Eyes on treasury

2008 European treasury survey

Table of contents
About 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

2
About this survey
This is the second Ernst & Young Information was gathered through
European treasury survey of individual interviews with the treasury
corporate treasurers across the managers of 55 companies from nine
continent. The objective is to provide different countries across Europe
insight into the treasury and cash (Belgium, Finland, France, Italy,
management services of the largest Luxembourg, the Netherlands, Spain,
European companies and the Sweden and the UK).
difficulties and challenges they are Interviews were led by Ernst & Young
currently encountering. This issue treasury professionals.
covers various topics such as:
• Regulatory matters: Sarbanes-Oxley
(SOX) Act, IAS 39 and Basel II
• Financial risks
• Cash forecasts
• Tools
• Tax risks

Eyes on treasury 2008 European treasury survey 3

 Executive summary
The ongoing uncertainty and turmoil in
the capital markets in the last months
make the key role played by corporate
treasurers in their aim to soften the
effects of volatility in their respective
company’s results essential. But this is
not the only challenge that the
treasury function is facing today. Other
challenges include regulation, financial
risks, cash forecasts, tools and tax
risks. This report explores in detail
these and other issues arising in this
area.
Regulation
Corporate treasurers have had to
embrace several changes in regulation
over recent years: SOX Act, Basel II,
IAS 39. When IFRS 7 was first adopted
it proved to be very difficult for many
European companies. This new
standard requires companies to
enhance the disclosures contained in
their financial statements regarding
financial instruments. The survey
shows that most difficulties were found
in complying with all the disclosure
requirements, the significant amount
of work needed for historical data
research and the liquidity and
sensitivity analysis. Despite being
implemented several years ago,
IAS 39, a standard which establishes
principles for recognizing and
measuring financial instruments,
is still a major challenge for most
4 Eyes on treasury 2008 European treasury survey
companies questioned. A great
proportion found difficulties in the
strict rules, which limit the eligibility of
some hedged items to be designated
as part of a hedging relationship and
in testing hedge effectiveness.
Main financial risks
As far as financial risks are concerned,
foreign exchange and interest rate
risks continue to be the main worries
for European corporate treasurers.
But there are other emerging risks,
according to the survey, on which
treasurers are focusing due to the
subprime crisis and the consequent
slowdown of the world economy:
liquidity and credit risk. It is also worth
mentioning the market risk impact on
commodity prices, which has led to a
doubling of the price of oil in less than
one year. The vast majority of
European companies (three-quarters
of respondents) measure their risk
exposure at a central level, and complex
models of risk valuation such as Value
at Risk (VaR) and sensitivity analysis
are widespread. Nevertheless, more
than one-half report difficulties in
measuring these risks and only two-
fifths of the corporate treasurers
report to their Audit Committee,
illustrating the long road ahead for risk
management in the future.
Cash forecasts
Cash management remains a main
concern for European treasurers, not
only because of the subprime crisis,
which has led to a reduction in liquidity,
but also because of the need to
allocate resources in an efficient way.
The balance sheet approach is a
popular route that both shareholders
and senior management tend to take
when producing a cash forecast. Just
as income statements show the
accounting profit for the year gone by,
and balance sheets show the company
at a point in time, so cash flow
statements provide a link between this
year and the next. Interest in published
cash flow statements has created an
extra focus on timely and accurate
submission of forecasts. While it is
widely recognized that the likely result
of a cash flow statement varies greatly
over a year because of fluctuations in
foreign exchange (FX), interest rates,
commodity prices and general business
performance, increasing emphasis has
been placed on the accurate and
reliable production of cash forecasts –
from the bottom up. Furthermore,
the implementation of the Single Euro
Payments Area (SEPA) will enable
companies to improve the efficiency
of international payments, through
payment factories for example,
although the survey shows that a great
proportion of European companies will
adopt a ‘wait and see’ strategy.
Tools two-fifths two years ago) reflecting
the threat of uncertainty and liquidity
The survey also showed that certain
risk arising in global capital markets in
areas of the treasury function (e.g.
the last few months. Furthermore, it is
cash management) are highly
also worth pointing out that all of the
standardized, using complex systems
companies surveyed have implemented
to optimize resources, whereas other
policies, controls and procedures within
areas are not intensive in using
the treasury area, in contrast with the
integrated solutions. Nevertheless,
three-quarters two years ago. This
the consolidation that the vendors’
demonstrates that treasurers are
treasury systems market has
seeking to reduce fraud and the
experienced in recent years will lead to
operational risk embedded in treasury
more integrated solutions within
activities, though much still needs to be
corporate treasuries. The results show
done to better integrate the treasury
that many improvements can be made
work flow.
to the IT environment of corporate
treasuries in terms of innovation and
integration by adopting sufficient tools
to make the treasury function more
efficient, automated and safer.
Tax risks
In terms of tax risks, thin capitalization
is becoming increasingly important
among corporate treasurers’ concerns
as changes in some rules are being
implemented across Europe. The
European companies surveyed also
showed concern about transfer pricing
rules for intragroup transactions, cash
pooling, derivative instruments and
IAS 32/39 tax implications.
In contrast with the 2006 results, our
survey shows the growing need for
corporate treasurers to carry out daily
treasury forecasts (half of the
companies questioned versus
Eyes on treasury 2008 European treasury survey 5
 The companies
The survey was conducted in 55 of the
largest European companies, including
listed companies and foreign branches
of multinational organizations.
Most of the treasury departments of the
organizations surveyed are staffed by
between one and five persons,
while only one-tenth of the treasury
areas is made up of more than
15 persons.

