Introduction of EU negative DEL regime from 2006-07 onwards

By Sandra Elliott,2014-11-25 18:48
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Introduction of EU negative DEL regime from 2006-07 onwards

Head of Accountability and

     Accountancy Services Division

    Ciaran Doran

Room G2-1

     Rathgael House

    Balloo Road


    Tel No: 028 9185 8203 (x 68203)

    Fax No: 028 9127 7690



     DAO (DFP) 16/06

     18 December 2006

Dear Accounting Officer




    1. This guidance is primarily aimed at government Departments and sets

    out the arrangements for budgeting and accounting for EU income from

    2006-07 onwards. Treasury has changed the budgeting principles so

    as to treat EU income as negative DEL* where it is in support of DEL

    expenditure. The accounting treatment of EU Income therefore follows

    the reclassification in the budgeting principles (there is no change in

    accounting policy).


2. Prior to 2006-07, the budgeting treatment of EU receipts was that they

    benefited the 'EU net payments' line (i.e. outside departmental budgets)

    and were not offset against departmental expenditure. The reason for

    this was that EU receipts reduce the abatement the UK receives from

    the EU in respect of its large positive net contribution to

    * For some bodies where the related expenditure is in AME, the DEL

    consequences described in this DAO will apply to the Department’s

    AME rather than its DEL

    Reference : FE001694

    EU finances. Departmental expenditure financed by EU receipts

    scored against departmental budgets in the normal way.

3. In Estimates and accounting terms, EU income was treated as a

    Consolidated Fund Extra Receipt (CFER). When income became due

    from EU, a CFER debtor was created which was treated as income in

    the Operating Cost Statement. An equal creditor was also required,

    showing the amount due to be paid over to the NI Consolidated Fund

    (the double entry to the General Fund).

    4. In August 2005, HM Treasury circulated a memorandum seeking

    departmental comments on the practical issues around their wish to

    consider changing the budgeting system for EU income. The main

    drivers cited for the proposed change included:

     departments had long pressed HM Treasury to simplify the

    budgeting regime in this area, and had sought automatic spending

    cover for expenditure financed by the EU; and

     HM Treasury were also keen to simplify the budgeting system for

    EU income and for government departments to manage exchange

    rate fluctuations.

    These new arrangements have now been adopted and are applicable

    from 2006-07 onwards.



Closing EU Debtor Balances at 31 March 2006

    5. Cash receipts in relation to EU debtors recorded in accounts at 31

    March 2006 are subject to the 2005-06 rules and consequently must

    be surrendered to the Consolidated Fund;


    6. EU debtor balances as at 31 March 2006 that need to be written off

    will follow the 2005-06 treatment as described in FD (DFP) 10/06.

    This treatment is also applicable to exchange rate losses on these

    balances. There will therefore be no DEL budgetary consequences

    for these balances.

EU Income from 1 April 2006 Onwards

    7. From 2006-07 EU income scores in DEL as a receipt in budgets and

    as an accruing resources in estimates and accounts. Income should

    be treated as resource, capital or capital grant to match the

    expenditure it finances. EU income is no longer required to be

    recorded in Estimates and accounts as a CFER.

    8. Write off of EU debts arising after 31 March 2006 will score in DEL in

    Department’s budgets and Estimates. All write offs will require to be

    reported as losses and the relevant approval sought.

Cost of Capital

9. Cost of Capital on ALL EU Debtors (including the balance at 31

    March 2006) will also score in DEL.

Exchange Rate Gains and Losses

    10. Foreign exchange gains below the budgetary de-minimis threshold

    may be offset against EU related losses IN YEAR ONLY until such

    time when they are fully utilised.

    11. Net foreign exchange losses in relation to EU income will score in

    DEL. Such losses require to be reported as losses and the relevant

    approval sought. Gains that are not offset against in year losses

    must be offered up as a Reduced Requirement at the earliest



    12. Whilst hedging exchange rate fluctuations is permitted by GANI

    under certain conditions, it is DFP’s view that the uncertainty of

    timing of EURO receipts from the EU, coupled with the costs

    associated with building the correct level of expertise in Departments

    are unlikely to make hedging a viable or value for money option.

