1

29 October 200729 October 2007

Certification Modalities in FP7Certification Modalities in FP7

V. Lorenzo RomaniV. Lorenzo RomaniL. DechevreL. Dechevre

DG RTD – Unit A5DG RTD – Unit A5

2

Overview of presentation

▪ Background to the FP7 certification system

▪ Types of certification

▪ Advantages

▪ Practical issues– Submission, timing and format– Cost– Content

▪ Examples and common errors

3

Background to the FP7 certification system

▪ Research FP implemented by multi-annual work programmes with specific financial and legal provisions, covering various topics (health, energy,…) in the EU and even beyond…

▪ … implying a large number and variety of participants (20,000+), each operating with their own internal control and accounting systems

▪ Commission on average pays for up to 50% of the costs of scientific work. The reimbursement is based on “actual eligible costs” which can be problematic for some items (personnel and overheads, VAT, …)

▪ Commission’s cost reimbursement model did not capture all national accounting rules.

Inherent risks for errors

4

Background to the FP7 certification system

▪ Problems noted by Commission auditors and European Court of Auditors when re-auditing certified FP6 projects. Commission needed tighter control over work carried out by auditors.

▪ Decision to adopt ‘Agreed Upon Procedures’ rather than certificates based on an ‘assurance opinion’

▪ In addition to the certification of periodic grant payment requests, introduction of the Certificates on Methodology

5

“Agreed Upon Procedures”

▪ Objective : auditor carries out procedures of an audit nature to which auditor and beneficiary have agreed and reports on factual findings (no opinion expressed).   

▪ Auditors will provide information according to a specific format defined via agreed Terms of Reference (ToR)

▪ ToR are annexed to the FP7 model grant agreement (Annex VII – Forms D & E)

▪ ToR are derived from best practices in audits and correspond to international audit standards (International Federation of Accountants - IFAC)

6

Auditors eligible to deliver the certificates

▪ Beneficiaries are free to choose an External Auditor, provided that the auditor is :– Independent

and

– Qualified (according to Directive 2006/43/CE repealing 8th Council Directive)

▪ Public bodies, research organisations and secondary and higher education establishments may opt for an external auditor or a Competent Public Officer– In order to guarantee independence, the Competent Public

Officer may NOT be involved in the processing of the financial statements.

7

Types of Certification in FP7

▪ Certification on Financial Statements (CFS)

– Verification of costs and receipts (Form D)

▪ Certification on the Methodology

– Verification of systems (Form E)• for Personnel & Overheads (optional)(CoM)

• for Average Personnel Costs (mandatory if average system applied by the beneficiary) (CoMAv)

8

Certification of Financial Statements (CFS)

▪ Replaces the FP6 Audit Certificates ▪ Main differences:

– Submission periodicity does no longer depend on the clauses of the grant :

CFS to be submitted only when cumulative EC contribution is ≥ € 375,000

Exception: if project ≤ 2 years, only at the end of the project ; if a certification on the methodology is provided, no intermediate CFS only at the end of the project

– Auditor will carry out procedures in a detailed independent report of factual findings (no opinion !)

– The Commission will draw conclusions from the Certificates (Form D) as to the acceptability of the costs claimed

– Where applicable, reference to Certificate on the Methodology

9

Certification on Methodology (NEW)

▪ Experience shows that main sources of errors are found in Personnel and Overheads costs

▪ Promote the use of correct methodologies in conformity with FP7 rules for the calculation of personnel and overheads costs

▪ Two types of Certificates on Methodology:– For Personnel and Overheads (CoM)– For Average Personnel Costs (CoMAv)

▪ The submission of any certificate on the methodology does not waive the right of the Commission to carry out its own audits.

