The Former Financial Regulation

1) OBJECTIVE

To lay down the procedures for drawing up, adopting and implementing the budget of the European Union.

2) COMMUNITY MEASURE

Financial Regulation of 21 December 1977 applicable to the general budget of the European Communities.

Amended by:

Council Regulation (ECSC, EEC, Euratom) No 1252/79 of 25 June 1979

Financial Regulation of 16 December 1980 (80/1176 /EEC, Euratom, ECSC)

Council Regulation (ECSC, EEC, Euratom) No 1600/88 of 7 June 1988

Council Regulation (ECSC, EEC, Euratom) No 2049/88 of 24 June 1988

Council Regulation (Euratom, ECSC, EEC) No 610/90 of 13 March 1990

Council Regulation (ECSC, EC, Euratom) No 1923/94 of 25 July 1994

Council Regulation (ECSC, EC, Euratom) No 2730/94 of 31 October 1994

Council Regulation (EC, Euratom, ECSC) No 2333/95 of 18 September 1995

Council Regulation (EC, Euratom, ECSC) No 2334/95 of 18 September 1995

Council Regulation (EC, Euratom, ECSC) No 2335/95 of 18 September 1995

Council Regulation (EC) No 2444/97 of 22 September 1997

Council Regulation (EC, ECSC, Euratom) No 2548/98 of 23 November 1998

Council Regulation (EC, ECSC, Euratom) No 2779/98 of 17 December 1998

Council Regulation (EC, ECSC, Euratom) No 2673/1999 of 13 December 1999

3) CONTENTS

"The budget of the European Communities is the instrument which sets out the forecasts of, and authorises in advance, the expected revenue and expenditure of the Communities for each year". It is on the basis of this definition (given in Article 1) that the Financial Regulation goes on toshape the European Union's financial architecture step by step. Subsequent articles of the Regulation introduce the key concepts underlying the budget and lay down the procedures and rules for its establishment and implementation. The main features of the Financial Regulation are summarised below. More detailed questions can be answered by referring to the text of the Regulation itself.

I. European budgetary law in 16 definitions

The financial year: The financial year runs for 12 months from 1 January to 31 December. The budget comprises all expenditure and revenue authorised for that year. The appropriations entered in the budget are authorised only for the duration of one financial year. (See point 12 - Carryover of appropriations).

Differentiated appropriations: One of the principles governing the Community's financial system is annuality. This means that operations relate to a given financial year, making it easier to control the work of the Community executive. However, multiannual operations are often necessary (e.g. research programmes, structural measures, etc), in which case the notion of differentiated appropriations is used. Differentiated appropriations, as opposed to non-differentiated appropriations, are split into commitment appropriations and payment appropriations. Operations extending over more than one financial year have a deadline attached, i.e. a date by which the relevant projects must be completed.

Commitment appropriations: Commitment appropriations cover the total cost, in the current financial year, of the legal obligations entered into for operations to be carried out over more than one financial year. This type of appropriation constitutes the upper limit of expenditure which can be committed during the financial year.

Payment appropriations: Payment appropriations cover expenditure arising from commitments entered into during the current financial year or preceding years.

Appropriations for commitment: This term refers to the sum of commitment appropriations and non-differentiated appropriations.*

Appropriations for payment: This term refers to the sum of payment appropriations and non-differentiated appropriations. *In effect, non-differentiated appropriations authorise an equal amount of commitments and payments, so that both aspects must be fully taken into account.

Principles of sound financial management: Principles underlying the use of budget appropriations, including economy, cost-effectiveness, evaluation prior to mobilisation of Community resources, regular review of operations, etc.

Financial statement: The financial statement sets out the various financial aspects of an operation (financial consequences, links with financial instruments, schedule, etc). Any proposal or communication which may have budgetary consequences must include a financial statement.

No offsetting: According to this principle, all revenue and expenditure must be entered in full with no adjustment against each other, thus ensuring an exhaustive and complete presentation of the budget.

