COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 14.11.1995 
COM(95) 508 final 
COMMUNICATION FROM THE COMMISSION 
ACCOUNTING HARMONISATION : 
A NEW STRATEGY VIS-A-VIS 
INTERNATIONAL HARMONISATION 

1° Introduction and Summary 
1.1 The Fourth and the Seventh Company Law Directives provide a harmonised basis 
for the preparation of the accounts of Individual companies and groups of companies in 
the EU. They have been successful in bringing about a general raising of accounting 
standards, in improving the comparability of accounts and thus the conditions for cross-
border business and in allowing the mutual recognition of accounts for the purposes of 
quotation on securities exchanges throughout the Union. 
1.2 The Directives do not, however, provide answers to all the problems facing the 
preparers and users of accounts and accounting standard setters in the 1990s. Some 
issues are not addressed at all in the Directives. Others were settled when the Directives 
were originally negotiated by the inclusion of numerous options, or by formulas which 
are open to different interpretations. Accounts prepared in accordance with the 
Directives and the national laws which implement them do not meet the more demanding 
standards required elsewhere in the world, notably by the Securities Exchange 
Commission in the United States. 
1.3 The result of this last problem is that large European companies seeking capital on 
the international capital markets, most often on the New York Stock Exchange, are 
obliged to prepare a second set of accounts for that purpose. This is burdensome and 
costly and constitutes a clear competitive disadvantage. Producing more than one set of 
accounts also causes confusion. Moreover, it involves companies in conforming with 
standards (US Generally Accepted Accounting Practices or GAAP) which are developed 
without any European input. As more and more Member States are implementing 
important privatisation programmes and as the capital needs of the companies concerned 
are increasing, the number of companies facing this problem is growing. 
1.4 The approach proposed in the present communication consists of putting the Union's 
weight behind the international harmonisation process which is already well under way in 
the International Accounting Standards Committee (IASC). The objective of this process 
is to establish a set of standards which will be accepted in capital markets world-wide. 
The Union must at the same time preserve its own achievements in the direction of 
harmonisation, which are a fundamental part of internal market law. It therefore needs to 
take steps to ensure that existing international standards (IAS) are consistent with the 
Community's Directives and that IAS which remain to be formulated remain compatible 
with Community law. 
1.5 There needs to be closer cooperation within the Union, through the improved 
functioning of the existing bodies at EU level which deal with accounting issues, to reach 
agreed positions on both international and internal accounting issues. This would 
strengthen the influence of the EU in the international harmonisation debate and help 
improve consistency of application of agreed standards in the Member States, especially 
for the consolidated accounts of groups of companies. 
1.6 It is proposed to carry out this reform as far as possible without any change in the 
Accounting Directives. 
2. Background 
2.1 Company law harmonisation is based upon Article 54(3)(g) of the EC Treaty. The 
Fourth Council Directive ((78/660/EEC) of 25 July 1978 requires all limited liability 
companies to prepare annual accounts. In conformity with its legal base, the Fourth 
Directive does not aim to achieve a complete standardisation of accounting rules. Its 
objective is rather the comparability and equivalence of financial information. The 
Directive therefore contains a large number of options for Member States or for 
companies, which permit different accounting treatments. Comparability between 
different options is established through additional information in the notes which must 
accompany the balance sheet and the profit and loss account. Exemptions are allowed for 
small and medium-sized companies. 
2.2 The Seventh Council Directive (83/349/EEC) of 13 June 1983 concerns 
consolidated accounts. It requires a parent company to prepare, in addition to its 
individual accounts, consolidated accounts and a consolidated annual report in which the 
financial situation of the group is shown as if it were a single entity. 
2.3 These Directives were followed by two sectoral Directives, dealing with the 
financial information to be disclosed respectively by banks and other financial 
institutions (Council Directive 86/635/EEC of 8 December 1986) and by insurance 
companies (Council Directive 91/674/EEC of 19 December 1991). These Directives 
contain the derogations from the Fourth and Seventh Directives necessary to take account 
of the particular characteristics of the entities concerned. 
2.4 Problems of application and interpretation of the Directives are discussed in the 
Contact Committee on the Accounting Directives which was set up under Article 52 of 
the Fourth Directive. This Committee is chaired by the Commission and usually meets 
twice a year. It is composed of experts from the responsible ministries of Member States. 
