nm1112: let's make a start 
su1113: 
nm1112: if there's any please look at them later all right and we will go 
through them okay well welcome to the second term of this course er this cour-, 
this part of the course as i mentioned to you last term is concerned mainly 
with con-, convergence last last term we looked at how accounting systems were 
different we looked at France and Germany and the Netherlands and so forth to 
see how the financial reports are different this term we're looking 
particularly at what pressures there are or have been in the world to make 
accounting comparable between different countries and we're going to do this in 
two stages first of all we're going to look at the process of trying to 
harmonize accounting within Europe and that process has effectively ended so 
we're really dealing with history and then namex is going to talk to you about 
current issues in s-, bringing accounting systems together which is through the 
work of the I-F-C and you'll have that in 
two weeks time and you've already had a lecture with him so i'm going to spend 
this week and next week looking at the European Union harmonization process 
because it has many er points i think that are important for the future about 
relative success and failure er and what we're going to do is it's going to be 
excruciatingly boring is we're going to come in we're going to look at two of 
the main instruments of harmonization within Europe the first is something 
called the Fourth Directive which i'm going to look at this week and the second 
is the Seventh Directive that i'll look at next week and then we shall look at 
some developments in the European Commission er that tie pieces together right 
so it's not i better warn you it's not going to be a terribly exciting area but 
i think it's good for the soul you may find it quite interesting to see why 
these things have had relative success or failure right well what i want to do 
first is just to because i know some of some of you are not from the European 
Union at all some of you are from the European Union 
countries er i just want to take a very simple view of what the European Union 
consists of and [cough] the first point is that it's been called various names 
in its history the European Communities Common Market the European Community 
the single market and we're now called the European Union but in its origin it 
started with a treaty signed by a small number of continental countries 
basically the Benelux countries France Italy and Germany who signed a Treaty of 
Rome and the political aspect to it was that of course it was the idea that 
there should be no more war in Europe after the Second World War but we're 
going back to nineteen-fifty-seven for that we're going some way and the 
original Treaty of Rome had three central economic objectives there was a 
political dimension but it had three basic objectives now do you know what they 
are what was the original idea come on you're you're from European Union 
countries what's the 
sm1116: energy i think someth-, something about energy 
nm1112: well there was 
sm1116: steel 
nm1112: yeah you're right in fact there were t-, that's why it's called 
communities 
sm1116: yeah 
nm1112: 
there was European Economic Community and the European Coal and Steel Community 
but if i take the European Economic Community what was the aim what were the 
three central points shh what was the three central points 
sm1117: is that the com-, common policy er 
nm1112: er very easy to remember honestly they all begin the word free free 
something free something free something come on 
su1115: free 
nm1112: free 
sf1118: 
nm1112: you're on the right lines the word is free trade it was the removal of 
tariff barriers and quotas between the member states that would allow free 
trade without restriction so that was one the second one was right i'll give 
you a clue what is it that underpins the fact that you are soc-, the Socrates 
scheme you're here studying in the U-K 
sm1116: movement of 
nm1112: good free movement of labour good and there was a third one 
sm1116: free transportation of goods 
nm1112: no i don't know 
ss: 
nm1112: well i think that comes under free trade doesn't it free movement of 
sm1116: money 
nm1112: i like it yeah free movement of capital so these were the three central 
ideas in ter-, economic terms before we ever had the idea of a single market 
before we had the idea of a euro this was the starting point of the European 
Economic Community right now i want to ask you this question i want to think 
the European Communities later Union embarked upon a process of the 
harmonization of company law in the member states why how how did that they 
started right from the beginning what had that got to do with this why would 
the European Economic Community be interested in trying to bring accounting 
systems company law in each of the member states why would it think about 
bringing them together harmonizing them can you construct a rationale looking 
at these 
sm1117: 
nm1112: a bit more 
sm1117: in order to come free movement of capital only for someone from England 
or France and invest in France 
nm1112: abs-, 
sm1117: and share a common government system 
nm1112: absolutely right the idea was this the free movement of capital was 
originally about s-, you know getting rid of th-, exchange control so the money 
flows would be free within the European Community but then it led on to the the 
following idea if i am somebody with some funds in the U-K 
and i am thinking of investing in a company this principle should mean that 
there should be no barriers to my investing in a British company or French 
company or an Italian company however the decision about where i'm going to 
invest my funds is critically dependent upon the fact that the companies are 
comparable and that the financial information that those companies provide to 
me are of a kind and a nature that i can make a comparison between them to find 
the best investment opportunity so this argued therefore for harmonizing 
company law and for getting equivalent kinds of financial information for me to 
be able to make a decision that was in a sense a consequence of this central 
principle and indeed we find this idea of harmonizing company law in the Treaty 
of Rome in a very obscure section article fifty-four section three subsection G 
forever engraved on your hearts this is the origin of the company law 
harmonization 
programme now again just by way of introduction i don't know how familiar you 
