  require  access  to  the  general  ledger  in  order  to  check,  at  any
time, the balances and transactions linked to the property under their management. More
specifically, DGs will have to:

– 

– 

– 

determine  the  physical  inventory  in  order  to  establish  the  opening  balance  for
the various assets, liabilities and contingent assets and liabilities;

establish specific inventory procedures within each DG, after self-assessment of
the risks linked to the valuation of their assets and liabilities;

analyse, in the context of the internal control standards, the segregation of duties
between those who authorise transactions, those responsible for the safe-keeping
of assets, and those responsible for the inventory.

I.5.3.3. Certification of local systems

Article 61 of the new FR mentions that the Accounting Officer shall be responsible for
laying  down  and  validating  accounting  systems  and,  where  appropriate,  validating
systems laid down by the Authorising officer to supply or justify accounting information.

When systems  for  financial management  laid  down  by  the  Authorising  Officer  provide
data for the accounting of the Commission, or when they are required to justify data, the
Accountant Officer has to give his agreement to their setting in place as well as to their
modification.

The Accounting Officer has also to be consulted on the setting up and the modification
by the Authorising Officers of the systems for inventory and for the valuation of assets
and liability.

Today, the validation is carried out by the validation of the interfaces between the local
systems and the  central system.  In 2005 the  Accounting  Officer will  have  to  verify  the
capacity of local systems to provide to the central system data complying with the new
accounting  rules.  After  this  verification  the  central  system  will  no  longer  accept  data
provided by non-validated local systems.

25

The way  of  dealing  with  the  data  is  under  the  Authorising  officer’s  responsibility.  The
Accounting Officer needs accounting information that is available, complete, reliable and
necessary, in order to produce financial statements according to the new standards, based
on the principles of integration of the data and of accrual accounting.

Consequences for the DGs

DG Budget has to identify, within the Commission, the local systems used and requiring
validation  by  the  Accounting  Officer.  To  this  end,  DG  Budget  should  have  the  audit
resources  necessary  to  carry  out  the  certification  of  these  systems.  In  principle,  the
certification of local systems will be done by external audit companies.

The DGs have to ensure that their local system will be adapted in time in order to be able
to  provide  the  data  required  by  the  new  accounting  framework  set  out  by  DG  Budget
sufficiently in advance.

I.5.3.4. Accounting information by DG

Authorising  DGs  will  be  wholly  responsible  for  their  accounting  operations.  Services
will need to have access to high-quality management information that is accurate, clear,
useful, easily accessible, complete and up to date.

Each DGs annual activity report must contain both its annual accounts and a declaration
by  the  Director-General  certifying  that  adequate  internal  controls  are  in  place  and  that
resources have been used for their intended purpose.

Besides management information, the justification by inventory of all the balance-sheet
accounts  will  require  a  breakdown  of  account  balances  by  authorising  department
responsible.  The  system  to  be  put  in  place  will  therefore  have  to  allow  balances  and
accounting transactions to be broken down by authorising officer.

Implications for DGs

DGs will have to earmark the necessary resources for analysing and providing supporting
evidence for the accounting data.

DG  Budget  will  provide  operational  DGs  with  a  user-friendly  system  for  exploiting
accounting  data  by  DG.  The  DGs’  requirements  in  terms  of  management  information
will be taken into account.

I.5.4.

Training and awareness raising among those concerned

An essential factor for the smooth functioning of the future system will be to implement
appropriate training and awareness-raising measures among those concerned.

Awareness

Efforts will have to focus not only on the technical  aspects  but  also  on  the  need for  an
accounting approach in each DG. If the new accounting framework is to have the desired
effect, it is crucial for everyone concerned in the operational services to be made aware
of  the  importance  of  producing  reliable  and  complete  accounting  data  and  of  their
responsibilities in this area.

26

Action  to  raise  awareness  in  Commission  services  has  already  been  taken  through  the
network of heads of financial units (RUF) and the formation of working parties with the
task of preparing the July memorandum and this communication. The other institutions,
the  agencies  and  the  Commission’s  own  services  will  be  kept  duly  informed  on  the
progress of the project.

Training

The training required covers various areas.

During the transition towards the new accounting framework, target groups of staff with
similar training requirements will be designated. To identify requirements themselves, a
statement of the skills available in operational services will be drawn up and compared
with  the  list  of  skills  required  under  the  reform.  These  may  be  expressed  in  terms  of
production and actions to be undertaken, or in the form of a graded scale.

At all events, two types of training will be provided: general courses and complementary
modules  targeted  at  the  specific  requirements  of  DGs  managing  particular  accounting
events.  By  assessing  the  effectiveness  of  the  training  provided,  it  will  be  possible  to
determine any further training that may be appropriate.

It  will  require  continuous  training  at  a  steady  rate  in  order  to  meet  the  requirements
entailed  by  the  changes  in  methods  and  systems,  staff  mobility  and  the  recruitment  of
new staff.

Recruitment

Recruitment  requirements  in  terms  of  external  staff  with  accounting  qualifications  will
have  to  be  anticipated  sufficiently  early  because  of  the  time  lag  inherent  in  the
organisation  of  competitions;  job  descriptions  will  have  to  be  updated  in  line  with  the
reforms under way.

Network

The effort to raise awareness among staff in authorising services could also be boosted
through  a  number  of  new  arrangements.  An  accounting  correspondent  would  be
designated in each DG and a network of those in charge of accounting would be set up,
along the lines of the network of financial units. An easy way of answering the practical
questions  managing  officials  would  be  faced  with  in  their  day-to-day  work,  could  be
obtained by setting up an “accounting help-desk”.

Lastly, a substantial effort would be required in terms of the documenting of procedures
and of the new system.

Implications for DGs

It will be the DGs and other entities concerned that will have to take stock of the skills
they have available in order to identify their training requirements and decide on the best
way to satisfy them. In this connection, the following points are worth noting:

27

– 

– 

it is preferable to anticipate staff turnover during reform implementation, since
this has an impact on training and could cause some delay in putting the scheme
in place,

it  is  useful  to  try  to  adopt  an  integrated  approach  to  training,  which  entails
bringing  together  participants  from  different  sectors,  so  enabling  them  to
exchange information about their experience and knowledge.

28

II.

PART II : IT SYSTEM

II.1.

Current position

II.1.1. Description of the current system

The Commission’s central financial management and accounting needs are provided for
by  a  central  computer  system  (SINCOM2),  introduced  for  the  first  time  in  1997  and
extended  to  cover  all  Commission  services  in  1999.  The  architecture  of  this  system  is
complex and comprises three different systems which are inter-linked and are also linked
with sectorial systems developed by the spending services to meet sectorial management
needs. These systems may be used to initiate financial transactions.

SINCOM2  comprises  two  interfaced  central  systems  designed  to  meet  the  needs  of
different users:

– 

– 

SAP  R/3  is  used  by  the  services  of  the  Accountant  and  by  the  Financial
Controller. This system is the official accounting system of the Commission in
which  budgetary  accounting,  general  accounting,  treasury  management,  the
validation  of  third  parties,  recoveries  and  the  emission  of  payments  via  the
SWIFT network are carried out; and

Si2 is the budgetary management tool for the authorising services. Transactions
are introduced by the Directorates General in Si2, either directly or indirectly via
transfer  from  sectorial  computer  systems 
interface.
Irrespective  of  their  origin,  all  transactions  must  be  validated  in  Si2  by  the
authorising officer before transfer into SAP.

through  a  standard 

The current system architecture is completed by the reporting functionality provided by
the  data  warehouse.  A  budgetary  data  warehouse  has  been  created  which  contains  data
from Si2 and is used by the authorising services. The legal reporting by the Accountant is
carried out on the basis of SAP data copied into the accounting data warehouse.

The  standard  accounting  package  SAP  is  the  official  accounting  system  of  the
Commission.  It  is  from  this  system  that  the  Commission  produces  its  financial
statements. The Commission decided in the SINCOM2 project to create a system (Si2) in
which the managing services could introduce their transactions without making detailed
accounting entries before approving  them  and  sending  them  into  the  central  accounting
system.  Because  different  spending  services  operate  to  different  sectorial  rules,  the
current system architecture allows for services to develop their own sectorial information
systems  and  to  transfer  (through  a  standard  interface  and  following  strict  rules)
transactions from these systems to Si2 in which the authorising officers  must  give their
approval.  Under  the  provisions  of  the  new  Financial  Regulation,  the  Accountant  must
validate these sectorial systems in the future.

29

II.1.2.

The need to create accrual accounting functionality

SINCOM2 was developed to support the production of cash-based financial statements in
line with standard public sector practice at the time. Consequently, the system  does  not
support the production of accrual accounts, as required by the Financial Regulation from
the  2005  financial  year.  There  is  therefore  a  need  both  to  develop  the  accounting
framework as outlined in Part 1 of this Communication and to implement functionality in
the computerised accounting system to support this framework.

While  many  of  the  necessary  accounting  tools  exist  in  SAP,  some  of  these  do  not  at
present form part of the Commission’s implementation of SAP. The tools which need to
be implemented to support accrual accounting include an inventory system and client and
supplier ledgers. The implementation will depend on the rules fixed by the Accountant in
the accounting framework.

II.1.3.

