6 November 1998

Ways to make the most of euro trade

TRADING in euros may be the key to reduced currency risk, lower interest rates and the "euro overdraft", but it also presents a real challenge to the farm accounting system.

To make the most of euro-trading, the aim must be to avoid conversions to and fro, says Richard Crane of accountants Deloitte & Touche Agriculture.

"That means you need to be sure you have sufficient suppliers prepared to accept euro-cheques to use up any euro income from IACS payments or produce sales."

While most larger companies should be prepared to accept the euro, and the taxman has already confirmed he will take payments in euros after 2000, there are still some multinationals who have yet to finalise their positions.

"Look ahead at the potential effects to your cashflow," says Mr Crane. "While you may find you can match income and expenditure over the full farming year, you need to work through your euro and sterling cashflow timings carefully. Any period when you are euro rich and sterling poor could result in expensive conversions or borrowings, which might cancel out any benefit from trading in euros.

"If you are going to borrow in euros, you must also ensure that your cumulative expenditure will be matched by euro receipts."

For the foreseeable future, farmers will still have to deal in sterling as well as euros. That means accounting systems will have to deal with both currencies. This may be beyond the scope of some computer-based systems and farmers will have to operate a separate euro system.

"You will need to keep a new euro cash book, which will have to be reconciled against the bank statements in the usual way," says Mr Crane. "Each time you make a euro payment, you will have to convert it at the prevailing rate and enter the sterling equivalent on to your sterling system, with the transaction being put through a separate bank account code.

"To pay an invoice, you will issue a euro cheque. That payment is recorded in your euro account, which can be written up manually or on a spreadsheet. Each entry should be cross-referred to the entry in your sterling system. At the same time, you will enter a sterling equivalent into your main accounting system, via a separate bank code."

The closing balance in the euro account will need to be converted to sterling at the exchange rate applying at the end of the accounting year. Any difference between that and the balance for that account on your sterling system will be posted to your profit and loss account under the heading "difference on exchange".

Any gain or loss on exchange rate differences will normally be treated as part of taxable income. But when it arises from investments you have made in euros, it will be treated as a capital amount.

VAT also needs to be accounted for on euro transactions. All UK-based traders will have to issue a VAT invoice in sterling for any goods or services they sell.

"It may sound complex, but in practice it is quite simple provided, as with any accounting, you identify the systems needed to record transactions and maintain the system," says Mr Crane.

Richard Crane stresses the importance of balancing euro and sterling income flows.

August

Buy tractor for 40,000 euros

Borrow euros (at prevailing rate of 1eu=70p)

Sterling equivalent

(on to UK system) £28,000

March year-end

No euro receipts or interest charge

Balance still 40,000 euros overdrawn

£ has strengthened. Year end rate 1eu=60p

Year end balance £24,000

Exchange rate difference £4000

This gain is credited to the profit and loss account, while the value of the overdraft is shown at £24,000 in the balance sheet.