Company turnover (in €) Size of the treasury department

2%
13% 9%

23%
49%

38%
66%

Less than 10 billion Between 1 and 5 persons

Between 10 billion and 50 billion Between 6 and 15 persons

More than 50 billion
More than 15 persons

No answer

Business sector
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 of
industrial products followed by services providers.

Industrial products 25%

Services 21%

Consumer products 20%

Energy, chemicals and pharmaceuticals 17%

Technology, communication and entertainment 11%

Real estate, hospitality and construction 6%

6 Eyes on treasury 2008 European treasury survey

Treasury organization
A stand-alone cost center
Three-quarters of the 55 companies
questioned for the survey have their
treasury function centrally organized.
In four-fifths of the companies, the
treasury department is a cost center
that reports to the Chief Financial
Officer. The treasury organizations are
perceived as risk managers rather than
seeking results and performance.
The treasury function
Three-fifths of the groups surveyed
have a specific company for treasury
transactions and in one-quarter it
centers on the cash pool, mainly to
achieve tax objectives. Our perception
is that creating a specific entity for
treasury matters eases treasury
management objectives (e.g. cash
optimization, centralization, etc.).
Functional areas
The companies treat risk management,
cash management and refinancing as
functional areas within their treasury
departments. Where there is no
treasury company, the function is
housed in a separate department,
which may be bank account
reconciliation, financial risk
management, guarantee management,
accounting of treasury activities or
enterprise risk management.
Adding value
More than three-fifths of treasurers
think their department adds value to
their company, mostly through daily
cash position management, cash
management, risk management and
bank relationships.
More than half of treasurers believe
that their company’s shareholders hold
the view that the treasury department
adds value to the company — mainly
through daily cash position
management, cash management, risk
management and bank relationships.
Meanwhile, treasuries are often
perceived as risk areas since they deal
with concepts and investments that are
usually not well understood by the rest
of the firm.
Which functional areas do you cover in your treasury department?
(total>100, more than 1 response possible)
Cash management
Refinancing
Accounting of treasury activities
Bank account reconciliation
Financial risk management
Guarantee management
Risk management
Enterprise risk management 8%
Eyes on treasury 2008 European treasury survey
Measuring performance
The companies usually measure
performance of their cash
management, corporate finance, risk
management and working capital
management. However the link with
financial statements is not systematic
and may prove to be difficult.
Impact of the subprime
crisis
The credit crisis that has followed the
collapse in the market for subprime
securitized assets has had an impact on
leading European corporations. One-
third of the companies have
experienced difficulties recently with
short-term funding, mainly arising from
higher interest rates. However, a
quarter of the companies say they have
not experienced difficulties.
54%
48%
41%
40%
38%
34%
14%
7
 Regulation

In an environment of heightened risk treasury activities while implementing

and volatility, setting up a robust
corporate governance framework
is no longer an option, but a necessity.
All the companies we questioned are
extremely focused on the quality
of their risk management, reporting
and relevant communication, as well
as fraud detection tools. However,
the majority of companies believe that
the benefits of corporate governance-
related regulations do not outweigh the
cost of investments made to achieve
compliance.
Therefore, the SOX Act in the US and
equivalent local legislation are no
longer burning issues, as the 2008
survey shows. Yet even though two-
thirds of companies questioned are
subject to these regulations, nearly all
of them have written policies or
procedures with top-level approval
for treasury activities. These concern
standardized and repeatable
processes. Increased pressure from
group audit committees arising from
today’s difficult financial market
environment may have fueled that
process.
However, our evidence shows that the
level of analysis of documentation is
quite variable, that most of the time
the documentation is not updated
regularly and that procedures do not
cover all the risks.
It is clear that the treasury
environment will continue to evolve.
In which area does SOX or equivalent
legislation have a significant effect?
11%
29%
15%

nature and level of risk, roles and

responsibilities, approved financial
instruments and counterparty limits. 18%

Much has changed in the past two 27%

years. Today, all of the companies
surveyed have implemented at least
one set of policies and/or control Your organization
procedures, compared with just three-
Your management and communication tools
quarters in our 2006 survey.
This shows that companies are The automation of your processes
embracing the necessity to frame risk
management principles and monitor No answer

the high level of risk inherent in Other

8 Eyes on treasury 2008 European treasury survey

 Regulatory pressure is not expected to decrease but treasurers seem to
be 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.
New regulations governing banks’
capital requirements under the Basel II
framework have had a limited impact
on corporate treasuries. Overall,
almost three-quarters of survey
respondents across all countries saw
no impact from Basel II on their
companies. This figure ties in with the
findings of our 2006 survey in which
only one-quarter of companies
questioned labeled Basel II as a "fear".
Basel II regulations result in a closer
correlation between credit spreads
and corporate ratings and, therefore,
spread hierarchy between companies.
Nevertheless, nearly all treasurers
reported that Basel II has not
significantly changed their relationship
Did implementation of IAS 39 have an influence on?
(total>100, more than 1 response possible)
Your company's risk management/hedging strategy
The organization of your company's
financial statements closing process
Your company's management,
accounting and reporting tools
Your company's treasury procedures
The analysis of unrealized income generated
Your company's hedge horizon
Centralization/decentralization
of your company's treasury
No answer
0 10
with their banks, although their
capacity to present their situation may
still have an influence on their spreads.
But IAS 39, which sets out principles
for recognizing and measuring financial
assets, financial liabilities and some
contracts to buy or sell nonfinancial
items, is clearly having a significant
impact. The biggest challenge remains
the application of hedge accounting.
Among the companies questioned, the
vast majority apply hedge accounting
(two-thirds of them systematically and
one-third selectively) for FX, interest
rate and commodity exposures. Most
companies face difficulties because of
strict rules governing the eligibility
44%
44%
42%
38%
29%
22%
11%
2%
20 30 40 50
Eyes on treasury 2008 European treasury survey
of hedged items for hedging
accounting treatment – particularly the
IAS 39 constraint requiring hedging of
all components of risks. This rule is
regarded as a significant penalty
when hedging commodities.
Almost none of the companies
questioned systematically hedges
the FX risk linked to the quotation
of derivatives on the London Metal
Exchange (LME) in US dollars. Overall,
one-fifth of respondents encounter
difficulties arising from the test of
hedge effectiveness, essentially in
valuing commodity derivatives and
related underlying exposures.
Has your company experienced
difficulties with?
18%
11%
7%
64%
Test of hedge effectiveness
IAS 39 constraint requiring
hedging of all components of risks
Forecasts
No answer
9
 For many European companies, the Did you adopt IFRS 7 early?
most significant 2007 regulatory
change lies in IFRS 7. The new
standard financial instrument 22%
29%
disclosures are intended, firstly, to
provide information that will enhance
the understanding of the significance
of financial instruments to a
company's financial position,
performance and cash flow; and,
49%
secondly, to assist in evaluating the
risks associated with these
instruments, including how
Yes
companies manage those risks.
No

No answer

Do you still encounter difficulties

As they expect difficulties, three-
when applying IFRS 7?
quarters of survey respondents have
launched a special project to better
21%
manage the first application of the
32%
rules. We noticed that an aging
balance of receivables, liquidity and
sensitivity analysis caused problems
for companies. In most cases, a very
significant amount of work was
47% required to search for historical data.
The next step is the industrialization
of the reporting process under IFRS 7.
Yes

No

No answer

10 Eyes on treasury 2008 European treasury survey

Main financial risks

Following rapid and large shifts in
exchange rates, which remain
unstable, and amid uncertainty over
interest rates, which have changed
sharply in some countries, FX
transactions and interest rates are the
main financial risks capturing the
attention of European corporate
treasurers. That focus derives partly
from hectic global financial markets.
But the risks arising from FX and
interest rates are also well understood
by management and operational
participants because they play an
integral role in the business of the
companies surveyed.

What are your main financial risks?

(total>100, more than 1 response possible)

Interest rates 93%

Foreign exchange transactions 93%

Liquidity 76%

Foreign exchange translation 67%

Credit 65%

Commodities 40%

Energy 31%

Equity prices 22%

Pollution rights 20%

Raw materials 9%

Eyes on treasury 2008 European treasury survey 11

Nevertheless, corporate treasurers are
adopting a more holistic view of
financial risks and not only focusing on
FX transactions and interest rate
management. Indeed, with another
volatile year in financial markets and a
slowdown in the world economy
looming, companies are looking more
closely at liquidity, FX translation and
credit risk.
The subprime crisis did not trigger
funding concerns for companies in
Europe, but monitoring of liquidity risk
has increased. Sellers and buyers of
commodities are also clearly concerned
about rising prices.
Despite the centralization of financial
risk management, subsidiaries are still
widely involved in the process of
measuring risk exposure. Risks are
measured using forecast data as a
starting point. Both this practice and
measurement methods have evolved.
In most cases, risk measurement is
based on notional values. Sensitivity
analysis and Value at Risk (VaR) are
also mentioned; they are now widely
used, not only by the larger companies.

At which level is your exposure measured?

(total>100, more than 1 response possible)

Central level 74%

Local level 62%

How confident can you be?

Companies seek to identify, measure The treasurer’s remarks emphasises

and manage risks. Yet one French a key point. Risk assessment is also
corporate treasurer thus describes about sharing a common financial
the real-life limits: “We are confident in understanding, through a simple and
our risk assessment but only up to the efficient process where dedicated and
point where the human factor becomes integrated tools are implemented and
more significant. We rely upon our understood by everyone.
local staff. We are never protected
The adequacy of information flow
against a lack of comprehension of
and confidence in financial data remain
the overall risk management process,
an area where much work is needed
an inaccuracy in one of the figures
within risk management activities.
we request or an incomplete
understanding of the commercial
agreements”.