are with the institutions of the European Communities or or European Union are 
you isn't it i mean isn't it shameful you should say that they should be 
ashamed here they are parts of a European Union with all kinds of political 
institutions and they haven't the faintest idea what the what these 
institutions are well let's do it very quickly i'm not here to give you a 
course on Europe but i think it's important to understand the institutional 
background if we're to get into the to the actual things that govern accounting 
or the accounting harmonization [cough] okay well s-, let me lead you a little 
centrally within the European Union there are four main institutions can you 
guess what they might be three main institutions of the Union or a-, of the 
European Communities as they then was come on come on 
name anything that you remember from Europe the cover 
sf1119: parliament 
nm1112: good there you are it's not so difficult directly elected parliament 
right three more 
sf1120: justice court
nm1112: yes a European Court of Justice which was is a court of law to deal 
with issues of European law two more if i say to you Brussels duh big building 
bureaucrats what does that tell you 
sm1116: commission
nm1112: yes the European Commission which is a kind of civil service fonc-, the 
fonction publique and [cough] one more in fact the most por-, important one but 
not one that most people know well it's called the Council of Ministers so 
[cough] these are the four main institutions directly elected court of law a 
civil service and the Council of Ministers now the Council of Ministers is a 
body that consists of the national ministers 
from each of the member states and the council then will reflect the topic 
under discussion so if it's if there is an agricultural issue that is to be 
decided like the common agricultural policy the council will consist of the 
Minister of Agriculture from Britain the Minister of Agriculture from Belgium 
the Minister of Agriculture from er Italy and so forth now [cough] these are 
the four institutions and under the Treaty of Rome and everything subsequent to 
it the European Communities or as it's now called European Union can produce 
law which affects all of the member states of the Union and very simply and i 
am oversimplifying here there are two kinds of law that can be produced and 
this law of course can be tested in the European Court of Justice which is not 
the European Court of Human Rights let me tell you the first type of law are 
something called regulations and the second type of law is called directives so 
we have European Regulations and European Directives does 
anyone know what the difference is you come across these phrases 
sm1121: i see the directive's not as a obligation it's just 
nm1112: it's an interesting yeah
sm1121: dire-, direction of 
nm1112: well it certainly it sounds right doesn't it for i-, actually you 
there's something in what you say is right but something that's quite wrong but 
you so you've got it half right well let me say that the first deal with the 
the regulations these deal with minor technical matters and once they are 
decided once they are published in something called the Official Journal they 
are immediately binding they may go out for consultation to the member states 
but once the u-, the European Union decides on a regulation by publishing it in 
the Official Journal it has immediate legal effect 
and the sources of regulations can either be the Commission can issue one on 
its own or a Council of Ministers can issue one on its own and once they are 
published in the Official Journal they have legal effect and they tend to be 
used for let's say minor matters like let's think of a silly example of one 
recently the amount of real cream in the ice cream that you buy the amount of 
pig meat in a sausage all right these are technical minor things that come and 
once the regulation has been issued that's it has effect in the U-K in Belgium 
and in Spain or wherever so these are minor matters but for important issues 
the legal instrument is a directive right and these are only binding i'll write 
it so it's clear for you and this is half your point actually oh binding only 
when [cough] they are enacted by the parliaments of the 
member states i'm running out of pens here right in other words once a 
directive is published in the Official Journal of the European Union it has no 
legal effect what has to happen is that the individual parliaments have to cr-, 
put it into national law and they normally have a delay in which to do it they 
must do it but they have time to put it into national law using national 
phrasing right now these are for important issues and the procedures for for 
actually these directives being published or the word is adopted by the 
European Union are quite complicated and normally what happens is this the 
commission the civil service has an idea for a directive right it publishes a 
draft first draft the draft goes to the parliament for consultation goes back 
to the commission and then it may go backwards and forwards several times and 
then the commission puts a draft to the Council of Ministers and it goes back 
and it goes back again and it is a vote of the Council of Ministers not the 
commiss-, the commission can't do it on its own the parliament can't 
do it on its own it's only the Council of Ministers that adopts notice the verb 
adopts the directive once they adopt the directive it's published in the 
Official Journal of the European Communities or the European Union as it now is 
and then there is an obligation on the governments of the member states to put 
it into national law into their own national law so very are there any 
questions on that anyone i i'm sketching and oversimplifying but i want you to 
understand what a directive is how roughly how it happens particularly the 
notion of a draft the notion of adoption and then the requirement for national 
legislates to enact it or put it into national law [cough] okay no questions 
it's a lot of fun isn't it right well let's look at what this harmonization 
programme on company law and the direct-, under de-, the directive system has 
been for [cough] the European Communities and if you look at the first page of 
the handout 
you'll see a list of the principal directives that ac-, been emitted from or 
adopted and enacted from er the European Communities and you'll see that they 
cover quite a long time period each directive the first one in sixty-eight the 