No assignment of revenue: This rule prevents specific revenue from being used to finance specific expenditure. Total revenue covers total expenditure. There are exceptions to this principle: for example Member States' financial contributions to certain research programmes and contributions from non-member countries to Community activities under the Agreement on the European Economic Area.

Booking of revenue and expenditure to articles: Revenue can be collected and expenditure effected only if it is booked to an article in the budget. This means that all financial operations (revenue or expenditure) must have a budgetary basis, i.e. a specific article in the budget. In addition, no expenditure may exceed the authorised appropriations.

Carryover of appropriations: As a general rule, non-differentiated appropriations lapse if they are not used at the end of the financial year for which they are entered. However, in the case of payments outstanding in respect of commitments entered into before the end of the financial year, appropriations left unused must be transferred to the budget of the following year. Optional carryovers are possible when requirements cannot be met from the budget of the following financial year. Differentiated appropriations (consisting of commitment appropriations and payment appropriations) also lapse if they are not used at the end of the financial year, although a decision may be taken to carry them over in certain instances (e.g. where the basic legislative instrument is adopted at the end of December and the Commission is unable to commit the amounts before 31 December).

Provisional twelfths: If the budget is not finally adopted by the beginning of the financial year, i.e. 1 January, the "provisional twelfths" system comes into operation. In this case, payments may be made monthly up to a limit of one twelfth of the appropriations entered in the budget of the previous financial year.

Adoption of the budget: The adoption of the budget marks the end of the budget procedure. The budget, which is drawn up in euros, is declared adopted by the President of Parliament and then published in the Official Journal. Once the budget has been finally adopted, each Member State is required to make available to the Community its own resources payments with effect from 1 January of the following financial year.

Reserves: Under European budgetary law, there are six types of reserves, of which three are expressly provided for by the Financial Regulation:

These reserves are designed to facilitate budget management. They can be drawn on - during the financial year - to enter amounts in a budget line for an operation that was not entirely finalised when the budget was adopted, to increase the authorised appropriations in order to deal with unforeseen circumstances or to reduce the authorised appropriations for the sake of economy, taking into account the progress made in implementation. The reserves can be used only by implementing a transfer procedure.

The financial perspective provides for three other reserves designed to create room for manoeuvre, so that expenditure can be covered even where the requirements could not easily have been foreseen when the financial perspective was drawn up:

Discharge: The European Parliament, acting on a recommendation by the Council, grants the Commission discharge for its implementation of the budget, after examining a series of reports, in particular that of the Court of Auditors. The purpose is to bring the financial year to a close in both formal and political terms. The discharge decision covers the accounts of all Community revenue and expenditure and the situation described in the balance sheet (statement of assets and liabilities). It consists of an appraisal of how the Commission has discharged its responsibility for budget management over the past financial year.

II. Establishment of the budget

The first stage in the process leading to the establishment of the budget is that each institution (Parliament, the Council, the Court of Justice, the Court of Auditors, the Economic and Social Committee and Committee of the Regions and the Ombudsman) draws up estimates of its expenditure and revenue for the following year and sends them to the Commission.

After receiving the various estimates, the Commission draws up the preliminary draft budget, which must be presented by 1 September and contains:

• a general statement of the revenue of the Communities;
• a statement of estimates;
• a general introduction including financial tables covering the entire budget and a description of the policies for which the appropriations are requested;
• an introduction to each section, drafted by the institution concerned;
• a working paper on the staff of the institutions (staff policy, variation in staff numbers, etc);
• a working paper on subsidies to decentralised bodies (agencies, European schools etc);
• an analysis of financial management over the past year and a balance sheet setting out the Communities' assets and liabilities;
• an opinion on the estimates of the other institutions.

During the procedure, the Commission may amend this preliminary draft by sending a letter of amendment to the Council at least 30 days before Parliament's first reading of the draft budget.

