The Fourth Directive


The Fourth Directive

——Group presentation report


The main topic of our group presentation is the Fourth Directive. Thus, the background of this report is the Fourth Directive. The Fourth Directive, as the most important prominent of a series of European Union directives, is leading to the harmonization of company law. The Fourth Directive introduced detailed schedules for the form and content of company accounts and was implemented in the UK in the 1981 Companies Act. Regarding to the European Economic Community treaty, especially Article 54, the fourth directive established a treaty on several types companies' annual accounts in 25 July 1978. The aim of this report is to create a list of topic areas in financial reporting for which differences could. And discuss whether the differences in financial reporting are covered in the Fourth Directive, and whether the Directive’s requirement could be expected to lead to harmonisation. The main body of report is mainly divided into two parts. The first part is to provide a list of topics in financial reporting for which differences could be found. The second and even the most important part is to exam the Fourth Directive to see whether the topics are covered and whether the Directive’s requirements could be expected to lead to harmonization. That is to say, this report will discuss the relationship between the fourth directive and the harmonization.

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The drive for harmonization of accounting and financial reporting derived from the Treaty of Rome initially. Different studiers have different opinions on harmonization. Such as Nobes and Parker (2012) have point out that Harmonization is a process of increasing the compatibility of accounting practices by setting bounds to their degree of variation? Tay and Parker (1990) also have their opinion that harmonization is a process which entails a movement away from total diversity of practice. Harmonization is a word that trends to be associated with the transnational legislation emanating from the European Union. Harmonization means that different standards might prevail in individual countries, so long as they are "in harmony" with each other. As for the importance of harmonization, the topic of international accounting harmonization has continued to generate interest among accounting practitioners, academics, investors and other users of corporate financial reports. (Emmanuel and Sidney, 1992) And in the European Union, governments through Directives, and the accounting profession through the International Accounting Standards Committee (IASC), both claim to be seeking to harmonize accounting practices. (Blake and Amat, 1994)

Investors and financial analysts have the duty to analysis the financial statements of foreign companies because they want to buy their shares. In addition, companies, which need to issue more shares, will see the benefits of harmonisation. For multinationals, the advantages of harmonization are much more important.

Topics list

Balance sheet and Format

In the Fourth Directive, we can see in according to Article 3, the company should not change the way of presenting their profit & loss and balance sheet account from one year to another. However, some exceptional is allowed, as the reasons for this change must be included in the notes. In Article 4, it says that the numbers shown in profit & loss and balance sheet account items are not important to article 2. The members of state might claim that they cannot compare these numbers, which should be adjusted in the previous year. (The Fourth Directive, 1978) This shows that there is information given in the Fourth Directive that covers formats, there are many options given across articles 9-10 and 23-26, meaning that this does not harmonize across countries, as countries and companies can use different formats.

In France, income statement formats and the Balance sheet for individual companies are set out in the PCG. Several items in these formats are the product of creditor and tax oriented accounting. All financial statements must give a true and fair view but this largely affects the Notes, not the balance sheet and income statement. (Nobe, 2012) In Germany the Income statements and formats for balance sheets are laid down in the HGB. These items must be disclosed no matter they are material. Despite the introduction of a true and fair view requirement, the financial statements of individual companies are largely determined by tax rules. In UK companies, they choose UK GAAP or IFRS using in the unconsolidated financial statements. Financial statement formats have been kept as flexible as possible with the constraints of EU directives.

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It can be found that in the Fourth Directive Article 33, member states are permitted to use the replacement value, methods of valuation that consider revaluation and inflation. (The Fourth Directive, 1978) Emmanuel, Emenyonu and Gray (1992) point out that in Germany, various methods which reflecting changing price levels are not authorized. The use of the historical cost convention is obligatory. And in France, the government and stock exchange bodies, having appreciated the effects of inflation on historical cost accounting, required index-based revaluation and hence some modification of the strict historical cost convention. As for the UK, the regulations in the UK permit revaluations by firms. The use of current cost accounting is also permitted in financial statements. Overall, the ways of valuation used in the Fourth Directive is various, such as fair value and historical cost, which the member states use therefore meaning that asset valuation is not harmonized across countries.

As in the area of goodwill, the Fourth Directive is more flexible. In the Fourth Directive, Article 9 said some rules of goodwill, which is need to value consideration. (The Fourth Directive, 1978) In Article 37 refers to goodwill, individual business firms have the right to use goodwill during a period of five years. (Emmanuel, Emenyonu and Gray, 1992) In individual countries, in the majority of Germany and UK’s companies, they will have not capitalized goodwill. They concluded that the methods of treating goodwill adopted by large French, German and UK companies are significantly differently. Thus, the difference in the methods of treating goodwill used by large French, German and UK companies is significantly.


