Eyes on treasury - Ernst & Young · 2015-07-29 · Eyes on treasury2008 European treasury survey 5 Cash forecasts Cash management remains a main concern for European treasurers, not

Eyes on treasury2008 European treasury survey

2

Table of contentsAbout this survey 3

Executive summary 4

The companies 6

Regulation 8

Main financial risks 11

Cash forecasts 14

Tools 18

Tax risks 22

Moving forward 27

3Eyes on treasury 2008 European treasury survey

This is the second Ernst & YoungEuropean treasury survey ofcorporate treasurers across thecontinent. The objective is to provideinsight into the treasury and cashmanagement services of the largestEuropean companies and thedifficulties and challenges they arecurrently encountering. This issuecovers various topics such as:• Regulatory matters: Sarbanes-Oxley

(SOX) Act, IAS 39 and Basel II• Financial risks• Cash forecasts• Tools• Tax risks

Information was gathered throughindividual interviews with the treasurymanagers of 55 companies from ninedifferent countries across Europe(Belgium, Finland, France, Italy,Luxembourg, the Netherlands, Spain,Sweden and the UK). Interviews were led by Ernst & Youngtreasury professionals.

About this survey

Eyes on treasury 2008 European treasury survey

Executive summary

The ongoing uncertainty and turmoil inthe capital markets in the last monthsmake the key role played by corporatetreasurers in their aim to soften theeffects of volatility in their respectivecompany’s results essential. But this isnot the only challenge that thetreasury function is facing today. Otherchallenges include regulation, financialrisks, cash forecasts, tools and taxrisks. This report explores in detailthese and other issues arising in thisarea.

RegulationCorporate treasurers have had toembrace several changes in regulationover recent years: SOX Act, Basel II,IAS 39. When IFRS 7 was first adoptedit proved to be very difficult for manyEuropean companies. This newstandard requires companies toenhance the disclosures contained intheir financial statements regardingfinancial instruments. The surveyshows that most difficulties were foundin complying with all the disclosurerequirements, the significant amountof work needed for historical dataresearch and the liquidity andsensitivity analysis. Despite beingimplemented several years ago, IAS 39, a standard which establishesprinciples for recognizing andmeasuring financial instruments, is still a major challenge for most

companies questioned. A greatproportion found difficulties in thestrict rules, which limit the eligibility ofsome hedged items to be designated as part of a hedging relationship and in testing hedge effectiveness.

Main financial risksAs far as financial risks are concerned,foreign exchange and interest raterisks continue to be the main worriesfor European corporate treasurers. But there are other emerging risks,according to the survey, on whichtreasurers are focusing due to thesubprime crisis and the consequentslowdown of the world economy:liquidity and credit risk. It is also worthmentioning the market risk impact oncommodity prices, which has led to adoubling of the price of oil in less thanone year. The vast majority ofEuropean companies (three-quartersof respondents) measure their riskexposure at a central level, and complexmodels of risk valuation such as Valueat Risk (VaR) and sensitivity analysisare widespread. Nevertheless, morethan one-half report difficulties inmeasuring these risks and only two-fifths of the corporate treasurersreport to their Audit Committee,illustrating the long road ahead for riskmanagement in the future.

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Eyes on treasury 2008 European treasury survey 5

Cash forecastsCash management remains a mainconcern for European treasurers, notonly because of the subprime crisis,which has led to a reduction in liquidity,but also because of the need toallocate resources in an efficient way.The balance sheet approach is apopular route that both shareholdersand senior management tend to takewhen producing a cash forecast. Justas income statements show theaccounting profit for the year gone by,and balance sheets show the companyat a point in time, so cash flowstatements provide a link between thisyear and the next. Interest in publishedcash flow statements has created anextra focus on timely and accuratesubmission of forecasts. While it iswidely recognized that the likely resultof a cash flow statement varies greatlyover a year because of fluctuations inforeign exchange (FX), interest rates,commodity prices and general businessperformance, increasing emphasis hasbeen placed on the accurate andreliable production of cash forecasts –from the bottom up. Furthermore, the implementation of the Single EuroPayments Area (SEPA) will enablecompanies to improve the efficiency of international payments, throughpayment factories for example,although the survey shows that a greatproportion of European companies willadopt a ‘wait and see’ strategy.

ToolsThe survey also showed that certainareas of the treasury function (e.g.cash management) are highlystandardized, using complex systemsto optimize resources, whereas otherareas are not intensive in usingintegrated solutions. Nevertheless, the consolidation that the vendors’treasury systems market hasexperienced in recent years will lead tomore integrated solutions withincorporate treasuries. The results showthat many improvements can be madeto the IT environment of corporatetreasuries in terms of innovation andintegration by adopting sufficient toolsto make the treasury function moreefficient, automated and safer.

