International Group Accounting (RLE Accounting)

Issues in European Harmonization

S. Gray, Adolf Coenenberg, Paul Gordon

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781134708499
• Edition: 1
• Topic: Business
• Subtopic: Accounting
• Index: Business

The 43 papers in this collection, originally published from 1972 to 1987 delve into accounting, observing and exploring its functioning. They construct a basis for interrogating it in use and indeed they attempt to account for accounting. The author seeks to understand accounting, to appreciate what it is, what it does and how it does it, examining it from without rather than from within.

Part I

European accounting harmonization and the Seventh Directive

1

The Seventh Directive on consolidated accounts and company law harmonization in the European Community

Hermann Niessen

The text of the Seventh Community Directive on company law dealing with consolidated accounts¹ is neither perfect nor easy, but there can be no doubt of its great importance, first for the accounting rules of member states, and second for the accounting practices of all undertakings engaged in activities within the EC, including subsidiaries of companies from abroad. So the topic merits thorough exploration.

It would perhaps be of some help to learn something about the framework into which the Seventh Directive must be put in order to avoid erroneous constructions of these accounting rules. I would like to begin with a very basic question: what is a directive?

This subject cannot be considered without a reminder of the main purpose of the EC. That has been and will be, whatever the EC’s other dimensions might be, the creation, maintenance and development of a Common Market.² This implies, inter alia, the free movement of persons, goods, services and capital. These freedoms, while of undisputed value for individuals, are in practical terms of greatest importance to companies and firms since they undertake the bulk of economic activity within the Community. The relationship of companies with their shareholders, employees, creditors or other third parties is in all member states the subject of detailed legal provisions giving the appropriate protection to such persons. The safeguards, which often pre-date the Community, may vary widely from one country to another.

The exercise of the freedoms already mentioned means that the transnational dimension of companies’ activities is ever increasing. That increase brings with it conflict between the differing national safeguards to the detriment of those they were designed to protect. The greater the development of the Common Market, the more such disparities inevitably contradict the principles on which it is based. For those dealing with companies uncertainty results. For companies themselves the result may well be distortion of competition. Thus in the Treaty of Rome the power is given to the Community to harmonize national company laws by way of directives.³

In the arsenal of Community measures, directives are the classic means for such kinds of approximation of laws.⁴ With regard to accounting matters a very important distinction must be made: the characteristics of directives are in no way comparable with those of international or national standards launched by private professional organizations. I am not intending a criticism of the quality of any recommendation of this kind here. But the standards are not enforceable as legal rules before the courts. In contrast, directives are binding instructions on the member states as to their results and are integrated into national law by implementing legislation within stipulated time limits.⁵ For the Seventh Directive the time limit was January 1988 and, for application of the modified national rules, January 1990.⁶

Coming back to company law harmonization in general, its purpose is to provide not identical but equivalent safeguards throughout the Community. Indeed, the idea of equivalence, which also implies in the accounting field that of comparability, is a key concept for our activities. It may explain the varying nature of rules inserted into the directives. They can be (i) uniform rules to be implemented in the same way in all member states or (ii) minimum rules which may be strengthened by the implementing national legislator or (iii) alternative rules giving member states options between two or more solutions described in the directive. This categorization is not a mere academic exercise. It is necessary for a correct understanding of the impact of measures taken by the Community.

It is not possible here to describe at length the procedure provided for the adoption of directives.⁷ There is no parallel with national legislation. This may explain why we often find very strange ideas of how the Community works in this respect. The European Commission, with whom the right of initiative lies under the Treaty of Rome, consults thoroughly with national bodies, experts and interested parties before formulating a proposal. In this context, I must express thanks to the ‘Groupe d’études des experts comptables de la CEE’ for having made preliminary drafts for all our accounting proposals. Without these very valuable contributions from the profession, we would not have been able to prepare such legislation. Each proposal of the Commission is then examined by the European Parliament, to which the Commission owes political responsibility, and the Social and Economic Committee representing, as the French say, the milieux intéressés such as industry, trade unions, liberal professions etc. The Commission amends its initial proposal in the light of the advice given by the two bodies and the matter passes to the Council of Ministers for final adoption, almost invariably after many years of difficult negotiations, first, at expert level in a working group and, towards the end, at political level, with the permanent representatives of the member states. This picture would be incomplete without mentioning the European Court of Justice which has jurisdiction concerning the correct implementation or interpretation of all directives.⁸

After having spoken on the legal nature and procedural aspects of a directive in general, I would like to turn more specifically to company law harmonization.

Despite the wide scope of Article 58 of the Treaty of Rome the company law programme has to date been confined largely to limited companies since these are economically and socially the most important enterprises in the Community. Seven major company law directives have been adopted.⁹ We cannot go through all of them. However, it would be impossible to examine the Seventh Directive in complete isolation from the other accounting directives. These are as follows:

• The First Directive of 1968 provides a system of publicity for all companies by way of a register open to the public and publication of the registered information in a gazette.
• The Fourth Directive of 1978 covers the accounts of individual companies, giving a standard layout for the balance sheets and the profit and loss account and providing minimum requirements on the contents of the notes and the annual report.
• The Eighth Directive of 1984 deals with the qualifications of auditors.

All these measures are to a greater or lesser extent linked. I would like to illustrate their mutual relationship by giving some examples.