In exceptional circumstances, the Commission may present preliminary draft supplementary and/or amending budgets, which are examined according to the usual budgetary procedure. A preliminary draft supplementary budget either increases the total amount of appropriations or finances new operations without increasing appropriations. A preliminary draft amending budget makes technical changes, without increasing the overall budget or providing for new operations. These preliminary drafts must be accompanied by statements of justification.

The budgetary procedure is laid down in Article 272 of the EC Treaty. After examining the preliminary draft budget, the Council sends Parliament a draft budget, accompanied by an explanatory memorandum explaining why it has departed from the preliminary draft budget, if it has done so.

III. Structure and presentation of the budget

The budget contains a general statement of revenue (estimated revenue of the Communities for the financial year in question and actual revenue in the previous financial year), plus a number of sections subdivided into statements of revenue (revenue for the financial year in question and the previous year, together with the relevant remarks) and expenditure. The various sections cover:

The Commission section contains a Part A (staff and administrative expenditure) and a Part B (operational expenditure). Part B is broken down into several sub-sections, according to requirements. These subsections, which correspond to European Union policies, are shown in the table below. The figures are taken from the 1999 budget.

Policies (sub-sections)	Amount in 1999 budget (EUR million)	Percentage of the total budget
Common agricultural policy (CAP)European Agricultural Guidance and Guarantee Fund, Guarantee Section	40 940.0	42.2
Structural operationsstructural and cohesion expenditure	39 260.0	40.5
Training, youth, culture, audiovisual media, information, social dimension and employment	812.0	0.8
Energy and environment	235.4	0.2
Consumer protection, internal market, industry and trans-European networks	1129.1	1.2
Research and technological development	3450.0	3.6
External action	6223.8	6.4
Common foreign and security policy	30.0	0.0
Guarantees and reserves	346.0	0.4

Each section or subsection is divided into titles, chapters, articles and items. The statement of expenditure in each section (i.e. for each institution) includes, for the various titles, chapters, articles and items (each subdivision being accompanied by remarks):

• the appropriations made available for the financial year in question;
• the appropriations made available for the previous financial year;
• actual expenditure in the last financial year (= actual payments plus carryovers to the following financial year).

IV. Implementation of the budget

The implementation of the budget is based on a fundamental principle - the need for a legislative basis - which has been both the cause and the result of a series of crises between the two arms of the budgetary authority. The implementation of appropriations entered in the budget for "significant" Community action requires the prior adoption of a basic act, i.e. a legal provision such as a regulation, a decision, etc., providing for the expenditure. Pilot schemes and certain kinds of information activities are deemed not to be "significant", so that they can be put into effect merely on the basis of the relevant line in the Community budget.

The Community budget is implemented by the European Commission, acting under its own responsibility, in accordance with the Financial Regulation and within the limits of the appropriations entered in the budget. But while the Commission's implementing responsibilities cover its own internal operations and Community policies, the other institutions (Parliament and the Council, etc.) implement the sections of the budget which concern them. This power to implement the budget cannot be delegated to external bodies, at least in relation to the tasks of the European civil service (e.g. public procurement). Implementing powers may be delegated within the European administration so that certain officials act as authorising officers, accounting officers and financial controllers. In practical terms, it is they who implement the budget. This internal delegation of powers is subject to strict conditions in order to avoid conflicts of interest or abuse of power.

Within the European administration the implementation of the Community budget rests on the existence of three different functions, which must be performed separately: authorising officer, accounting officer and financial controller.

The authorising officer administers the appropriations. He alone has the power to "commit" expenditure, i.e. to give the initial authorisation for expenditure. The authorising officer is liable to disciplinary action and may be held financially liable if he fails to comply with the Financial Regulation or neglects tasks relating to his function.

The accounting officer makes the payments. He is the only person empowered to handle monies and other assets and is also responsible for their safekeeping. The accounting officer is liable to disciplinary action and may be held financially liable for payments in which a procedural error is detected. Officials performing accounting functions receive a special allowance to compensate for their increased responsibility vis-à-vis "ordinary" officials.