2.5 The adoption and implementation of the Fourth and Seventh Directives, with their 
later amendments, were only achieved with difficulty and no further progress has been 
made at EU level in harmonising the basic rules on accounting and financial reporting. 
There is disagreement between Member States about the usefulness of the Directive as an 
instrument for accounting harmonisation: certain Member States would prefer a broader 
international harmonisation and/or harmonisation based on standards rather than law. 
2.6 At a Conference which the Commission organised in 1990 on the future of 
harmonisation of accounting standards in the EU, a clear preference was expressed for 
not reducing the number of options in the Directives, for not adopting new legislation in 
the near future and for the need to take into account the harmonisation efforts at a broader 
international level. 
2.7 Following that Conference, in order both to open the debate on accounting issues at 
European level and to influence the work of national accounting standard setting bodies, 
the Commission set up the Accounting Advisory Forum. National standard setters and 
European organisations of users and preparers of accounts work together in the Forum to 
find technical solutions for a number of problems not yet dealt with in the Accounting 
Directives. After a difficult start, the Forum has done excellent work, but in the absence 
of a clear mandate, the results of its work do not carry enough weight to exercise a real 
influence on accounting developments. 
2.8 Also as a result of the Conference, the Commission decided to take up the invitation 
extended to it by the International Accounting Standards Committee (IASC) to become a 
member of its Consultative Group and to sit on the Board in an observer capacity. IASC 
is a private organisation which was set up in 1973 by the accounting profession. It has 
been working on the development of a comprehensive set of international accounting 
standards. These standards, although not legally binding, are used by several large and 
multinational companies throughout the world. They have also influenced the standard 
setting process in a number of countries. The International Organisation of Securities 
Commissions (IOSCO) has recently reached an agreement with IASC on a joint work 
programme, which aims to produce in the medium-term a core set of international 
accounting standards to be applied by companies seeking a multinational listing of their 
securities. The realisation of this objective would make it easier for European companies 
which apply International Accounting Standards (IAS) to have access to international 
capital markets and especially to the US capital market. 
2.9 Work on accounting standards has also been carried out in various other international 
fora (UN, OECD etc). Most recently, the WTO's working party on Professional Services 
received a mandate to make recommendations designed to remove unnecessary barriers 
to trade in accountancy services and also to "concentrate in particular on the use of 
international standards", taking account of the work of international standard setting 
bodies. 
3. The need for a new approach 
3.1 The Fourth and Seventh Directives have allowed the preservation of the different 
accounting traditions which existed in Member States prior to their adoption, but have at 
the same time had a real positive impact. The quality of financial reporting has 
considerably improved in Member States. The free circulation of comparable financial 
information constitutes an important condition for the proper functioning of the Internal 
Market and helps foster competition. 
3.2 There are nevertheless a number of problems which need to be addressed if the 
progress achieved so far is to be preserved and if the Union is to be in a position to deal 
with the important challenges which face it. 
3.3 The most urgent problem is that concerning European companies with an 
international vocation. The accounts prepared by those companies in accordance with 
their national legislation, based on the Accounting Directives, are no longer acceptable 
for international capital market purposes. These companies are therefore obliged to 
prepare two sets of accounts, one set which is in conformity with the Accounting 
Directives and another set which is required by the international capital markets. This 
situation is not satisfactory. It is costly and the provision of different figures in different 
environments is confusing to investors and to the public at large. There is a risk that 
large companies will be increasingly drawn towards US GAAP. They and the Member 
States are looking to the Union for a solution that can be implemented rapidly. 
3.4 Other problems relate to the Directives themselves. The Directives allow several 
options and do not address a number of accounting issues which have become 
increasingly relevant since they were adopted. This, together with the fact that some 
principles contained in the Directives are interpreted differently in different Member 
States, has had negative consequences for the comparability of accounts. Externally, the 
absence of a common position on accounting issues has prevented the EU from playing 
an effective role in international fora which discuss accounting issues. The fact that EU 
Member States have difficulty in coordinating their efforts and in identifying a common 
position is also disorienting for other European countries which increasingly look to the 
EU when they have to establish or to reorganise their national accounting systems. 
3.5 Furthermore, a new approach is also needed because changes have taken place in 
Member States since the adoption of the Accounting Directives in terms of the process 
through which accounting standards are being adopted. Because of the need for 
accounting standards to follow economic developments, many Member States have 
established Accounting Standard Setting Bodies which further develop the accounting 
rules which are incorporated in the law. Work on accounting at European level needs to 
adapt to these changes, without of course dismantling the present Directive-based 
approach. 