10

Certification on Methodology for Personnel & Overheads (I)

▪ Covers the method applied by the beneficiary for the calculation of personnel costs and overheads

▪ Optional for those beneficiaries meeting EC eligibility threshold:– At least 8 FP6 participations with EU contribution≥375K €

– Alternative criteria based on FP7 participations will be settled in 2008

▪ Can be also requested by beneficiaries using flat- rate for calculating overheads

11

Certification on Methodology for Personnel & Overheads (II)

ADVANTAGES:

– Waives the obligation of certificates on financial statements for interim payments (only a final CFS will have to be submitted when EC contribution ≥ 375.000)

– Once accepted, the certificate is valid for all subsequent financial statements throughout FP7

– Early detection and correction of possible errors of the calculation method applied regarding the grant agreement provisions

– Reduces audit scope for personnel and overheads in CFS (e.g. check of compliance to methodology without individual recalculations)

– Simplification of administrative burden (beneficiaries in many projects will have to submit less certificates).

– Reduction of costs for the whole certification system (less funds spent on certificates)

12

▪ Mandatory for any beneficiary who wishes to use average costs in their claims (even if requested amount < 375.000 €)

▪ Not necessary if a Certification on Methodology for Personnel & Overheads on the same calculation method has been already approved by the Commission.

▪ Does NOT waive the obligation of certificates on financial statements for interim payments

▪ Enables EC to assess ‘significant deviation’ of the system as required by the Rules for Participation

Certification on Methodology for Average Personnel Costs

13

Summary – Submission periodicity of the certificates

– Certificate on Financial Statements (CFS) • Requested EC contribution (cumulative)<375.000€:

-> No CFS to be submitted (not even at the end of the project)• Requested EC contribution (cumulative)≥375.000€:

-> Certificate on financial statements has to be submitted:» CFS every time ≥375.000 €» If Certificate on Methodology (CoM) accepted by the

Commission : no interim CFS but only at the end of the project

– Certificate for Average Personnel Cost (CoMAv)• Whenever average personnel costs are applied AND• If there is no Certificate on the Methodology approved

– Certificate for Personnel and Indirect Costs (CoM)• This certificate is OPTIONAL and can be submitted by any

beneficiary fulfilling the EC eligibility criteria

14

Example : Beneficiary WITHOUT CoM for Personnel and Overheads

- Year 1 EC contribution= 185.000€ : No CFS because <375.000€

- Year 2 EC contribution= 200.000€ : CFS to be submitted(since 185.000€+200.000€> 375.000€)

- Year 3 EC contribution= 380.000 : CFS because >375.000€

  Year 1 Year 2 Final Period

EC Contribution 185.000 € 200.000 € 380.000 €

Contribution accumulated not covered by CFS

185.000 € 385.000 € 380.000 €

CFS Mandatory NO YES YES

(<375.000 €) (>375.000 €) (>375.000 €)

15

Example : Beneficiary WITHCoM for Personnel and Indirect Costs

- Year 1 EC contribution= 185.000€ no CFS because <375.000€

- Year 2 EC contribution= 200.000€ (185.000€+200.000€> 375.000€) no intermediate CFS due to the approval of the CoM

- Year 3 EC contribution= 380.000€ CFS for the whole duration

  Year 1 Year 2 Final Period

EC Contribution 185.000 € 200.000 € 380.000 €

Contribution accumulated not covered by CFS

185.000 € 385.000 € 765.000 €

CFS Mandatory NO NO YES

Interim CFS waived due to the approval of the CoM

(>375.000 €)

16

Submission of the Certificates on Methodology (I) - Process

1) Request to EC (eligibility criteria): at any time during FP7

2) Acceptance / Rejection of the request: within 30 calendar days

3 ) Submission of the CoM: During lifetime of FP7 and at the earliest on the start date of the first FP7 project(warning: the certifying auditor needs a sound basis to perform the agreed upon procedures)

4 ) Acceptance /Rejection: normally within 60 calendar days

Only applicable to CoM for Personnel & Overheads

Applicable to both types of Certificates on Methodology

17

Submission of the Certificates on Methodology (II) - Consequences

▪ In case of rejection, a motivated decision will be communicated to the beneficiary. The beneficiary will be invited to submit another certificate on the methodology which is compliant with the requirements of the Commission.

▪ Pending acceptance decision:– For CoM (Personnel and Overheads), the requirement to

provide intermediate CFS is not waived.

– For CoMAv (Average Personnel costs), until the acceptance the beneficiary cannot charge average personnel costs.

18

▪ The auditors’ fee is an eligible cost in the 1st financial statements or in any of the financial statements submitted after the acceptance by the EC, even if it relates to all FP7 grant agreements.