13. Further detail is given in Annex A.


    14. If you have any queries regarding this letter please contact:

    Budgeting or Paul Duffy (CED)

    Estimate Issues

    028 91858081 (GTN: 68081)

    Accounting Issues Brigitte Worth (AASD)

    028 91858025 (GTN 68025)

    Laura Murphy

    028 91858133 (GTN 68133)

    15. The content of this letter has been agreed with the Northern Ireland

    Audit Office (NIAO) and other divisions within the Central Finance

    Group (DFP).

Yours sincerely


     Annex A

Budgeting for EU Income for 2006-07 Onwards

    1. The new arrangement is that EU income will become negative DEL (i.e.

    score as a DEL receipt) where it is in support of DEL expenditure. The

    timing of recording EU income in budgets should follow the timing of

    recording EU income in accounts. In principle, EU related income and

    expenditure will be treated for budgeting like other expenditure where

    there is associated income. Department’s net DEL will be at a lower

    level than under the previous treatment of EU income. However, the

    gross spending power implied by that DEL will be the same as before

    assuming the income is received in full.

Resource / Capital

    2. In budgets and Estimates, the income from the EU should be treated

    as resource, capital or capital grant to match the expenditure it

    finances. For example, income from the EU will be netted off Capital

    DEL if it is in support of DEL spending and if it supports capital

    expenditure. Departments should note capital grants form part of

    Capital DEL in budgets from 2006-07. However, in Estimates and

    accounts capital grants and related EU income continue to be

    classified as resource.

    3. With regards to EU funded assets, there is no change to the treatment

    of the asset itself. However, where a government department receives

    a grant from the EU towards the purchase of a departmental fixed

    asset (as opposed to funding for a capital grant where the asset

    belongs to a third party), the grant should be credited to the

    Government Grant Reserve (GGR) rather than surrendering the receipt

    to the consolidated fund.

    4. The depreciation charge on these assets is offset in the operating cost

    statement, budget and Estimate by a release from the government FE001694

    grant reserve. The release from the GGR should be credited to a separate budget record, whilst the depreciation is included with depreciation on other assets. This enables depreciation for these items

    to be recorded in budgets like any other depreciation so that the correct

    overall level of depreciation is recorded in the National Accounts.

    5. The following table illustrates the treatment of EU Income in Budgets,

    Estimates and Accounts.

    Estimates Budgets Accounts

Resource Capital Resource Capital Resource Capital

     SSAP 4 FRS 15 Grants Capital Record Line in Record line in FReM 5.2.37 FReM 5.2 EU (including DEL (showing DEL (showing Expenditure capital budget budget Grants Fixed Asset

    grants) allocation) allocation) (including Additions


    grants) (no change)

    (no change)

     FReM 5.2.38 Accruing Non Receipt Line in Receipt Line in SSAP 4 Income EU Income Resources Operating DEL (showing DEL (showing FReM 5.2.37 credited to

     Accruing accrued accrued Income Government

    (Income in Resources income) income) should match Grant Reserve

    relation to expenditure it and released

    both revenue (Income contributes to OCS over

    and capital received towards useful life of

    grants to third for own asset in

    parties) asset Income due amounts equal

    purchases from EU to to depreciation

    only) fund and any

    expenditure impairment.

    should be

    treated as Income due

    Accruing from EU as a

    Resources result of



    should be

    treated as Non





Accounting for EU Income and Expenditure

    6. There are no changes to the accounting guidance in relation to the

    recognition of EU income and expenditure and hence this is not

    regarded as a change in Accounting Policy. However, as EU income

    arising from 2006-07 onwards is no longer required to be surrendered

    to the consolidated fund on receipt, the CFER creditor at the end of

    2006-07 is likely to be significantly lower than that at the end of 2005-

    06. Departments should add a footnote to the creditors note (note 20

    in Department Yellow) explaining the change. A suggested wording

    is as follows:

    7. “In 2005-06 all EU grant income was classified as CFER income and

    remitted to the Consolidated Fund on receipt. From 2006-07 EU

    income is will be classified as an Accruing Resource where it

    supports expenditure incurred. This has led to a reduction in the

    CFER creditor of ?[insert amount by which relevant EU CFER

    creditor has reduced from 2005-06 year end]”

EU Debtor Opening Balances

    8. Cash received in 2006-07 and subsequent years that relates to

    debtors as at 31 March 2006 will continue to be treated in accordance

    with the budgeting treatment for 2005-06 in that that all receipts will

    be CFER’d back to the consolidated fund. Receipts from Debtors

    arising in 2006-07 onwards will be treated in accordance with the new

    procedures and will score as negative DEL.

