Ernst And Young Publishes Second European Treasury Survey

by Robin Pilgrim, LawAndTax-News.com, London

17 September 2008

Treasury managers from 55 companies across Europe cited financial risk, liquidity concerns and thin-capitalization as key challenges currently faced by treasury teams, according to Ernst & Young’s second European treasury survey, published on Monday.

Rapid and large shifts in exchange rates and uncertainty over interest rates were identified as prime financial risks by nearly all of the respondents. And, as the world economy continues to slow and companies face the prospect of continuing market volatility and rising commodity prices, treasury managers are looking more closely at risks relating to these issues.

Of those surveyed, three-quarters identified liquidity as a main financial risk, two-thirds cited foreign exchange translation and credit, and just under half cited commodities.

Olivier Drion, corporate treasury leader at Ernst & Young France, explained that:

“The recent turmoil in the capital markets has made the role of the treasurer more essential and increasingly visible. Half of the companies questioned now carry out daily treasury forecasts compared with two-fifths of respondents in our 2006 survey. This reflects the threat of uncertainty and liquidity risk arising in global capital markets.”

Despite being implemented several years ago, IAS 39 (an international accounting standard, which establishes principles for recognizing and measuring financial instruments) is still a major challenge to most companies, as they encounter difficulties arising from the test of hedge effectiveness.

Cash management remains a key concern for treasurers due to liquidity issues arising from the credit crisis, and also from the need to allocate resources effectively, the survey revealed. In addition, increased interest in published cash flow statements has upped the pressure for timely and accurate submission of forecasts.

The implementation of the Single Euro Payments Area (SEPA) will enable companies to improve the efficiency of international payments through payment factories. However, only one-fifth of the respondents expressed an interest in SEPA, with the majority preferring to adopt a ‘wait and see’ strategy.

In terms of tax risks, thin-capitalization is increasingly important to corporate treasurers, as changes, which aim at restricting the level of indebtedness of a company, are being implemented across Europe. Overall, two-fifths of those questioned stated that their companies had already been investigated by their local tax authorities with respect to their compliance with thin-capitalization rules.

Half of the respondents revealed that they have put in place specific processes to monitor changes in thin-capitalization rules affecting countries where their group is present. Other concerns included transfer pricing rules of intra-group transactions, cash pooling, derivative instruments and IAS 32/39 tax implications.

The survey also shows that the US Sarbanes-Oxley Act is no longer a critical issue. While only two-thirds of companies questioned are subject to these regulations, nearly all have written policies or procedures relating to risk, roles and responsibilities, approved financial instruments and counterparty limits.

In addition, new regulations governing banks’ capital requirements under the Basel II framework have had a limited impact on corporates, with almost three-quarters of respondents seeing no impact on their companies.

Three-quarters of the respondents measured risk exposure at a central level, and complex models of risk valuation such as value at risk and sensitivity analysis are widespread. Nevertheless, more than half of those surveyed encountered difficulties in measuring these risks, and only two-fifths reported to their audit committee, illustrating some of the risk management challenges ahead.

However, all of the companies surveyed have implemented policies, controls and procedures within the treasury area, in contrast with the three-quarters of companies two years ago.

“Increased focus on policy implementation show that treasurers have sought to reduce fraud and the operational risk embedded in treasury activities. This development may have been fuelled by difficult economic conditions and increased focus on the role of the treasury function in mitigating risk,” Drion concluded.

Recommended