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Euro Implications

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1998 version, Last updated 2000-11-06  minor corrections

These are brief notes intended to guide our clients and stimulate thinking. They are not the definitive word on the topic, as that is up to each business to decide for itself. They do not cover issues such as political and economic impact, trading opportunities for importers and exporters, competitive advantage in customer information, staff training, legal and contract issues, customer education, public relations, security, or forgery problems.

Background

For:

Foreign exchange exposure will be eliminated for trading with countries in EMU. There will be a small benefit to travellers saving currency exchange. There will be increased price transparency across Europe that will benefit purchasers. New opportunities will emerge for strategic alliances.  

Against:

Consumers are not aware of any benefits of EMU. Initial promises of low interest rates are fading. Retailers will be subject to suspicions that they are using the transition to the Euro as an excuse to raise prices. European price transparency will make competition more difficult. Strangely, I can buy a Spanish software package only by mail order in USD from the USA than directly from the Spanish producers.

Important dates:

May 1998 Decision on participating states.
01-Jan-1999 Conversion rate set "irrevocably"
01-Jan-2002 Euro notes & coins introduced
09-Feb-2002 National currency notes & coins cease to be legal tender in Ireland, 28-Feb for some other European countries.

 

Accounting Systems Affected

Order Processing
Pricing (Ticketing) and cataloguing
Invoicing (Billing)
Debtors (Accounts Receivable)
Creditors (Accounts Payable)
Nominal ledger (General ledger)
Stock (Inventory)
Payroll
Manufacturing
Costing

EDI versions of the above.

Change over issues

VAT & Tax reports will probably be expected for a while in 1999/2000 in local currency, but the Revenue authorities have always had a pragmatic approach on this and will take money in any form.

Dual currency

When the currencies of the "inner" (participating) states are fixed in EMU , the only currency is the euro, and the national symbols simply expressions or denominations of the euro. Thus saying that the Irish Pound is (for example) about 1.27 euro is only like saying that a foot is 30.5 centimetres.

When the Euro becomes the base currency, all single-currency accounting packages will have to convert to that. Multi-currency packages may be storing data in a home currency but handle all conversions automatically; they may still need to be converted for convenience in ongoing links to external systems. Conversion applies to historical data too. This can be minimised by changing at the year end. This is facilitated by the "no compulsion, no prohibition" mode of introducing the Euro over three years. Competitive pressures will drive companies to provide price lists, quotations, invoices and statements in the customer's preferred denomination as soon as they want it. Internal transactions and balances may be held in a single currency until the year end.

Mixed currency documents

This raises interesting transition cases. At one stage a company may be operating in IEP (Punts), and have some customers and suppliers requesting documentation expressed as Euros. When they change to receiving and paying in Euros, they will have outstanding orders and invoices in IEP and new transactions in Euros while still receiving both IEP and Euro payments. The question is how to design statements and other accounting reports to minimise confusion. Unlike other countries such as Italy, the size of the Euro at £0.787564 is close enough to the IEP for confusion, and currency denomination will have to be very clearly marked. Where there is no Euro currency symbol on their keyboard or printer character set, businesses will simply use "E" until the technology catches up, much as they used "L" for pounds.  The ISO symbol is "EUR", Irish Punts are "IEP".

Conversion software

Such conversion will spark a rush of conversion software to the market. UK package suppliers may be slow to provide converters on the grounds that the UK is not joining the first phase of EMU. This will open up opportunities for Irish software developers, who sell and support such packages, to provide converters and market them to the UK. In the extreme case, such conversions should provide for reversion should a country withdraw from EMU; but the euro will continue in some form.

Rounding

In the transition period, companies may simply use converters not to change the underlying data, but simply to re-present it in either Euro or IEP denominations depending on the preferred account of the recipient. A regulation endorsed by ECOFIN on 12 December 1996 based on Article 235 of the Treaty gives specific guidance on how to perform the conversion. This requires the application of a six-digit conversion factor e.g. 0.787564. Unlike normal multi-currency conversions, there will be no exchange rate variances to consider, the rate is irreversibly fixed. If that turns out to be politically unsustainable, the conversion will have to be applied again. Rounding will apply to both the detail lines and the total, with the result that the total of the rounded figures will not be exactly the same as the rounded total. This discrepancy will probably be disclaimed in a note at the bottom of the document. Automated systems that depend on an exact match for document acceptance (such as invoice versus order checking) will have to be allowed a few cents variation.