Tax risksIn terms of tax risks, thin capitalizationis becoming increasingly importantamong corporate treasurers’ concernsas changes in some rules are beingimplemented across Europe. TheEuropean companies surveyed alsoshowed concern about transfer pricingrules for intragroup transactions, cashpooling, derivative instruments and IAS 32/39 tax implications.

In contrast with the 2006 results, oursurvey shows the growing need forcorporate treasurers to carry out dailytreasury forecasts (half of thecompanies questioned versus

two-fifths two years ago) reflecting the threat of uncertainty and liquidityrisk arising in global capital markets inthe last few months. Furthermore, it isalso worth pointing out that all of thecompanies surveyed have implementedpolicies, controls and procedures withinthe treasury area, in contrast with thethree-quarters two years ago. Thisdemonstrates that treasurers areseeking to reduce fraud and theoperational risk embedded in treasuryactivities, though much still needs to bedone to better integrate the treasurywork flow.


The companies

Company turnover (in €)

66%

9% 2%

23%

Size of the treasury department

Between 1 and 5 persons

Between 6 and 15 persons

More than 15 persons

No answer

Business sector

Real estate, hospitality and construction

Technology, communication and entertainment

Energy, chemicals and pharmaceuticals

Consumer products

Services

Industrial products 25%

11%

21%

20%

17%

6%

49%

38%

13%

More than 50 billion

Between 10 billion and 50 billion

Less than 10 billion

The survey was conducted in 55 of thelargest European companies, includinglisted companies and foreign branchesof multinational organizations.

The companies that participated in our survey operate in a wide range of sectors,highlighting the presence of companies whose main activity is the manufacture ofindustrial products followed by services providers.

Most of the treasury departments of theorganizations surveyed are staffed bybetween one and five persons, while only one-tenth of the treasury areas is made up of more than 15 persons.

6


Treasury organization

A stand-alone cost centerThree-quarters of the 55 companiesquestioned for the survey have theirtreasury function centrally organized.In four-fifths of the companies, thetreasury department is a cost centerthat reports to the Chief FinancialOfficer. The treasury organizations areperceived as risk managers rather thanseeking results and performance.

The treasury functionThree-fifths of the groups surveyedhave a specific company for treasurytransactions and in one-quarter itcenters on the cash pool, mainly toachieve tax objectives. Our perceptionis that creating a specific entity fortreasury matters eases treasurymanagement objectives (e.g. cashoptimization, centralization, etc.).

Functional areasThe companies treat risk management,cash management and refinancing asfunctional areas within their treasurydepartments. Where there is notreasury company, the function ishoused in a separate department,which may be bank accountreconciliation, financial riskmanagement, guarantee management,accounting of treasury activities orenterprise risk management.

Adding valueMore than three-fifths of treasurersthink their department adds value totheir company, mostly through dailycash position management, cashmanagement, risk management andbank relationships.

More than half of treasurers believethat their company’s shareholders holdthe view that the treasury departmentadds value to the company — mainlythrough daily cash positionmanagement, cash management, riskmanagement and bank relationships.Meanwhile, treasuries are oftenperceived as risk areas since they dealwith concepts and investments that areusually not well understood by the restof the firm.

Measuring performanceThe companies usually measureperformance of their cashmanagement, corporate finance, riskmanagement and working capitalmanagement. However the link withfinancial statements is not systematicand may prove to be difficult.

Impact of the subprimecrisisThe credit crisis that has followed thecollapse in the market for subprimesecuritized assets has had an impact onleading European corporations. One-third of the companies haveexperienced difficulties recently withshort-term funding, mainly arising fromhigher interest rates. However, aquarter of the companies say they havenot experienced difficulties.

Enterprise risk management

Risk management

Guarantee management

Financial risk management

Bank account reconciliation

Accounting of treasury activities

Refinancing

Cash management

14%

54%

48%

40%

38%

8%

34%

41%

Which functional areas do you cover in your treasury department?(total>100, more than 1 response possible)


In an environment of heightened riskand volatility, setting up a robustcorporate governance framework is no longer an option, but a necessity.All the companies we questioned areextremely focused on the quality of their risk management, reportingand relevant communication, as well as fraud detection tools. However, the majority of companies believe thatthe benefits of corporate governance-related regulations do not outweigh thecost of investments made to achievecompliance.