last one ten just over ten years ago and you'll see they're each given a number 
you'll also see that some of them have never been adopted in other words the 
Council of Ministers has never said yes they only exist in draft so for example 
the Fifth Directive which would have brought employees onto company boards of 
directors if they were public companies has never been agreed the Council of 
Ministers actually that's Mrs Thatcher she wouldn't allow it to be a directive 
to be adopted and the Ninth and the Tenth equally well what i want to do is 
just to go through and pick out the important ones [cough] first of all let me 
talk about the First Directive very early on it did three things two of which 
are mentioned here and the third which isn't first of all it defined what 
companies could do whether they were Italian or French or 
German or British or any of them their powers that defined also the powers and 
duties of directors of companies those two points are mentioned the third point 
which is not mentioned is an accounting point the First Directive made it an 
obligation on national governments to establish a company registry or 
registries into which companies would file their accounts for public disclosure 
now for some countries like although the U-K wasn't a member of the er the 
European Communities of that date some countries there has always been a 
company registry there has co-, there's Companies House in the U-K where 
companies must deposit their accounts in France [cough] you've always had some 
but you know that that they are local les Tribunaux de Commerce okay in other 
countries like Greece before this was enacted in Greece there there were never 
any company registries but this was the first point you know how could you 
ensure to get 
free movement of capital then an investor could actually get hold of accounts 
if there wasn't some place where they were deposited the accounts were 
deposited and you know this is not common well it is common in some countries 
but there's plenty countries in the world don't have them so for example if you 
wanted to look up the accounts of a Vietnamese company forget it you're not 
going to be able to find it the Second Directive is one we've already come 
across and it sets minimum capital requirements on the formation of a company 
it also defined distributable profit although that's not mentioned here but 
more importantly it gave a common constitution throughout all the member states 
between a private company and a public company between a P-L-C limited S-A S-R-
L A-G G-M-B-H all similar right and that's useful so that any investor now will 
know what kind of company he or she is dealing with okay the Third Directive 
was a one that only affected 
Benelux and France it's deals with something well you'll know about that er in 
France it deals with something called fusion and mergers the Fourth Directive 
is the big one dealing with when the accounts are published what financial 
information must be disclosed what the content of the annual accounts is going 
to be and that's where we'll be looking at a little later but at the bottom of 
the page you'll see although the Fourth Directive was adopted by the Council of 
Ministers in nineteen-seventy-eight it was given a delay was given for 
countries to put it into national law so Denmark and the U-K were the first 
countries Sweden Austria and Finland who joined quite recently European Union 
of er just recently and you may notice Italy Italy took thirteen years to put 
this er directive into national law they were even going to be taken to the 
Court of Justice 'cause they were so late [cough] so we're going to look at the 
Fourth Directive today the Fifth 
hasn't been er adopted the Sixth is a minor one that deals with something 
called again i just speak to the French scission de-, de-mergers if you've done 
scission the Seventh Directive is the other great one it deals with 
consolidated accounts group accounts and we shall look at that next week and 
again if you look at the bottom of the page you'll see the dates of enactment 
there the Seventh was adopted in nineteen-eighty-three and you'll see the dates 
when it was put into national law er and you'll notice that some countries that 
you've dealt with actually put them in together so if you look at the case of 
Germany Germany waited to put the Fourth Directive into national law into their 
national law until the Seventh had come out and then they did the two together 
and that you may remember when namex did Germany you came across the 
Bilanzrichtlinie-Gesetz of nineteen-eighty-five that's the one that er puts in 
both the Eighth Directive is the third 
is the third big one Fourth the Seventh and the Eighth and this deals with 
common qualifications for auditors and their appointment procedures for 
appointment and procedures for their dismissal Ninth and Tenth er aren't 
haven't been introduced the Eleventh is very minor [cough] the Twelfth is a 
minor one although it's had quite an impact in some countries er the idea of a 
company is that you have two shareholders minimum of two the Twelfth Directive 
introduced the idea that you can have a one-person company where there's only 
one shareholder and create company as a shell er in some countries in the 
European Union there's a name for this i'm going to ask the French what's it 
called in France E-U-R-L Entreprise unipersonnelle à responsabilité limitée 
the U-E er E-U-R-L you can spot one of these if you see a French business and 
it's got the name and it's got this behind the name then it's a one-person 
company right [cough] so i mean that's the background now we're going to go 
in to the Fourth Directive 'cause that's the big one and what i'm going to do 
with you and you're going to hate this you really are going to hate this is i'm 
going to we are going to read the directive together we're going to go through 
a certain number of articles and i'm going to ask questions and think i want 
you to think back to France and to Germany and to the Netherlands 
we did those countries because it's by going through it that you can see the 
potential for success and the potential for failure in terms of bringing 
accounting systems together now what you have in front of you is a copy of the 
Fourth Directive i don't propose to go through it all i'm going to go through 
depending on the time we have up to about article forty-two i'm not going to 
consider each article i'm just going to pick out and ask you to think about the 
consequences the implications of the basic [cough] things that are contained 
