ERDF User Manual
Chapter 6: Financial Management
Contents
1.
Introduction ..................................................................... 2
2.
Financial Tables .............................................................. 2
N+2 spend targets and decommitment ............................................................... 3
Exchange Rates .................................................................................................... 3
Expenditure declarations to the Commission and requests for payment ....... 4
Liability for exchange rate losses ....................................................................... 5
Management of Financial Tables ......................................................................... 5
The 7.5% Advance......................................................................................................... 5
Legal proceedings and administrative appeals ................................................. 6
Exceptions to the N+2 rule ................................................................................... 6
3.
Accounting and Budgeting Requirements ................... 7
Overview of the Claims and Payment Process .................................................. 7
Accounting System Requirements ...................................................................... 7
Accounting for ERDF Transactions .................................................................... 8
Advance Payments ........................................................................................................ 8
Claims Expenditure .............................................................................................. 9
Ensuring correctness and regularity of expenditure ........................................................ 9
Processing approved expenditure .................................................................................. 9
Forecasting information ..................................................................................... 10
End of Month Reconciliation.............................................................................. 11
HM Treasury Reporting ...................................................................................... 11
Point of Contact within CLG .............................................................................. 11
Example of Accounting Treatment .................................................................... 12
Annex A: Definitions of Expenditure Categories ............... 13
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Chapter 6: Financial Management
1. Introduction
1.1. This chapter makes provision about the financial aspects of management and
control of the operational programme and contains guidance to aid effective
management of financial tables covering spend and decommitment targets,
exchange rate issues and RDA accounting and budgeting requirements.
2. Financial Tables
2.1. The annual budget allocations are set out in euros in the financial tables for each
approved Operational Programme (OP). RDAs will use the yearly allocations in the
financial tables loaded on MCIS as the basis for planning expenditure.
2.2. Changes to the Euro value of financial tables can arise from:
i.
the Commission exercising automatic decommitment to any part of a budget
commitment in an operational programme under the N+2 principle as set out in
Articles 93 to 97 of Regulation 1083/2006;
ii.
The Commission can also apply financial correction in accordance with
provisions of Articles 99 to 102 of Regulation 1083/2006 arising from identified
serious deficiencies in the management and control systems for operational
programmes and/or irregularities; and
iii.
virement of funds between priority axis and/or years.
2.3. The Certifying Authority will enter a single record on MCIS showing indicative
translated Sterling values of the Programme which will form the basis of the
indicative Sterling value of the programme for planning purposes. RDAs will monitor
the indicative Sterling value of yearly allocations in the financial tables for the basis
of planning expenditure. Any changes to Sterling value of the financial tables will be
made by CA to the MCIS Project Record following the authorisation of the payment
of an RDA claim or as a result of changes to the Euro value of the Programme
described above. The CA will apply the monthly EC Euro rate to the reimbursements
made to the RDAs and use the Treasury forward planning rate to establish the value
of the remaining programme. RDAs should follow the same principle for their own
planning purposes. RDAs must monitor ERDF spend and commitments carefully to
ensure that any changes in exchange rate between Euro and Sterling does not
result in an over spend against the programme allocation.
2.4. Any impact on the budget of an operational programme arising from a financial
correction applied by the Commission will be met by CLG from its departmental
resources if and to the extent that it would otherwise result in the RDA incurring a
deficit (having spent more ERDF overall than it is entitled to receive from the
certifying authority). It is recognised that the RDA, as a statutory authority, cannot
carry a budget deficit.
2.5. The risk of financial correction is to be minimised by ensuring that CLG, as
managing authority and certifying authority, and the RDA, as intermediate body,
carry out their regulatory functions effectively and efficiently and in accordance with
the Structural Funds Regulations and the implementation system put in place by
CLG as the MA. Nevertheless, circumstances may arise under which the
Commission decides to make a financial correction. In that event, any resources
made available by CLG from its own departmental resources to make up for the
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budgetary impact of the correction will take account of sums recovered by the RDA
from grant recipients responsible for irregular spending. The procedure for dealing
with irregularities is set out in Chapter 5. The role of the Audit Authority is also
relevant here and is set out in Chapter 8.
2.6. The OP budget allocation must be managed in line with Articles 75 to 102 of
Regulation EC (No)1083/2006. The remaining paragraphs of this section provide
guidance on N+2 spend targets and decommitment, exchange rates and
management of financial tables.