▪ Can be claimed only once in the lifetime of FP7 unless, due to a change of the methodology, the submission of a new certificate is required.

▪ Cost charged subject to the general eligibility criteria of the grant agreement and should consider relevant market prices for similar services (to be eligible, the price should be consistent with principles of economy, efficiency and effectiveness. Excessive or reckless expenditure will be rejected).

▪ The eligible cost is limited to the performance of the agreed upon procedures with the exclusion of any costs relating to consultancy (design, implementation, improvement of a cost accounting methodology).

Cost of Certificates on the Methodology

19

Format of Certificates on the Methodology

▪ Use of the reporting format attached as Annex VII of the model grant agreement is compulsory (FORM E)

▪ ToR are to be completed by the beneficiary and the auditor

▪ The report on factual findings must be signed, stamped and dated by the external auditor (or competent public officer)

▪ Drafted in the language indicated in Article 4 of the grant agreement.

20

EXAMPLES AND EXAMPLES AND COMMON ERRORSCOMMON ERRORS

PERSONNEL COSTSPERSONNEL COSTS INDIRECT COSTSINDIRECT COSTS

TIME RECORDING

DEFINITIONS

AVERAGE COSTS SIMPLIFIED METHOD

CALCULATION METHODS

ANALYTICAL ACCOUNTING

21

Personnel : Definitions (I)

Productive hours: represent the (actual / average / standard) number of hours actually worked by an

employee.

Productive hours = maximum chargeable time

Hourly Personnel Rate: actual cost per hour of an employee

Total actual personnel costs for the employeeHPR =

Total productive hours for the employee

22

Personnel : Definitions (II)Example of Productive Hours

Total days in a year 365

Weekends -104

Annual holidays -21

Statutory holidays -15

Illness / Others -15

Workable days in a year 210

*

Working hours per day 8

Total productive hours 1680

23

Personnel : Definitions (III)Most common errors encountered

▪ The beneficiary uses budgeted rates instead of actual rates

▪ The beneficiary uses only the hours worked in research for calculating the hourly rate, thus overcharging the EC project

24

Personnel : Time Recording

▪ A reliable system of time recording is required for the eligibility of the costs

▪ Primary source to support personnel costs allocation:

– Personnel working in multiple projects

– Personnel working in multiple activities (e.g. R&D, management, etc)

▪ For staff involved in multiple projects, the total time with a breakdown by project should be recorded Without an indication on total time, there is no basis for apportioning the total salary

▪ Primary source in most cases to support overheads allocation in direct calculation methods (being the most common ‘cost driver’)

25

Use of Average Personnel Costs (I)

▪ Whenever Average Personnel Costs are used, this method does require certification by the Commission.

▪ Conditions of acceptability:

– The use of average rates is consistent with the beneficiary’s management principles and usual accounting practices (not purpose-made for the Commission)

– There must be enough personnel categories to avoid excessive differences between average and actual costs

– For each category:

Average personnel rate * total productive hours ≤Actual costs (actual costs = costs recorded in the accounting records)

Note: Average Personnel Costs can be combined with other cost calculation schemes within the same organisation (e.g. ‘average’ for permanent staff and ‘actual’ for additional staff)

26

Use of Average Personnel Costs (II)Most common errors encountered

▪ No sufficient number of categories: the salary range is too wide and, therefore, the average is not representative enough

▪ The average system of the beneficiary is purpose-made for the Commission

▪ The total calculated personnel costs using the averages is higher than the actual cost

27

A B C D E F

 

Annual cost for the employer (accounting

records)

Working time (Full

time=100%)

Months worked in the

year

% of year worked

(C / 12)

Full time equivalent

(B * D)

Equivalent annual cost

for full year (A * E)

Technician 1 21.000,00 100% 12 100% 1,00 21.000,00

Technician 2 2.631,25 50% 3 25% 0,13 21.050,00

Technician 3 21.060,00 100% 12 100% 1,00 21.060,00

Technician 4 10.750,00 100% 6 50% 0,50 21.500,00

Technician 5 3.550,00 33% 6 50% 0,17 21.515,15

Technician 6 22.090,00 100% 12 100% 1,00 22.090,00

Technician 7 22.100,00 100% 12 100% 1,00 22.100,00

TOTAL 103.181,25       4,80  

Average = 103.181,25 / 4,80 = 21.496,09 €

Use of Average Personnel Costs (III)Example for one category

28

Indirect Cost Calculation - Methods (I)