1. For the disclosure of individual or consolidated accounts the Fourth and Seventh Directives can simply refer to the publicity system set out in the First Directive.¹⁰
2. The requirement of the Fourth or Seventh Directive for auditing of the accounts has been amended by the Eighth Directive by the laying down of minimal conditions for the approval of auditors.¹¹
3. The layout for the balance sheet and the profit and loss account provided in the Fourth Directive is applicable to consolidated accounts except for some inevitable adjustments.¹²
4. The valuations rules are identical.¹³
5. The Fourth and Seventh Directives have the common overriding principle for both types of accounts that they present a true and fair view of the assets, liabilities, financial position and profit and loss of the company or group. They also stipulate the exceptional conditions under which this basic rule requires that additional information be given or under which departure from the specific rules of the directives may be allowed, the latter being always combined with an explanation in the notes.¹⁴
6. Much of the minimum information to be given in the notes on the account is nearly the same for both individual and consolidated accounts.¹⁵
7. A parallel also exists for the content, auditing and disclosure of the annual report.¹⁶
8. In so far as derogations in favour of small and medium-size enterprises are concerned, the Fourth and Seventh Directives use just the same combination of two out of three criteria, namely balance sheet total, net turnover and number of employees, even if the scope of the derogation and thresholds provided for are not identical in both instruments.¹⁷
9. Similar problems exist in both directives concerning the transitional arrangements for banks and insurance companies. The Council Directive of 8 December 1986 on the annual accounts and consolidated accounts of banks and other financial institutions (86/635/EEC) covered the problems of accounts of banks, where the crucial point is hidden reserves. The amended proposal for a Council Directive on the annual accounts and consolidated accounts of insurance undertakings (COM(89)474 final -SYN 78) is under discussion in the Council.¹⁸

Having demonstrated the close link between the Community rules on individual and consolidated accounts, it will now be much easier to understand for which topics there was a need for special rules in the Seventh Directive in comparison with the Fourth Directive. The provisions of the Seventh Directive can only be explained by the existence of a group and for the specific purpose of consolidated accounts. These will show the assets, liabilities, financial position and profits and losses of the undertakings included in the consolidation as if they were a single undertaking.¹⁹

This is the raison d’être of the very technical rules on, for example, capital consolidation,²⁰ the treatment of positive or negative consolidation differences,²¹ minority interests,²² uniform evaluation methods,²³ the elimination of intra-group profits or losses²⁴ and so on. As a lawyer, I feel some trepidation about dealing with these accounting problems.

The most fascinating topic of the Seventh Directive, and also the most controversial, is certainly the definition of a group. Surprisingly, this term is not even used in the Directive. Instead you will find a cumbersome definition of the phenomenon. The only explanation for this complicated wording was the concern of some member states that use of the term ‘group’ could be constructed as a precedent for the Community’s harmonization of substantive group law. However that may be, the First Chapter of the Seventh Directive gives the definition of a group in the accounting meaning of the term. After a crucial debate on the pros and cons of a legal definition as opposed to an economic definition the final outcome was the following: member states must require the drawing up of consolidated accounts in all cases where a parent company has the legal power of control over a subsidiary, by having either a majority of voting rights,²⁵ or the right to appoint the majority of board members,²⁶ or a contract giving control.²⁷

But member states may (and here the Commission would have preferred a ‘must’) go beyond these mandatory provisions by providing for consolidation also when minority participating interests are used for actual control either by exercise of a dominant influence or by management on a unified basis.²⁸ A similar option has been given for horizontal groups (without any parent-subsidiary relationship) by way of interlocking directors, for example.²⁹ All consolidated accounts, on whatever basis they have been made, must be in compliance with the Community rules.

Groups can have several levels. In these cases the problem of subconsolidation arises. The initial proposal provided for consolidation at each level of the group. However, the final solution of the Directive is not so rigid. Enterprises at the top of a subgroup can be exempted if consolidated accounts are drawn up at a higher level of the group. Nevertheless, the Community cannot be indifferent to the quality of the consolidation on which the exemption will be based. In so far as the latter consolidation has been made within the EC, the only measurement is the Seventh Directive.³⁰ But what of consolidation effected outside? I think there could be no doubt, from a purely legal point of view, that the Community would have had the power not to accept them at all. But we have not gone so far. On the contrary, consolidation from Third States, as we call them, may also be accepted under the well-known condition of equivalence with Seventh Directive accounts.³¹ This criterion is not easy to handle. On the one hand, it will allow the refusal of consolidations that provide no information comparable with that resulting from the application of our rules and, on the other, the more sophisticated consolidations can be used even if their presentation is not in total conformity with the Community rules.

By the way, these Community provisions as such do not impose anything on the accounting policies of non-Community enterprises. The only objective is to define the conditions under which a Community subsidiary of a non-Community parent can be exempted from subconsolidation and the management of the group will be completely free to decide whether the subconsolidation is preferred to delivering equivalent accounts made at a higher level of the group.

I have concentrated more than half of this paper not on the Seventh Directive as such but on the framework of this very special Community measure and its various links with other accounting directives, the company law programme, and the approximation of law by directives in general and in the context of the Common Market as one of the essentials of the EC.

The adoption of the Seventh Directive does not mean the end of our concern with consolidation. Many of our member states are in the process of implementation. Controversial problems concerning the wording and spirit of the Directive have been and will be discussed in the Contact Committee in order to achieve, as far as possible, a harmonized application of the harmonized rules.³² In ten years’ time, in the light of the experience then acquired, we shall have a first revision in order to see whether we can make further progress.³³ It is evident how much we shall also rely in future on expertise from outside. For that there is no monopoly. On the contrary we need the help of all involved, either in practice or in theory, in the matter of conso...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Table of Contents
• List of figures and tables
• Notes on contributors
• Introduction
• Part I: European accounting harmonization and the Seventh Directive
• Part II: Comparative European group accounting after the Seventh Directive: Part II Comparative European group accounting after the Seventh Directive
• Part III: Group accounting in some major countries outside the European Community
• Part IV: International group accounting issues
• Part V: Measuring international accounting harmonization
• Appendix Seventh Council Directive
• Index