right [laugh] how are 
you feeling happy pleased content it's a lovely new year and we're going to 
enjoy ourselves right [cough] let's just start by looking just the words coming 
out Fourth Council Directive 'cause it's the Council of Ministers based on 
article fifty-four-three-G of the Treaty and then this wonderfully pompous 
phrasing the Council having regard to the Treaty having regard to a draft from 
the Commission having regard to an opinion of the parliament all of this 
preliminary stuff then says whereas the coordination of national provisions 
concerning watch the words presentation content of annual accounts and annual 
reports valuation methods and publication is of special importance three four 
key words there the directive is going to deal with the way the accounts are 
presented what their content is what rules are going to be used for the 
valuation of assets and liabilities and the details of publication so in the 
very first introduction you know what this is about the next paragraph says 
whereas simultaneous coordination is necessary well try telling 
that to the Italians they took thirteen years to put this in as i mentioned and 
then it goes dum-de-dum-de-dum-de-dum and then the last part says whereas 
moreover the necessity and the urgency of cu-, such coordination has been 
recognized and confirmed by article two of Directive sixty-eight-one-five-one 
what is Directive sixty-eight -one-five-one what would you guess 
sm1117: 
nm1112: yeah which which directive is it 
sm1117: first 
nm1112: it's the first now that's telling you something interesting it's 
telling you that the European Communities as they we-, then were were trying to 
they had in mind the Commission at least had in mind a whole series of 
interconnected directives they weren't just oh that's a good idea and now 
here's another good idea they were thinking them through as they were working 
on one they were thinking of the next right the next paragraph whereas it is 
necessary moreover to establish in the community now watch 
three words minimum equivalent legal requirements as regards the extent of the 
financial information right again this gives you a clue to the harmonization 
process first of all it's going to concentrate on basic things minima it's not 
intending to go through and lo-, cover all the accounting issues that are 
involved in the balance sheet P and L notes it's minima right second the second 
word is equivalent it's not trying to make the requirements the same in each of 
the member states it's trying to make them equivalent one to another so that's 
actually quite a limited process it's not saying that in France you must 
depreciate buildings over twenty years and also in England you must be-, 
depreciate buildings over twenty years it's just trying to make things 
equivalent and then the third thing is legal the harmonization process is 
through the amendment of company law now can you see a problem with that word 
legal can you see a problem with 
this approach to bringing accounting systems together making them converge 
using a requirement of chan-, using legal requirements come on 
sm1117: i think the problem is er who is er er who is giving the law for 
accounting in this country some in France come from the government the 
government issues er and from something in the U-K is coming from er they look 
at the the boards of accountants 
nm1112: well not the boards of accountants come on what's it coming from 
[sniff] you're right you're exactly on the right track what's the point y-, y-, 
you're absolutely right i just want i want the words
sm1117: er the 
nm1112: [laughter] it's the Christmas holidays being too long [laughter] all 
right there you got the point i mean the 
sm1117: SAPs and 
nm1112: yeah SAPs are a bit old 
sm1117: yeah
nm1112: we don't talk SAPs now yeah the point is this in in many member states 
in the European Communities as they then were er accounting regulation is 
entirely by law in Germany in Italy in Spain in France 
sm1117: Greece 
nm1112: and the point about and in Greece thank you and you you know in France 
there's a Code de Commerce there's the Plan Comptable Général there's the 
Comité de Reglementation Comptable all these things we've talked about it's 
all government driven but in the U-K and Ireland and to a lesser 
extent in the Netherlands the principal detail governing accounting doesn't 
come from law it comes from accounting standards generated in the U-K by the 
Accounting Standards Board and that's the problem there's only a certain amount 
that's covered by company law in the in in the Anglo-Saxon element of the 
European Community so it tells you [laugh] you're not going to get 
harmonization how can you require how can you re-, require U-K accounting to 
change by changing its law when for the actual thing that governs accounting in 
the U-K is not law and it changes very quickly we get more and more standards 
coming out it tells you in a sense that inherently in this process the success 
if any is going to be very limited and it also re-emphasizes the point about 
minima you couldn't capture accounting regulation by simply changing the law in 
the U-K so i think that's a very significant phrasing right the next paragraph 
tells you a little bit 
more about the content and it says whereas annual accounts must give a true and 
fair view right so we got that's that's Anglo-Saxon in origin isn't it this 
notion of a true and fair view next part whereas to this end a mandatory layout 
a prescribed format that's German and French so there's an element of a 
compromise coming and you see there's both Anglo-Saxon and continental inputs 
into this whereas there is a minimum content of the notes and whereas de-, 
derogations may be granted and derogations means exemptions in English er for 
certain companies of minor e-, economic and so-, social importance and then the 
next paragraph says whereas the different methods I-E rules for the valuation 
of assets and liabilities must be coordinated dum-de-dum-de-dum-de-dum disclose 
comparable and equivalent information comparable and equivalent it does not say 
disclose the same information it just means 
that they should be comparable one to another and equivalent so again very 
limited objectives so have to give it and the next paragraph is well yes 
whereas the annual accounts must be published in accordance with the First 
Directive yes whereas however certain derogations exemptions can be given for 