N+2 spend targets and decommitment
2.7. The N+2 is a European Commission requirement set out in Article 93.1 that states
that the annual budget allocations that is approved in an OP’s financial table must
be spent within two years of the year for which they were allocated.
2.8. Basically, the ERDF budget allocated in the financial tables for the year 2007 has to
be spent and a claim submitted to the Commission by the end of 2009, funds
committed for 2008 have to be spent and claimed by 2010 and so on.
2.9. Declarations for payment are made by the Certifying Authority to the Commission.
These are based on the aggregate claims made by RDAs at priority axis level for
each of the Operational Programmes for the defrayed expenditure made by projects
– see Chapter 7. Applications for payments will normally be sent by the CA three or
four times a year. The end of year Declaration needs to be submitted by the 31st
December to ensure that the maximum spend is lodged with the Commission for
that year.
2.10.
Any part of the budget for the year in question that remains unspent is
automatically decommitted by the EC. Auto-decommitment applies at programme
level (not priority axis). It is only if the programme fails to hit its spending target that
funds are decommitted.
2.11.
The final two payments will have de-commitment deadlines that extend
beyond the actual period of the programme 2014 and 2015. Any part of the
programme allocation still open on 31 December 2015 will be automatically
decommitted if the Commission has not received an acceptable payment application
for payment for it by 31 March 20171
Exchange Rates
2.12.
Amounts set out in operational programmes, certified statements of
expenditure, applications for payment to the Commission and expenditure
mentioned in the annual and final implementation reports have to be reported in
euros.2 All ERDF transactions within England are conducted in pound sterling
(GBP).
2.13.
All projects will receive a funding agreement (offer letter) setting out the
maximum grant levels in Sterling and the project spend profile will also be in sterling.
Projects will claim grant from the RDA for their expenditure and be reimbursed in
Sterling. At no time will the euro be involved. In turn, the RDAs will claim and
receive reimbursement from CLG in Sterling. The rate of exchange of the euro to
the pound will not affect any of these transactions.
1
2
Article 93(3) of 1083/2006
Article 81 of 1083/2006
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2.14.
However in order to manage the financial tables to avoid decomitment the
RDAs will need to convert the euro value to Sterling. As stated in paragraph 4 the
Certifying Authority has the responsibility to maintain the Sterling value of the
programmes at priority axis level and N+2 targets at programme level. This will allow
RDAs to contract, monitor outturn and forecast spend (for N+2) against these
sterling values. It will also allow the conversion of the sterling data into euro for
reporting in the Annual Implementation Reports. The value of programmes will
change each time:
 Expenditure is recorded within the accounts of the Certifying Authority
 The forecast planning exchange rate (issued by HMT) is updated.
2.15.
Any gains/losses resulting from the difference between the Sterling value that
make up CA application to the EC and the amount of translated sterling that CA
receive will be met by CLG from its own resources and not passed on to the RDAs.
Expenditure declarations to the Commission and requests for
payment
2.16.
Chapter 7 sets out how the Certifying Authority will make certified
declarations on expenditure to the Commission. The Certifying Authority will convert
all amounts reimbursed to the RDAs into euros using the monthly EC exchange rate
for the month in which it is paid before aggregating the expenditure for submission to
the Commission. RDAs will be informed via MCIS any changes made to the claims
by CA or MA before the claims are approved for payment. Article 77 provides that
the Commission will reimburse expenditure by applying the co-financing rate set for
each priority axis to the amount of eligible expenditure mentioned under that priority
axis in the certified declaration of expenditure. The Certifying Authority will meet the
RDA’s claims for reimbursement on the same basis irrespective of the proportion of
total eligible expenditure in the claims for the priority axis met from the ERDF. In
calculating the amount to be reimbursed for claims, CA will also take into account
the total ERDF paid out to date to ensure that the cumulative total amount paid does
not exceed the Euro value for a priority axis as recorded on MCIS at the point of
reimbursement.
2.17.