Therefore, the SOX Act in the US andequivalent local legislation are nolonger burning issues, as the 2008survey shows. Yet even though two-thirds of companies questioned aresubject to these regulations, nearly allof them have written policies orprocedures with top-level approval for treasury activities. These concernnature and level of risk, roles andresponsibilities, approved financialinstruments and counterparty limits.

Much has changed in the past twoyears. Today, all of the companiessurveyed have implemented at leastone set of policies and/or controlprocedures, compared with just three-quarters in our 2006 survey. This shows that companies areembracing the necessity to frame riskmanagement principles and monitorthe high level of risk inherent in

treasury activities while implementingstandardized and repeatableprocesses. Increased pressure fromgroup audit committees arising fromtoday’s difficult financial marketenvironment may have fueled thatprocess.

However, our evidence shows that thelevel of analysis of documentation isquite variable, that most of the timethe documentation is not updatedregularly and that procedures do notcover all the risks.

It is clear that the treasuryenvironment will continue to evolve.

29%

18%

11%

15%

27%

Your organization

Your management and communication tools

The automation of your processes

No answer

Other

Regulation

88

In which area does SOX or equivalent legislation have a significant effect?

9Eyes on treasury 2008 European treasury survey 9

New regulations governing banks’capital requirements under the Basel IIframework have had a limited impacton corporate treasuries. Overall,almost three-quarters of surveyrespondents across all countries sawno impact from Basel II on theircompanies. This figure ties in with thefindings of our 2006 survey in whichonly one-quarter of companiesquestioned labeled Basel II as a "fear".Basel II regulations result in a closercorrelation between credit spreads and corporate ratings and, therefore,spread hierarchy between companies.Nevertheless, nearly all treasurersreported that Basel II has notsignificantly changed their relationship

with their banks, although theircapacity to present their situation maystill have an influence on their spreads.

But IAS 39, which sets out principlesfor recognizing and measuring financialassets, financial liabilities and somecontracts to buy or sell nonfinancialitems, is clearly having a significantimpact. The biggest challenge remainsthe application of hedge accounting.Among the companies questioned, thevast majority apply hedge accounting(two-thirds of them systematically andone-third selectively) for FX, interestrate and commodity exposures. Mostcompanies face difficulties because ofstrict rules governing the eligibility

of hedged items for hedgingaccounting treatment – particularly theIAS 39 constraint requiring hedging ofall components of risks. This rule isregarded as a significant penalty when hedging commodities.

Almost none of the companiesquestioned systematically hedges the FX risk linked to the quotation of derivatives on the London MetalExchange (LME) in US dollars. Overall, one-fifth of respondents encounterdifficulties arising from the test ofhedge effectiveness, essentially invaluing commodity derivatives andrelated underlying exposures.

64%7%

18%

11%

Test of hedge effectiveness

IAS 39 constraint requiring hedging of all components of risks

Forecasts

No answer

0 10 20 30 40 50

No answer

Centralization/decentralizationof your company's treasury

Your company's hedge horizon

The analysis of unrealized income generated

Your company's treasury procedures

Your company's management,accounting and reporting tools

The organization of your company'sfinancial statements closing process

Your company's risk management/hedging strategy 44%

44%

22%

38%

42%

29%

2%

11%

Regulatory pressure is not expected to decrease but treasurers seem tobe better at accomodating it. Current market turmoil could constitutes

a stress test of the robustness of newly implemented processes. This should facilitate budget allocation to improve them.

Has your company experienced difficulties with?

Did implementation of IAS 39 have an influence on?(total>100, more than 1 response possible)

For many European companies, themost significant 2007 regulatorychange lies in IFRS 7. The newstandard financial instrumentdisclosures are intended, firstly, toprovide information that will enhancethe understanding of the significanceof financial instruments to acompany's financial position,performance and cash flow; and,secondly, to assist in evaluating therisks associated with theseinstruments, including howcompanies manage those risks.

Do you still encounter difficulties when applying IFRS 7?

As they expect difficulties, three-quarters of survey respondents havelaunched a special project to bettermanage the first application of therules. We noticed that an agingbalance of receivables, liquidity andsensitivity analysis caused problemsfor companies. In most cases, a verysignificant amount of work wasrequired to search for historical data.The next step is the industrializationof the reporting process under IFRS 7.

49%

29%22%

Yes

No

No answer

47%

32%

21%

Yes

No

No answer

Did you adopt IFRS 7 early?

