Harmonization of the Fourth Directive
Harmonization of the accounting system among the EEC member states aims at removing all the
obstacles that may discourage the establishment of trade or businesses by foreigners within the
EEC common market due to accounting systems. The harmonization laws on valuation were
mostly influenced by the Germans specifically from the Aktiengesetz of the year 1965 (Nobes,
1983) hence the valuation rules have strong conservative formats. Germany mostly uses the
German Gaap accounting system as compared to France that has also parts of the International
financial Reporting standards (IFRS) (Nobes, 1998). The valuation calculation policies and
procedures together with the formats of the balance sheet and income and expenditure formats
are mostly German but the others though they are still from the European Union they mostly
relate to the accounting practices mostly witnessed in France (Nobes, 1998).
- The difference in financial reporting can occur on the following accounting procedures
a) The calculation of production costs and the purchase price.
b) Valuation of fixed assets
c) Reserve revaluation
d) Revaluation of tangible fixed assets in consideration to the effects of inflation
e) Separate valuation of the basic components of liability and assets.
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d) The layout and format of the balance sheet
f) Treatment of international currencies
g) Treatment of liabilities
h) Treatment of assets
j) Valuation of assets for taxation purposes
h) Historical cost valuation
g) Treatment for goodwill
Historical cost or valuations are handled differently in most countries across the world. Countries
that use the international financial reporting have adopted historical cost valuation while others
like the US rarely use revaluations except maybe under certain types of financial instruments.
Some countries have defined formats for the income and expenditure and the balance sheet.
Revenue and interest expense recognition is differently treated in different countries
The harmonization of consolidated accounts including banks and insurance companies has been
tackled effectively with the directive. The directives have laid out the format and structure of
drawing the annual accounts. These are the balance sheet and the profit and loss account. Article
11 specifies the assets from A to E and the prescribed format or layout as described in article 9.
The cash flow has also being included in the harmonization. The directive has suggested two
methods of drawing the balance sheet and which are both acceptable to all countries.
Harmonization of the Fourth Directive 3
The directive on harmonization has also outlined the notes that are to be included in the financial
statements. The problems of international currency and exchange rates have been addressed in
article 12 that limits the increment due to exchange to 10%.
Article 22 harmonizes the format of the profit and loss account and the members have been
allowed under article 23 to 26 to choose among the convenient formats.
To harmonize valuation methods, article 31 provides the guidelines and the general principles to
be followed. One of the rules is that all the methods applied for valuation must be consistent and
it must be based on prudent reasoning. The depression provision for all assets must be provided
for even in cases where the company is making losses. These rules are all to be adhered to and
any departures must be noted in the notes section of the balance sheet (Europa, n.d).
The rules of reserve revaluation are found in article 33 section (2b) where the reserve or its
equivalent may be capitalize wholly or in part. However, the application rules for the revaluation
reserve may also be governed by the laws that are meant to supplement the member states rules.
To harmonize the rules, the transfers from the revaluation reserve to the profit and loss may be
applied as far as the transferred amounts have been charged to the profit and loss account and
which should reflect what has actually been realized. The revaluation reserve cannot be
distributed in anyway unless it’s part of or represents the gains made in business.
Article 35 lays down the rules for valuation of purchase price and production costs. Value
adjusted figures may be made to financial assets whose values should be lower and which should
actually be written off over the useful period of the products life (Arlt, Bervoets, Grechenig and
Harmonization of the Fourth Directive 4
The purchase price should be calculated by including the incidental expenses and the price paid
thereon while the production price should also include the materials purchasing price, cost of
consumables that are directly related to the products. The amounts paid as interest on amounts
borrowed should also be included in the production costs (Dohnanyi, 1978).
In cases of value adjustment for the sole reason of taxation, the reasons should be noted down
among the notes on the financial statement ( The European Public Limited-Liability Company
Regulations, 2004 ).
Article 34 shall apply to the treatment of goodwill and the harmonization of accounting for good
will among the member countries. The EEC member countries may allow companies to
systematically write off goodwill over periods that exceed five years provided its within the
assets useful economic life but it should be noted and the reasons provided also entered on the
Article 40 deals with the harmonization of the rules of valuing stock and the production costs
that are related to the stock of goods. Most stocks are subjected to weighted averages to
determine the true value of the stocks. The value of the stocks that has been entered in the
balance sheet at the time of the disclosure and the current value of the stocks at the time of the
balance sheet should be disclosed.
The payments of debts and interests payable expenses should be noted if the amount of interests
repayable exceeds the interests payable. These amounts should be written off systematically at
the end of each financial year until they are totally written off.
Harmonization of the Fourth Directive 5
Arlt, A., Bervoets,C., Grechenig, K. Kalss, S.(2002) The Societas Europaea in Relation to the
Public Corporation of Five Member States (France, Italy, Netherlands, Spain, Austria),
European Business Organization Law Review (EBOR) 733-764
Europa (n.d) Summaries of EU legislation; Retrieved from
Dohnanyi, K.V. (1978) Retrieved from http://eur-
February 7 2015.
Grundmann, S. (2006) European Company Law, Intersentia.
Nobes, C. (1993). Group Accounting in the United Kingdom. In S. Gray, A. Coenenberg & P.
Gordon (Eds.), International Group Accounting – Issues in European Harmonisation.
Nobes, C. (1993). The True and Fair View Requirement: Impact on and of the Fourth Directive.
Accounting and Business Research, 24(93).
Nobes, C. (1998). Towards a General Model of the Reasons for International Differences in
Financial Reporting. Abacus, 34(2), 162 – 187.
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The European Public Limited-Liability Company Regulations (2004 ) SI 2326/2004 and EU