Many companies have yet to fully considered the impact of European Monetary Union on their organisations. Attitudes and readiness vary from country to country and, according to a recent survey, two-thirds of UK companies have yet to review their IT systems and plan the necessary changes required for dealing with EMU.
In Germany, the level of awareness and preparedness is far higher. Consultants CMG found that only 7 per cent of UK financial directors thought that EMU would have an impact on their IT systems, compared to 58 per cent in Germany.
Like the year 2000 date change problem, EMU will entail major IT projects ? and, more significantly, 2000 and EMU are likely to coincide. But, while the year 2000 issue is a prescriptive IT exercise, achieving monetary union is a complex business involving tricky legislation. It is clear what changes need to be made to software and computer systems to cater for the date change, but the rules and procedures of monetary union are currently open to a fair degree of interpretation.
The transition to a single currency will be a gradual three-and-a-half year process. As this time-frame is set out by the EU, companies will clearly not have the luxury of setting the pace of their own internal changeover, though this will inevitably accelerate once acceptance reaches a critical mass. The process is already underway: throughout 1997, the European Commission will be publishing details of the legal requirements of the rules of conversion which will lead to full monetary union.
The impact all this has on your business systems will depend on when your organisation has to convert. The two areas of influence driving this change will be legislation and market pressures. There are also a number of key accounting issues relevant to each phase of transition which will require the review of financial software, systems and processes.
1 January 1999 ? 1 January 2002
If a company decides to make the transition to the Euro during this period, it will need to run multiple currency systems so it can handle both the Euro and local currency for trading partners not yet converted ? this will be essential for such things as invoicing.
Indeed, it is not just a case of operating in two currencies. If you are a multinational subsidiary operating in several EU countries you?ll require three currency translations: to the local currency of the subsidiary, to the currency of the parent country and to Euros, if required by the parent company.
This facility is not solely required for general ledger. In fact, multi-currency support would need to extend across billing, accounts receivable and payable, and cash book, in order to provide full visibility of, for example, transactions and valuations of stock.
Moreover, companies may be obliged to commence operations or report in Euros for competitive, cost or legislative reasons. However, due to the complexities of national tax systems having to convert to the Euro, VAT sales taxes and general tax reporting may well remain in local currencies. This will be dictated by the timetables and rules for implementation of the individual countries. Consequently, certain reports will still need to be produced in local currency.
On top of all this, companies will have to process invoices sent to them by their suppliers in Euros. Similarly, purchase orders may need to be placed in Euros to handle suppliers that have also converted. Again, this means that multi-currency function is required even for companies dealing within a national boundary.
1 January ? 30 June 2002
During this phase, as Euro coinage is introduced, all companies will need to be able to handle two cash currencies. With two currencies being used by consumers, this will obviously have the greatest impact on retail organisations. But by the end of this phase, all companies will need to have made the transition to the Euro.
1 July 2002 and beyond
1 July 2002 is the last date by which companies in participating member states can convert to the Euro.
Although the timing of EMU is established by the European Union, the actual transition is likely to be market led. As one or two companies start this process, more and more will be drawn in by competitive pressures. This will become an issue of customer service. Your customers and suppliers may start operating in Euros sooner rather than later, so you need to carefully consider your response.
As discussed, multiple currency business systems will be required sometime during the phases of transition. When a company makes the transition, financial software will have to begin to use Euros as the new base currency.
Historic data will also need to be converted. This will include, for example, outstanding liabilities and values of assets, so sophisticated conversion software programs will be required.
Internal and external reports and documents ? for example, manuals and contracts ? will need to be reviewed to determine if changes are necessary. Also, software and hardware ? for example, printers and keyboards ? will need to cope with the new Euro currency symbol.
There is much discussion about the need for a ?dual-base currency? system to handle transition. A dual-base system records transactions in two base currencies ? for example, UK pounds sterling and US dollars. This allows reports and measurements to be made in either currency, and is useful when a business is operating in a country with a weak or variable exchange rate.
Many businesses may consider a dual-based currency system an advantage in managing the transition project. Furthermore, dual-currency systems would provide an easy way to revert back to local currency if monetary union failed.
Pricing issues are where customer service pressures will be most acute. When a company starts to show prices in Euros, its trading partners, and possibly its consumers, are likely to be affected.
During the transition phases, companies are likely to want to show and operate a dual-price system, and so will need to consider the level at which dual prices will be shown on invoices: whether this should be a summary or line by line; and whether two prices could be stored, or one calculated from the other. If so, how will price points (for example #9.99) be managed?
