Principles underlying the paper
The introduction of the euro will change the currency in which many financial statements are prepared. It will also have practical consequences for many firms. Increasingly Commission services have been asked to clarify how these changes should be reflected properly in financial statements.
Commission services have studied how the existing framework of European accounting legislation could be used to account for the introduction of the euro in consultation with the Contact Committee on the Accounting Directives. To facilitate a smooth and orderly changeover to the use of the euro and to help national accounting authorities, firms and advisers across Europe the Commission services are publishing the results of their reflections. This paper is the result of a round of consultations, notably between Commission services, the Contact Committee on the Accounting Directives, and the Fédération des Experts Comptables Européens. They in turn consulted their respective constituencies. This paper reflects the broad agreement of the Contact Committee on the Accounting Directives on accounting issues arising from the introduction of the euro.
The key conclusions reached are threefold:
The Contact Committee on the Accounting Directives is a body that was set up, under the auspices of the Commission, under the Fourth (78/660/EEC) and Seventh (83/349/EEC) company law Directives. Its function is to facilitate harmonised application of the Accounting Directives through regular meetings dealing in particular with practical problems arising in connection with the application of these Directives. Furthermore, the Contact Committee advises the Commission, if necessary, on additions or amendments to the Accounting Directives. The Contact Committee is composed of representatives of the Member States and representatives of the Commission.
An introductory section provides the relevant background. It sets out the various phases for the introduction of the euro (paragraphs 13–14) and then describes the legal framework for the introduction of the euro, highlighting the elements of proposed Community legislation which are most relevant to accounting (paragraphs 15–23).
A large part of accounting for the euro is concerned with foreign exchange translation. Paragraphs 24 to 28 describe the context of existing EC rules for foreign currency translation. The issue is complex because different methods for foreign currency translation exist, the use of which varies between the Member States. This section also highlights the relevant articles in EC legislation and describes how in practice accounting principles are currently applied to foreign currency translations (paragraphs 31–43).
The paper then suggests how these principles might be used to account for the introduction of the euro (Section III). There are two key points to note:
First, in establishing annual accounts for financial periods ending on 31 December 1998, the fixed conversion rate should be used as the closing rate. Paragraphs 48 to 50 explain why; and
Second, in many cases the introduction of the euro will have an effect on the profit and loss statement. This is clearly an issue of importance to firms and their advisers, as well as to national authorities. In determining exactly how the profit and loss statement will be affected, the nature of the event is predominant (paragraph 68).
The paper discusses certain special cases, for example adherence to a strict interpretation of the historic cost convention (paragraphs 70–71), foreign exchange contracts (paragraphs 72–73) and different methods of consolidation (paragraphs 74–81).
When accounting for costs associated with the introduction of the euro, the underlying assumption is that most costs incurred are comparable to regular costs faced by companies (paragraphs 82–87). This means that most cannot be classified as extraordinary income or charges. Some, however, can be capitalised. The paper looks in particular at whether provisions can be made for costs. It sets out the relevant articles of the Accounting Directives and other papers. Paragraphs 88 to 91 discuss how to present comparative figures for previous financial years in euro. It suggests using the irrevocably fixed conversion rate. Those that use and interpret the accounts will have to bear in mind any historic exchange rate fluctuations when comparing financial statements that were originally measured in different currencies. The paper also discuss how companies with financial years which do not coincide with the calendar year (paragraph 92) should present their accounts. In some cases, the introduction of the euro will qualify as an important post-balance sheet event requiring proper disclosure (paragraph 93). Section IV of the paper clarifies that national regulators may wish to give additional guidance and amend existing rules, but that they must work within the existing framework of Accounting Directives (paragraphs 95–96). It suggests some principles to help a smooth transition (paragraphs 97–100). Finally it identifies a particular area where some adjustment of Accounting Directives will be necessary, namely the thresholds for small and medium-sized enterprises.