10 Eyes on treasury 2008 European treasury survey10

11

Following rapid and large shifts inexchange rates, which remainunstable, and amid uncertainty overinterest rates, which have changedsharply in some countries, FXtransactions and interest rates are themain financial risks capturing theattention of European corporatetreasurers. That focus derives partly

from hectic global financial markets.But the risks arising from FX andinterest rates are also well understoodby management and operationalparticipants because they play anintegral role in the business of thecompanies surveyed.

Main financial risks

Raw materials

Pollution rights

Equity prices

Energy

Commodities

Credit

Foreign exchange translation

Liquidity

Foreign exchange transactions

Interest rates

93%

93%

76%

67%

65%

40%

31%

22%

20%

9%

What are your main financial risks?(total>100, more than 1 response possible)


Local level

Central level 74%

62%

How confident can you be?

12

Nevertheless, corporate treasurers areadopting a more holistic view offinancial risks and not only focusing onFX transactions and interest ratemanagement. Indeed, with anothervolatile year in financial markets and aslowdown in the world economylooming, companies are looking moreclosely at liquidity, FX translation andcredit risk.

The subprime crisis did not triggerfunding concerns for companies inEurope, but monitoring of liquidity riskhas increased. Sellers and buyers ofcommodities are also clearly concernedabout rising prices.

Despite the centralization of financialrisk management, subsidiaries are stillwidely involved in the process of measuring risk exposure. Risks are

measured using forecast data as astarting point. Both this practice andmeasurement methods have evolved.In most cases, risk measurement isbased on notional values. Sensitivityanalysis and Value at Risk (VaR) arealso mentioned; they are now widelyused, not only by the larger companies.

At which level is your exposure measured?(total>100, more than 1 response possible)

Companies seek to identify, measureand manage risks. Yet one Frenchcorporate treasurer thus describes the real-life limits: “We are confident in our risk assessment but only up to thepoint where the human factor becomesmore significant. We rely upon ourlocal staff. We are never protectedagainst a lack of comprehension of the overall risk management process,an inaccuracy in one of the figureswe request or an incompleteunderstanding of the commercialagreements”.

The treasurer’s remarks emphasises a key point. Risk assessment is alsoabout sharing a common financialunderstanding, through a simple andefficient process where dedicated andintegrated tools are implemented andunderstood by everyone.

The adequacy of information flow and confidence in financial data remainan area where much work is neededwithin risk management activities.


These methods seem to be morecommonplace than at the time of our2006 survey. Complex valuationmodels are not solely used for tradingactivities. Measurement is reportedthrough standardized reports that are partially automated: manualcomputation of information is still anarea for improvement. Initiatives areunderway to make the reports morehomogenous. While there aredevelopments in automating theprocess and integrating systems, halfof the survey’s participants rely oncomputer applications developed in-house to report risk exposures.Vendors of treasury managementsystems who can develop softwarewith strong and flexible reportingcapabilities are likely to find a strongdemand.

While confidence in the measurementof risk is mostly restricted to FXtranslation, interest rates and financialcharges, more than half of theinterviewees are still having difficultymeasuring these risks. This seems toarise from:

• Inaccuracy in forecasts resultingfrom operational handling (handlingerrors, misinterpretation of centraltreasury requirements, lack ofcontrols on data provided)

• Uncertainty and volatility related toforecast realization (levels ofcertainty and uncertainty as towhether sales will be realized)

These two factors confirm theobservations from the last survey:improvements are still needed toachieve an adequate flow ofinformation within many companies.

Better coordination might be thepreferred solution, but only a fewcompanies have concrete plans tomake progress in this area.

What should be done? Shouldcompanies settle for a measurementreport that is still very time consumingto prepare and yet, according to oursurvey, is seen as inaccurate? Is thetreasury department regarded as apoor relation within the company?

Although a wide range of information isreported, there is no systematic focusin the treasurer’s report on the impactof financial risk on the financialstatements or the business of thecompany, even when treasury is asupport function. Corporate treasurersare left largely to their own devices.Two-thirds of respondents report tocorporate management on a monthlybasis; but 60% do not report to theirAudit Committee.

Does this suggest that improvementsought to be discussed outside thecorporate treasury area? Would theaudit committee, for instance, be a better choice? The majority ofrespondents report that riskmanagement results are usuallyreconciled with derivatives accountingresults (a process made easier withIFRS implementation) and that riskmanagement policies and processesare carefully checked by internalauditors. Do senior management andinvestors, for example, fully under-stand the nature and scale of risksbeing managed and the way these risksare being handled? Or is it thatfinancial risks are still seen as a matterfor experts?