Paragraph 8 of chapter 7 provides that CA will start to reimburse legitimate
expenditure incurred by the RDA without waiting for the Commission to approve the
management and control system (as long as the Audit Authority’s opinion provides a
reasonable assurance on the effectiveness of the RDA's own systems and the MCIS
system is in operation). Clearly, for a period of some months, the CA will be
reimbursing claims without itself receiving funds from the Commission. Given this,
and the fact that CLG does not know when the system of management and control
will be approved, the Managing Authority may have to exercise some control over
the rate of commitment of ERDF funds to avoid an unaffordable call on CLG
resources. This is unlikely to occur, but if it did occur, discussion would first take
place within the high level European Programme Board.
2.18.
The rate of exchange to be used for each RDA claim will be the month in
which the approved reimbursement amount is first registered in CLG’s accounts3 on
SAP. This will be the date when the aggregated claim from the RDA is authorised for
payment by CA. The rate of exchange to be used is the monthly one published by
3
Article 81(2) of 1083/2006
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Chapter 6: Financial Management
the
Commission
at
the
following
website:
http://ec.europa.eu/budget/inforeuro/index.cfm?fuseaction=currency_historique&curr
ency=72&Language=en
2.19.
The Commission will then reimburse the claim in euros to the Bank of
England. This is converted back into Sterling at the daily rate of exchange used by
the Bank of England. It is then transferred to CLG’s accounts in Sterling. Any
financial impact of a correction applied by the Commission to the certified
declarations will be borne by CLG. It will not be passed on to the RDA or reduce the
approved value of the programme.
Liability for exchange rate losses
2.20.
The Commission can take up to two months to reimburse the claims and
there will be times, because of exchange rate fluctuations, when the Sterling value
of the repayment from the EC is less than the Sterling value of the amount submitted
for repayment by the CA. There will also be times when there is a Sterling “profit”.
CLG will cover all foreign exchange (FX) rate fluctuations. There will be no liability
arising from FX losses for the RDAs.
Management of Financial Tables
The 7.5% Advance4
2.21.
As actual funds (rather than committed funds) can only be drawn down on
production of a payment claim, the EC provides a cash advance, or "float", in order
to help get the programme underway. This float is advanced when the programme
is approved and is made in three instalments: the first in 2007 of 2% of the total
grant value of the OP; and the second, 3%, in May 2008, and the final 2.5% in June
09.
2.22.
This 7.5% advance, also described as pre-financing, reduces the n+2 target
for 2009 by its value. These amounts then roll through for the duration of the
programme. The n+2 target is a cumulative one and not an individual annual target
each year. If there is a cumulative overspend at any year end against the target the
excess spend will count towards the following years cumulative n+2 target. If there
is a cumulative underspend, that underspend will be decommitted and the total
value of the programme reduced by the same amount
4
Article 82 of 1083/2006
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2.23.
The table below illustrates how it all is calculated.
Per year
7.5% = 35
2007
2008
Total
costs
200
200
ERDF
budget
100
100
2009
2010
2011
2012
200
200
200
200
100
100
100
100
N+2
Cumulative Cumulative Years
for
Grant ERDF
E.U
budget
%
spend
N+2 Target aggregation
50%
0
50%
0
65 (100 less
50% 100
35 advance) 2007
50% 200
165
2007-8
50% 300
265
2007-9
50% 400
365
2007-10
2013
2014
2015
TOTAL
200
100
50%
1400
700
50%
500
600
700
465
565
700
2007-11
2007-12
2007-13
2.24.
This effectively means that the first n+2 period only requires 47.5% of the
Euro value of the 2007 commitment allocation to be spent by the end of 2009.
However, it also means that there is a catch up exercise by 2015 and more has to
be spent in the final year. The Sterling value of the advance is translated from Euros
at the date the advance was received by the Bank of England. This Sterling value is
then deducted from the indicative Sterling value target for 2009 N+2 to determine
the projected value of Sterling claims required to achieve N+2. However, it is the
target in Euros that has to be achieved and RDAs must monitor exchange rate
movements to ensure their Sterling targets are realistic.
Legal proceedings and administrative appeals
2.25.
If an operation has been suspended by a legal proceedings or an
administrative appeal (such as may arise where the RDA exercises a discretionary
right to suspend the payment of grant for an operation or the grant recipient
challenges a decision by the RDA), the amount potentially concerned by automatic
decommitment will be reduced by the amounts that the certifying authority as not
been able to declare to the Commission. The member state has to ask the
Commission to make the reduction5.
Exceptions to the N+2 rule6
2.26.