The financial controller carries out monitoring and audit tasks. He checks the commitment and authorisation of all expenditure and ensures that revenue is properly collected. In short, he checks the legality of operations. To carry out this task, the financial controller has access to all the necessary documents and information. In his capacity as auditor, he is also regularly consulted on and evaluates changes to financial management systems. Commission staff exercising this function are governed by special rules guaranteeing their independence (for example, in certain cases they may bring actions before the Court of Justice). The financial controller is liable to disciplinary action and may be held financially liable if he grants his approval to expenditure in excess of the budget appropriations.

In a stricter sense, implementation of the Community budget consists mainly of expenditure, which, under budgetary law, is broken down into various stages: commitment, validation, authorisation and payment:

1 Commitment	Prior to any measure which may give rise to expenditure (in particular legal commitments vis-à-vis third parties), the authorising officer must draw up a proposal for a budgetary commitment on which the financial controller must grant his approval. The purpose of the financial controller's approval is to establish that the appropriations are available and that the expenditure is consistent with the relevant legislation and correctly charged to the budget. If some of these conditions are not met, the financial controller may refuse to grant his approval. The superior authority may overrule such a refusal, informing the Court of Auditors of its decision, but this hypothetical facility is rarely used in practice.
2 Validation	Validation is the act whereby the authorising officer checks the claim of the creditor (the recipient of expenditure), the amount of that claim and the conditions under which payment falls due. Validation is subject to presentation of supporting documents.
3 Authorisation	Authorisation is the act whereby the authorising officer instructs the accounting officer to pay an item of expenditure which he has validated. Payment orders are sent for prior approval to the financial controller, the purpose being to establish, among other things, that the payment order agrees with the commitment of expenditure and that the amount is correct. After approval, the order is forwarded to the accounting officer.
4 Payment	Payment is the final action whereby the institution is discharged of its obligations towards its creditors. It is carried out by the accounting officer.

Appropriations are classified under chapters and articles. Parliament and the Council may transfer appropriations from one chapter to another and from one article to another within their own section of the budget. The Commission may, within its section of the budget, transfer appropriations from one article to another within each chapter and from one chapter to another within each of the titles relating to staff and administrative expenditure. The Commission informs the budgetary authority of these transfers, giving a statement of the grounds.

The balance from each financial year is entered in the budget of the following financial year as revenue or expenditure, depending on whether it represents a surplus or a deficit.

During the financial year, the Commission sends Parliament, the Council and the Court of Auditors figures on the implementation of the budget in the form of:

• monthly reports on both revenue and expenditure, together with information on the use of appropriations carried over from previous financial years;
• a report every four months on revenue and expenditure, together with information on the use of appropriations carried over from previous financial years.

In the course of the year, following a given financial year, the Commission produces several documents describing its financial activities in that financial year. By no later than 1 May of the following year, it draws up a consolidated revenue and expenditure account comprising:

The revenue and expenditure account encompasses all revenue and expenditure operations relating to the past financial year for each institution. It is presented in the same form as the budget. At the same time, the Commission presents a consolidated balance sheet setting out the Communities' assets and liabilities, including borrowing and lending operations, and an analysis of financial management.

The institutions comply with existing European legislation regarding public procurement.

The Communities' movable and immovable property is recorded in an inventory, which is used in drawing up each institution's balance sheet.

The Community accounts are kept in euros, using the double entry method, on the basis of the calendar year. The accounts show all revenue and expenditure for the financial year and are supplemented by supporting documents.

The Court of Auditors monitors the implementation of the Community budget. The institutions send it all the supporting documents required for that purpose. The object of the Court's supervision is to ensure that revenue and expenditure is legal and consistent with the Treaties, the budget and Community legislation. The Court also ensures that sound financial management is practiced. The Court's comments are set out in its annual report. It may present special reports when it wishes to comment on specific matters. Special reports may also be drawn up at the request of an institution.

V. Special status of certain areas of the Community's financial activities

The very nature of certain operations or policies means that their financial management receives special treatment: