Location: AICPA Washington Office

(Reference: AICPA International Practices Task Force - December 2, 1997 meeting)

Based on current plans of the European Union, a common European currency (the "Euro") is to be established from January 1, 1999 for participating member countries meeting certain criteria. The Euro and participating Home country currencies are to co-exist during a three year transition period at irrevocably fixed exchange rates and Home country currencies are to cease to exist for participating member countries from January 1, 2002. It is anticipated that exchange rates will be fixed shortly after the participating countries are determined during 1998. The purpose of this paper is not to identify all the reporting issues that will arise as a result of the Euro but rather to focus on a relatively narrow issue relating to the presentation of historical comparative financial information for foreign registrants.

Foreign registrants based in a participating member country will have the option to use the Euro as its reporting currency for financial statement purposes in place of its home country beginning January 1, 1999. The Directorate General XV of the European Commission paper entitled "Accounting for the Euro" (the "Report") states that companies adopting the Euro as its reporting currency beginning in 1999 must present its historical comparative financial statements in Euros by restating previously reported home currency financial information using the fixed conversion rate. Reference is made to paragraphs 88 through 91 of the Report.

Rule 3-20(e) of Regulation S-X states in part: "... the issuer shall recast its financial statements a if the newly adopted currency had been used since at least the earliest period presented in the filing." The issue is will the SEC accept the recasting of historical financials using the fixed exchange rates? It should be noted that in so doing certain financial reporting trends will differ from those previously reported.

For example, using the DM as a surrogate for the Euro in earlier years, assume Company X an Italian registrant, sells its one product only in Italy and Germany. Company X's sales in Italy were flat and its export sales to Germany denominated in DM have also been flat in DM but represent a material portion of its sales for each of the three years ended December 31, 1999. Assume the Lira has appreciated against the DM during such period. (Also assume Italy is a participating country in adopting the Euro-certainly not a foregone conclusion.) As reported in Lira, Company X's sales have shown a decreasing trend as the constant DM denominated sales have translated into fewer Lira. However, if Company X recast its historical sales using the fixed exchange rate, reported sales in Euros would have been flat for the three year period.

Possible solutions for discussion:

1. Allow prior year financials to be restated using the fixed exchange rate and address changes in reported trends in MD&A.

2. Require foreign registrants participating in the Euro to continue to present its financials in the home currency until 2001 to ensure three year audited period comparability and avoid changes in reported trends. (5 year SFD would also need to be addressed.) Euro financials could also be presented beginning in statement for Company X would have four columns with 1997, 1998 and 1999 in Lira and a fourth column presenting 1999 also in Euros.