Details of exceptions to the automatic decommitment are set out in Article 96
of EC Regulation No 1083/2006. In essence those parts of the budget commitment
will be disregarded in calculating the automatic decommitment:
a. where an application for payment has been made by the CA but the Commission
has interrupted or suspended reimbursement in accordance with Articles 92 and
93, once the problems are resolved the automatic decommitment rule will apply;
5
6
Article 95 of 1083/2006
Article 96 of 1083/2006
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b. where an application for payment has been made but the Commission caps
reimbursement to CLG due to lack of budget resources; and for which it has not
been possible to make an acceptable application for payments to the
Commission for reasons of force majeure seriously affecting the implementation
of the OP; and
c. major projects have their own rules for calculating decommitment. In accordance
with Article 94 of EC Regulation 1083/2006 when the Commission takes a
decision to authorise a major project the amount potentially concerned by
automatic decommitment will be reduced by the annual amount concerned by
such major project. The starting date for the calculation of the automatic
decommitment deadline set in Article 93 (ie. two years from budget commitment)
will be the date of the subsequent decision of the Commission to authorise the
major project.
3. Accounting and Budgeting Requirements
3.1. This section sets out:
 the process for the recording and reporting of ERDF expenditures within RDA’s
accounts
 the financial data sets required by CLG as a department for their own reporting
purposes and to meet information requirements of the EC, Her Majesty’s
Treasury (HMT) and other interested parties.
3.2. RDAs which have elected to manage their ERDF programme expenditure through
the Management Control and Information System (MCIS) will be provided with an
electronic interface into their own accounting systems for a number of the required
financial entries.
Overview of the Claims and Payment Process
3.3. Projects will make a claim to a RDA either on a monthly or a quarterly basis seeking
reimbursement of legitimate expenditure incurred. RDAs will scrutinize the claims
and if satisfied make a payment to the projects. RDAs will then aggregate all
expenditure incurred under a particular priority axis and using MCIS submit a claim
to the CA for reimbursement. CA will apply the intervention rate for that priority axis
to the eligible expenditure to calculate the ERDF due back to RDAs and make a
payment. The total reimbursement to RDAs through interim and final payments will
not exceed the agreed Sterling value of the Euro amount at priority axis as
calculated by the CA and reported to RDAs through MCIS. CA will use the
reimbursements made to RDAs the basis for quarterly declarations to the
Commission.
Accounting System Requirements
3.4. ERDF resources are EC resources, which are paid through several layers of
administration before they are used to meet expenditure by the final beneficiary.
The regulations require that there is a separation of ERDF money from domestic
public funding. Therefore, the accounting systems of RDAs must be established so
that a separate funding stream for the ERDF transactions can be readily identified.
This can be achieved through the use of appropriate account codes and/or cost
centre codes specific to ERDF. It would be beneficial for RDAs to operate a
separate bank account for the ERDF programme as this will allow a clearer and
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easier identification of interest received which is attributable to ERDF funding. Those
regions who are undertaking Competitiveness and Convergence programmes
should account for these programmes separately.
3.5. All central government departments are required to report to HM Treasury on a
monthly basis their actual and forecast expenditure (including those bodies they
sponsor such as agencies and NDPBs) within DEL. For CLG this includes the ERDF
expenditure of the RDAs. This is done on the Treasury’s Combined Online
Information System (COINS) which is used to manage public expenditure. Treasury
sets the format for the information to be provided by departments. To meet this
requirement RDAs will need to maintain forecasts of expenditure on a monthly basis
on an Excel spreadsheet which is allocated across the ten categories set by the
Treasury as listed below. These categories are included in the reference data sheet
of the data dictionary. Although this reporting requirement is different from
Treasury’s cash management scheme under which RDAs’ monthly cash repayment
forecast in Sterling will be included in the CLG’s return to the Treasury, a single
return can fulfil both the requirements (for further details refer to Certifying Authority
Chapter 7):
Expenditure reporting for Current and Capital for each of the category:





NDPBs, other bodies & organisations within central government
Local Authorities
Public Corporations
Private sector Non Profit Institutions Serving Households (NPISH)
Private sector companies
Description of current and capital expenditure and the organisations listed above is
set out in Annex A to this chapter.
