The major achievements of the harmonization program were to bring accounting
in all the EU member states up to a good and reasonably uniform level. The program
probably accelerated the development of accounting quite dramatically in a number
of countries, and it also had the effect of providing a standard which influenced ac-
counting in neighboring, non-EU countries.
There are, however, different cultural traditions within Europe about the role of
accounting and how regulation should be articulated, and these take more time to har-
monize, even if harmonization itself is in accordance with a long European tradition
of borrowing and adapting regulations from neighbors. In particular, continental Eu-
ropean accounting, largely inspired by French regulations issued as early as 1673,
sees accounting as something to be regulated by the state, and mostly to suit state
needs for regulating taxation and the economy. Against this, British and Irish ac-
counting, like that of the United States, evolved in the wake of the industrial revolu-
tion in the nineteenth century as part of the apparatus of the capital markets, and is
primarily oriented around providing economic information to investors. This contrast
in approaches leads to the kind of uncomfortable compromises found in the Fourth
Directive, even if time and experience have now shown how to move forward. It also
leads to differences in the way in which the rules are applied, with tax-oriented coun-
tries likely to be much more prudent in their judgment in areas such as depreciation,
provisions, and asset impairment.
At a detailed level, the harmonization process has produced its own disharmonies.
In particular, member states did not scrap their existing accounting rules when adopt-
ing EU directives, but rather adapted the new rules to their existing ones, meaning
that in no two countries do you find exactly the same rules, even if there is much
common ground. For example, French accounts before the Fourth Directive were
supposed to be “sincere and regular.” The Fourth Directive says accounts should give
a true and fair view, so current French law requires that accounts are sincere and reg-
ular and give a true and fair view.
In Germany, the Fourth Directive requirement that rules should be set aside if ul-
timately necessary to give a true and fair view (clause 2.5 of the Directive) was
greeted with horror and not included in the German legislation, not least because in
German law a general rule can never override a specific rule. In addition, the Ger-
mans have developed a view (known as separation theory) that the true and fair view
applies to the notes to the accounts, while the income statement and balance sheet
must comply with accounting rules at all times. Clearly, the true and fair view is not
seen the same way in every country.
The extraordinary result is another area of hazard where different countries see it
as having a different role. In France, the regulations require asset disposals and ac-
celerated depreciation to be accounted for automatically as extraordinary items. U.K.
standard setters have more recently tried to get rid of extraordinary items but are con-
strained by their existence in the Fourth Directive.
Equally, asset valuation is contentious: Germany applies strict historical cost rules,
and if an asset is deemed to be impaired, its value is written down, with no require-
ment to adjust back to historical cost later when no longer impaired, if the write-back
would result in higher taxable income—which is normally the case. France, Italy, and
Spain permit revaluation above historical cost, but this is rarely done because such a
revaluation has tax consequences, while U.K. companies practiced revaluation of real
estate almost uniformly until the late 1990s, and some Dutch companies use replace-
ment cost for tangible assets.
17 • 6 EUROPEAN HARMONIZATION