Software changes

All such software changes assume the original source code is still available, in a correctly managed form, to the authors or maintainers to update. If they have tailored different versions of the software and not maintained proper change control, they may find it impossible to revise all the versions in use. Businesses will need to ensure their suppliers can manage this change, and this is of great importance to Electronic Data Interchange (EDI) systems which are less visible to humans . Businesses will need to agree date interpretations with their suppliers.

Cash Handling

Price changes will be very significant. It will require hardware changes for cash handling equipment such as vending and change machines, cash register tills, and price display equipment.

Customers may wish to pay in Euros using credit cards or cheques before the Euro notes come in. Retailers wanted the Euro notes & coins introduced out of peak shopping season, but this has been rejected. For a period before and after this date, dual pricing will be demanded by customers. Small retailers will just have to rely on conversion tables and some sample posters. Those with automated supermarket pricing systems will certainly introduce dual price displays. Their wish is to have this overhead for as short a period as possible - say six weeks before and after. They would like the dual cash handling after the introduction to be even shorter. Depending on the logistics and security implications of the biggest movement of cash ever around the country, this may take four to eight weeks.

Unit Pricing

The Unit Pricing directive could in theory result in up to eight prices being displayed : normal and promotional price, in two denominations, and a unit price per Kg for each. Those shops still displaying price per pound for older customers who refuse to accept prices in £ per Kg will have to provide special education in conjunction with community organisations, or provide yet another unit price - perhaps on only a few products such as fresh meat and vegetables. A compromise might be as follows. "Base currency" refers to local currency (Punt or IEP) before conversion and Euros after it.
- Old price in base currency - this only applies to promotional items.
- Current (promotional) price in base currency - what they actually pay.
- Current price in the other currency to assist transition comparison.
- Unit new price per Kg in base currency

Pricing and rounding

When the conversion influences psychological pricing, such as 99p becoming E1.26, that will have to stand until the new "Euro pack" comes in. You then have the choice of making it smaller for 99c, or larger for E1.99. Either will give the impression of either short-changing or price increases. The latter particularly applies to goods bought less frequently, so a two weeks supply in the new larger size becomes a three weeks supply. The less frequently an item is bought, the less sensitive the price. The appearance of new price points will also need to be managed - e.g. an unremarkable £0.79 may become E1.00. The marketing fingers will itch to move that to 99c, but if the margin is low, that may not be possible. Rounding will also cause losses or gains in margins on high-volume low-price items. A 50p item becoming 63c will lose .49c which is a 15% loss of profit on a retail margin of 5%.

Psychological pricing ( .99 price points)

For those of us with heavy currencies such as Irish Pound or Sterling, the .99 price may not theoretically be possible  to convert from pound prices under current legislation. Article 5 of 12143/1/96 in the first regulation endorsed by the ECOFIN council on 12 Dec 1996 states that "amounts.. shall be rounded up or down to the nearest cent". The "or" here refers to the nearest cent, not to any choice on the part of the converter. So a figure of 99.6c MUST become E1.00. So if a retailer wants a price of 99c, they cannot round the converted amount, they must change their national currency price. But for a heavy currency like the IEP , 1 penny off means E 1.3c off. That makes the converted amount 98.3c, forcing them to round DOWN to 98c. The achievement of 99c is a mathematical impossibility. So what does a retailer do?

A) Ignore the directive and round down anyway, on the grounds that nobody can complain about price reductions? Except those who followed the rules and rounded up and are now being made to look uncompetitive.
B) Re-introduce the old half-penny (no longer legal tender) as a pricing mechanism? Not likely.
C) Call for national legislation to permit the display of rounded-down prices provided they are signalled in some way by using a symbol like "~" or "*" after them?

 
 

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Last updated January 03, 2005