12
These methods seem to be more
commonplace than at the time of our
2006 survey. Complex valuation
models are not solely used for trading
activities. Measurement is reported
through standardized reports that
are partially automated: manual
computation of information is still an
area for improvement. Initiatives are
underway to make the reports more
homogenous. While there are
developments in automating the
process and integrating systems, half
of the survey’s participants rely on
computer applications developed in-
house to report risk exposures.
Vendors of treasury management
systems who can develop software
with strong and flexible reporting
capabilities are likely to find a strong
demand.
How does your company measure risk?
(total>100, more than 1 response possible)
Notional values
Sensitivity analysis
Value at Risk (VaR)
Gap analysis
Duration
Asset liability management 15%
Earning at Risk (EaR) 7%
Monte Carlo simulations 7%
Other 5%
No answer 2%
While confidence in the measurement
of risk is mostly restricted to FX
translation, interest rates and financial
charges, more than half of the
interviewees are still having difficulty
measuring these risks. This seems to
arise from:
• Inaccuracy in forecasts resulting
from operational handling (handling
errors, misinterpretation of central
treasury requirements, lack of
controls on data provided)
• Uncertainty and volatility related to
forecast realization (levels of
certainty and uncertainty as to
whether sales will be realized)
These two factors confirm the
observations from the last survey:
improvements are still needed to
achieve an adequate flow of
information within many companies.
55%
40%
38%
25%
25%
Eyes on treasury 2008 European treasury survey
Better coordination might be the
preferred solution, but only a few
companies have concrete plans to
make progress in this area.
What should be done? Should
companies settle for a measurement
report that is still very time consuming
to prepare and yet, according to our
survey, is seen as inaccurate? Is the
treasury department regarded as a
poor relation within the company?
Although a wide range of information is
reported, there is no systematic focus
in the treasurer’s report on the impact
of financial risk on the financial
statements or the business of the
company, even when treasury is a
support function. Corporate treasurers
are left largely to their own devices.
Two-thirds of respondents report to
corporate management on a monthly
basis; but 60% do not report to their
Audit Committee.
Does this suggest that improvements
ought to be discussed outside the
corporate treasury area? Would the
audit committee, for instance, be
a better choice? The majority of
respondents report that risk
management results are usually
reconciled with derivatives accounting
results (a process made easier with
IFRS implementation) and that risk
management policies and processes
are carefully checked by internal
auditors. Do senior management and
investors, for example, fully under-
stand the nature and scale of risks
being managed and the way these risks
are being handled? Or is it that
financial risks are still seen as a matter
for experts?
13
 Cash forecasts
‘Cash is still king’, and liquidity is a core
issue for treasurers, especially during
the ongoing adoption of the SEPA.
Overall, virtually all of the respondents
to our survey were involved with cash
management and the issue was listed
as their leading concern, closely
followed by financial risk management
and organizational issues in an
environment where the subprime crisis
has had a significant impact for most of
the companies questioned.
Two-thirds of companies say they
experience difficulties accurately
forecasting cash and hedging
requirements. Issues surrounding the
reliability of cash flow information
remain, implying that obtaining the
buy-in of other departments to the
value and importance of accurately
forecasting cash flow can be difficult.
Unsurprisingly, the overwhelming
majority believe that shareholders see
the value in a well-managed treasury
function, with many (almost three-
fifths) believing that senior
management is sufficiently engaged in
the process. However given the need
to improve forecasting accuracy, it is
perhaps more important that the
allegiance of senior management is
leveraged in pursuit of this goal.
14 Eyes on treasury 2008 European treasury survey
More than two-thirds of respondents
are in favor of moving towards cost-
center models for treasury, so perhaps
it is surprising that more time and
resources have not been allocated to
improving the accuracy of cash
forecasts. Although controlling costs is
a key concern, there are still many
opportunities for improvement and
adding value without taking on
excessive risks or positions.
Initiatives to gain visibility of cash
balances can reveal hidden ‘trapped’
cash, which can sometimes be easily
repatriated, thus reducing funding
requirements and cost-of-carry. Even
though many treasurers are not
directly involved in supply chain
management, their role here is
growing. More and more are involved
in determining the appropriate levels of
working capital employed and cash-
route-to-treasury, as well as providing
thought leadership on the right local
funding solutions and cash and FX
forecasting requirements.
Some companies now use an out-
sourced payment factory (a single
payment processing center) to handle
accounts receivable (AR) and
accounts payable (AP); this seems to
be a growing trend.
During our interviews, it was clear
that the new SEPA regulations are
another lever to implement and
deploy payment factories, because
common payment leads to
streamlined processes. By
consolidating all payment activity
of both intragroup and external
payments through a single center,
further efficiencies and cost savings
can be found (new SEPA regulations
may also help to capture cost savings
and deliver process efficiency
benefits). This should increase
support for cash flow forecasting and
cash management because the flow
of funds can be seen clearly through
a single center.
While the SEPA regulations aim to
improve the efficiency of cross-
border payments and cut banking
charges, only a small number (less
than one-fifth) of treasurers express
interest in SEPA. Most prefer to
adopt a ‘wait and see’ attitude. This
may be linked with the fact that most
treasuries have received information
about SEPA from banks with which
they have relationships.

What gains has your company What does your company think about
identified relating to SEPA? SEPA developments?

4%
4%

26% 9%

31%

18%
7%
65%

11%
25%

Process improvement Following them but

(for accounts receivable) nothing planned yet

Lower banking charges Ongoing study

Payment factories Not interesting

Other Interesting

No answer No answer

Eyes on treasury 2008 European treasury survey 15

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.
It is surprising that almost half did
not consider tax implications when
centralizing. It seems that a desire to
keep the function alongside the head
office remains decisive for many, even
though moving it might offer tax
advantages.
Where is the centralizing entity
located?
15%
5%
7%
Looking ahead, improvements in cash
management are expected to come
from automation of processes and
review and organization of the cash
forecast responsibilities.
There has been a clear increase in
short-term cash forecasting using a
bottom-up approach. It appears that
treasury departments have found it
worthwhile to produce these forecasts
as they implemented improvements
planned in 2006.
Forecast time horizon
(total>100, more than 1 response possible)
Daily 49%

