Final run into the euro gets under way

When finance directors, chief accountants and IT managers come back from their couple of weeks in the sun - or the rain, as the case may be - they will hopefully return with their minds clear for the final run into the euro.

It will be only four short months from September, when business gets back to normal after the summer break, before the euro becomes the currency of the 11 participating states. It is then, regardless of whether or not their companies have decided to turn a major part of their business activities to the euro, that people in business will start to come across the euro in their everyday dealings.

By January 1st, they should have decided how they are going to treat invoices in euros, both domestic and foreign, and how they are going to make payments. There is nothing like the basic Community legislation texts to fall back on if there are any doubts. The Commission has helpfully gathered together the bulk of these texts in "Euro Papers Number 7", which is entitled a Compilation of Community Legislation and Related Documents.

It should be noted that the draft regulation on the introduction of the euro contained in the compilation has now been officially adopted and was published as council regulation 974/98 on May 3rd. Effectively, the regulation states that as from January 1st, 1999, the currency of participating member states will be the euro - the currency unit will be subdivided into 100 cents. During the transition period defined as January 1st, 1999, to December 31st, 2001, the euro will also be divided into the national currency units according to the conversion rates which will come into being on January 1st. Under article 8, the regulation states that acts (transactions) stipulating the national currency should be performed in the national currency and those stipulating the euro should be performed in the euro. However, these provisions are subject to anything which parties may have agreed.

In addition, they are subject to clause 3 of article 8. This states that any amount denominated in the euro or the national currency in a given member-state and payable in that member-state by crediting the account of the creditor can be paid either in the euro unit or the national currency unit. The amount is then credited to the account of the creditor in the denomination of the creditor's account.

Effectively, therefore, business has a range of options for carrying out transactions after January 1st. However, each company should decide in advance how it is going to treat transactions and lay down policy for the company so that employees who have to deal with these issues are informed and conversions are done on a consistent basis. A company should also reach agreements with its trading partners at the outset as to which currency unit should be used for invoicing and payment.

Although the bilateral rates to come into force on January 1st were announced on May 5th, the euro regulations do not permit the use of the implied cross rates such as the Irish pound against the French franc. The Commission is concerned that the use of cross rates and their inverses would not necessarily produce the same amount for every transaction.

It has, therefore, set down rules for the conversion and rounding of currency amounts within the euro block and their foundation is laid down in articles 4 and 5 of council regulation No 1103/97.

In particular, article 4(4) states that monetary amounts to be converted from one national currency into another shall first be converted into a monetary amount expressed in the euro unit, which amount may be rounded to not less than three decimals and shall then be converted into the other national currency unit. No alternative method of calculation may be used unless it produces the same results. This is known as triangulation. The British Business and Accounting Software Developers' Association (BASDA) has issued a self-certification pack to test whether software is triangulation compliant. This can be downloaded from its website www.basda.org

It can best be demonstrated by the following example. Convert 10,000 deutschmarks to Irish pounds. Euro £0.784321 and DM1.97123 (based on current ecu rates). Step 1: Convert DMs to euros: DM10,000/1.97123: €5072.97474. Step 2: Optionally, round to 3 decimal places: €5072.975. Step 3. Convert euros to Irish pounds: €5072.975 x 0.784321: £3978.84082. Step 4. Round to 2 decimal places: £3978.84.

In this example, the implied cross rates of £1 equals DM2.513295 would have yielded exactly the same result when rounded to two decimal places. The Commission does allow such alternative calculations provided the result always leads to the same result as the conversion via the euro.

In practice, many companies may find triangulation too cumbersome and on a commercial basis may agree between themselves to use a cross rate. They should be aware, however, that in the event of dispute, the legal risk stays with the person who has used the bilateral rate instead of the algorithm outlined above.

For many transactions companies would be advised to leave the conversions to their banks or escape the whole process by changing over completely to the euro. However, from January 1st they must have decided what to do.

David Croughan is chief economist at the Irish Business and Employers Confederation.