No answer

Other

Monte Carlo simulations

Earning at Risk (EaR)

Asset liability management

Duration

Gap analysis

Value at Risk (VaR)

Sensitivity analysis

Notional values 55%

25%

25%

40%

38%

7%

15%

7%

5%

2%

How does your company measure risk?(total>100, more than 1 response possible)


‘Cash is still king’, and liquidity is a coreissue for treasurers, especially duringthe ongoing adoption of the SEPA.Overall, virtually all of the respondentsto our survey were involved with cashmanagement and the issue was listedas their leading concern, closelyfollowed by financial risk managementand organizational issues in anenvironment where the subprime crisishas had a significant impact for most ofthe companies questioned.

Two-thirds of companies say theyexperience difficulties accuratelyforecasting cash and hedgingrequirements. Issues surrounding thereliability of cash flow informationremain, implying that obtaining thebuy-in of other departments to thevalue and importance of accuratelyforecasting cash flow can be difficult.

Unsurprisingly, the overwhelmingmajority believe that shareholders seethe value in a well-managed treasuryfunction, with many (almost three-fifths) believing that seniormanagement is sufficiently engaged inthe process. However given the needto improve forecasting accuracy, it isperhaps more important that theallegiance of senior management isleveraged in pursuit of this goal.

More than two-thirds of respondentsare in favor of moving towards cost-center models for treasury, so perhapsit is surprising that more time andresources have not been allocated toimproving the accuracy of cashforecasts. Although controlling costs isa key concern, there are still manyopportunities for improvement andadding value without taking onexcessive risks or positions.

Initiatives to gain visibility of cashbalances can reveal hidden ‘trapped’cash, which can sometimes be easilyrepatriated, thus reducing fundingrequirements and cost-of-carry. Eventhough many treasurers are notdirectly involved in supply chainmanagement, their role here isgrowing. More and more are involvedin determining the appropriate levels ofworking capital employed and cash-route-to-treasury, as well as providingthought leadership on the right localfunding solutions and cash and FXforecasting requirements.

Some companies now use an out-sourced payment factory (a singlepayment processing center) to handleaccounts receivable (AR) andaccounts payable (AP); this seems tobe a growing trend.

Cash forecasts

14


During our interviews, it was clearthat the new SEPA regulations areanother lever to implement anddeploy payment factories, becausecommon payment leads tostreamlined processes. Byconsolidating all payment activity of both intragroup and externalpayments through a single center,further efficiencies and cost savingscan be found (new SEPA regulationsmay also help to capture cost savingsand deliver process efficiencybenefits). This should increasesupport for cash flow forecasting andcash management because the flowof funds can be seen clearly througha single center.

While the SEPA regulations aim toimprove the efficiency of cross-border payments and cut bankingcharges, only a small number (lessthan one-fifth) of treasurers expressinterest in SEPA. Most prefer toadopt a ‘wait and see’ attitude. Thismay be linked with the fact that mosttreasuries have received informationabout SEPA from banks with whichthey have relationships.

65%

9%

18%

4% 4%

Following them but nothing planned yet

Ongoing study

Not interesting

Interesting

No answer

31%

25%11%

7%

26%

Process improvement (for accounts receivable)

Lower banking charges

Payment factories

Other

No answer

What gains has your company identified relating to SEPA?

What does your company think aboutSEPA developments?

16 Eyes on treasury 2008 European treasury survey

As in 2006, almost three-quarters of companies produce forecasts at a local and central level, although it appears companies are now more inclined to do so in local currencies than they were two years ago. This may be a result of the use of payment factories, cash pooling and through both notional and zero-balancing accounts. Since the vast majority of treasuries are now centralized to some extent, it is expected that the benefits of cash pooling have been recognized. Both notional pooling and zero-balancing accounts are frequently used within the same business, because of national restrictions.

73%

18%

9%

Yes

No

No answer

16

Have you set up international cash pooling?

73%

15%

5%

7%

In home country

In other countries

In several countries

No answer

Where is the centralizing entitylocated?

It is surprising that almost half did not consider tax implications whencentralizing. It seems that a desire tokeep the function alongside the headoffice remains decisive for many, eventhough moving it might offer taxadvantages.

Other

Quarterly

On a rolling basis

Yearly

Monthly

Daily 49%

49%

36%

49%

38%

16%

Forecast time horizon(total>100, more than 1 response possible)

Looking ahead, improvements in cashmanagement are expected to comefrom automation of processes andreview and organization of the cashforecast responsibilities.

There has been a clear increase inshort-term cash forecasting using abottom-up approach. It appears thattreasury departments have found itworthwhile to produce these forecastsas they implemented improvementsplanned in 2006.


What is my cash position?