Monthly 49%
73%
Have you set up international cash
pooling? Yearly 49%

On a rolling basis 38%

9%
In home country Quarterly 36%

In other countries Other 16%

18%

In several countries

No answer

73%

Yes

No

No answer

16 Eyes on treasury 2008 European treasury survey

What is my cash position?
One of the most widely discussed
institutions in 2007 was the UK’s
Northern Rock. The US subprime
mortgage crisis, culminating in the
credit crunch starting in the summer
of 2007, resulted in a plea for public
funding by the over-extended bank.
Elsewhere, senior financial managers
started to question the soundness of
their credit policies after what had
been a counterparty rated A+ by Fitch
Ratings became the subject of scrutiny.
Anyone who was in the market at the
time found it hard to deal. Though
there were attractive rates on-screen,
these had only the most desperate and
lower-rated entities behind them. Yet
the profile of committed facilities has
increased, and accurate and reliable
Eyes on treasury 2008 European treasury survey
liquidity-management techniques have
allowed many larger companies to
navigate through difficult times
relatively unscathed.
Collected results showed that higher
rates hit some treasuries’ short-term
funding. Yet some others experienced
little difficulty, and a third group
indicated that planned business
activities had to be reassessed or
delayed. There was also additional
pressure from board members, audit
committees, business partners and
investors, asking treasurers
rudimentary questions such as “what is
the cash position?” and “how much
capacity is there for the foreseeable
future?”
17
 Tools
A strategic shift is underway as turmoil
in credit markets combines with
currency volatility to make the treasury
department a highly visible and
strategic partner within companies.
Against this backdrop, it is unsurprising
that treasury management systems
(TMS) and treasury workstation
systems (TWS) are becoming
increasingly important within corporate
treasury departments as they seek
more embedded, comprehensive and
integrated solutions. But their quest for
improved information flow,
standardization of information,
straight-through processing (STP),
centralization and automation, and
integrated solutions has yet to be
fulfilled.
In the last few years, vendors of
treasury systems have been
consolidating rapidly. There have been
many mergers and acquisitions, as
witnessed by deals involving Wall Street
In which business areas does your company have IT projects?
(total>100, more than 1 response possible)
Financial risk management
Cash pooling : Zero Balance Account (ZBA),
notional, internal
SEPA
SWIFTNet
Payment factory
Netting: banking, internal
Straight-through processing
Other
18 Eyes on treasury 2008 European treasury survey
Systems (WSS) and SunGard.
London-based Trema has been merged
with WSS after acquiring Richmond
Software, while SunGard has acquired
the Belgian player Trax.
Although these strategic moves may
lead to better, more versatile products,
our survey shows that treasurers are
already using leading class systems in
many areas. But for some functions,
they are still working on non-fully
integrated and STP solutions such as
Microsoft Excel spreadsheets, or they
feel the need to set up leading practice
but niche solutions.
Our survey reveals that corporate
treasuries use systems mainly for cash
management (cash pooling, netting,
payment factories) and less for
financial risk management (back-office
functions and electronic dealing).
This is in line with the centralization
trend.
29%
29%
24%
22%
20%
18%
15%
5%
According to our survey, the systems
most often used across Europe are
supplied by Reuters (KTP), City
Financials, SAP, SunGard (AvantGard)
and WSS.
For financial risk management, Excel is
still reported as the main tool.
FXall is the most used electronic
dealing system, but it is unclear how
well this is connected into the rest of
the treasury systems.
The main back office systems are from
Misys and Reuters (KTP). However,
neither product is necessarily
connected to front-office systems.
The systems for cash pooling, netting
and payment factories are primarily
provided by banks, although some
treasuries use systems from
Despite the fact that about half of the
treasurers interviewed are satisfied
with their current tools, many
treasurers say these tools and systems
have shortcomings. For instance, some
systems do not adequately support
payment factories and or multi-
currency portfolios.
Integration of treasury tools is also
mentioned as a significant
shortcoming.
Is your company satisfied with the tools
used today?
25%
57%

specialized commercial vendors.