Such issues will lead to the creation and maintenance of multiple price lists. For instance: original price per unit; original price per item; promotional price per unit; and promotional price per item in local and Euro currency.
Handling the actual switch itself should be treated as a serious project, involving all the key business areas. Timings need to be planned so that different parts of the business ? payroll, pricing, invoices and tax reports ? are synchronised for conversion.
Consideration should also be given to the fact that there is now a worrying deficit in IT and project management expertise as a result of the year 2000 problem and major consultancies are already saturated with year 2000 and EMU projects.
In planning for the conversion, you should remember that the impact of monetary union will extend throughout the organisation, creating administrative problems for marketing, business, strategic and human resource departments.
You should also consider which of your supply chain trading partners are affected and their timescales for conversion.
If your company has multi-country European subsidiaries it will require financial business systems that can handle a range of different transition scenarios. In addition, contracts that refer to currency amounts will need to be reviewed and re-written in Euros.
Finally, it is important to confirm where responsibility lies for delivering required new function in your software. If using packaged software, are your suppliers, especially non-European ones, aware of Euro issues? If you have custom systems, you should identify and allocate skills and resources as required to re-write software.
Managing the change
The Association for Monetary Union (Amue) has developed an approach to project managing the transition to EMU which is worth reviewing. (Association for Monetary Union http://amue.lf.net//index.htm).
In outline, the Amue recommends companies establish a cross-functional steering committee to plan for and project-manage the impact of EMU. It proposes the committee starts collecting information; sets up a project team; identifies areas of impact on the business; defines a changeover strategy, including a calendar; and budgets and implements changes.
If you are operating in a participating country, multi-currency business software will be required sometime from 1 January 1999 to 31 July 2002. So, if your financial software does not support multiple currencies, it will have to be updated or replaced.
Your software should also be capable of producing reports with VAT, general tax returns and possibly other reports in local or Euro currency. And you will need conversion programs to update historical data.
EMU is bound to have an impact on your business. The nature and extent of that impact will depend on where you operate, who your trading partners are, and the geographical spread of your business.
1998 Establishment of ECB and ESCB
Final decision on participating states
1 Jan 1999 Irrevocable fixing of exchange rates
Start of Dual Currency phase
1 Jan 2002 Euro notes and coins circulate
1 July 2002 Withdrawal of local currency
Full Euro implementation
There are a number of likely situations in which your
business could find itself:
If your company is in a country likely to participate in EMU you have the following options:
Convert to Euro between 1 January 1999 and 2002.
l This is probable for many larger companies operating internationally.
l You will require multi-currency software (not just general ledger) conversion tools and new reports. Base currency in financial software will need to be reset to the Euro.
Wait until the ?last minute? and go for a ?big bang? approach.
l Most likely scenario for many companies who will ?wait and see?.
l You may still require multi-currency software to handle invoices and process purchase orders in Euros, as dictated by your trading partners. It is recommended that multi-currency extends to all areas of the software not just general ledger. (Base currency will need to be reset to Euro currency).
If, however, your company is in a country unlikely to participate in EMU (for example, the UK), or in a non-European country (US) and:
You have subsidiaries in an EMU participating country
l Your subsidiary?s systems and processes will be impacted according to one of the above scenarios.
If your business does not trade with EMU countries:
l Your systems may not be affected.
l How your organisation?s business software is affected will depend on when your organisation has to start using the Euro. You should determine when this is likely and how well your software will cope. For example, does your software multi-currency function need to extend beyond the general ledger?
l You should identify links with trading partners and other third-party organisations to understand their readiness for EMU and how this could affect your business.
l If you use ?custom? software you may need to take urgent action. If ?packaged? software, then the responsibility may lie with the supplier.
l If you?re one of the many companies in Europe using non-European software suppliers, find out how prepared for EMU your supplier is.
l Whatever happens to individual European countries in the immediate future, ?conversion to the Euro? is likely to be an ongoing problem for many years, as more countries decide to join the EMU.
Recommended systems checklist
l Does your software support multi-currency?
l Does your software supplier intend to provide you with conversion programs and appropriate facilities so reports can be produced in Euro or local currencies?
l Will your software supplier provide you with tools and general facilities to assist management and accounting functions with the transition to the Euro?
l Is your software also ready for the year 2000 date change?
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