▪ Based on actual Indirect Costs:

– ‘Normal’ (analytical accounting system)– Simplified (at entity level)

▪ Flat-rates on direct costs

– Flat rate 20% (general)– Flat rate 60%* (transitional rate until 31/12/2009)

* For funding with RTD and for certain types of entities (non-profit public bodies, research organisations, universities, SMEs)

29

Real Indirect Costs Flat Rate

Normal Simplified 20% 60% *

Do I have an analytical accounting system allowing to determine with certitude the indirect cost related to research activities ?

YES    

IF THE ANSWER IS NO, THEN:          

Do I have an accounting system allowing to identify all my indirect costs and a reliable cost driver to allocate them?

YES NO

Which indirect cost method ?

* Only applicable to Non-profit public bodies, Secondary and higher education establishments, Research organisations and SMEs

30

Indirect Costs Calculation (II) Most common errors encountered

▪ Cost driver used for allocating indirect costs is an unsubstantiated estimation

▪ Identifiable indirect costs not related to research charged to the project.

▪ For flat rate beneficiaries: indirect costs are also applied on subcontracting (& resources made available by third parties not used on the premises of the beneficiary)

31

Analytical accounting

▪ No single definition from the academic point of view. As far as FP7 rules are concerned, at least these two elements must be present:– The system can identify and group their indirect costs

(pool of costs) in accordance with the eligibility criteria (e.g. exclude non-eligible costs)

– A fair and reliable cost driver to allocate indirect cost from the 'pool of cost' into the different projects.

▪ Whatever the method of calculation is, it must be in accordance with normal accounting practices and should be extracted from or reconciled with the official accounts.

32

Simplified Method (I)

▪ For beneficiaries who do not aggregate their indirect costs at a detailed level but at the level of entity (e.g. beneficiaries without analytical accounting system or with cash-based accounting system)

▪ Use of simplified method does not require certification (optional)

▪ “Simplified” does not mean “Simple”-> accounting system which enables to identify all eligible indirect costs

-> a reliable cost driver to allocate the indirect costs

▪ Is called ‘Simplified’ because the calculation is done at ‘entity’ level (i.e. not by departments, activities, etc).

33

Marketing

Cost Driver:- % Personnel costs- Hourly rate

Teaching activity 1

Teaching activity 2

Research project 1

Research project 2

Simplified Method

Administrative Headquarters

Research Indirect Costs

Research

Administration

Research

laboratory rent

… Teaching Indirect Costs

Teaching

admin.

Teaching related

supplies

…

Analytical system

Shared indirect costs

General Management

Internal Training Facilities, etc

Cost driver X Cost driver Y Cost driver Z

Cost Driver:- % Personnel costs- Hourly rate

Research project 1

Research project 2

Cost Driver

Teaching activity 1

Teaching activity 2

Activity relatedindirect costs

Activity relatedindirect costs

Deduct any IDENTIFIABLE Indirect Costs not related to

Research activities

General pool of indirect costs

AdministrationBuilding rent Other I.

costsSupplies

Non – Research

Buildings

…

Adjusted pool of indirect costs

34

Simplified Method (II) Most common errors encountered

▪ The pool of costs contains clearly differentiable indirect costs not related to research activities

▪ Only research hours (and not all productive hours) are used for the allocation of the indirect costs to the projects

35

FURTHER INFORMATION

▪ Basic elements published on Internet :

– FP7 Guide to Financial Issues– Part I - Guidance Note for beneficiaries and auditors on

certificates issued by external auditors (incl. by Dec. 2007 Technical guidance for the auditors)

▪ In case of questions, FP7 Helpdesk is available :

http://ec.europa.eu/research/enquiries

http://cordis.europa.eu/fp7/home_en.html

36

Thank you very much for your Thank you very much for your attention!attention!

Questions ?Questions ?