18%

Yes

No

No answer

Eyes on treasury 2008 European treasury survey 19

 To address these weaknesses, several
treasuries use additional systems or
spreadsheets. Nevertheless, these
solutions are mostly regarded as
sub-optimal. Several companies are
considering integrating multiple
systems into a single enterprise
resource planning (ERP) system, such
as SAP, because as most treasurers
agree, STP has benefits in terms of
security, automation and lower banking
charges.
What gains has your company identified
in relation to IT tools?
4%
9%
34%
21%
32%
Security
Automation
Lower banking charges
Other
No answer
Other process flaws also remain
unresolved. Only about a quarter of the
treasuries have ongoing internet
projects for e-invoicing or e-payment.
This is remarkable because most
20 Eyes on treasury 2008 European treasury survey
companies agree that these could
contribute to increased productivity,
further standardization and security of
cash flows and, subsequently, to cost
reductions.
Innovation seems slow. Only a small
number of treasurers have considered
SWIFTNet, which is intended to allow
companies to access the SWIFT
international banking payments system
online. This is significant because its
use could potentially reduce bank
charges for many.
Clearly, treasury management and
workstation systems have evolved, and
treasurers have identified further
opportunities to become more efficient
without changing existing systems.
Emerging technology tools, such as
Application Service Provider (ASP)
and software as a service (SaaS) can
help them achieve this.
But there is also improvement potential
from adopting better technology
solutions (integration, automation)
and processes (cash flow forecasting,
liquidity planning, payments).
However, implementation of TMS is
ever more closely linked with overall
information technology strategy.
Treasurers have to think differently
or engage with the IT department
to define how best to handle
implementation of a TMS system or the
evolution of what they already have(1).
(1)
See Ernst & Young Treasury Package Overview 2007
for a guide to treasury capabilities of European TMS
vendors and a guide to selection and implementation.
To customize or not to customize?
that is the question
Corporate treasurers know the should a company consider
importance of having a single system customization? Will it be too rigid to
that enables all the treasury functions face new functionalities in today’s
to be carried out. However, each continuously changing context?
corporate treasury faces different
These and other questions regarding
types of risks, making integration with
the IT environment of corporate
a package sold in the market an
treasuries are explored in the
extremely difficult task. Taking this into
Ernst & Young Treasury Package
account and, despite the system not
Overview 2007.
meeting 100% of the business needs,

customization? How is this supported?

Eyes on treasury 2008 European treasury survey 21

 Tax risks

Organization

Given the complexity of the tax issues Are financial transactions part of your
raised by financial transactions, the tax planning ?
involvement of tax specialists able to
handle these issues in alignment with
the business and risk management
objectives of the company has become
more and more crucial.
42%
One-third of respondents confirm that
58%
they usually work with external tax
advisors when dealing with financial
transactions, and an overall majority of
respondents say that they
systematically refer to their in-house
tax department when initiating new Yes
types of financial transactions.
No
The survey shows that more than one-
quarter of companies ensure support
for the treasury function through a
dedicated tax team and many have set
up a specific process between the tax
and accounting departments.
The survey also shows that financial
transactions are part of the tax
planning of a majority of respondents.

22 Eyes on treasury 2008 European treasury survey

Thin-capitalization

Thin-capitalization has become a hot
topic for companies as rules – which
aim to restrict the level of
indebtedness of a company by
disallowing the tax deductibility of
interest expenses under certain
conditions – are cropping up in most
European countries.
Two-fifths of companies surveyed have
already been investigated by their local
tax authorities with respect to their
compliance with thin-capitalization
rules. Three-fifths of respondents
recognize that they suffer thin-
capitalization limitations with respect
to their intragroup financing
transactions, and wish to optimize their
financing methods in the light of their
thin-capitalization position. Half of the
respondents have put in place specific
processes to monitor changes in tax
legislation, where thin-capitalization
rules are affecting the countries where
their group is present. That is partly
because thin-capitalization rules have
As far as the rules are concerned, the
evolution is marked by three elements,
which deviate from the traditional debt-
to-equity ratio. Firstly, thin-
capitalization rules now also rely on
criteria such as earnings before
interest, taxation, depreciation and
amortization (EBITDA)– as in Italy and
Germany. Secondly, the legislation is
now based on cumulative requirements
to be met (e.g., debt-to-equity-ratio,
EBITDA, asset-based limitation).
Finally, in some countries (France,
Germany and Italy), non-deductibility
is no longer permanent: non-deductible
interest can be carried forward, within
certain limits and restrictions.
Has your compliance with thin-
capitalization rules been investigated
by tax authorities?
38%

gone through very significant changes

over the past two years. 62%

As far as lenders are concerned, one of

the most remarkable developments is
that in some countries (Belgium,
Czech Republic, Germany, Italy and
Latvia), thin-capitalization rules now Yes
apply to loans extended by non-related
and/or banking parties. No

Eyes on treasury 2008 European treasury survey 23

 Transfer pricing

Transfer pricing rules require that Have you set up a specific

interest rates applicable to intragroup methodology and documentation
financial transactions meet the arm’s in respect of intragroup financing?
length principle (that is, correspond to
a market interest rate). Because
transfer pricing rules for financing
13%
transactions are under the intense
scrutiny of tax authorities, the vast
majority of respondents have set up a
specific process and documentation for
intragroup financing. However, it
appears that only one-third of the
respondents have been investigated by
87%
the tax authorities.

