The final version, approved by the Council of Ministers in 1978 (11 years after the
initial report—a good example of the potential length of the institutional processes)
said that accounts should both give a true and fair view and comply with accounting
rules. The Directive also included numerous options, where member states could make
choices about details of the regulations. For example, while the Directive contains an
official format for the income statement, this can be presented horizontally in account
form or vertically as a list, and ordinary operating expenses can be analyzed by nature
(materials, depreciation, salaries, etc.) or by function (cost of goods sold, distribution,
administration). In this way, German and British companies could continue to do the
different things which they had always done, while still being officially “harmonized.”
The Seventh Directive, which required that large companies produce consolidated
accounts, had an easier passage through the drafting process. No new member states
joined during the drafting. Of the original six members, only Germany had any reg-
ulations requiring companies to produce consolidated accounts, so there was no long
history of well-established but different local rules, and the drafting committee made
a conscious effort to align itself with the International Accounting Standards Com-
mittee (IASC) standards (the IASC came into being in 1973, too late to influence the
Fourth Directive). This directive was passed in 1983.
(b) Impact of the Accounting Directives. There can be no doubt that the Fourth and
Seventh Directives had a dramatic impact on financial reporting throughout the EU,
without, for all that, producing accounting as harmonized as might have been hoped.
While the Fourth Directive has many options, it did succeed in standardizing the ap-
proach to presenting income statements by separating out (1) the “ordinary” operat-
ing result, (2) financial income and expenses, and (3) the extraordinary result.
Equally, the balance sheet format provided coherent, standard classifications and did
away with dubious practices such as showing unpaid calls on stock as an asset. A
minimum amount of supplementary information had to be provided in the notes to
the accounts, including any modification of the economic result brought about by
compliance with tax regulations.
This last is a particularly difficult issue in continental Europe because tax regula-
tions have since the start of the twentieth century become progressively entwined
with accounting rules. It is typical of this environment that companies can claim ac-
celerated depreciation for tax purposes and also deduct certain provisions, provided
that these deductions appear in stockholder accounts (with the idea that if the state
gives tax concessions to help companies retain cash, the money should not be paid
out in excessive dividends). This linkage causes expenses to be overstated and the
Fourth Directive requires the degree of this overstatement to be disclosed in the
notes. It is debatable how strictly this requirement is observed, but users will typi-
cally find remarks in notes about the application of tax rules. In addition, French and
Italian rules provide for the difference between economic depreciation and tax de-
preciation to be shown as part of the extraordinary result.
The introduction of consolidated accounts was also a major advance. The only
consolidation requirement in continental Europe had been that of Germany, which
nonetheless allowed groups to exclude from consolidation any foreign subsidiaries.
The Seventh Directive brought all EU members into line (even if Italy did not apply
the rules until 1994) and also provided some forward-looking innovation in allowing
that the criteria for consolidation should include not only ownership of a majority of
voting stock, but also economic domination where the stock holding is a minority.
17.3 ACCOUNTING HARMONIZATION 17 • 5