The issue of consistency between sub-systems

Under  the  current  system  architecture,  data  are  transferred  between  Si2  and  SAP  in
accordance with fixed workflows. When changes to a transaction are made in one system,
these  are  synchronised  with  the  other  system.  The  interfacing  does  however  allow
potential inconsistencies between the systems as the same central budgetary accounting
data  exist  and  are  treated  in  both  systems  –  this  has  an  impact  for  example  where  the
automatic  synchronisation  does  not  work  correctly  or  where  certain  calculations  (for
example for the revaluation of commitments) are done separately in both systems.

Since  the  launch  of  SINCOM2,  and  particularly  in  the  light  of  the  decentralisation  of
responsibility  as  part  of  the  financial  reform  process,  users  have  been  concerned  about
consistency  between the Si2  data to  which  they  have  access  and  the  central  accounting
data  held  in  SAP  to  which  they  do  not  have  access.  To  examine  this  question,  the
Commission  launched  a  quality  assurance  project,  the  first  phase  of  which  has  been  to
reconcile data between Si2 and SAP for the 2001 financial year. This exercise has shown
that  the  two  systems  are  consistent  –  the  systems  have  been  fully  reconciled  for
commitments, payments and receipts. The project has resulted in the improvement of the
synchronisation mechanism between the two systems.

Following  the  successful  result  of  the  quality  assurance  exercise  for  2001,  the
Commission  has  developed  tools  to  enable  a  comparison  to  be  made  in  respect  of  the
2002 financial year. This work is under way. Once this latter  exercise is completed, the
Commission  will  put  in  place  a  regular  quality  control  mechanism  to  ensure  that
differences can be identified, investigated and corrected as soon as they occur. This work
and  the  improvement  to  the  system  will  continue  until  such  time  as  it  is  replaced  by  a
new system architecture.

II.1.4. Management functionality

In addition to the pure accounting functionality within SINCOM2, the Commission began
as part of the financial reform to develop management functionality which is integrated
within  SINCOM2.  To  date,  a  central  invoice  register  (allowing  services  to  register

30

invoices  received  and  to  manage  payment  deadlines)  has  been  put  into  production.  A
central  database  of  contracts  and  contractors  (ICON)  is  also  being  developed  and  is
currently  implemented  on  a  pilot  basis  in  two  specific  areas.  Both  of  these  tools  are
integrated with SINCOM2 and both use “web” technology. The functionality provided by
both  of  these  systems  will  need  to  be  integrated  into  the  new  system  architecture  as
aspects of both systems may be used to support accrual accounting. This integration must
be at both functional and technical levels.

The Commission has also been developing other separate modules within Si2 – notably a
workflow motor which enables the management of security in the new and more complex
financial circuits within the spending services which are required under the new Financial
Regulation.  This  workflow  motor  is  adapted  to  the  specific  needs  of  financial
management  in  the  Commission  and  would  also  need  to  be  integrated  in  any  revised
system.

II.1.5. Cost of the current system

The  SINCOM2  system  cost  some  €10.4  million  to  develop  between  1994  and  1997,
including testing, documentation and the training of users. This cost is relatively low in
terms of investments  by  other  organisations to put in place their computerised  systems.
The  budget  is  also  comparable  to  that  of  some  systems  being  developed  by  individual
spending services to meet their own sectorial needs. The maintenance costs of the system
(new developments, training of new users…) are some €2.6 million per year.

II.2.

The situation in the Member States

As  identified  in  Section  I.3  above,  the  Commission  is  not  acting  in  isolation  and  most
European  States  are  at  least  at  the  stage  of  considering  moving  towards  accrual
accounting. To support these moves, Member State administrations are at various stages
of  implementing  new  computerised  financial  management  and  accounting  systems  –  at
both national and local level. These systems are always based on proprietary packages –
in-house development is no longer  seen as  a  solution. The main reasons  for  purchasing
packages are that:

– 

– 

– 

they  offer  greater  flexibility  than  in  the  past  and  it  is  therefore  easier  to  meet
specific requirements by customising the package;

the total cost of a package solution is considered to be lower than developing in-
house; and

the  use  of  a  standard  package  increases  harmonisation  between  different
ministries or departments.

While  packages  are  used,  these  are  always  supplemented  by  additional  specific
developments  –  accounting  on  average  for  a  quarter  of  the  functionality  provided.  The
remaining  functionality  required  is  provided  by  special  additional  developments  or
packages  or  by  so-called  “legacy  systems”  –  existing  systems  which  are  proven  and

31

which the organisation decides to keep and integrate within the new system architecture.
Given  the  accent  on  providing  a  significant  part  of  system  functionality  outside  the
package solution, there is a concentration on ensuring that systems are easily linked and
easy  to  integrate.  Web-based  technology  is  now  becoming  the  standard  for  these
developments.

The timescale for projects to convert to accrual accounting can be long and the resources
considerable – project teams number generally from 20 to 50 persons and can be as many
as 200 persons. While implementation of the computerised system can be achieved in 18
months,  the  whole  project,  including  the  implementation  of  accounting  rules,  generally
takes six to ten years.

II.3.

Consideration of the options for the future

Whatever the final choice made as regards the systems, some key principles need to  be
followed  in  making  this  choice.  Experience  with  SINCOM2  shows  that  the  future
accounting system must be totally integrated (providing all accounting data directly from
the system), whether the solution is a standard single package or a package surrounded by
other  compatible  modules  which  are  bought-in  or  specifically  developed.  The  single
package  approach  is  essential  for  the  core  accounting  functionality.  Where  the  central
standard package does not meet users’ needs for management functionality or where it
is  not  cost  effective  to  use  the  relevant  functionality  the  Commission  could  envisage
purchasing  complementary  software  or  developing  its  own  systems  to  meet  identified
needs – but always  respecting the principles of  integration  and  inter-operability.  Where
needs are sectorial rather than common, these needs could be met by the development or
retention  of  sectorial  systems,  again  respecting  inter-operability  and  integration
principles.

The new system must provide the appropriate accrual accounting functionality as defined
by  the Accountant.  It must  also  guarantee the  security  and reliability of data as  well  as
guaranteeing  a  full  audit  trail.  The  requirements  for  the  new  system  are  summarised  in
the table below.

32

Table 1: Key requirements for the future accounting system

Ensuring full accrual accounting capacity

(cid:1)  full accrual accounting functionality provided by the central standard package

(cid:1)  full respect of generally-accepted accounting principles

Ensuring consistency of data

(cid:1)  no duplicate treatment of data in different parts of the system

(cid:1)  elimination of redundant data and assurance of consistency

(cid:1)  the sectorial functionality must be included in the overall system architecture

(cid:1)  the  system  must  be  seamless  –  where  specific  management  functionality  is  created,
this must respect rules regarding presentation of data and must be designed to ensure
full coherence

(cid:1)  respect of inter-operability principles fixed by the e-Commission initiative

(cid:1)  services should all have access to the same reliable reporting data – the system must

be the sole source of accounting data

Ensuring effective security

(cid:1)  standard security policy to be fully implemented

Other requirements

(cid:1)  the transition risks to the new system must be minimised

(cid:1)  preference  for  central  standard  functionality  (including  management  tools)  provided
by a standard package. Other solutions only to be developed if the standard package
solution is not cost effective or does not meet users’ needs

(cid:1)  ease of maintenance, portability and user-friendliness

The cost of the system is not regarded as a key requirement for the new architecture – the
result of the project must be an integrated reliable system and so, while value for money
must  of  course  be  assured,  cost  is  a  secondary  consideration  in  appraising  the  options.
The  new  system  must  meet  users’  needs,  including  accrual  accounting  functionality,
integrated operation and tight security. The objective of the project will be to ensure such
a system is implemented while also ensuring best value for money for the Commission.

33

The July memorandum identified three main options for the future:

– 

– 

– 

the  current  SINCOM2  system  while  continuing 

using 
performance;

to 

improve 

its

to use a single standard package to provide all functionalities; and

to use elements of the existing system in an evolution towards a new architecture
based  on  the  single  standard  package  already  in  use  in  the  Commission
eliminating the causes of incoherence and in which data are stocked only once.

This section of the Communication evaluates each option and reaches a conclusion on its
desirability and feasibility.

II.3.1. Option 1: Continued use of the current system

This option would in fact  mean  no change  to  the  present system  architecture – Si2 and
SAP would remain in operation while action is taken to improve the synchronisation of
data and further to reinforce security. Clearly, additional functionality would need to be
created to cater for the requirements of accrual accounting. While in SAP this additional
functionality  could  probably  largely  be  created  by  using  existing  modules  within  the
system, Si2 would need to be extensively modified to ensure that all accrual accounting
data can be captured on entry into the system.

While  of  course  this  is  likely  to  be  the  “least-cost”  option,  it  is  not  the  recommended
solution  for  two  main  reasons.  Firstly,  the  architecture  of  the  system  is  not  optimal,
relying on two separate interfaced systems; and secondly to the option does not integrate
sectorial systems in the overall system architecture.

It  is  for  these  reasons  that  this  option  is  rejected.  It  is  clear  however  that  action  to
improve  the  functioning  of  the  current  architecture  must  continue  until  such  time  as  a
new  architecture  is  put  in  place,  notably  in  terms  of  the  consistency  of  data  and  the
security of the system (see section II.4.1 below).