Yes

No

How deep is the tax departments’

involvement?
Tax issues relating to cash pooling On the other hand, tax issues relating
(e.g., thin-capitalization rules, transfer to interest rate and foreign exchange
pricing, withholding taxes) seem to be movements affecting intragroup
identified and handled on the whole by financing or the use of hedging
tax departments. instruments are not necessarily well
known by tax practitioners. However
Nevertheless, these tax issues still
they can significantly impact the post-
require careful attention because their
tax yield of commercial transactions,
surrounding tax environment is
as well as plain ‘vanilla’ or tax-
particularly unsettled and is shifting
structured borrowings.
ever more rapidly towards a more
restrictive path.

24 Eyes on treasury 2008 European treasury survey

Cash pooling
Around three-quarters of respondents
indicated that the location of the
centralizing entity is not driven by tax
considerations. This suggests tax is no
longer a key driver for creating value
from cash pooling solutions. However,
treasury departments are keener to
monitor cash pooling solutions to avoid
tax drawbacks: respondents rely on
domestic tax exemption (two-fifths),
on tax treaty benefits (less than one-
half) and European Union benefits
(one-third) to manage tax leakages
for withholding tax purposes. More
than one-half of respondents say they
do not suffer thin-capitalization
limitations in respect of cash pooling.
Is the location of the centralizing
entity driven by tax considerations?
26%
74%
Yes
No
Eyes on treasury 2008 European treasury survey
Derivative instruments
Respondents say tax treatment
and filing duties related to hedging
instruments are handled both with
the assistance of the accounting
department (two-fifths) and treasury
department (one-half) because of
their complexity. It appears that there
is still room for improvement in this
area, since most acknowledge that
they do not feel comfortable with
applicable tax rules and tax filing duties
related to derivative instruments used.
Complexity, and the apprehension
it arouses, may explain why only
one-tenth of respondents use
derivative instruments in their tax
planning solutions.
Do you use derivative instruments
in your tax planning solutions?
11%
89%
Yes
No
25
 IAS 32/39
Two recent IFRS standards have been
especially controversial and complex:
IAS 32, dealing with disclosure and
presentation of financial instruments,
and IAS 39, concerning their
recognition and measurement.
The survey confirms that the
implementation of IAS 32/39 has not
stirred up tax management in
companies: most respondents do not
expect IAS 32/39 to have any impact
on their current taxation or their
current financial tax solutions.
26 Eyes on treasury 2008 European treasury survey
Nor have they considered using
information gathered in the course of
implementation of IAS 32/39 to
monitor the tax treatment of derivative
instruments or related tax filings. Only
deferred taxation implications seem to
be a concern for companies and these
are monitored in collaboration with the
tax department by a majority of
respondents (nearly four-fifths).
Is the tax department involved
in deferred taxation analysis?
20%
80%
Yes
No
Moving forward
Ernst & Young’s 2008 European
treasury survey provides an overview
of the trends influencing the treasury
function across Europe. Our results
show that the treasury functions of the
companies that participated share
similar organization structures
regardless of their size or industry.
Therefore, the identified trends can be
considered within a broader context
and our conclusions may be applicable
to other companies.
The introduction of numerous
regulatory requirements in the past
few years has shifted the treasury
function towards a more centralized
and strategic role within companies.
After struggling to adapt their
information systems to accommodate
these new requirements, companies
should now rationalize their systems
and related processes. However, this
rationalization is challenging because
the treasury software vendors market
is increasingly concentrated with fewer
product offerings.
Additionally, we consider that the
effect of the SEPA has been
underestimated by survey
respondents. As SEPA and Swiftnet
emerge, they raise challenges to a
companies’ organization not only
around communication with banking
institutions but also for the payment
factory cases.
Eyes on treasury 2008 European treasury survey
As already highlighted in our 2006
survey, the treasury department is
increasingly under the attention of
audit committees, top management
and the financial market as it holds key
information around risk and liquidity
management. As this information
comes from various departments
within the company there is a growing
need for solid and effective
communication between these
departments and the treasury function.
This interaction is important so that
companies can anticipate the
accounting impacts of potential
decisions.
The ongoing uncertainty and turmoil in
the capital markets has placed greater
focus on liquidity management and
optimization. Interestingly, we noted
that Scandinavian and UK companies’
treasury departments more often
cover the working capital optimization
role. Is this a trend towards a more
holistic treasury function?
27
Ernst & Young

Assurance | Tax | Transactions | Advisory

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