Are You EURO READY?

If you have operations in the euro zone or are doing business with euro countries, failure to become euro-compliant will cause problems throughout your operations.

The euro was adopted in 1999 by 12 out of 15 European nations to be the single currency of the European Monetary Union. On Jan. 1, 2002 -- when these nations start conducting all business transactions in euros -- legacy currencies such as the French franc and German mark will disappear completely. Concerns have emerged that as the date approaches, many North American companies will discover that they cannot comply with demands for doing business and paying taxes in euros. This could have a serious impact, even effectively shutting down their European operations.

FE asked Mike Parker, the chief operating officer of CODA Financials, to discuss what companies can still do to avoid interruptions and potential business losses.

Why should United States' companies be concerned about the euro?

Parker: The stakes for U.S. companies -- especially those with European operations -- are huge. Right now, the U.S. does about $1 trillion worth of trade annually with the countries of the European Monetary Union (E.M.U). That's twice as much as is traded with Canada, and three times as much as with Japan. Of the 15 countries in the E.M.U., 12 are adopting the euro; Denmark, Sweden and the United Kingdom are not. The euro will make it easier for U.S. companies to sell and source products and to raise capital in Europe, but only if they are fully prepared for dealing in euros, which most aren't.

Why are there problems now, three years after the adoption in 1999?

Parker: After the euro was adopted, countries faced the enormous logistics problem of eliminating all their coins and bills and replacing them with the new euro coins and bills. So, although the euro was legally adopted as their currency and they began using it for many business transactions, they held off using it for most retail transactions. To prepare for the full conversion in 2002, the euro countries plan to mint some 50 billion coins and print some 14 billion notes.

What's the worst-case scenario for a U.S. company doing business in Europe if it isn't "euro ready" by Jan. 1, 2002, and how likely is it?

Parker: The worst case is that the company won't he recognized as a going business, Companies with operations in the euro zone will have to do their bookkeeping in euros as it will be virtually impossible -- and illegal -- to do business in the old currencies. Also, in some countries firms that don't do their accounting in euros will be hit with stiff tax penalties. Non-complying companies could even be put out of business.

As for the worst-case scenario, it's surprisingly likely that smaller U.S. companies with operations in Europe could face major problems. Large multinational companies are mostly ready for dealing in euros, but the small and mid-size companies -- even those operating within the E.M.U. -- don't recognize that there's a problem. The level of complacency is frightening. A recent survey of such companies in the euro zone found that just 25 percent claim readiness to operate in euros while another 25 percent think they can wait until the very last minute to make changes. You can be sure that the percentages among U.S. companies are even worse,

Why is getting ready for the euro more of a challenge than getting ready to deal in any other foreign currency?

Parker: The European Commission has set up rather complicated rules with a lot of arcane details to cover conversions to the euro. One rule requires conversion rates to contain six significant figures; they can't simply be rounded off, and a lot of software isn't designed to carry six figures. Another problem is that all conversions have to be in euros; you will no longer be able to convert francs directly into deutschmarks. You'll have to convert the francs to euros first and then to deutschmarks. Similarly, if you want to go the other way, it will have to be from deutschmarks to euros to francs.

As a CFO, treasurer or controller. where could I expect problems?

Parker: If you have operations in the euro zone or are doing business with euro countries, failure to become euro-compliant will cause problems throughout your operations - in marketing, distribution, finance, supply chain, manufacturing, pricing, marketing analysis and so on. You'll wake up on Jan. 2 and discover that all of your bank balances and payments in the euro zone have been converted to euros. While different countries are offering grace periods in which their old bills and coins will still be accepted, most of these grace periods are for just a few months. You'll still be able to exchange them at banks for euros until July 2002, but they won't be good for commerce nor will they be legal tender.

Here are some other practical issues:

* Companies will need to be able to invoice customers in euros beginning Jan. 1, 2002.

* If you have an accounts-payable balance owing to a vendor in deutschmarks on Dec. 31, 2001, you'll have to convert it to euros and pay the vendor in euros when the account becomes due in 2002.

* If a customer owes you in deutschmarks on Dec. 31, 2001, you will be paid in euros in 2002.

* You will need to convert all your accounts payable and accounts receivable open items outstanding on Dec. 31, 2001 to euros. The conversion will have to be done correctly according to the rules for conversion, otherwise the cash amounts, when received, will not reconcile.

Is there any business advantage to dealing in euros?

Parker: For U.S. companies, the ability to deal in a single foreign currency (rather than in dozens of currencies) makes the euro a big advantage; some U.S. companies are already dealing in euros. A single currency makes it a lot easier to balance accounts, it leaves companies less exposed to exchange risks and it makes sourcing a lot easier, since everything can be compared in terms of euros. In some European countries, it's been very expensive for U.S. companies to raise capital locally for their operations. They got around the problem by raising money in dollars and changing it into the local currency. Now, they can raise whatever money they need, in euros.

What should companies do to be prepared for the euro?

Parker: First, determine whether or not their software is euro-compliant. If not, they should evaluate their risks and plan ahead. Small companies with modest European operations can probably still install new software to meet the deadline, but mid-sized or larger companies may struggle to be ready in time. They should quickly install new software and, at the same time, develop contingency plans for dealing with compliance problems.

This kind of conversion takes time. Typically, companies spend several months planning the conversion and then implementing it in stages. It's important to ensure that the financial software a company has or proposes to implement has been audited and accredited to comply with the relevant standards. The Business and Accounting Software Developers Association (www. basda.com) maintains a list of vendors whose software has been accredited. It's a relatively short list with some surprising omissions.

Mike Parker is the chief operating officer of CODA Financials