II.3.2. Option 2: A single standard package

The use of a single standard package would mean that existing sectorial systems would
no  longer  be  allowed  to  transmit  financial  data  into  the  central  system.  All  spending
services would need to use the standard functionality in the package in the same way –
for management as well as accounting purposes. This option would eliminate the risk of
incoherence as all users would be using the same system in the same way and their own
existing sectorial financial management systems would effectively be discontinued as the
functionality would be provided in the central system.

However, the extent to which this solution could be adopted in practice is uncertain and
needs  to  be  studied  further  as  different  sectors  of  Commission  activity  are  conducted
under specific sectorial rules imposed by the legislator. In fact the  Financial Regulation
contains  specific  and  varied  provisions  for  the  different  sectors.  It  is  not  at  all  clear

34

without  further  study  whether  these  different  sectorial  needs  could  be  met  by  a  single
standard package.

The  feasibility  of  developing  a  common  procedure  which  respects  all  of  the  relevant
sectorial rules would need to be examined. The extent of the adaptation necessary would
of course influence the feasibility and cost effectiveness of this option. While this option
is attractive on paper, there are a number of practical aspects which need to be taken into
account before a decision can be taken to move in this direction.

Under  the  terms  of  the  open  procurement  of  the  SAP  package  used  in  SINCOM2,  this
package could be retained without further recourse to the market if it were to be used for
accounting purposes only. However, if the solution were to be widened to cover other
(management  and  sectorial)  functionality,  it  is  likely  that  a  full  public  procurement
procedure would need to be carried out. A  full  public procurement procedure  would  be
necessary  for  any  system  to  replace  the  current  package.  This  would  result  in  a  new
procurement  procedure  which  would  almost  certainly  delay  the  introduction  of  an
accrual-based new system until after the 2005 threshold.

The  use  of  a  single  standard  package  as  the  sole  system  would  require  the  different
sectorial rules and practices to be incorporated within the standard procedures required by
the  package.  This  option  is  still  open  for  further  consideration  as  further  work  is
necessary to analyse the feasibility of incorporating all required sectorial functionality in
a  single  standard  package.  It  is  not  at  all  certain  that  these  analyses  will  show  that  the
option is feasible or cost-effective. Therefore a further option must be considered.

II.3.3. Option 3: A new integrated system

This  option  is  different  from  option  2  in  that,  while  ensuring  that  all  accounting
functionality  is  provided  by  the  central  accounting  package,  it  recognises  that  the
required management functionality may not be available from the core package and thus
calls  for  sectorial  systems  to  be  maintained  or  developed  within  the  overall  system
architecture . The feasibility of this architecture and the action necessary to put it in place
will  be  studied  in  the  first  quarter  of  2003.  This  option  envisages  using  the  current
package  for  the  purposes  of  the  original  tender  (to  provide  accounting  functionality)  .
Additional accounting functionality could be obtained by extending the existing contract.
Any new management functionality to be integrated into the system could lead to a need
to go to the open market – in co-ordination with the Informatics Directorate. Depending
on the amount of additional functionality purchased, option 3 could eventually resemble
option 2 in the technical aspects, in terms of recourse to the market and in the time taken
for full implementation.

Sectorial  systems  integrated  into  the  overall  system  architecture  would  be  approved  by
the Accountant in conformity with Article 61 (2) of the Financial Regulation and would
need to respect strict inter-operability and integration rules to ensure proper security and
consistency of data. The option would respect Article 206 of the Implementing Rules for
the Financial Regulation, in that accounting would be carried out in an integrated system

35

in that all accounting functionality would be provided by the central system. For financial
management functionality, the following approach would be applied:

– 

– 

– 

– 

firstly,  the  feasibility  of  providing  this  within  the  current  package  would  be
evaluated.  Where  this  can  be  done  in  accordance  with  users’  needs  and  at
reasonable cost, the functionality would be provided in the common system;

second,  where  it  is  not  possible  to  use  the  current  package  to  meet  user
requirements  without  complementary  developments,  the  option  of  using  a
standard  package  which  would  fully  integrate  with  the  current  one  would  be
evaluated. Where this solution is cost effective, it would be adopted;

third, where the package solution is not possible, a decision would be made on
whether  the  requirement  is  a  common  one  shared  by  some  or  all  sectors,  or
whether  it  is  sectorial  in  nature.  Where  there  is  a  common  need,  an  in-house
solution would be developed and integrated in the overall architecture to  avoid
that  individual  services  need  to  invest  in  developing  their  own  separate
solutions; and

finally, where the need is sectorial in nature, the responsible services would be
invited  to  develop  their  own  solution,  but  would  be  required  fully  to  respect
inter-operability principles. These systems would be subject to validation by the
Accountant  and  would  need  to  conform  to  rigorous  specifications  to  ensure
coherence with the central system.

In this option, all functionality (whether provided by the common system or by sectorial
systems  integrated  within  the  overall  architecture)  must  be  totally  integrated  so  as  to
ensure  consistency  of  data  at  all  times.  Accounting  functionality  would  be  provided
within  the  package,  but  through  the  use  of  a  web  front-end,  data  from  other  systems
validated by the Accounting Officer could be displayed on screen.

The above approach would mean that there will be a common core central financial and
accounting  system  which  would  be  integrated  and  fully  coherent.  It  would  be  the  sole
source of accounting data and the data would be shared by all users. Around this central
core, systems would operate to provide management functionality which is necessary  at
sectorial level to meet specific needs not relevant to all Commission services. The central
core  system  would  provide  appropriate  management  functionality  for  those  services
which do not have specific sectorial needs. A business process analysis would be carried
out with the  spending  services  to  evaluate  their  user  requirements  as  part  of  the  design
phase of the system.

Full coherence  would be ensured by this option because  data  would be  shared  between
the different system modules  following the principles  of  inter-operability.  For  example,
all  data  on  commitments  and  payments,  whether  viewed  from  sectorial  systems  or  the
common  system,  would  be  the  same.  All  users  would  in  fact  view  the  same  data  from
sectorial systems or the central system. To ensure the reliability of data, rules would be
fixed as to the source of definitive data at any stage in the life cycle of a transaction. For

36

example,  before  a  transaction  launched  in  a  sectorial  systems  is  approved  by  the
authorising  officer,  the  single  source  of  reliable  data  on  that  transaction  would  be  the
sectorial  system  (as  it  would  not  yet  exist  in  the  common  system).  However,  once  the
transaction  is  approved  by  the  authorising  officer  and  is  registered  in  the  accounts,  the
common  system  would  become  the  sole  source  of  financial  information  on  that
transaction. The history of the transaction in the sectorial system would be kept for audit
trail purposes, but in all cases once a transaction is  completed, the  user  would  only see
the financial elements of the transaction from within the core accounting system.

The advantages of  this solution are that  it  would  allow  the  maximum  possible  use  of  a
single standard accounting package while also recognising that some management needs
may be more effectively met by other solutions. It would guarantee coherence of data by
defining at each stage of the lifecycle of a transaction which is the master system. Users
of all other linked systems would only be able to view the master data. Decisions on how
to provide this additional functionality would be taken on a case-by-case basis and would
be guided by cost effectiveness and operational issues. In no case would the development
of  a  solution  external  to  the  central  package  be  allowed  to  compromise  coherence.  All
decisions would be fully documented.

II.3.4.

Inter-operability of systems

The  E-Commission  project  was  launched  in  2001  to  examine  how  information  and
communication technologies can be applied to improve administration. An interim report
on  the  project  in  2002  concluded  that  the  “lack  of  inter-operability  of  corporate  and
sectorial  management  information  systems  is  a  restraining  factor  on  achieving
efficiency”. The report recognised that “achieving a quality administration requires better
co-operation  between  services”  although  it  also  noted  that  “there  is  currently  little
incentive  for  individual  services  to  contribute  to  corporate  approaches”.  The  report,
which covered all  common  corporate  systems,  noted  that  the  following  risks  of  lack  of
inter-operability:

– 

– 

– 

data inconsistencies between the various information systems;

data  is  often  “locked”  within  an  information  system  and  cannot  be  shared
between users; and

information systems are designed to perform a  certain function,  without  regard
to the continuity of tasks of the user to support his or her work.

In  July  2002,  the  Commission  established  an  action  plan  relating  to  the  annual  activity
reports  and  declarations  of  the  directors  general  and  heads  of  service  in  July  2002
(COM(2002) 426). It had become clear from certain of the declarations that the lack  of
inter-operability  of  systems  caused  management  difficulties  for  some  services.  In  this
context,  and  with  the  objective  of  ensuring  data  quality,  it  is  vital  that  the  new  system
architecture developed to support the accounting reform should respect inter-operability
principles.

The future accounting system must therefore ensure that:

37

– 

– 

– 

the user has a single point of access to data, adapted to his own needs;

there  will  be  a  single  entry  of  information  and  this  information  will  be  shared
across all systems (respecting security rules); and

there will be unique and uniform data definitions for each piece of data and these
definitions will be shared across systems.