One of the most widely discussedinstitutions in 2007 was the UK’sNorthern Rock. The US subprimemortgage crisis, culminating in thecredit crunch starting in the summer of 2007, resulted in a plea for publicfunding by the over-extended bank.

Elsewhere, senior financial managersstarted to question the soundness oftheir credit policies after what hadbeen a counterparty rated A+ by FitchRatings became the subject of scrutiny.Anyone who was in the market at thetime found it hard to deal. Thoughthere were attractive rates on-screen,these had only the most desperate andlower-rated entities behind them. Yetthe profile of committed facilities hasincreased, and accurate and reliable

liquidity-management techniques haveallowed many larger companies tonavigate through difficult timesrelatively unscathed.

Collected results showed that higherrates hit some treasuries’ short-termfunding. Yet some others experiencedlittle difficulty, and a third groupindicated that planned businessactivities had to be reassessed ordelayed. There was also additionalpressure from board members, auditcommittees, business partners andinvestors, asking treasurersrudimentary questions such as “what isthe cash position?” and “how muchcapacity is there for the foreseeablefuture?”

Tools

A strategic shift is underway as turmoilin credit markets combines withcurrency volatility to make the treasurydepartment a highly visible andstrategic partner within companies.

Against this backdrop, it is unsurprisingthat treasury management systems(TMS) and treasury workstationsystems (TWS) are becomingincreasingly important within corporatetreasury departments as they seekmore embedded, comprehensive andintegrated solutions. But their quest forimproved information flow,standardization of information,straight-through processing (STP),centralization and automation, andintegrated solutions has yet to befulfilled.

In the last few years, vendors oftreasury systems have beenconsolidating rapidly. There have beenmany mergers and acquisitions, aswitnessed by deals involving Wall Street

Systems (WSS) and SunGard. London-based Trema has been mergedwith WSS after acquiring RichmondSoftware, while SunGard has acquiredthe Belgian player Trax.

Although these strategic moves maylead to better, more versatile products,our survey shows that treasurers arealready using leading class systems inmany areas. But for some functions,they are still working on non-fullyintegrated and STP solutions such asMicrosoft Excel spreadsheets, or theyfeel the need to set up leading practicebut niche solutions.

Our survey reveals that corporatetreasuries use systems mainly for cashmanagement (cash pooling, netting,payment factories) and less forfinancial risk management (back-officefunctions and electronic dealing). This is in line with the centralizationtrend.

Other

Straight-through processing

Netting: banking, internal

Payment factory

SWIFTNet

SEPA

Cash pooling : Zero Balance Account (ZBA),notional, internal

Financial risk management 29%

29%

18%

22%

24%

20%

5%

15%


In which business areas does your company have IT projects?(total>100, more than 1 response possible)

18


According to our survey, the systemsmost often used across Europe aresupplied by Reuters (KTP), CityFinancials, SAP, SunGard (AvantGard)and WSS.

For financial risk management, Excel isstill reported as the main tool.

FXall is the most used electronicdealing system, but it is unclear howwell this is connected into the rest ofthe treasury systems.

The main back office systems are fromMisys and Reuters (KTP). However,neither product is necessarilyconnected to front-office systems.

The systems for cash pooling, nettingand payment factories are primarilyprovided by banks, although sometreasuries use systems fromspecialized commercial vendors.

Despite the fact that about half of thetreasurers interviewed are satisfiedwith their current tools, manytreasurers say these tools and systemshave shortcomings. For instance, somesystems do not adequately supportpayment factories and or multi-currency portfolios.

Integration of treasury tools is alsomentioned as a significantshortcoming.

57%

18%

25%

Yes

No

No answer

Is your company satisfied with the toolsused today?

Eyes on treasury 2008 European treasury survey20

To address these weaknesses, severaltreasuries use additional systems orspreadsheets. Nevertheless, thesesolutions are mostly regarded as sub-optimal. Several companies areconsidering integrating multiplesystems into a single enterpriseresource planning (ERP) system, suchas SAP, because as most treasurersagree, STP has benefits in terms ofsecurity, automation and lower bankingcharges.

Other process flaws also remainunresolved. Only about a quarter of thetreasuries have ongoing internetprojects for e-invoicing or e-payment.This is remarkable because most

companies agree that these couldcontribute to increased productivity,further standardization and security ofcash flows and, subsequently, to costreductions.

Innovation seems slow. Only a smallnumber of treasurers have consideredSWIFTNet, which is intended to allowcompanies to access the SWIFTinternational banking payments systemonline. This is significant because itsuse could potentially reduce bankcharges for many.