The Fourth Directive does not cover the treatment of lease, so it is difficult to define the lease differences in the EU, even if building and land or plant and machinery cannot be found. The principles about treatment of lease are different, such as financial lease, classification and operation lease in Germany or the UK. Meanwhile, the diversities of lease treatment in member states will cause the efforts of block of transnational economy.


In the Fourth Directive, in the Article 35(1) d present the condition that if the fixed assets value are used as the adjustment for the purpose of taxation, then this values and why making such adjustment value should be disclosure in the accounts' notes. This point also mentioned in the Article 39(1) e, it is defined how to use the current assets for taxation purpose.

The principles of counting taxable profit and the principles of counting accounting profit are linked together in some countries. For example, Germany is one of these countries who has adopted this approach, in Germany accounting rules, it says "massageblich keitsprinzip", which means the "bindingness", "congruency" or it also could means the "authoritativeness". If there is a same amount of charge in published accounts, then the generous tax is allowed. This aim to form a specific conservation accounting system, it also helps to implement a "very conservative transformation" EC directives in Germany (Hailer, 1992). In contrast, a lot of countries do not have this binding link, such as the UK. However, even though the tax principles are not linked with accounting principles, the countries' tax law still influences it accounting principles and practices. According to a survey conducted in the UK, most people are agreed or even strongly agreed that tax is one of the big factor when company choose the accounting policies.

The Fourth Directive and Harmonization

It is said in Nobes’ research (1993) that the period of the Fourth Directive to be implemented is quite long. Mason (1978) refers to two main benefits to realizing harmonization of accounting. Firstly, it is beneficial to companies reduce their cost in either in the accounting actions or in the number of adjustments on consolidation. Then, Internal and external reporting systems and performance measures will promote the integration development. When it comes to the reasons why the harmonization is critical in the EU, the answers are differs. Seeking the harmonization to demand the need of international investors. Some international investors need promote the work of transnational investors. Nowadays, this is more convenient for companies to exchange accounting methods and basis. Actually, in the EU, government and business firms are design to use Directives to realize the harmonization.

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As it is mentioned in this report, harmonization is a process. (Nobes, 2012) Therefore, there can be some of harmony not full harmony being achieved. The relationship between The Fourth Directive and the harmonization is difficult to define. As for how the fourth directive make a promote in the harmonization, Turley (1983) once present the differences in accounting practices among different countries to support that harmonization of accounting needs more accounting principles and agreement. The development and implementation of the Fourth Directive should be addressed. And European accountants define the Fourth Directive could be defended on the grounds to attempt to move toward achieving harmonization of accounting. It is also be defined that harmonization of accounting is influenced by environment in different countries. EU accountants point out that on the positive side, the Fourth Directive represents a goal of achieving harmonization of accounting. The Fourth Directive may make more contribution to the harmonization in the future. Even though there are still some limitations and problems in the Fourth Directive the Fourth Directive will not result in complete harmonization, the contribution still cannot be ignored. More rules may be paid more attention within member states in the EU before full harmonization can be achieved in the future.

Tay and Parker (1990) researched harmonization is a process and revealed the problems and obstacles in harmonization. Harmonization is regarded as a process leading to ‘a movement away from total diversity of practice’ and standardization is considered as a process involving ‘a movement towards uniformity’. In this regard, the objectives of harmonization and standardization are totally different. The former one aims at removing accounts away from the whole variety, while the later one is to combine them as a whole. It may be not easy to find out the certain point that accounting regulation switch from harmonization to standardization inside the continuum. However, the accounting practices of corporates in individual nations inside the continuum, even the EC harmonization programmer, are possible to be moved from complete variety toward uniformity. The elements that lead to the harmonization is reviewed either. This research comes to the conclusion that a high level of harmonization can be achieved though the Fourth Directive for some instances. But it is also should be seen the obstacles by the Directives. Two findings can be found in this survey, the Fourth Directive has a significant influence on the accounting’s harmonization because of the lack evolution of accounting practices.


To sum up, this report discusses the Fourth Directive. In this report, it lists some topics in financial reporting for which differences could be found, such as format, balance sheet assets and so on. They may be covered in the Fourth Directive or not, and their differences in the EU countries. For instance, the difference in the methods of treating goodwill used by large French, German and UK companies is significantly. So this difference will make some negative influence on harmonization of accounting. However, some topics cannot be found in the Fourth Directive, such as the topic of lease it presents in the report. It is difficult to define the lease differences in the EU. Then it examines the Fourth Directive to see whether the topics are covered and whether the Directive’s requirements could be expected to lead to harmonization. Overall, the Fourth Directive did a little contribution to the Harmonization. In addition, the lack of harmony in the accounting differences, with the inadequate revealing and measurement methods using in the stock valuation development. The harmonization is a process and it is still in the stage of exploration. Some more actions and improvement must be taken in the future to get more achievement.