Achieving  inter-operability  is  both  a  technical  question  (ensuring  that  the  technology
used  for  the  system  enables  it  to  share  data  with  other  systems)  and  one  of  functional
design (ensuring that it really meets users’ needs). Inter-operability also means that firm
central  technical  and  functional  rules  would  need  to  be  established  to  govern  how  the
systems  operate  and  are  developed.  To  comply  with  the  latter  requirement,  the  system
must be designed to support the work processes of all users. Procedures must also be put
in place to ensure that all accounting and financial data presented in other systems comes
where relevant directly from the core accounting system.

Other  actions  relating  to  inter-operability  must  also  be  respected  –  notably  the
establishment  of  common  data  management  principles  (to  ensure  that  the  same  term  in
one system means the same thing in another system, whether this system is common or
sectorial).  In  line  with  developments  in  the  context  of  the  overall  progress  on  inter-
operability, the system  must  be  able  to  accommodate  the  use  of  a  single  portal  through
which users can enter the core system.

II.3.5. Evaluation of the system options

An initial appreciation of the three system options identified is summarised  in the table
below, using the criteria set out in Table 1.

38

Table  2:  Evaluation  of  options  against  key  requirements  for  the  future
accounting system

Ensuring full accrual accounting capacity

full  accrual  accounting  functionality  provided  by  the  central
standard package

full respect of generally-accepted accounting principles

Ensuring consistency of data

no duplicate treatment of data in different parts of the system

elimination of redundant data and assurance of consistency

the sectorial functionality must be included in the overall system
architecture

the  system  must  be  seamless  –  where  specific  management
functionality  is  created,  this  must  respect  rules  regarding
presentation  of  data  and  must  be  designed  to  ensure  full
coherence

Option 1

Option 2

Option 3

No

No

No

No

No

No

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Depends

Yes

respect of inter-operability principles fixed by the e-Commission
initiative

No

Depends

Yes

services should all have access to the same reliable reporting data
– the system must be the sole source of accounting data

Yes by end
2003

Yes

Yes

Ensuring effective security

standard security policy to be fully implemented

Other requirements

The transition risk must be minimised

for 

central 

(including
standard 
preference 
management  tools)  provided  by  a  standard  package.  Other
solutions to be developed if the standard package solution is not
cost effective or does not meet users’ needs

functionality 

Depends

Yes

Common
systems
only

N/A

No

No

No

Yes

Yes

ease of maintenance, portability and user-friendliness

No

Depends

Yes

Table 2 shows that, while the improvement of the current system in terms of consistency
of data and security is a high priority for the coming year, this action does not support the

39

principles of the accounting reform form 2005. This option can therefore be eliminated as
the longer-term solution.

The Table also shows that the choice between options 2 and 3 is less simple. The options
offer many of the same advantages – the main difference being that option 2 envisages all
functionality being provided within the common system and there is therefore uncertainty
as  to  whether  certain  of  the  criteria  can  be  met  by  this  option.  This  is  mainly  because
option 2 would mean that different sectorial rules would need to be accommodated within
the common system, while sectorial procedures and working practices would need to be
adapted  to  conform  with  the  requirements  of  this  system.  Option  2  would  also  mean
major changes which would be implemented in one single step - data would need to be
converted from existing sectorial systems and input into the new system and the sectorial
systems eliminated at the  same time.  This would  increase the  transition risk  to the new
system and also increase the cost.

The advantage of option 3 is that it enables the maximum possible functionality (and all
of the accounting functionality) to be provided by the common system while recognising
that the common package may not provide all of the required management functionality
or  that  it  may  be  more  cost  effective  to  use  other  integrated  solutions  to  provide  some
elements  of  this  functionality.  Option  3  also  recognises  the  sectorial  systems  which
already  exist and which are adapted to the particular management  needs  of  the services
which  use  them.  This  option  would  provide  perfect  coherence  because  the  core
accounting  data  would  only  come  from  the  common  accounting  system.  Strict  rules
would  ensure  that  all  systems  interfaced  with  the  common  system  conform  completely
with inter-operability principles (including the use of standard data definitions describing
all  data  items  (name,  detailed  description/meaning,  format,  rules  applying  to  them)
together with an integrated Data Model).

The  development  of  the  new  system  architecture  is  a  major  undertaking  for  the
Commission,  as  it  would  be  for  any  organisation.  It  is  vital  that  this  development  is  a
success.  Risk  will  therefore  need  to  be  reduced  to  the  absolute  minimum.  The  solution
should therefore be based on tried and tested solutions – whether these are bought-in or
built in-house. The key principles which must be respected are the integration of systems
(and hence the coherence of data) and the maintenance of effective security. These will
be the watchwords of the project.

Both common corporate systems and sectorial systems need to be interoperable. Thus, an
examination  needs  to  be  carried  out  of  how  systems  developed  to  meet  sectorial  needs
can  be  integrated  with  the  common  core  financial  management  and  accounting
functionality.  In  particular,  an  external  study  by  recognised  experts  in  the  field  will  be
commissioned  as  early  as  possible  to  examine  options  2  and  3  and  notably  the  latter
option  –  how  sectorial  systems  can  be  included  in  the  overall  system  architecture.  The
study, the results of which will also be shared with the Informatics Directorate to obtain
their comments, will evaluate the options from both technical and practical viewpoints. A
detailed road map for the development and implementation of the new architecture will
be prepared in the second quarter of 2003 on the basis of this study and will be validated
by experts.

40

II.4.

Action to be taken

II.4.1.

Improvement of the current system

To  ensure  its  staff  have  access  to  high  quality  financial  and  accounting  data,  the
Commission  needs  to  improve  the  current  functioning  of  the  SINCOM2  system  at  the
same time as it develops the new architecture. This  improvement  has  been  a priority in
2002  and  will  continue  to  be  so  in  2003.  The  specific  concrete  actions  which  will  be
taken in 2003 in co-operation with external experts include:

– 

– 

– 

– 

– 

– 

the development and implementation of a web-based version of the Si2 system
to  facilitate  inter-operability  (this  also  goes  along  the  same  lines  as  the  new
management functionality developed within SINCOM2 – the ICON contractors’
database and the central invoice register);

the  elimination  of  redundant  data  by  incorporating  the  possibility  to  view
accounting data from SAP within the web version of Si2;

the  reconciliation  of  Si2  and  SAP  data  for  2002  and  the  establishment  of  a
regular quality control of data in the system;

the  development  of  a  written  security  policy  to  govern  the  management  of
security in the system which will draw on best international practice15 and which
will be strictly adhered to;

the  fixing  of  rules  governing  the  incorporation  of  security  elements  at  the
development  stage  of  new  functionality.  This  will  ensure  that  all  future
developments fully conform to the security policy; and

the development of computerised tools to facilitate the management and audit of
access rights within the system.

II.4.2. Development of the new system

Detailed  planning  will  be  necessary  according  to  the  system  option  chosen.  However,
certain  common  steps  can  be  identified  and  these  are  presented  in  Table  3  below.  The
timetable for the development of the system is clearly dependent on the progress of the
overall  accounting  reform  and  the  delivery  of  user  specifications  to  the  project  team.
While the work to improve the functioning of the current system will continue until such
a time as the new architecture is put in place, the new functionality can only be developed
once  users’  needs  have  been  fixed  (whether  these  are  accounting  rules  provided  by  the
Accountant or management needs provided by other users).

15 

Including  British  Standard  7799 –  Information  security  management  systems,  specification  with
guidance for use.

41

                                                
In  parallel  with  the  development  the  web-based  Si2,  the  Commission  will  begin  the
migration  from  the  current  version  of  SAP  to  the  new  module  –  SAP  Enterprise.
Migration  to  this  module  from  the  version  of  SAP  currently  used  4.0  is  necessary,
independent of the change of the system, as SAP will cease to support the 4.0 release by
end-2004. While SAP Enterprise release 4.7 would provide the same functionality, it also
offers the possibility of accessing the system using a web-based approach, thus providing
greater  flexibility  of  use.  While  obligatory  in  any  case,  this  migration  will  ultimately
permit  the  implementation  of  a  seamless  approach  fully  integrated  with  web-based
management systems while also moving away from specific technical constraints linked
to the use of the current module. The aim is to start to prepare this migration in 2003 with
the aim of completion in August 2004 in preparation for the implementation of the new
system  architecture.  It  should  be  noted  that,  while  problems  of  coherence  and  security
will be solved earlier in the project, it is only at the stage of the full implementation of the
new architecture that a fully integrated system will be put in place.

The priority for 2004, apart from the completion of the migration, will be the completion
of  the  future  architecture  (ensuring  that  the  functionality  required  by  the  Accountant  is
put  in  place)  and  the  subsequent  testing,  training  and  documentation.  Subject  to
successful  testing  and  acceptance  of  the  new  system,  the  new  architecture  will  be
implemented from January 2005 for all transactions relating to the 2005 budget.

Existing  data  from  SINCOM2  will  of  course  needed  to  be  incorporated  in  the  new
architecture. This will mean that all existing data items will need to be adapted to the new
data structures and contents. Under option 3 this would be  an evolutionary  process, but
the conversion would need to be done nonetheless. Time and resources will be necessary
to ensure that this process can be carried out in an orderly and efficient way. In particular,
a  heavy  investment  of  time  will  be  necessary  just  before  the  full  system  is  put  into
production  and  this  needs  to  be  foreseen  in  the  overall  timetable.  Each  Commission
service is likely also to be called on to prepare its transactions for the change.