Clearly, treasury management andworkstation systems have evolved, andtreasurers have identified furtheropportunities to become more efficientwithout changing existing systems.Emerging technology tools, such asApplication Service Provider (ASP)and software as a service (SaaS) canhelp them achieve this.

But there is also improvement potentialfrom adopting better technologysolutions (integration, automation)and processes (cash flow forecasting,liquidity planning, payments).

However, implementation of TMS isever more closely linked with overallinformation technology strategy.Treasurers have to think differently or engage with the IT department to define how best to handleimplementation of a TMS system or theevolution of what they already have(1).

(1) See Ernst & Young Treasury Package Overview 2007for a guide to treasury capabilities of European TMSvendors and a guide to selection and implementation.

34%

32%

21%

9%4%

Security

Automation

Lower banking charges

Other

No answer

What gains has your company identifiedin relation to IT tools?

20


To customize or not to customize? that is the question

Corporate treasurers know theimportance of having a single systemthat enables all the treasury functionsto be carried out. However, eachcorporate treasury faces differenttypes of risks, making integration witha package sold in the market anextremely difficult task. Taking this intoaccount and, despite the system notmeeting 100% of the business needs,

customization? How is this supported?

should a company considercustomization? Will it be too rigid toface new functionalities in today’scontinuously changing context?

These and other questions regardingthe IT environment of corporatetreasuries are explored in the Ernst & Young Treasury PackageOverview 2007.

58%

42%

Yes

No


Are financial transactions part of yourtax planning ?

Organization

Given the complexity of the tax issuesraised by financial transactions, theinvolvement of tax specialists able tohandle these issues in alignment withthe business and risk managementobjectives of the company has becomemore and more crucial.

One-third of respondents confirm thatthey usually work with external taxadvisors when dealing with financialtransactions, and an overall majority ofrespondents say that theysystematically refer to their in-housetax department when initiating newtypes of financial transactions.

The survey shows that more than one-quarter of companies ensure supportfor the treasury function through adedicated tax team and many have setup a specific process between the taxand accounting departments.

The survey also shows that financialtransactions are part of the taxplanning of a majority of respondents.

Tax risks

22


Thin-capitalization

Thin-capitalization has become a hottopic for companies as rules – whichaim to restrict the level ofindebtedness of a company bydisallowing the tax deductibility ofinterest expenses under certainconditions – are cropping up in mostEuropean countries.

Two-fifths of companies surveyed havealready been investigated by their localtax authorities with respect to theircompliance with thin-capitalizationrules. Three-fifths of respondentsrecognize that they suffer thin-capitalization limitations with respectto their intragroup financingtransactions, and wish to optimize theirfinancing methods in the light of theirthin-capitalization position. Half of therespondents have put in place specificprocesses to monitor changes in taxlegislation, where thin-capitalizationrules are affecting the countries wheretheir group is present. That is partlybecause thin-capitalization rules havegone through very significant changesover the past two years.

As far as lenders are concerned, one ofthe most remarkable developments isthat in some countries (Belgium,Czech Republic, Germany, Italy andLatvia), thin-capitalization rules nowapply to loans extended by non-relatedand/or banking parties.

As far as the rules are concerned, theevolution is marked by three elements,which deviate from the traditional debt-to-equity ratio. Firstly, thin-capitalization rules now also rely oncriteria such as earnings beforeinterest, taxation, depreciation andamortization (EBITDA)– as in Italy andGermany. Secondly, the legislation isnow based on cumulative requirementsto be met (e.g., debt-to-equity-ratio,EBITDA, asset-based limitation).Finally, in some countries (France,Germany and Italy), non-deductibilityis no longer permanent: non-deductibleinterest can be carried forward, withincertain limits and restrictions.

38%

62%

Yes

No

Has your compliance with thin-capitalization rules been investigated by tax authorities?

How deep is the tax departments’involvement?

87%

13%

Yes

No

Have you set up a specific methodology and documentationin respect of intragroup financing?

Transfer pricing

Transfer pricing rules require thatinterest rates applicable to intragroupfinancial transactions meet the arm’slength principle (that is, correspond toa market interest rate). Becausetransfer pricing rules for financingtransactions are under the intensescrutiny of tax authorities, the vastmajority of respondents have set up aspecific process and documentation forintragroup financing. However, itappears that only one-third of therespondents have been investigated bythe tax authorities.

Tax issues relating to cash pooling(e.g., thin-capitalization rules, transferpricing, withholding taxes) seem to beidentified and handled on the whole bytax departments.

Nevertheless, these tax issues stillrequire careful attention because theirsurrounding tax environment isparticularly unsettled and is shiftingever more rapidly towards a morerestrictive path.