small and medium-size companies now what's that telling us what do you think 
that's telling us i know is this wording is strange and a little official but 
what's it telling us then whereas the annual accounts of all companies to which 
this directive applies must be pub-, must be published in accordance with the 
First Directive whereas however certain derogations may likewise be granted in 
this area for small and medium-size companies what's that telling us go on have 
a go 
sm1117: it's not very important so er because maybe they'll all think of cost 
so is one a medium-size company matter four of clause four what 
nm1112: well we haven't got to au-, you're right actually haven't got to audit 
yet but you're right it is about costs what it's basically saying First 
Directive says if you are a company you 
must file your accounts in the registry what this is saying effectively is that 
if you are under the criteria of size small or medium-size you don't have to 
give so much detail that's what it means all of the detail that you would 
normally publish if you're small er not so much detail and your audit point is 
the next point whereas annual accounts must be audited by authorized persons 
whose minimum qualifications shall be subject of shall be the subject of 
subsequent coordination 
which subsequent coordination whereas annual accounts must be audited by 
authorized persons whose minimum qualifications will be the subject of 
subsequent coordination which what are they looking forward to go to your list 
of directives 
sm1117: er 
nm1112: which one 
sm1117: i think it's er [cough] er 
nm1112: which one the Eighth can you see it look on the list of directives so 
this Fourth Directive is looking back to the First and looking forward to the 
Eighth it's saying that the programme of harmonization is going to include the 
coordination between the member states of the qualifications of auditors the 
Eighth okay again emphasizing that the programme is seen as a whole so whereas 
the annual accounts must be audited by authorized persons whose minimum 
qualifications will be the subject of subsequent coordination whereas only 
small companies may be relieved of this audit obligation so what it's saying is 
the Fourth Directive is going to permit member states to allow small companies 
not to be audited and that already is telling you there's going to be a 
difference in the U-K all companies no matter what size have to have their 
accounts audited and the Fourth Directive is going to al-, may er is going to 
allow member states to relieve very small companies from having to be audited 
can you give me an example of a country that does that 
sm1117: Greece 
nm1112: Greece can you give me an example of a country that does that 
sf1118: 
nm1112: France thank you very good come on a bit further and then we'll take a 
break er the next para-, the next paragraph at the end whereas when a company 
belongs to a group right it's desirable that group accounts should be published 
whereas however pending the entry into force of a Council Directive on 
consolidated accounts which directive the 
sm1117: seventh
nm1112: seventh yeah so again it's looking forward okay er they're making some 
transition arrangements right well at that exciting point we'll 
take a break for ten minutes and then we're going to dive in and as i said i 
don't want you to be frightened by the words but i think it's quite useful to 
do this because at each stage you can stop and think okay now how's that going 
to work or what problems is that going to throw up and in doing that you 
actually see as i say the advantages and disadvantages of the process so we'll 
meet again at twelve o'clock 
nm1112: 
clear what we're doing okay leave the case studies we'll deal with them later 
let's go back to right so we looked at the preamble we've already got some 
clues as to the way that this directive's going to shape up and what i want to 
do first is to look at article one which looks very long and it says it's got 
two sections and it says the coordination measures notice the word coordination 
what the directive is doing is not making everything the same it's coordinating 
between the different member states coordination members shall apply to the 
laws et cetera et cetera of the member states relating to the following types 
of companies and then you've got the companies that were m-, the countries that 
were members of the European Community then and what do you notice about those 
companies either in France or Greece or Germany or Britain what's the common 
characteristic 
sm1117: a a limited liability company 
nm1112: yeah they're all limited liability companies right so it's only 
limited liability companies that are being captured by this directive as a 
requirement so general partnerships no sole traders no unlimited liability 
companies no they're not subject to this directive okay however and this is a 
point of difference there's nothing in this dir-, in this article that prevents 
member states from applying the directive to these c-, other sorts of 
businesses is there all it says is that this a-, must apply to these limited 
liability companies but there's nothing to stop a country saying oh well we'll 
make it apply to everybody and that's what's happened some countries have 
applied the directive aside from publication requirements to every enterprise 
that's the case in France and the case in Greece yeah Greek businesses even if 
they even if they're not limited liability companies will have the basic rules 
here applied through your Greek general accounting plan the French general 
accounting plan is 
consistent with this so the only difference is that that everybody uses it in 
France and Greece the directive the only difference is that if it's not a 
limited liability company they don't have to publish their accounts okay you 
might like to think about why does this directive only apply to limited 
liability companies i'll leave you to think about that 
sm1117: why 
nm1112: why why only limited liability companies limited liability businesses 
why doesn't it apply to everybody why didn't why didn't the European 
Communities make it apply to everybody partnerships sole traders unlimited 
liability companies nationalized industries well it's okay i said i'll let you 
think about it it's basically because when an earner has limited liability 
creditors need protection because a shareholder is only limited up to a certain 
amount it it's po-, it's for the protection of creditors that's why it's here 
and you'll notice in section two that there is 