Table  3:  Actions  to  be  taken  for  the  implementation  of  the  new  system
architecture

Action/ Result

Provision by the Accountant of an initial analysis of accounting requirements based on
the Commission’s decision

Feasibility  study  of  the  new  architecture  –  and  in  particular  an  examination  of  how
sectorial systems can be integrated (option 3)

Detailed road-map for implementation of next computerised system

Inventory and analysis of existing sectorial systems and analysis of users’ management
needs

Design of proposed solutions – the progressive functional and technical definition of the

42

system

Start of migration towards SAP Enterprise

Elimination of redundancy of data

User workshops and feedback

Progressive  implementation  of  new  functionality  –  once  additional  functionality  is
available to meet users’ needs, it would be implemented rather than wait for the deadline
of January 2005

Migration to SAP Enterprise complete

New functionalities adapted to take account of tests

Training for key users

Release of new system

II.4.3.

Timetable

The time available to make the required changes is short if the system is to be available to
support the production of accrual accounts from 2005. Much will depend  on the option
chosen – in principle, option 2 would take longer to implement than option 3. In addition,
infrastructures  would  need  to  be  put  in  place  in  the  case  of  option  2  to  oversee  the
migration of functionality  and data from sectorial  systems to  the  central  system  and,  in
the case of  option  3,  the  integration  of  approved  sectorial  systems  both  technically  and
functionally within the new system architecture.

Whichever option is chosen, it is likely that by 2005 not all accrual accounting data will
come from the central accounting system. This mirrors the position in the Member States
where accrual accounting  has  been  introduced, but  where the  computerised systems are
still  being  developed.  In  these  cases,  the  accrual  accounting  data  comes  from  sources
outside the system. It will be important to identify as early as possible the functionality
which  cannot  be  put  in  place  for  2005  so  that  the  Accountant  can  introduce  other
procedures to collect and ensure the quality of accounting data.

III.

PART III: PROJECT MANAGEMENT

Clearly,  this  reform  of  accounting  will  be  a  major  undertaking.  By  approving  this
communication  the  Commission  gives  a  clear  mandate  for  the  reforms,  the  expected
timing  and  the  authority  of  the  DGs  to  initiate  the  changes  required.  The  risks  of
undertaking  the  major  changes  proposed  in  an  organisation  as  complex  as  the
Commission  and  in  such  a  short  timescale  should  not  however  be  underestimated.  To

43

reduce these risks, all services will need to play a full role in this major project in order
that  it  can  meet  the  requirements  of  all  users  and  so  that  the  Commission  has  a  high
quality system which meets its own management needs and provides appropriate, timely
and  reliable  information  to  the  Budgetary  Authority  and  other  interested  parties.  The
availability  of  sufficient  and  competent  internal  resources  and  suitably  qualified  and
experienced  external  support  will  be  vital  to  the  success  of  the  project.  The  ultimate
deadline is to comply with the new Financial Regulation – the new accounting rules must
be in place for the beginning  of 2005  and the computerised accounting  system must  be
available to support as many of these rules as possible.

This section describes the structure to put in place for the management of the project, the
resources needed – both human and financial – and the timetable for implementation.

III.1.

Project organisation

The key to the success of the project lies with the project management and organisation.
The  project  organisation  requires  proper  ownership  of  the  project,  clear  definition  of
responsibilities  and  assignment  of  tasks,  high  involvement  of  all  interested  parties  and
fluid co-operation between sub-projects.

Given  the  critical  nature  of  the  project,  a  full  commitment  and  leadership  from  the  top
management of DG Budget will be ensured. A Project Oversight Board, presided by the
Director  General  for  Budget  and  including  representatives  from  the  horizontal  services
(General  Secretariat  and  Personnel  and  Administration)  as  well  as  from  each  sector  of
Commission activity16, will be established. This Board, of advisory nature, will provide
feed-back  and  guidance  useful  for  the  stewardship  of  the  project.  The  Internal  Audit
Service will be invited as observer, the Court of Auditors will also be.

The  Accounting  Officer  will  have  the  central  responsibility  in  conducting  the  project,
establishing accounting standards and validating information systems. All resources and
competencies, including information services, within DG Budget and the Commission, as
well as external expertise, will be pulled at the service of the Accounting Officer in order
to achieve the objectives  of the  project.  Furthermore,  the  Accounting  Officer  will  chair
the Accounting Standards Committee (see section 5.1.2.).

The development and implementation of the new accounting system architecture will be
carried  out  following  a  tripartite  approach,  whereby  the  domain  experts  (from  the
accounting  department  and  the  spending  services),  the  user  service  manager  (who
represents  all  users  interests)  and  the  system  supplier  belong  to  the  project  team.  The
Informatics Directorate as well will be closely associated to the project team. All aspects
of the project will involve appropriately experienced external support.

Finally, users representatives from DGs will be regularly consulted through the networks
of accounting correspondents and financial units.

16 

Common  agricultural  policy,  structural  funds,  internal  policies  (with  research  on  an  equivalent
basis) and external relations.

44

                                                
III.2.

Project resources

The development which is proposed represents a major undertaking for the Commission,
and for this to be a success, significant resources need to be mobilised – both in human
and financial terms.

This chapter contains estimates of the resources needs that will be updated as the project
is implemented.

The following specific needs should be met:

–  statutory posts for the management of the project by DG Budget and the carry out of

future accrual accounting operations within DG Budget and in all DGs;

–  technical  assistance for the development  of  the  IT  systems,  project  management  and

training;

–  procurement of software, licenses and technical studies.

DG  Budget’s  estimated  need  for  2003  is  15  statutory  posts  (4A,  8B,  3C)  for  the  tasks
related to the  modernisation of accounting  and  22.5 for the upgrading  of  the current  IT
system (8A, 14.5B). Internal redeployments will be examined and the net demand will be
made in the framework of the 2003 human resources allocation procedure. The carrying
out  of  future  accrual  accounting  operations  within  DGs  will  require  resources,  either
additional  or  developed  by  training,  only  from  2004  onwards  (1  to  3  posts  by  DG
depending  on  the  complexity  of  financial  transactions  and  their  impact  on  accrual
accounting). Resources will be required in the 2004 Budget for this purpose, they will be
allocated to DGs in the framework of the 2004 human resources allocation procedure.

45

The estimated external resources needed for the development of the IT system are:

Running and maintenance of
current system

New Financial Regulation
functionnalities and ABB
implementation

Accrual accounting (with ICON-
DB)

New architecture: technical and
web based upgrade

Quality Assurance – data
coherence – tests

2003

2004

2005

Total

1.040.600

1.051.600

1.051.600

3.143.800

528.000

0

0

528.000

1.149.200

1.897.200

1.897.200

4.943.600

1.336.200

822.600

484.000

2.642.800

660.000

759.000

479.600

1.898.600

Operation – Production

588.500

748.000

748.000

2.084.500

Training

600.000

700.000

800.000

2.100.000

Project Management support

107.800

107.800

53.900

269.500

Package licences

260.000

260.000

510.000

1.030.000

Totals

6.270.300

6.346.200

6.024.300

18.640.800

The  external  resources  for  the  accounting  framework  sub  project  for  2003-2005  are
estimated  at  1.900.000  €.  An  additional  e nvelope  of  400.000  €  for  2003-2005  will  be
needed for the procurement of specific studies on public accounting.

This budget includes the running and improvement of the current SINCOM2 systems, the
cost of the migration to SAP Enterprise and the training  of  users  to  the  new  system.  In
addition,  resources  need  to  be  foreseen  for  the  development  of  local  financial
management  functionalities,  the  cost  of  new  SAP  licences  and  the  adaptation  of  the
sectorial systems for their integration in the new system architecture.

This budget concerns Option 3. The cost of Option 2 would include roughly this amount
plus  the  cost  of  new  SAP  (or  other  supplier)  licenses  for  the  current  users  of  the  local
systems that would be replaced by the single standard package.

Several DGs may need external resources in 2004 for the adaptation of sectorial systems
which may continue to operate within the new architecture (under option 3). Again, this
will be foreseen in the 2004 PDB.

46

III.3.