4. Possible solutions examined 
4.1 The Commission has examined several possible approaches to dealing with the 
problems described above and has discussed them with the Member States, most recently 
at the meeting of the Contact Committee on 11/12 September. 
4.2 Concerning the most urgent problem, namely that of large listed companies, one 
solution would be to exclude them from the scope of application of the Directives and 
thus free them to follow other rules. This would raise a number of questions as to the 
scope of the exclusion (all listed companies, certain listed companies, companies with 
important non-EU shareholdings, etc.) and as to the rules which the excluded companies 
would then be allowed to apply (international accounting standards, US standards or 
both). It would require a change in the Directives, which would take time. Finally, it 
would involve abandoning the homogeneous approach to accounting harmonisation 
which has served the Union well up to now. 
4.3 Another solution would be to obtain an agreement with the United States on the 
mutual recognition of accounts. The Commission has attempted to initiate such 
discussions, but has found little interest on the American side. Accounts prepared by US 
companies under US GAAP are in fact already recognised in all Member States. This is 
not the case in the US for accounts prepared by European companies in accordance with 
the Accounting Directives. The Directives themselves do not provide a sufficiently 
detailed set of standards to meet US requirements. 
4.4 Of the various international bodies working on accounting standards, for the time 
being only the IASC is producing results which have a clear prospect of recognition in 
the international capital markets within a timescale which corresponds to the urgency of 
the problem. 
4.5 Another part solution, addressing the internal problems identified, would be an 
update of the Accounting Directives, to include technical solutions for the various 
accounting issues which have not yet been dealt with. It would however be difficult to 
agree on the issues which should be covered in such a revision. Some Member States 
might seek to renegotiate parts of the Directives they do not like. The preparation and 
negotiation of such an important revision of the Directives would take a long time and 
new issues would probably arise by the time the amendments have been finally adopted 
and implemented in Member States. Amendments to the Directives would be best 
confined to cases where it is necessary to provide legal certainty. 
4.6 Another option which has been considered is the creation of a European Accounting 
Standard Setting Body. To set up such a body (which would require legislation) and to 
develop a comprehensive set of European accounting standards would take a great deal of 
time. Most Member States have expressed misgivings about creating an additional layer 
of standards, bearing in mind in particular the progress already made with IAS. 
5. Proposed approach 
5.1 In preparing its recommended approach to current accounting problems, the 
Commission has paid particular attention to respecting the principles of subsidiarity and 
proportionality, as now enshrined in the Maastricht Treaty. New legislation or 
amendments to existing legislation at the EU level should be avoided so far as possible. 
It is also desirable to avoid the creation of an additional layer of standards on top of those 
already existing or in preparation. A more flexible framework is needed which can 
respond rapidly to current and future developments. At the same time, the necessary 
degree of legal certainty must be preserved and respect for Community law ensured. 
5.2 In order to deal with the urgent issue of European companies which are looking for 
listings on the international capital markets, the Commission proposes first to examine 
with Member States in the context of the Contact Committee, as a matter of priority, the 
conformity of existing International Accounting Standards (IAS) with the Accounting 
Directives. Establishing that these standards are in conformity with the Accounting 
Directives is an essential first step if Member States are to allow their large companies to 
prepare their accounts on this basis. (It is up to Member States to conduct a similar 
exercise with regard to their national law. Since national laws do not make use of all the 
options in the Directives, an IAS which is in conformity with the Directives may 
nevertheless infringe national law.) 
5.3 If this examination reveals any inconsistencies between the Directives and IAS, 
these will need to be examined on a case by case basis. The Commission's preliminary 
view is that few if any difficulties will emerge. In case of conflict, a solution will have to 
be found. One solution would be to ask the IASC to change the relevant standard. 
Another solution would be to amend the Directives. The IASC's executive has indicated 
its willingness to re-examine any IAS which are found to be not in conformity with the 
Directives. If absolutely necessary, the Commission will propose changes in the 
Directives. If the Directives have to be changed to deal with a conflict between an IAS 
and a provision in a Directive, the Commission believes that serious consideration should 
be given to delegating powers to a committee so as to accelerate the procedure for 
amending the Accouting Directives. It can indeed not be excluded that other conflicts 
with IAS will arise in the future. It would be useful if the EU were then in a position to 
adapt its regulatory framework more quickly. 