pending subsequent coordination the member states need not apply the provisions 
of this directive to banks or to insurance companies why why do you think that 
they w-, you know needn't apply to banks and insurance companies 
sm1117: got special er 
nm1112: they've got special accounting special legal requirements to state-run 
banks protection of depositors protection of policy holders the accounting 
issues are very very different but what's happened is th-, the European 
Communities and then the European Union has published a Fourth Directive for 
banks and a Fourth Directive for insurance companies separate okay let's move 
to article two which is section one general provisions and article two is 
really the heart of the directive and it needs to be read very carefully i'm 
going to point out some words to you and then i'm going to ask you to think of 
the implications and consequences right so the first one the annual accounts 
shall comprise the balance sheet P and L 
account and notes what's missing 
sm1117: cash flow 
nm1112: cash flow statement why is it missing why do you think it's missing why 
didn't they put cash flow statement as a requirement well the answer is 
historical the cash flow statement was really only developed in the nineteen-
nineties the first requirement in the world for a cash flow statement was S-F-A-
S-ninety-five in the U-S they didn't have it then but in fact y-, a country 
very re-, last year Norway which is not a country in the European Union has 
actually because of trading and all the rest and making sure funds can flow has 
enacted the into Norwegian law a Fourth Directive but it's added a legal 
requirement for the cash flow statement but cash flow statements weren't around 
and that's telling you something rather interesting it's telling that this is 
essentially a one-off directive it hasn't been amended seventy-eight it was 
adopted we're now two-thousand i'm not very good at sums but that's twenty-two 
years isn't it nothing's changed telling you perhaps that the process of 
getting agreement on these things is actually very difficult and then the 
second statement i'll just ask you to remember this these documents shall 
constitute a composite whole in other words the annual accounts are not to be 
thought of individually as a balance sheet and P and L notes they're all 
together they're a whole you'll see the importance of that in a minute right 
article two says section two says they shall be drawn up clearly in accordance 
with the provisions of this directive that's German in origin and now look at 
this this is the key one the annual accounts shall give a true and fair view of 
the companies' assets comma liabilities comma financial position and profit or 
loss where is this come from from the U-K okay so it's a true and fair view 
which comes from the U-K's Companies House but there are several things to say 
about this first of all 
you're reading the English language version of the Fourth Directive but there 
is obviously a French version and a Greek version and a Finnish version and in 
the European Communities or European Union they all have equal authority the 
Finnish version is exactly the same authority as the English version it's 
exactly the same as the Greek or the French can you see a problem 
sm1117: translation of the true and fair view 
nm1112: translation of true and fair view di pragmatiki eikona une image 
fidèle la do you remember the Spanish case la imagen fiel the you don't 
remember this i talked about it last time Spanish translated this phrase as the 
faithful picture there's only one the and you get it by applying the rules in 
the Spanish law whereas the English version says a true and fair view so you're 
going to get differences and each version is equally authoritative do you do 
you understand be-, because the the criterion is expressed in a different way 
it could lead to different numbers 
in the accounts different ways of doing things yeah what about i-, you did a 
lecture with namex on the I-S-C do different languages have equal authority for 
international accounting standards can you remember no they don't they're 
published in English so that's quite interesting because there's always a base 
in international accounting standards that you can refer to it's it's the 
English version that has authority and everything must fit with it but in the 
European Union the European Communities they're all of equal authority so they 
can be taken the phraseology can be taken differently 
and this is the first point e-, despite despite it being of Anglo-Saxon origin 
the second point is the words er see if you can remember this if i show this to 
British students and i say of the company's assets liabilities financial 
position they look a bit odd they say to me well what's the difference assets 
and liabilities do represent financial position so why is the words being 
repeated but in a lot of other language versions assets comma liabilities are 
translated by a single word can you remember what it is i'm looking at the 
French 
sf1120: actif passif actif passif
nm1112: non non that would be the straight translation actif passif here's the 
word you should remember it you told me this is the same word in Greek i 
remember the words assets comma liabilities translated by the word a single 
word 
patrimony now what's the significance of this patrimony idea well it refers to 
things that are legally owned or legally owed right take me a bit further no 
you don't follow the point what it means is that you can only put something on 
the balance sheet if it's legally owned it can only appear as an asset if it's 
legally owned which is the reason why you can't capitalize finance leases but 
we don't have that restrictive notion of patrimony so we can put more things on 
the balance sheet do you not underst-, do you not follow don't you remember 
this come on let me gi-, you're sure don't remember this all right let me give 
you a better example to make you remember are you do any do you know anything 
about co-, 
sm1117: it's about leases leases 
nm1112: lea-, finance leases absolutely right you can't capitalize finance 
leases under the restrictive notion of patrimony and that's that's what appears 
in the French and Greek versions and Spanish and Italian so it's telling 
you that because of a for-, a lang-, a translation problem you're not going to 
get harmonization do you understand this point about patrimony no all right 
well then i'll give you just just refresh-, i i'm going to take a football 