On the other hand, tax issues relatingto interest rate and foreign exchangemovements affecting intragroupfinancing or the use of hedginginstruments are not necessarily wellknown by tax practitioners. Howeverthey can significantly impact the post-tax yield of commercial transactions,as well as plain ‘vanilla’ or tax-structured borrowings.



26%

74%

Yes

No

Is the location of the centralizing entity driven by tax considerations?

Cash pooling

Around three-quarters of respondentsindicated that the location of thecentralizing entity is not driven by taxconsiderations. This suggests tax is nolonger a key driver for creating valuefrom cash pooling solutions. However,treasury departments are keener tomonitor cash pooling solutions to avoidtax drawbacks: respondents rely ondomestic tax exemption (two-fifths),on tax treaty benefits (less than one-half) and European Union benefits(one-third) to manage tax leakagesfor withholding tax purposes. Morethan one-half of respondents say theydo not suffer thin-capitalizationlimitations in respect of cash pooling.

Derivative instruments

Respondents say tax treatment and filing duties related to hedginginstruments are handled both with the assistance of the accountingdepartment (two-fifths) and treasurydepartment (one-half) because oftheir complexity. It appears that thereis still room for improvement in thisarea, since most acknowledge thatthey do not feel comfortable withapplicable tax rules and tax filing dutiesrelated to derivative instruments used.

Complexity, and the apprehension it arouses, may explain why onlyone-tenth of respondents usederivative instruments in their taxplanning solutions.

11%

89%

Yes

No

Do you use derivative instrumentsin your tax planning solutions?


IAS 32/39

Two recent IFRS standards have beenespecially controversial and complex:IAS 32, dealing with disclosure andpresentation of financial instruments,and IAS 39, concerning theirrecognition and measurement.The survey confirms that theimplementation of IAS 32/39 has notstirred up tax management incompanies: most respondents do notexpect IAS 32/39 to have any impacton their current taxation or theircurrent financial tax solutions.

Nor have they considered usinginformation gathered in the course ofimplementation of IAS 32/39 tomonitor the tax treatment of derivativeinstruments or related tax filings. Onlydeferred taxation implications seem tobe a concern for companies and theseare monitored in collaboration with thetax department by a majority ofrespondents (nearly four-fifths).

80%

20%

Yes

No

Is the tax department involved in deferred taxation analysis?


Ernst & Young’s 2008 Europeantreasury survey provides an overviewof the trends influencing the treasuryfunction across Europe. Our resultsshow that the treasury functions of thecompanies that participated sharesimilar organization structuresregardless of their size or industry.Therefore, the identified trends can beconsidered within a broader contextand our conclusions may be applicableto other companies.

The introduction of numerousregulatory requirements in the pastfew years has shifted the treasuryfunction towards a more centralizedand strategic role within companies.After struggling to adapt theirinformation systems to accommodatethese new requirements, companiesshould now rationalize their systemsand related processes. However, thisrationalization is challenging becausethe treasury software vendors marketis increasingly concentrated with fewerproduct offerings.

Additionally, we consider that theeffect of the SEPA has beenunderestimated by surveyrespondents. As SEPA and Swiftnetemerge, they raise challenges to acompanies’ organization not onlyaround communication with bankinginstitutions but also for the paymentfactory cases.

As already highlighted in our 2006survey, the treasury department isincreasingly under the attention ofaudit committees, top managementand the financial market as it holds keyinformation around risk and liquiditymanagement. As this informationcomes from various departmentswithin the company there is a growingneed for solid and effectivecommunication between thesedepartments and the treasury function.This interaction is important so thatcompanies can anticipate theaccounting impacts of potentialdecisions.

The ongoing uncertainty and turmoil inthe capital markets has placed greaterfocus on liquidity management andoptimization. Interestingly, we notedthat Scandinavian and UK companies’treasury departments more oftencover the working capital optimizationrole. Is this a trend towards a moreholistic treasury function?

Moving forward

27

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any specific matter, reference should be made

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For more information about this survey,please contact:

Belgium:Jean-François [email protected]

Finland:Antti [email protected]

France:Olivier [email protected]

Italy:Luca [email protected]

Luxembourg:Pascal [email protected]

Netherlands:Nico [email protected]

Spain:Manuel Vaca de [email protected]

Sweden:Karin [email protected]

UK:Owen [email protected]

Documents

Eyes on treasury - Ernst & Young · 2015-07-29 · Eyes on treasury2008 European treasury survey 5 Cash forecasts Cash management remains a main concern for European treasurers, not