3.6. The above requirements relate only to recommended set up and data capture within
RDAs own accounting systems so that accounting based transactions and reports
can be compiled.
Accounting for ERDF Transactions
Advance Payments
3.7. To provide RDAs with a cash reserve to cover claims expenditure before
reimbursement from the CA, the EC has provided an advance payment equivalent to
7.5% of the total programme ERDF grant allocation. CA has paid over this amount
to the RDAs in three instalments in the order they were received from the EC
3.8. When received, RDAs should account for the advance payment as:
 Dr Cash
 Cr Deferred Income
3.9. Note that the advance payment is to be treated as a liability on the balance sheet, as
per SSAP 4, Accounting for Government Grants. RDAs should ensure that income is
released on to the Income and Expenditure Account in the same period as the
expenditure is incurred. In this way, the effect on the overall net balance sheet
position is nil (cash asset = deferred income liability), and therefore, no cost of
capital charge will be incurred. RDAs can take advantage of the interest earned on
the cash deposit to use as match funding of ERDF projects.
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3.10.
The advance payment will be held on the balance sheet until 92.5% of the OP
is completed. CLG will reimburse RDA interim claims up to 92.5% of programme
value after which, the advance will be used by RDAs to fund the remaining 7.5%
until programme completion. Whilst the Commission imposes a 5% retention of
funds until the programme is completed, the 5% gap will be borne by CLG, who will
then seek reimbursement of the final 5% from the Commission in accordance with
programme closure requirements.
3.11.
The advance amount or any part of it may be recovered by the C A as a last
resort if the Programme is not being implemented effectively. Although this is most
unlikely to arise, the Council Regulation does make provision for:
 the revision of the Programme following implementation difficulties (Article 33.1)
(which could involve a change in the Implementation Provisions whereby a RDA
ceases to be an intermediate body); and
 reimbursement of the pre-financing amount if no application for payment under
the Programme is sent to the Commission within 24 months from the date on
which the pre-financing amount was paid (Article 82.2).
3.12.
In the unlikely event of a decision to recover the advance or any part of it a
RDA must repay the amount specified in a demand for payment made by the CA
within 10 days of receiving the demand.
Claims Expenditure
Ensuring correctness and regularity of expenditure
3.13.
Once claims are received, procedures must be undertaken to ensure the
correctness and regularity of expenditure declared under the operation programme.
This topic is covered in User Guide, Chapter 7.
Processing approved expenditure
3.14.
Once the necessary expenditure checks have been conducted and the
validity and correctness of the expenditure is assured, the claim can be processed
through the RDAs normal accounting system.
a. The accounting entry for this will be:
 Dr ERDF Expense
 Cr Creditor
b. The coding must be sufficiently detailed to enable analysis by expense type as
defined in the Data Dictionary and the ten categories detailed in paragraph 32.
c. When RDAs record the expense for third party claimants, they subsequently
should release income from Deferred Income. Thus at the same time as
establishing the third party creditor, RDAs should undertake this release
transaction.
d. The accounting entry for this will be:
 Dr Deferred Income
 Cr ERDF Income
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e. To ensure that the ERDF income is readily identifiable, RDAs will need to
establish either a specific income account for this, or alternatively, use an existing
income account coupled with a separately identifiable ERDF cost centre code.
f.
As shown above, ERDF expense and income within the RDAs accounts should
always be equal and therefore there will be no impact on the Income &
Expenditure Account Surplus / Deficit.
g. RDAs will pay third party claimants through their accounts payable system in the
normal manner. The extinguishing of the creditor will result in the following journal
entry:
 Dr Creditors
 Cr Cash
RDA requests reimbursement from CLG
h. The process for applying for reimbursement is described in Chapter 7 that covers
the role of the Certifying Authority. In brief, by the 5th working day of a month,
RDAs will send an aggregated claim to the Certifying Authority team within CLG
for reimbursement of prior month’s expenditure. The aggregated claim will be
raised using the CLG provided MCIS system. The instructions on the use of
MCIS are not covered here as there is separate guidance provided for this
purpose as part of the MCIS rollout and training.
i.
At this time, RDAs should record their entitlement to reimbursement from the CA.
Accordingly, RDAs will undertake the following journal:
 Dr Debtor CLG
 Cr Deferred Income
CLG reimburses RDAs
j.