example right this foot-, do you know anything about football i [laughter] 
don't know i i don't know anythi-, you know anything about football all right 
well look [cough] i'll tell you this 'cause this is what my son tells me there 
is a famous football player in the U-K called Alan Shearer he's cap-, you're 
nodding your head he's captain of the England football team and he plays for 
Newcastle United doesn't mean anything to me 
sm1117: 
nm1112: you yeah er you remember the story ah the story is this could Newcastle 
United put Alan Shearer as an asset on Newcastle United's balance sheet 
[laughter] now if i ask the question to the French or Greeks or to 
the Chinese you say of course not and you would say Newcastle United doesn't 
own new-, Alan Shearer he's not part of the patrimony right but in the U-K our 
notion of an asset is far more flexible to be an asset 
sm1117: 
nm1112: you have to have a resource that you can control and to which you can 
give a reliable monetary value does Newcastle United controlled Alan Shearer 
yeah he's under contract can you give a reliable monetary value yes he was 
transferred to Newcastle United for fifteen-million pounds is he going to 
produce economic benefits for the club yes bang put him on the balance sheet 
[laughter] yes but you can't do that when you have a notion of patrimony which 
is very restrictive and the fact that you got a la-, you got a translation 
issue here assets comma liabilities is English patrimony is French and Greek 
and Spanish and Italian and Belgian and almost e-, and Greek and ev-, almost 
every other country in the 
European Union so it's already telling you that there's going to be a problem 
you're not going to get harmonization because of this conceptual difference 
yeah now the third point about this statement is this i want you to connect 
this section the annual accounts shall give a true and fair view with the first 
section can you see a problem the annual accounts shall give a true and fair 
view 
sm1117: accounts 
nm1112: a little more yeah i like it i like it
sm1117: sections there doesn't say a true and fair view in the notes of the 
accounts 
nm1112: well what it s-, the first section says therefore from section three 
the accounts as a whole must give a true and fair view right what does that 
allow think France think Germany well what it means is it's possible to have 
one part of the accounts that is not true and fair provided that another part 
of the accounts corrects it so that overall the accounts are true and fair do 
you follow that can you think of anything where that might apply 
three letters T 
sf1118: tax 
nm1112: thank you tax it's possible for something to be tax-polluted in one 
part of the accounts provided that the correction to that tax pollution is made 
in the notes so that overall you give a true and fair view yeah [laughter] and 
it's only in close reading of this that you see the potential for divergence if 
i didn't make you do this you wouldn't even think of it so whereas you've got 
what seems to be harmonization the words are expressed in such a way that the 
potential for divergence is there okay [cough] let's go on a bit er sections 
four five and six say four says well if it you don't get a true and fair view 
got to add additional information that's b-, that's section four section five 
says where in exceptional cases you don't get a true and fair view by applying 
the provisions of the directive you must depart from the directive but national 
governments have said in Germany we don't have any 
exceptional cases so section five doesn't apply difference is interpretation 
we're getting all right well that is just giving you a flavour of some of the 
areas er let's go on we've got section two which is about some general 
provisions of the balance sheet er we'll leave most of those away er look at 
article six what does this remind you of this is a potential for divergence i 
wonder if you can think of a difference what's that remind you of member states 
may authorize or require adaptation of the layout of the balance sheet and P 
and L in order to include the appropriation of profit or treatment of loss 
sm1117: 
nm1112: yeah well a bit more you're right what you've just done the French case 
study what kind of balance sheet is a French balance sheet 
sm1117: tax 
nm1112: it's before appropriation in other words the net profit is put straight 
into equity without any appropriation 
of that profit yeah and you had to do that little exercise of finding the 
dividends do you remember whereas in the U-K which is a which has taken article 
six from the net profit after tax we show proposed dividends we retain profits 
the retained profits slot into equity and the proposed dividends go into 
sm1117: current liability 
nm1112: current liabilities so you've got already an exemption which is going 
to mean that the accounts are going to be different one country's done it 
another country hasn't okay section three says talks about the layout of the 
balance sheet right and basically there are two layouts possible article nine 
is the two-sided balance sheet assets on the left capital and liabilities on 
the right and article ten is the vertical balance sheet right so the European 
Union the European Communities as was are saying you can choose your layout 
horizontal or vertical and it's saying in article eight that member states can 
say either one or both well that's 
not going to make things very easy is it i mean you know in in most continental 
countries it's horizontal only one layout but in Denmark and the Netherlands 
and Ireland and the U-K both layouts have been permitted and what do most 
British companies choose 
sm1117: vertical 
nm1112: the vertical so y-, you in practice then you cry and compare a French 
balance sheet with a with a British one or sp-, Portugese with a British one 
we're going to be laid out in in a slightly different way which is not going to 
make it easy to understand the accounts and even if you look at the detail of 
the ordering you'll see that there are lots of strange things look at article 
nine number B it says formation expenses right start-up costs as defined by 
national law and in so far as national law permits their being shown as an 
asset can you show it as an asset in Germany 
sm1117: mm 
nm1112: yes you can 
sm1117: yes mm 
nm1112: can you do it in France yes you can can you do it in 
Greece yes you can can you do it in Britain 
sm1117: no 
nm1112: no you can't so the 
sm1117: it's a tax [laughter] 