Timetable

The actions to be taken described in parts 1 and 2 of the present communication will be
implemented according to the following timetable:

47

Accounting Framework Timetable

Action

2003

2004

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

2005

Q1

Devising the new accounting framework

Provision by the Accountant of an initial
analysis of accounting requirements based on
the Commission’s decision

Establishing the accounting standards to be
applied by the European Communities

Setting up an accounting standards committee

Adapting the chart of accounts

Defining the event giving rise

Extending the scope of consolidation

Financial statements

Integrating accounting data

fixing the opening balances

Defining the “object codes” and linking the
budget accounts and general accounts

Integrating contingent assets and liabilities (off-
balance sheet items)

Management and entry in the accounts of pre-
financing, interim payments and final payments

priority st.

other st.

draft

draft

draft

provisional

plan

definitive

linking

inventory

guarantees

Integration in
SAP

48

Use of CIR
mandatory

link general
accounting

draft

definitive

Creating a link between the Central Invoice
Register and the accounts

Receivables and files of clients and suppliers

Organisation of internal control of
accounting data

Expanding internal control in each DG to
include accounting aspects

Supporting evidence for balance sheet balances
through inventories

Certification of local systems

Training and awareness raising among those
concerned

Training

Recruitment

Network accounting correspondent

49

Improvement of current system architecture

Action

2003

2004

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

2005

Q1

Reconciliation of Si2 and R/3 data for 2002

Development of a written security policy

Comparison of security management principles

Fixing of rules governing the incorporation of
security elements

Development of computerised tools to facilitate
the management and audit of access rights

Development and implementation of a web-
based version of Si2

Elimination of redundant data

50

Development of the new system architecture

Action

2003

2004

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

2005

Q1

Feasibility study of the new architecture – and
in particular an examination of how sectorial
systems can be integrated

Detailed road-map for implementation of the
next computerised system

Analysis of users’ management needs

Design of proposed solutions – the progressive
functional and technical definition of the
system

Migration towards SAP Enterprise

User workshops and feedback

Progressive implementation of new
functionality – once additional functionality is
available to meet users’ needs, it would be
implemented rather than wait for the deadline
of January 2005

New functionalities adapted to take account of
tests

Training for key users

Release of new system

51

CONCLUSION

The different steps taken within the framework of the multi-annual plan launched in 2000
for  the  modernisation  of  the  accounts  have  been  the  building  blocks  for  this  detailed
communication,  describing  the  evolution  towards  an  integrated  accounting  framework
and system, based on internationally accepted accounting standards.

The new regulatory framework which will  enter  into  force  on  1  January  2003  provides
the  legal  instruments  appropriate  for  these  developments.  Indeed,  the  new  financial
regulation foresees that an accounting system as described above must be operational by
the financial year 2005.

The aim is therefore to develop both the new accounting framework and as far as possible
the information system by the end of 2004.

The  future  system  will  be  a  dual  system,  based  on  accrual  principles  for  the  general
accounting and based on cash principles for the budget execution.

The  new  system  architecture  will  provide  integrated  functionality,  ensuring  the
consistency  and  security  of  data.  In  the  meantime,  action  will  be  taken  to  improve  the
current  SINCOM2  system.  Key  to  the  success  of  the  reform  are  training,  awareness
raising, project management and organisation.

This communication identifies the various actions to be taken and sets out a timetable to
achieve the wide-ranging reforms proposed.

The Commission gives the highest priority to the accounting reform, as well as to the new
system  to  be  put  in  place,  and  is  confident  that  these  are  of  a  nature  to  improve  the
financial management of the European Communities. These developments continue and
significantly  deepen  the  steps  towards  financial  reform  begun  by  the  Commission  in
2000.

52

ANNEX  A:  THE  INTERNATIONAL  PUBLIC  SECTOR  ACCOUNTING

STANDARDS (IPSAS)

IPSAS  1  Presentation  of  Financial  Statements  (IAS1)  sets  out 
the  overall
considerations for the  presentation  of financial statements,  guidance for the structure of
those statements and minimum requirements for their content under the accrual basis of
accounting.

IPSAS 2 Cash Flow Statements (IAS7) requires the provision of information about the
changes  in  cash  and  cash  equivalents  during  the  period  from  operating,  investing  and
financing activities.

IPSAS 3 Net Surplus or Deficit for the Period, Fundamental Errors  and Changes in
Accounting Policies (IAS8) specifies the accounting treatment for changes in accounting
estimates,  changes  in  accounting  policies  and  the  correction  of  fundamental  errors,
defines  extraordinary  items  and  requires  the  separate  disclosure  of  certain  items  in  the
financial statements.

IPSAS  4  The  Effect  of  Changes  in  Foreign  Exchange  Rates  (IAS21)  deals  with
accounting for foreign currency transactions and foreign operations. IPSAS 4 sets out the
requirements  for  determining  which  exchange  rate  to  use  for  the  recognition  of  certain
transactions and balances and how to recognise in  the  financial  statements  the financial
effect of changes in exchange rates.

IPSAS  5  Borrowing  Costs  (IAS23)  prescribes  the  accounting  treatment  for  borrowing
costs and  requires  either the immediate  expensing of borrowing costs or,  as  an  allowed
alternative treatment, the capitalisation of borrowing costs that are directly attributable to
the acquisition, construction or production of a qualifying asset.

IPSAS  6  Consolidated  Financial  Statements  and  Accounting  for  Controlled  Entities
(IAS27)  requires  all  controlling  entities  to  prepare  consolidated  financial  statements,
which  consolidate  all  controlled  entities  on  a  line  by  line  basis.  The  Standard  also
contains a detailed discussion of the concept of control as it applies in the public sector
and guidance on determining whether control exists for financial reporting purposes.

IPSAS 7 Accounting for Investments in Associates (IAS28) requires all investments in
associates  to  be  accounted  for  in  the  consolidated  financial  statements  using  the  equity
method of accounting, except when the investment is acquired and held exclusively with
a view to its disposal in the near future in which case the cost method is required.

IPSAS  8  Financial  Reporting  of  Interests  in  Joint  Ventures  (IAS31)  requires
proportionate consolidation to be adopted as the benchmark treatment for accounting for
such joint ventures entered into by public sector entities. However, IPSAS 8 also permits
– as an allowed alternative – joint ventures to be accounted for using the equity method
of accounting.

53

IPSAS 9 Revenue from Exchange Transactions (IAS18) establishes the conditions for
the recognition of revenue arising from exchange transactions, requires such revenue to
be  measured  at  the  fair  value  of  the  consideration  received  or  receivable  and  includes
disclosure requirements.

IPSAS 10 Financial Reporting in Hyperinflationary Economies (IAS29) describes the
characteristics  of  a  hyperinflationary  economy  and  requires  financial  statements  of
entities, which operate in such economies to be restated.

IPSAS  11  Construction  Contracts  (IAS11)  defines  construction  contracts,  establishes
requirements  for  the  recognition  of  revenues  and  expenses  arising  from  such  contracts
and identifies certain disclosure requirements.

IPSAS 12 Inventories (IAS2) defines inventories, establishes measurement requirements
for  inventories  (including  those  inventories  which  are  held  for  distribution  at  no  or
nominal charge) under the historical cost system and includes disclosure requirements.

IPSAS  13  Leases  (IAS17)  establishes  requirements  for  the  accounting  treatment  of
operating and finance leasing transactions by lessees and lessors.

IPSAS  14  Events  After  the  Reporting  Date  (IAS10)  establishes  requirements  for  the
treatment of certain events that occur after the reporting date, and distinguishes between
adjustable and non-adjustable events.

IPSAS  15  Financial  Instruments:  Disclosure  and  Presentation  (IAS32)  establishes
requirements for the presentation of on-balance-sheet financial instruments and identifies
the  information  that  should  be  disclosed  about  both  on-balance-sheet  (recognised)  and
off-balance-sheet (unrecognised) financial instruments.

IPSAS 16 Investment Property (IAS40) establishes the accounting treatment, and related
disclosures, for investment property.  It provides for application of either a  fair value  or
historical cost model.

IPSAS 17 Property, Plant and Equipment (IAS16) establishes the accounting treatment
for  property,  plant  and  equipment,  including  the  basis  and  timing  of  their  initial
recognition,  and  the  determination  of  their  ongoing  carrying  amounts  and  related
depreciation. It does not require or prohibit the recognition of heritage assets.

IPSAS  18  Segment  Reporting  (IAS14)  establishes  requirements  for  the  disclosure  of
financial statement information about distinguishable activities of reporting entities.

IPSAS  19  Provisions,  Contingent  Liabilities  and  Contingent  Assets  (IAS37)  proposes
requirements for the recognition of provisions, and the disclosure of contingent liabilities
and contingent assets.

IPSAS  20  Related  Party  Disclosures  proposes  requirements  for  the  disclosure  of
transactions  with  parties  that  are  related  to  the  reporting  entity  including:  Ministers,
senior management, and their close family members.

54

IPSAS expected to be issued after 2002 are:

– 

– 

– 

– 

Financial  Reporting  under 
the  Cash  Basis  of  Accounting  proposes
requirements for the preparation and presentation of the cash flow statement and
supporting  accounting  policy  notes  under  the  cash  basis  of  accounting.  It
includes requirements relating to the identification of the reporting entity and the
structure and the minimum content of the cash flow statement.

Impairment of Assets (developed from IAS36)

Employee Benefits (developed from IAS19)

Accounting for Development Assistance

IPSAS that will be probably applicable to the specific situation of the Communities are:

International Public Sector Accounting Standards (IPSAS)

IFAC

IPSAS 1 – Presentation of financial statements

IPSAS 2 – Cash flow statements

IPSAS  3  –  Net  surplus  or  deficit  for  the  period,  fundamental  errors  and  changes  in
accounting policies

IPSAS 4 – The effects of changes in foreign exchange rates

IPSAS 5 – Borrowing costs

IPSAS 6 – Consolidated financial statements and accounting for controlled entities

IPSAS 7 – Accounting for investments in associates

IPSAS 8 – Financial reporting of interests in Joint Ventures

IPSAS 9 – Revenue from exchange transactions

IPSAS 10 – Financial reporting in hyperinflationary economies

IPSAS 11 – Construction contracts

IPSAS 12 – Inventories

IPSAS 13 – Leases

55

IPSAS 14 – Events after the reporting date

IPSAS 15 – Financial instruments: disclosure and presentation

IPSAS 16 – Investment property

IPSAS 17 – Property, plant and equipment

IPSAS 18 – Segment reporting

IPSAS 19 – Provisions, Contingent Liabilities and Contingent Assets

IPSAS 20 – Related Party Disclosures

Necessary supplementary IAS:

For subjects, which IPSAS still do not include any specific standard, the IAS that could
be applied are:

(1) 

(2) 

IAS 19 - Employee Benefits (until IPSAS shall be issued)

IAS 36 - Impairment of Assets (until IPSAS shall be issued)

(3) 

IAS 38 - Intangible Assets

56

ANNEX B: INVENTORY

Information on assets and liabilities normally exists in three different dimensions: reality,
management databases and accounts.

