Financial Terminology

Contents

• Financial terminology
  Basic definitions with examples
  • What is a commitment, paid to supplier and paid on budget code?
  • What is a carry over?
  • What is a provision?
  • What is an annual commitment, an annual open commitment?
  • What is a pluri-annual commitment?
• Team accounting
• Earned Value Metrics
• Glossary

Understanding CET financial terminology

In this article we will try to explain several financial terms such as provisions, commitments and carry over. Keep in mind that all examples are simplified to familiarise you with the basic concepts of financial terminology at CERN

What is a commitment, paid to supplier and paid on budget code?

A commitment is an amount of money engaged to be paid. When you place an order to purchase goods for 3000 CHF, we say you have committed 3000 CHF.

Paid to Supplier is the amount of money paid to the third party (the money which is physically leaving CERN).

Paid on Budget code (Charged to Budget code) is the amount actually debited from your budget code.

These definitions are illustrated with an example below:

Case 1: Year 2005

We ordered a hardware for 3000 CHF Currently we have a commitment of 3000 CHF.

We must pay 20% (600 CHF) on the order and the remaining 80% (2400 CHF) on delivery.

In August, we received the first invoice of 20% and we have paid the supplier from our 2005 budget.

In November, we received the hardware and the second invoice of 80%; we have also paid the remaining 2400 CHF from our 2005 budget.

What is a carry over?

The carry over is the open commitment at the end of the previous financial year. E. g. if there is an order with an open commitment at the end of the year, the amount of this open commitment will become the carry over at the beginning of the next year.

Let's illustrate this with an example:

Case 2: Year 2005

We ordered a hardware for 3000 CHF, therefore currently we have a commitment of 3000 CHF.

We must pay 20% (600 CHF) on the order and the remaining 80% (2400 CHF) on the delivery.

In August, we received the first invoice of 20% and we have paid the supplier from our 2005 budget. In CET we will have the following:

The Annual Open Commitment shown in CET represents the amount we still have to pay. At the end of this year, we will carry over the equivalent of 2400 CHF as a "debt".

In January 2006, we received the hardware and the second invoice of 80%. We have paid the supplier 2400 CHF from our current budget.

The Annual Open Commitment shows a value of 0 CHF as the payment has been done and no other payment is due to the order of the hardware.

What is a provision?

A provision is some money put aside during the current financial year to cover the payments originally foreseen in that year but which actually occured in the following financial year. This money remains separate from the following financial year's budget.

This provision mechanism ensures that money still available on this year's budget is put aside to cover already foreseen invoices arriving the following calendar year.

Case 3: Year 2005

We ordered a hardware for 3000 CHF and currently we have a commitment of 3000 CHF.

We must pay 20% (600 CHF) on the order and the remaining 80% (2400 CHF) on the delivery.

During the year, the first invoice of 20% was paid to supplier. In November, the hardware was delivered to us but the second invoice of 80% has not yet been received. The financial situation is presented as follows in CET:

Here we can see that a payment of 2400 CHF still needs to be done.

On the last days of December the second invoice arrived but there was no way of dealing with it. So we still have to pay 2400 the following financial year. As we have some money left from this year's budget we will create provisions.

In CET the financial situation for 2005 will appear as shown below:

The amount of 1400 CHF provisioned appears in CET under the column 'Provisioned next year' (money put aside this year to be used for the invoice next year) and what is left to pay will appear as an Annual Open Commitment. So far, we can say that 600 + 1400 have been paid from the 2005 budget.

In the beginning of 2006, we paid the corresponding 2400 CHF to the supplier. This amount was paid partially from the provisions and from the current budget for 2006. Looking at CET, we can see under 'Provision Paid This Year' the corresponding amount of 1400 CHF and the remaining 1000 CHF taken from 2006 budget under 'Paid (Charged to Budget Code)'.

What is an annual commitment and an annual open commitment?

An annual commitment corresponds to a commitment from an annual perspective. The notion of the annual commitment is only taken into account when the time period is not covering more than one financial year.

The annual open commitment is the amount left to pay viewed from an annual perspective.

Case 4: Year 2005

We ordered a hardware for 3000 CHF and currently we have a commitment of 3000 CHF.

We must pay 20% (600 CHF) on the order and the remaining 80% (2400 CHF) on the delivery.

In November 2005, the first invoice of 20% was paid and I have the following financial situation:

The Annual Open Commitment of 2400 CHF corresponds to what is still left to be paid.

When we look at the financial situation for this case in January 2006, we will notice that we have an annual commitment and an annual open commitment of 2400 CHF. As we have not yet paid, the figures for the 'Paid on Budget' and 'Paid to Supplier' show 0 CHF.

In May 2006, we paid the second invoice corresponding to the amount of 2400 CHF (80%). To pay this invoice, we have taken money partly from our provisions and  partly from the 2006 budget.

We have paid the supplier 2400 CHF. This amount is the combination of 1400 from our provisions + 1000 from our 2006 budget. Our Annual Open Commitment will appear as 0 CHF.

What is a pluri-annual commitment?

A Pluri-annual commitment is a commitment seen from a pluri-annual perspective. Summarising these commitments across the pluri-annual view gives the original order amount.

Case 5: Year 2005

We ordered a hardware for 3000 CHF and currently we have a commitment of 3000 CHF.

We must pay 20% (600 CHF) on the order and the remaining 80% (2400 CHF) on the delivery. In December 2005, we paid 600 to the supplier.

Below, we can see the financial situation in 2006 in the 'Summaries' report. The time period used was: 01.01.2005 till 31.07.2006:

In the line for 2005 we can see the 600 CHF we have already paid and the pluri-annual commitment corresponds to the payment done.

The next line for 2006 shows the situation before the payment of the remaining 80% of the invoice, where we just see what we owe.

The third line for 2006 corresponds to the situation after the payment of 80% and as we have paid the whole sum, the pluri-annual open commitment shows 0 CHF.

Now we can add the three lines corresponding to the pluri-annual commitment and the result is 3000 CHF (our initial commitment).