Euro – Exchange-rate confusion

A lack of a definitive treatment for converting historical accounts in data is worrying investors, an analyst warned in Brussels last week.

‘At the moment, there is no consensus on which exchange rate to use,’ said Patrick Vermeulen, a research analyst with City-based Schroder’s Investment Management, at the FEE conference last Thursday. ‘When you rewrite your financial history, the rates may not be comparable’.

The European Commission issued guidance that when accountants convert historical financial data to the euro, they should apply the exchange rates that will be fixed for the euro on 1 January, said FEE vice-president Goran Tidstrom, a Deloitte & Touche partner from Sweden.

‘I’m concerned about the appearance of differing views on how to present historical data,’ said Tidstrom. ‘The commission went for a short cut. When people realise it does not reflect the development of a specific company (because of changing historical exchange rates), there will be a lot of stress on that recommendation.’

Vermeulen explained companies would enjoy the lower cost of capital within an expanded euro equity market, but the transition period will be tricky. Although prices for bonds, shares and options will be quoted in euros from 1 January 1999, most companies in what Vermeulen called ‘euro land’ will continue to prepare accounts and annual reports in their national currencies. This would create discrepancies with share prices, warned Vermeulen.

‘If companies report in euros, then we would have to base our forecasts in euros,’ said Vermeulen.

He added that the euro would also increase demand for international accounting standards, which would save investment managers enormous amounts of time in trying to get comparable figures.

Vermeulen also suggested the euro equity market would encourage financial reporting websites, accounts on CD-ROM and video-conferencing. ‘In the UK, all the institutional investors are within one mile. But in a European market, investors are all over the place – how can you as a manager cope with that? The answer is in electronics,’ he said.

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