For example, the information on disposable assets, borrowings and hardware is presented
as follows:

Reality

Management
database

Accounts

Disposable
assets

Bank account statements
received from the bank,
contracts to open
accounts, etc.

Database where bank
statements and data
relating to bank
contracts are recorded.

Borrowing Contracts, bank
statements, legal
opinions, etc.

Database including the
details of loans, dates,
amounts, due dates,
rates, etc.

Hardware

Physical PC, insurance
contract, order slip,
invoice, etc.

Database recording
details, purchase date,
depreciation period,
inventory No, etc.

Account
balances and
transactions
recorded in the
journal and the
general ledger.

Account
balances and
transactions
recorded in the
journal and the
general ledger.

Account
balances and
transactions
recorded in the
journal and the
general ledger.

57

ANNEX C: How the Communication responds to the points made by the Court of Auditors

OBSERVATIONS MADE BY THE COURT OF AUDITORS CONCERNING
THE  COMMUNITIES'  ACCOUNTING  SYSTEMS  IN  CONNECTION
WITH THE DAS FROM 1994 TO 200017

ACTIONS  SET  OUT  IN  THE  COMMUNICATION  TO  ADDRESS  THE
COURT OF AUDITORS’ REMARKS

The accounting framework

Harmonisation of accounting methods

Up  to  1998  difficulties  occurred  with  the  consolidation  of  the  accounts  of  the
individual  institutions  because  of  the  diversity  of  the  accounting  methods  and
valuation  rules  applied.  Since  1999,  the  difficulties  are  only  occasional  as  the
methods applied by the institutions have been gradually harmonised.

Accounting standards and policies

Between 1996  and  2000,  the  Court  insisted  on  the  need  to  adopt  clear  accounting
principles  and  policies  complying  with  the  generally  accepted  international
accounting standards (IAS) adapted to the specific features of the public sector. All
too  often  the  Community  rules  were  an  obstacle  to  full  and  correct  recording  of
Community  assets  and  liabilities,  mainly  because  the  concept  of  expenditure  was
confused with that of payment. With the adoption of the new Financial Regulation
on 25 June 2002, the situation should gradually improve after 1 January 2003.

The  communication  sets  out  the  following  measures  to  widen  the  scope  of
consolidation and improve the consolidation procedure:

(cid:1)  Awareness-raising  and  training  for  the  Accounting  Officers  of  the  institutions

and agencies

(cid:1)  Analysis  of  the  accounts  of  the  agencies,  explanation  of  the  consolidation

manual and the single accounting procedures to be applied

(cid:1)  Determination of the procedure for consolidation.
(cid:1)  Establishing and developing an automated system for consolidation

As regards the adoption of accounting policies and principles, the following actions
appear in the communication:

(cid:1)  Creation of an Accounting Standards Committee
(cid:1) 

Identification of priority accounting standards to be defined and presented to the
Standards Committee

(cid:1)  Preparation  of  standards  and  presentation  to  the  Standards  Committee  for  its

opinion

(cid:1)  Definition of the accounting procedure for each type of event
(cid:1)  Proposal for chart of accounts
(cid:1)  Definition of the "event giving rise" for each type of transaction

17 

Note from the DAS sector of the European Court of Auditors dated 17 October 2002 given to the rapporteur for the forthcoming discharge, Mr Casaca,
on the observations relating to the Communities' accounting systems made by the Court of Auditors in its statements of assurance from 1994 to 2000.

58

                                                
Accounting procedures

The  cash-based  accounting  system  used  in  the  past  for  recording  Community
operations  is  not  suitable  for  the  presentation  of  accrual-based  accounts,  which
requires  the  recording  of  entitlements  and  obligations.  What  is  more,  the  break
between the budget accounts and the general accounts is in itself an obstacle to the
correct  and  full  recording  of  assets  and  liabilities.  In  June  2001  the  Commission
drew up a draft  action  plan  to  remedy  the  shortcomings  of  its  accounting  systems
but no concrete action has been taken since.

Economic result

Since  1999,  the  Commission  has  to  present  not  only  the  accounting  result  proper,
but also a broader economic result taking into account the items affecting the assets
and  liabilities  at  the  end  of  the  year.  This  calculation  is  affected  both  by  the
unsuitable  nature  of  certain  accounting  practices  and  by  the  accounting  system
itself, which does not lend itself to production of the necessary records. No specific
concrete  action  appears  to  have  been  taken  to  clarify  both  the  meaning  and  the
practical arrangements required to calculate this broader result.
Reservations and observations relating to the Community accounts

Advances and payments on account

The  treatment  of  payments  as  expenditure  raises  the  issue  of  pre-payments  or
intermediate payments which in actual fact are no more than a cash transfer with no
real  contra-entry.  The  Court  has  been  calling  since  1994  for  a  solution  to  this
question so that first of all a distinction can be made between the different types of
payment  and  then  a  guarantee  given  that  they  are  recorded  unambiguously  in  the
accounts  and  the  end-of-year  financial  statements.  Partial  answers  have  been
provided to this question. But some provisional payments continue to be treated as
expenditure;  this  is  not  consistent  with  the  generally  accepted  international
accounting principles which the Community intends to apply.

Besides the adoption of the international principles mentioned in the previous point,
the following actions are planned in order to integrate the budget accounts on a cash
basis and the general accounts on an accruals basis:

(cid:1)  Survey  of  accounting  events  in  all  DGs  and  identification  of  the  budget  lines

concerned

(cid:1)  Establishment of the structure of the "object codes" and extension of the chart of

accounts to accommodate them

(cid:1)  Establishment of links between the different object codes and the accounts of the
general accounts,  and  updating  of  the  nomenclature  throughout  each  accounting
year

(cid:1)  Reconciliation between cash-based budget implementation and the accruals-based

accounts

(cid:1) The full inventory of contingent assets and liabilities should be available for the
closure of the financial year 2003. Their incorporation into the accounts will be an
ongoing task.

The  communication  provides  for  the  entry  in  the  accounts  of  pre-financing  and  its
clearance  at  budget  level,  and  also  integration  into  the  general  accounts  and
establishment of the opening balance.

It is also provided that supporting evidence should be given for accounting balances
through inventories and the opening balance.

59

Treasury

to  financial 

The  questions  of  recording  of  cash  operations  are  broadly  linked  to  payments  of
advances 
intermediaries  or  for  external  action  projects.  The
Commission  has  not  yet  put  in  place  a  monitoring  system  which  gives  it  an
assurance of the reality and availability of the sums outstanding of which it tries to
produce a list at the end of the year..
Fixed assets

The questions relating to buildings between 1994 and 1997 were mainly to do with
listing  property  rights  and  leasing  rights.  Since  1998  the  focus  has  been  on
accounting methods for depreciation of assets. As very few operations are involved,
the remaining difficulties concern the value of certain buildings. For equipment and
furniture, the question regularly arising is that of the physical existence of the items
and the reconciliation between the administrative inventories and reality.
Third party debtors

The listing of third party debtors is a recurring problem to which no solution has yet
been  found.  The  question  is  closely  linked  to  that  of  recovery  for  which  the
Commission had a specific action in its White Paper (action 96). The final date for
this action was put back because unexpected difficulties arose. A second issue is the
valuation of amounts due either as traditional own resources (separate  account)  or
under the EAGGF Guarantee Section. In both cases the Commission is given only a
very rough idea from Member States about whether these amounts can actually be
recovered.

Off-balance-sheet commitments

Off-balance-sheet  commitments  are  still  too  much  of  an  overflow  tank  for  items
which,  according  to  the  accounting  principles,  should  be  entered  in  the  accounts
(balance sheet, revenue or expenditure) but which, under the Community rules, are
not, or not necessarily, entered in the balance sheet. Certain legal obligations appear
among  the  off-balance-sheet  commitments  while  others  are  recorded  in  the
accounts.  Rationalisation  of  the  accounting  methods  should  clarify  the  scope  and
presentation of off-balance-sheet commitments.

Besides  the  integration  of  fixed  assets  in  the  accounting  system  as  described  in  the
previous points, the communication provides for supporting evidence for accounting
balances through inventories and opening balance.

The communication sets out the following actions to address this issue :
(cid:1) 
(cid:1) 

to distinguish the various types of receivables and the third parties concerned.
to identify the type of RO, according to whether they involve a claim concerning
own resources, penalties, the recovery of an amount from a third party, or a claim
which concerns the refunding of an asset.
to distinguish the type of customer. It can be a true "customer" who pays money
to the Commission (as in the case of the penalties), or a "supplier", to whom the
Commission  paid  an  amount  for  the  implementation  of  a  programme,  and  who
has to transfer money back to the Commission

(cid:1) 

(cid:1)  to identify third parties as a legal entity.