Cost of Capital on EU Debtors

9. The cost of capital charge in respect of ALL EU debtors (including

    those at 31 March 2006) will score within Resource DEL. Therefore,

    Departments must take the necessary steps to minimise this cost and

    manage any pressures that may arise and should ensure that the

    appropriate Estimates cover is in place.


Write Off of EU Debtors

    10. If it is necessary to write off an EU debtor balance that arises after 31

    March 2006 then this cost will be a charge on the Resource DEL.

    Departments who anticipate incurring such a write off should notify

    CED at the earliest opportunity to enable budgetary implications to be


11. Any such write-offs will be treated as a loss to the department and

    the government accounting rules as set out in GANI chapter 18

    (Losses and Special Payments) and Annex 12.1 (Reporting

    Requirements in Departmental Resource Accounts) will apply.

    12. Closing EU debtor balances at 31 March 2006 that need to be written

    off will follow the 2005-06 treatment as described in FD (DFP) 10/06.

    This treatment is also applicable to exchange rate losses on these

    balances. There will therefore be no DEL budgetary consequences

    for these balances.

Accounting for Exchange Rate Movements

    13. There are no changes to the accounting guidance in relation to

    exchange rate movements, which are set out in FReM 4.3.10 to

    4.3.11. In summary, Departments are required to recognised gains

    and losses in relation to exchange rate movements in the financial

    year to which they relate. This includes the requirement to revalue

    any EU debtor balances in Euros (for example outstanding claims

    with the Commission) at the exchange rate prevalent at the balance

    sheet date and record any related unrealised gains and losses as

    described in this DAO.

    14. The general budgetary treatment in relation to gains and losses also

    remains unchanged, in that losses will score in DEL, whilst gains FE001694

    should be offered up as a Reduced Requirement at the earliest

    opportunity. EU income in excess of that included in the Estimates

    will be treated as Excess Accruing Resources and surrendered as a


    15. However, foreign exchange gains below the de-minimis threshold

    may be offset against EU related losses IN YEAR ONLY until such

    time when they are fully utilised. Gains and losses may NOT be

    carried forward from one financial year to the next and therefore,

    Departments must take the appropriate steps to manage these

    movements in year. If particular difficulties occur in managing these

    balances then Departments should approach their Supply Officer at

    an early stage to address the issues.

    16. Net losses due to exchange rate fluctuations for the financial year will

    be treated as Losses to the department and the government

    accounting rules as set out in GANI chapter 18 (Losses and Special

    Payments) and Annex 12.1 (Reporting Requirements in Departmental

    Resource Accounts) will apply.

Managing Risks

    17. The change in budgeting treatment will bring new risks for

    departments. Some of the main risks and additional considerations in

    relation to these risks are set out below.

    a. Time lag between the recognition of income and expenditure in


    ; It is anticipated that in most cases it will be possible to accrue EU

    income to match the related EU expenditure.


    ; Departments who are not currently adopting this matching principle

    may wish to review their accounting policies in conjunction with FReM

    to ascertain whether it is possible to recognise income earlier.

    ; Where this is not possible, Departments will need to ensure that

    sufficient budget and Estimates cover is available for the expenditure

    until the income can be accrued.

    ; Cost of capital is charged where a Department has accrued income

    from the EU but has yet to receive the cash payment. Although

    individual Departmental policies may vary on how frequently cost of

    capital is computed on these balances, in general the longer the time

    lag between income accruing and cash being received, the higher the

    cost of capital is likely to be.

; Whilst Department’s have limited control over the time lag between

    making a claim and receiving payment, it is possible to control the

    timing of claims made to the EU.

    ; Departments should consider whether the pattern of these claims can

    be changed (for example by making claims more frequently) in order

    to minimise the cost of capital.

b. Failure to realise debts

    ; In common with debts in relation to other income sources, failure to

    realise EU debt that has been recognised in a Department’s accounts

    will result in a DEL pressure.

    ; Departments should take steps to ensure that all debt recognised in

    their accounts is recoverable and ensure that sufficient budget and

    Estimates cover is sought for any anticipated write offs.


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