nm1112: well i know it's a tax issue for you but it it's just saying okay here 
it's recognizing that there are going to be differences anyway in so far as 
national law permits their being shown as an asset national law may also 
provide for formation expenses to be shown somewhere else well this is pretty 
weak stuff isn't it and if you read down the order you'll see there are lots of 
alternative places which doesn't actually help if you're making things 
comparable so you may say ask yourself the question well look heavens if the 
European Community was trying to harmonize couldn't they just at least 
harmonize this couldn't they have just done a common layout why do you think it 
was so difficult go on 
here are all these voluntary members of the European Union subscribing to nine 
years all of signing up to the Treaty of Rome Treaty of Maastricht and later on 
er why are they having so much difficulty well i think i i mean there are a 
number of reasons for it one the British didn't want to get involved in too 
much regulation by law secondly each each country had a certain national pride 
in the way they had been doing accounts and didn't see why they should change 
right and thirdly and perhaps a very important point well you've already se-, w-
, w-, let me rephrase the question you've already seen that there are going to 
be divergences and so the effect has been that if i look at a set of French 
accounts or Greek accounts or British or German or Italian they look different 
they got different numbers in them why why do you think you know at root the 
thing has proved to be so difficult i know there are different traditions i 
know that i mean you have different regulatory systems for accounting but what 
what what would you suggest is er 
is another reason perhaps more fundamental reason 
sm1117: tax 
nm1112: y-, y-, you're right it is related to tax but go a bit further you're 
you're you're right 'cause we've seen that several places think back to some 
lecture lecture that namex gave right at the beginning of
sm1117: er number so it's better for this country's of this country's to to 
begin a something 
nm1112: yeah 
sm1117: for example if the U-K has a go-, very big er capital market and in 
nm1112: yes yes it's th-, er okay it's the capital market tax creditor 
orientation issue 'cause underlying the problems in pulling all this together 
is the idea that accounting serves different purposes in different countries 
the primary purpose historically and currently in France and Germany and Greece 
for individual company accounts is to ensure that the tax authorities have 
information to make an assessment of taxable profit and also to provide some 
creditor protection the primary purpose of accounts in Anglo-Saxon countries 
and the Netherlands is to provide useful information to shareholders and that's 
the problem because no matter how much you try and regulate 
or harmonize those fundamental objectives will only change very slowly and in 
accordance with social and economic conditions that prevail so you can 
legislate as much as you like but you're going to get those interests being 
protected and particularly that orientation issue and you can see it all the 
way through as we go through let's pick up some more examples er if i jump to 
let's see if i yeah if i jump to article twenty-two here's the P and L accounts 
[cough] and what the Fourth Directive says if you look at article twenty-two 
twenty-three twenty-four twenty-five twenty-six is it says here are some 
layouts for P and L accounts member states and there are four member states can 
put into their law just one or two or three or all of them and here they are 
vertical horizontal tell me which is which article twenty-three twenty-four 
twenty-five twenty-six which one is article twenty-three 
sm1117: spoken by nature 
nm1112: 
it's vertical and it's is it by nature or by function by 
sf1118: nature 
nm1112: it's by nature yes there's no gross profit figure the analysis of costs 
is by their nature okay which one is this one by function 
sm1117: twenty-five 
nm1112: sorry 
sm1117: twenty-five 
nm1112: twenty-five very good and this one it starts getting easy now 
sm1117: was it twenty-four 
nm1112: twenty-four and this one is therefore by elimination article twenty-six 
now the point here is the [cough] the the Fourth Directive permits countries to 
either say just one or some or all right so you have a situation where for 
example if we take opposites er Portugal has just said that's the only one 
Denmark has said companies can use any of them and depending on whether you go 
for a by nature or by function format 
you're not going to get a lot of comparability because you you remember you 
know in a by nature format you can work out the value added the gross operating 
profit but because you don't have a g-, cost of sales you can't work out the 
gross profit which you can in a by function format so again it's not being very 
helpful in making things comparable and why did Portugal want to have by nature 
simply because there are so many small and medium-sized companies who couldn't 
afford the cost of running a costing system which is what you need if you have 
that kind of structure of P and L and it reflected if you like economic 
conditions it also in tax terms is more tax transparent so it fits very much 
with the particular economic conditions right are you depressed [laughter] fed 
up this is heavy stuff you know this is good stuff let's let's just pick a a 
few points further on i'm just picking things just to illustrate what this 
problem of 
inherent or inherent problems in trying to get harmonization through law to 
emphasize the minimum minimal qualities of this and to show why you can look at 
a set of accounts from another European country and it's not easily comparable 
with another er ah here's another one let's take er article twenty-nine this 
concerns certain provisions relating to special provisions relating to certain 
items in the P and L right income and charges that arise otherwise than in the 
course of the companies ordinary activities must be shown under extraordinary 
income and extraordinary charges unless the income and charges are immaterial 
explanations of their amount and nature must be given in the notes on the 
accounts what's the problem perhaps it's an unfair question because you haven't 
read the whole of the directive but you know enough about for example you 
should know enough about U-K accounting and French accounting to recognize one