The communication provides for a full inventory of contingent assets and liabilities,
their  incorporation  in  the  accounts  and  the  establishment  of  a  computer  tool  which
authorising officers may use for the management of guarantees.

60

Outstanding commitments

Since 1994, the Court has been stressing the fact that outstanding commitments are
not  adequately  monitored  and  that  some  operations  presented  in  the  accounts  as
ongoing no longer really exist. The sums involved are substantial. The Commission
recently began a systematic analysis of outstanding commitments and plans to finish
the  clearance  operation  in  2003.  It  has  to  stressed,  however,  that  such  clearance
exercises should not be sporadic; continuous action is required.
SINCOM 2

The SINCOM 2 system was put in place in 1999. It gradually took over historical
data and this disrupted its operation. Its complex architecture is the result of the way
things  have  developed.  Three  subsystems18  operate  in  virtual  independence  with
only loose links between them. Reconciliation of data between the subsystems, the
only guarantee of the coherence of the whole, is a laborious process and the results
are  not  entirely  satisfactory,  especially  as  regards  the  exhaustiveness  of  the
information underlying the production of the statement of assets and liabilities at the
end of the year (see point 4).

The procedures for updating the system are not sufficiently tight. Too many people
have  access  to  real  data.  The  adjustments  to  the  system  are  not  adequately
documented.  The  plan  for  resuming  operations  after  neutralisation  of  the  main
system was tested in 2000 in conditions which did not perfectly simulate complete
destruction of the main system.

The number of users with administrator profiles is still too high.

The Commission has given undertakings concerning corrective measures.

Although no specific action is provided for in the communication, the improvement
of  the  quality  of  financial  reporting  and  the  accounting  system  can  clearly  help  the
work in progress on analysing outstanding commitments.

The  Commission  will  develop  a  new  architecture  for  its  financial  management  and
accounting system. The key principle which must be respected are the integration of
systems (and hence the coherence of data) and the maintenance of effective security.

The new system needs to show a significant advantage in terms of functionality and
performance  over  the  current  system  –  not  least  to  include  accrual  accounting
functionality.

A  single  standard  package  (SAP  Enterprise)  will  be  used  to  provide  all  accounting
functionality.  Decisions  on  other  functionality  (for  management  purposes)  will  be
taken  with  the  following  preferences  in  mind  –  firstly  to  use  SAP  Enterprise
functionality;  secondly,  to  buy-in  a  standard  non-SAP  package  which  meets  the
integration criteria; and thirdly to develop  the  functionality  in-house,  respecting  the
same rules.

18 

SI2: budget accounts; R3/SAP: general accounts; DWH: accounting records.

61

                                                
ANNEX  D:  Detailed  actions  to  be  taken  for  the  modernisation  of  the  accounting

framework

HORIZONTAL MEASURES

– 

– 

– 

– 

– 

Adoption of a communication by the Commission (autumn 2002)

Keeping the Financial Units Network regularly informed (an initial presentation was
made  at  the  Network  meeting  in  October).  At  the  January  2003  meeting,  the
Accounting Officer will present the consequences flowing from this communication.
Ongoing task.

Regular talks with the Internal Audit Service (IAS). DG Budget will report regularly
on  the  project’s  state  of  progress  to  the  IAS  for  discussion  and  opinion.  A
presentation will also be made to the network of internal auditors. Ongoing task.

Creation of the Accounting Project Team.

Deadline: December 2002. For the sub-project leaders and teams: February 2003.

Setting  up  a  network  of  heads  of  accounting  in  each  DG.  This  network  will  meet
regularly under  the chairmanship of the  Commission’s Accounting  Officer in  order
to receive information and discuss the project’s state of progress and specific aspects.

Deadline: January 2003

– 

Creation of an Accounting Standards Committee.

Deadline: February 2003. The  first meeting  will be held in March 2003.  Besides a
presentation  of  the  project,  its  purpose  will  be  to  examine  a  proposed  list  of
standards, to be drafted, defining the priorities in this area and the structure.

Deadline: regular meetings will be organised depending on the state of progress of
the standards.

– 

Regular  information  of  the  accounting  networks  of  the  institutions  and  agencies.

Deadline: an initial meeting was held in 2002. Other meetings will be organised in
2003 to present this communication, propose a timetable of meetings and to fix the
contribution expected from the Accounting Officers of the institutions and agencies.

– 

Regular contact talks with the Court of Auditors.

The Commission will keep the Court of Auditors regularly informed of the project’s
progress and will seek its opinion.

ACCOUNTING FRAMEWORK MEASURES

– 

Definition of “event giving rise” for each type of transaction.

Deadline: October 2003

62

– 

Identification  of  priority  accounting  standards  to  be  defined  and  presented  to  the
standards committee.

Deadline: end February 2003

– 

Preparation of standards and presentation to the Standards Committee for its opinion.

Deadline: staggered  timetable,  the target being  to prepare and present the priority
accounting  standards  to  the  Accounting  Standards  Committee  by  the  end  of  2003.
Standards not identified as priorities should be ready by June 2004.

– 

– 

Definition of the accounting procedure for each type of event.

Deadline: same timing as for the previous measure.

Proposal for chart of accounts.

Deadline: an initial draft should be ready by October 2003; the draft will be liable to
improvement in line with the standards and procedures adopted.

– 

Organisation of making accounting information available to DGs.

ACTION TO DEVELOP INTEGRATED ACCOUNTS

– 

– 

– 

– 

– 

– 

Survey  of  accounting  events  in  all  DGs  and  identification  of  the  budget  lines
concerned.

Deadline: July 2003

Establishment  of  the  structure  of  the  object  codes  and  extension  of  the  chart  of
accounts to accommodate them.

Deadline: chart of object codes: October 2003

Establishment  of  links  between  the  different  object  codes  and  the  accounts  of  the
general  accounts,  and  updating  of  the  nomenclature  over  the  course  of  each
accounting year.

Entry in the accounts of pre-financing and corresponding clearances at budget level.

Deadline:  January  2004  for  clearance  at  budget  level;  December  2004  for  their
integration in the general accounts; 31 December 2004 for the opening balance.

Reconciliation  between  cash-based  budget  implementation  and  the  accruals-based
accounts.

Deadline: closure for 2005 financial year. Tests for June 2005

The  full  inventory  of  contingent  assets  and  liabilities  should  be  available  for  the
closure of the  financial  year  2003.  Their incorporation into the  accounts  will  be  an
ongoing task.

63

Deadline:  beginning  of  2004,  introduction  of  a  computer  tool  available  to
authorising officers for the management of guarantees. Financial year 2005 for the
incorporation of contingent assets and liabilities into the accounts.

INTERNAL CONTROL OF ACCOUNTING DATA

– 

Supporting  evidence  for  accounting  balances  through  inventories  and  opening
balance.

Deadline:  31  August  2004  (provisional  opening  balance),  31  December  2004  final
opening balance.

– 

Extension of internal control in every DG to accounting aspects.

Deadline:  a  proposal  for  the  organisation  of  internal  control  in  the  DGs  will  be
drafted  by  December  2003;  it  will  be  implemented  gradually  during  2004  so  as  to
allow the necessary corrections before definitive implementation in 2005.

– 

Certification of local systems. The  Accounting Officer  will certify local systems in
terms of data that can be supplied by those systems.

Deadline: June 2005

64

TRAINING AND AWARENESS-RAISING

– 

– 

– 

Analysis of requirements compared with existing expertise in DGs

Drafting supporting material for general and specific courses.

Deadline: for general courses: June 2003; for specific training: March 2004.

Organisation  of  general  and  specific  courses.  Preparation  of  effective,  interactive
training courses, based on new information technology.

Deadline: from October 2003 for general and May 2004 for the specific courses.

– 

Organisation of accounting competitions.

Deadline: July 2003

FINANCIAL STATEMENTS (BEFORE CONSOLIDATION)

– 

– 

Improve the existing financial statements. The Commission will gradually introduce
improvements in the financial statements, as has already been undertaken over recent
years.  The  improvements  will  relate  to  the  quality  and  comprehensiveness  of  the
data.

Deadline: ongoing task

Develop  the  new  statements:  cash-flow  table  (following  the  standard  pattern),
economic  out-turn  and  change in  capital. The new statements  will  be  presented  for
the  first  time  in  the  2005  financial  statements,  as  the  information  contained  in  the
object codes needs to be available.

Deadline: January 2005. The two new statements will be tested between 01.09.2004
and 31.12.2004 (trial start-up period for object codes).

ACTION RELATING TO THE SCOPE OF CONSOLIDATION

– 

– 

– 

– 

Awareness-raising  and  training  for  the  Accounting  Officers  of  the  institutions  and
agencies

Analysis  of  the  agencies’  accounts,  explanation  of  the  Consolidation  Manual  and
single accounting procedures to be applied.

Determining the procedure for consolidation.

Deadline: June 2004. Tools available to the Accounting Officer: January 2005.

Establish and develop an automated system for consolidation.

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