Company Share Capital Conversion into Euro

The definite fixing of the exchange rate between the Cyprus pound (£) and euro (€), which will be adopted as the official currency of the Republic of Cyprus as from 1 January 2008, was officially announced on 10 July 2007. The irrevocable conversion rate is €1 = £0,585274.

According to the Law that regulates matters relevant to the adoption of Euro (Law 33(I)/2007 which was published in the Official Gazette on 15 March 2007), the amount in Cyprus pounds is divided by the conversion rate. The value of the third decimal point determines whether the second decimal (i.e. the cents) will be rounded up. For example €26,354850 are rounded to €26,35, while €26,355850 are rounded to €26,36. The use of the reverse conversion rate, i.e. £1 = €1,708601 is prohibited

Conversion into Euro as from 1 January 2008

As from 1 January 2008 the functional currency as well as the reporting currency of most Cyprus companies will be the euro.

All balances of assets and liabilities, income and expenditure must be converted into euro using the conversion rate. In the case of share capital which is expressed in Cyprus pounds the conversion is performed as explained below.

Conversion of share capital into Euro on 1 January 2008

The share capital of a limited liability company which is expressed in Cyprus pounds is converted into euro and is rounded as from the date of the adoption of euro. What is converted and rounded is the nominal value of each share and not the total amount of share capital with the consequence of a corresponding increase or decrease of the total share capital within the meaning of the Cyprus Companies Law, Cap. 113, and the relevant provisions of the memorandum and articles of association are amended.

The conversion and the corresponding increase or decrease of the share capital should be approved by an ordinary resolution in general meeting of the company's shareholders. The resolution should mention the conversion as well as the method of accomplishing the increase or decrease, that is:

• If it is an increase by capitalization of reserves or/and by the payment of cash.
• If it is a decrease by posting it to a special reserve called "Difference from conversion of share capital into euro" which may be capitalized by way of a future capital increase. Alternatively, the company may decide at a shareholders' general meeting to distribute the decrease by way of a dividend. Such dividend will not be subject to Special Contribution for Defense. It should be noted, there is no need either for the issue of a Court order to ratify the reduction, or for the issue of a certificate of capital reduction.

A Company Resolution must be filed with the Registrar of Companies from 1 January 2008 to 31 December 2008.

As from 1 January 2008, the Registrar of Companies will not allow the approval or amendment to the memorandum and articles of association of a company, or the filing or amendment of company particulars in the Register of Limited Liability Companies, if no prior filing has been made of a resolution of the shareholders' general meeting showing that the share capital and the nominal value of the company's shares have been converted into euro. In case the resolution of the general meeting for the conversion of the share capital from Cyprus pounds to euro is not filed until 31 December 2008, then the subsequent conversion of the share capital from Cyprus pounds to euro, must be made in accordance with the provisions of the Cyprus Companies Law, Cap. 113, and with the payment of the relevant charges in force at the time of change.

For public companies only, if due to the conversion of the share capital into euro and the rounding, the share capital is reduced to a level below the euro equivalent of £15.000 which is the minimum capital of a public company as laid down in article 4A of the Cyprus Companies Law, then such company may continue to operate as a public company until 31 December 2008. Subsequent to this date it ceases to operate as a public company unless it has complied with the above minimum capital requirement.

We attach Annex A with the following illustrations of accounting treatment in cases of increases or decreases in the share capital which arise from the conversion of share capital to euro:

• Increase of share capital
• Decrease of share capital
• Companies whose functional currency is other than Cyprus pounds or euro
• Companies whose share capital is already expressed in euro before 1 January 2008
• Cyprus company which has an investment in another Cyprus company.

Disclosure in the financial statements for the year ended 31 December 2007

Paragraph 54 of the International Accounting Standard (IAS) 21 "The Effects of Changes in Foreign Exchange Rates", provides that when there is a change in the functional currency of a company, this fact and the reason thereof should be disclosed. Accordingly, the following disclosure should be made in the note of Post Balance Sheet Events.

"With the introduction of the euro as the official currency of the Republic of Cyprus as from 1 January 2008, the functional currency of the company has changed from Cyprus pounds to euro. As a result, the financial position of the company at 1 January 2008 has been converted into euro based on the definite fixing of the exchange rate €1 = £0,585274".

No other reference for this fact is considered necessary in the accounting policies or in any other notes to the financial statements.

Comparative amounts in financial statements for periods ending on 1 January 2008 and subsequently

According to the European Commission document "Accounting for the introduction of the euro" the only logical method for the conversion into euro of the comparative amounts that are expressed in Cyprus pounds at 31 December 2007 is the use of the irrevocable conversion rate.





Annex A

Illustrations of the accounting treatment in cases of increases or decreases in share capital arising from the conversion of the share capital into euro

1 - Increase in share capital

Company A Ltd with an issued share capital of £1.000 divided into 1000 shares of a nominal value of £1 each. The conversion of the share capital as at 1 January 2008 will be calculated as follows:

• Conversion of nominal value of shares from Cyprus pounds to euro £1 ÷ 0,585274 = €1,708601
• Rounding the nominal value to euro €1,71
• Determination of share capital in euro Share capital in euro: 1.000 shares @ €1,71 = €1.710
• Calculation of increase/decrease in share capital: Share capital in Euro on 31 December 2007 (before the conversion): £1.000 ÷ 0,585274 = €1.708.60 Increase in share capital: €1.710 - €1.708,60 = €1,40

The increase in share capital by €1,40 can be made through capitalization of reserves by debiting reserves (usually retained earnings) and crediting share capital by €1,40.

In case the increase in the share capital by €1,40 is made through the payment of cash by the shareholders, then the share capital will be credited by €1,40 against the cash received.