The certifying authority team within CLG will undertake checks of the RDA claim.
When satisfied that the expenditure is valid, the C A team will advise the RDA to
expect payment into their bank account within three working days of processing.
It is expected that RDAs should receive reimbursement by the 23rd of the month.
RDAs receive reimbursement from CLG
k. On receipt of the funds from CLG into the RDA bank account, the RDA will
extinguish the Debtor CLG in their accounts.
The associated accounting entry for this will be:
 Dr Cash
 Cr Debtor CLG
Forecasting information
3.15.
For reporting and monitoring purposes, the CA will require monthly
forecasting data for the current financial year. This data is required to be submitted
across the ten possible expenditure types as set out in paragraph 32 of this Chapter.
In April each year, the Commission also requires a current and subsequent year
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forecast to form part of the member state returns. Instruction regarding submitting
monthly forecast data into MCIS will form part of the MCIS User Guide. The forecast
data should be supplied by working day 5 of the month.
End of Month Reconciliation
3.16.
Balance sheet accounts relating to the ERDF programme should be
reconciled monthly in line with the RDAs’ own processes and procedures which
apply to other balance sheet accounts.
HM Treasury Reporting
3.17.
The ERDF year end transaction streams and balances between CLG and the
RDAs are subject to the Whole of Government Accounts year end agreement and
reporting processes.
Point of Contact within CLG
3.18.
The first point of contact within CLG for ERDF related queries and issues will
be the assigned CA team.
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Example of Accounting Treatment
Example of Accounting Treatment
The table below sets out the accounting treatment of the following scenario:
In one month a RDA receives a claim of £20,000 from a beneficiary and decides to reimburse £15,000. CLG reimburses RDA £15,000 and claims it from EC in Euros.
The payment received from EC is converted into £s which is worth £16,000, a gain of £1000 due to exchange rate differences.
RDA
CLG
Ledger Accounts
Process
1
Action
RDA Receive claims
Debit
from projects
Credit
Expense Creditors
Ledger Accounts
Debtor
Deferred
CLG
Income
Debit
Credit
Accrued
(RDA)
Income
Income
Foreign Cash
Debtor
Exch.
Brussels
-20,000
15,000
Credit
aggregated claim to CLG for
Creditor
20,000
Debit
At month end RDA sends an
Expense
-20,000
Credit
2
Cash
20,000
Debit
RDA pay £15,000
Income
-15,000
15,000
15,000
-15,000
15,000
-15,000
-15,000
reimbursement of claims paid.
3
4
CLG pays RDAs
Debit
the reimbursement
Credit
CLG submits declaration for
Debit
reimbursement in Euros
Credit
15,000
15,000
-15,000
-15,000
15,000
-15,000
from EC.
5
CLG receives reimbursement
Debit
in Euros from EC
Credit
Net balances
16,000
-1,000
20,000
-5,000
0
5,000
-20,000
0
15,000
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0
0
-15,000
-1,000
-15,000
1,000
0
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Annex A: Definitions of Expenditure Categories
Definitions of expenditure categories below that are referred to in paragraph 30 are based on
guidance made available by HM Treasury, ONS, BERR and CLG
Current Expenditure
It is the day to day operating costs. The most significant examples are direct paycosts,
accommodation costs, consultancies, the costs associated with capital expenditure (such as
depreciation), consumable supplies and materials, and travel and subsistence.
Capital Expenditure
This is the cost of acquiring, producing or enhancing fixed assets such as buildings, plant
and machinery, and office equipment.
NDPBs, other bodies & organisations within central government
This includes central government departments and their agencies including Trading Funds,
Non-departmental public bodies, NHS Health Authorities and Boards.
Local Authorities
All tiers of local government, police and fire authorities, transport authorities; greater London
Authority (GLA), state schools and colleges except City Technology Colleges and City
Academies.
Public Corporations
These are public trading bodies which have a substantial degree of financial independence
from the public authority which created them. Examples are Post Office, Transport for
London, Royal Mint, Land Registry, British Nuclear Fuels.
Private sector NPISH
These are non-profit institutions serving households. These include bodies such as charities,
universities, churches, trade unions or member’s clubs, National Trust.
Private sector companies
Private sector companies are taken to be organisations established and operating for profit,
where these profits accrue to shareholders, partners, or sole traders.
Annex A
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