2 - Decrease in share capital

Company B Ltd with an issued share capital of £1.000 divided into 2.000 shares of a nominal value of £0,50 each. The conversion of the share capital as at 1 January 2008 will be calculated as follows:

• Conversion of the nominal value of shares from Cyprus pounds to euro: £0,50 ÷ 0,585274 = €0,854301
• Rounding of the nominal value to euro €0,85
• Determination of share capital in euro Share capital in euro: 2.000 shares @ 0,85 = €1.700
• Calculation of increase/decrease in share capital: Share capital in euro on 31 December 2007 (before the conversion): £1.000 ÷ 0,585274 = €1.708,60 Decrease in share capital:€1.700 - €1.708,60 = €8,60

The reduction in the share capital by €8,60 can be made through an entry in a special reserve "Difference arising from the conversion of share capital into euro", by crediting the special reserve and debiting the share capital by €8,60.

In case the reduction of the share capital by €8,60 is made through dividend distribution to the shareholders, then the share capital will be debited by €8,60 against the cash paid to the shareholders.

3 - Companies whose functional currency is other than Cyprus pound or euro

Companies whose functional currency is other than Cyprus pounds during the year 2007 and continue to have the same functional currency during the year 2008, need not proceed with any conversion of balances as at 1 January 2008, except for the following that concern their share capital if it is expressed in Cyprus pounds.

The share capital of a company which is expressed in Cyprus pounds will be converted into euro in accordance to the guidance referred to in Illustrations 1 and 2 and the respective increase or decrease in euro will be calculated. The increase or decrease will be converted into the company's functional currency by using the exchange rate between euro and the functional currency as at 1 January 2008 as follows:

Company C Ltd is using the U.S. Dollar as its functional currency in 2007 and 2008. Its share capital is Cyprus pounds £1.000 divided into 1.000 shares of a nominal value of £1 each.

Its share capital was translated in the past into $2.000 when the shares were issued and the exchange rate was $1 = £0,50.

The exchange rate on 1 January 2008 is $1 = €0,70 (this rate is only for the purposes of this illustration whereas the real exchange rate may differ).

On 1 January 2008, the company will calculate the increase in share capital that arises from the conversion of Cyprus pounds into euro as in Illustration 1 to an increase of €1,40. The amount of €1,40 will be translated into U.S. Dollars using the exchange rate on 1 January 2008 $1 = €0,70 to $2,00.

As in Illustration 1, the increase in the share capital by $2,00 (€1,40) can be made by capitalization of reserves or by cash payment from the shareholders.

4 - Companies whose share capital is already expressed in euro prior to 1 January 2008

For companies whose share capital is already expressed in euro prior to 1 January 2008 either because the share capital was issued in euro from the beginning or because the share capital was converted from Cyprus pounds into euro prior to 1 January 2008, then the following apply.

If the functional currency of such company during the year 2007 is other than Cyprus pounds (i.e. euro or other currency), then no exchange difference arises.

If the functional currency of such company during the year 2007 is Cyprus pounds, then an exchange difference arises from the conversion of the share capital from euro to Cyprus pounds (functional currency) on the date of issue of the share capital using the then exchange rate and the subsequent conversion of this balance on 1 January 2008 into euro using the conversion rate €1 = £0,585274.

On 1 January 2008, the share capital should be re-expressed in euro at the amount at which the shares are expressed and the resulting exchange difference must be transferred to reserves as follows:

Company D Ltd has the Cyprus pound as its functional currency during the years 2006 and 2007 and the euro in the year 2008. Its share capital is €1.000 divided into 1.000 shares of a nominal value of €1 each, which was issued on 1 March 2006 when the exchange rate was €1 = £0,5747. The share capital was translated into the functional currency on 1 March 2006 to £574,70.

On 1 January 2008 the balance of £574,70 is converted into euro using the conversion rate €1 = £0,585274 to €981,93. The share capital is €1.000 and the balance of €981,93 must be readjusted to €1.000. The exchange difference of €18,07 will be debited to reserves.

5 - Cyprus company which has an investment in another Cyprus Company

A company whose functional currency during the year 2007 is Cyprus pounds and in the year 2008 is euro and has an investment in another Cyprus Company with a share capital expressed in Cyprus pounds, then the following are applicable in relation to the cost of investment at 1 January 2008. The cost of investment will be converted on 1 January 2008 using the conversion rate.

If any increase in capital is made by capitalization of reserves or if any reduction of capital is made by an entry to a special reserve "Difference from the conversion of share capital into euro", then no other change will be made to the cost of investment..

If the reduction in capital is made by a dividend distribution, then the cost of investment will be reduced by the amount of the said dividend. It should be noted that such dividend after a capital reduction, does not constitute income but reduction of the cost of investment.

If the increase in share capital is made by cash payment, then the investment cost will be increased by the said cash payment as follows:

Company E Ltd owns 100% of Company's A Ltd shares in Illustration 1. During the year 2007 Company E Ltd has the Cyprus pounds as its functional currency and in the year 2008 the euro. On 31 December 2007 the investment in Company A Ltd is presented at cost amounting to £1.000.

On 1 January 2008, if the increase in the share capital of Company A Ltd of €1,40 is made by capitalization of reserves, then Company E Ltd will convert the cost of investment in Company A Ltd at cost using the conversion rate €1 = £0,585274 tο €1.708,60.

On 1 January 2008, if the increase in the share capital of Company A Ltd of €1,40 is made by cash payment from Company E Ltd, then the amount of €1,40 will be added to the cost of investment in Company A Ltd and the investment at cost will be €1,710.