5.4 In order to ensure an appropriate European input into the continuing work of the 
IASC, the Contact Committee will examine and seek to establish an agreed position on 
future Exposure Drafts (or draft standards) published by the IASC. An agreed Union 
position on Exposure Drafts can thus be conveyed to the IASC. This will allow the 
Union progressively to gain a position of greater influence on the IASC's work, including 
the determination of its agenda, so that its output will increasingly reflect the EU 
viewpoint. 
5.5 To provide a mechanism for reaching an agreed position on issues such as 
compatibility with IAS, it is proposed to give a bigger role to the Contact Committee. 
The Committee's capacity to work on technical matters will be strengthened by the 
establishment of subcommittees which will be able to draw on the necessary technical 
expertise. Work will be organised in a pragmatic way, in cooperation with the Member 
States, to minimise extra costs. 
5.6 The work of the Contact Committee should focus on consolidated accounts . A more 
general approach including individual accounts would be more likely to run into 
controversy, since these are in many Member States directly related to reporting for tax 
purposes. A focus on companies preparing consolidated accounts is also justified 
because these companies are more directly affected by the problems described above. 
5.7 For those companies which are not directly concerned with the pressure of 
international capital markets and which prepare consolidated accounts, it is intended to 
continue efforts to improve the comparability of accounts. The Contact Committee 
should step up its efforts to facilitate a harmonised approach by dealing with practical 
problems which arise in connection with the application of the Directives. Through 
discussion in the Contact Committee, the Commission will seek to ensure a better 
coordination of the activities carried out by the various bodies in Member States which 
deal with accounting standards. The Commission will decide how to make the best use of 
the advice given by the Committee, for example to include it in an interpretative 
communication or in a recommendation. The Commission will give adequate publicity to 
the work of the Contact Committee where necessary. It is expected that SME's which are 
looking for outside capital will ultimately benefit from improved financial reporting at 
the level of consolidated accounts. 
5.8 It is clear that this flexible approach is only possible within the limits determined by 
the Accounting Directives. Respect for the Directives must be ensured and, to the extent 
that legal certainty might require this, the Commission will not hesitate to make 
proposals for the amendment of the Directives where necessary. Effective technical 
cooperation in the Contact Committee will make it possible to avoid legislation in most 
cases. It is therefore essential that all institutions which are dealing with accounting 
standard setting at national level should be involved in the work of the Contact 
Committee and that their representatives should have the necessary expertise to 
contribute to technical discussions. 
5.9 The Accounting Advisory Forum will continue its role as a consultative body. It 
will ensure that users and preparers remain closely associated with the work of the EU in 
the accounting field. An appropriate coordination between the Forum and the Contact 
Committee could be ensured by inviting the members of the Contact Committee to 
participate in the meetings of the Forum and associating the expertise of the Forum with 
the technical work of the Contact Committee. 
6. Conclusions 
The Union needs to move promptly to offer the users and preparers of accounts a clear 
prospect that companies seeking listings on the US and other world markets will be able 
to remain within the EU accounting framework and that US GAAP, over which they and 
their governments can exercise no influence, is not the only option. It also needs to made 
clear that the Community is not abandoning the field of accounting harmonisation, but is 
rather strengthening its commitment and contribution to the international standard-setting 
process, which offers the most efficient and rapid solution for the problems of companies 
operating on a world-wide scale. These messages require the explicit support and 
agreement of the Member States, if they are to be effective. 
FINANCIAL STATEMENT 
1 TEILE OF OPERATION 
"Accounting Harmonisation: a new strategy vis^à-vis International Harmonisation". 
2 BUDGET HEADING INVOLVED 
Part A : Human Resources (see paragraph 10) 
A 130 : missions 
A 1178 : technical assistance 
A 1520 : national experts 
A 2510 : meetings of committees 
3 LEGAL BASIS 
EC Treaty : Alleles 54 (3)(g),aiKi 3h). 
White paper on Growth, Competitiveness and Employment (Chapter 2). 
4 DESCRIPTION OF OPERATION 
4.1 General objective 
The general objectives of the new accounting strategy may be summarised as follows: 
— To bridge the gap between the present financial reporting requirements in the EU and 
the needs of the international capital markets. 
— To continue efforts to improve the comparability of accounts. 
— To ensure an appropriate European input into the international harmonisation debate. 
4.2 Period covered and arrangements for renewal 
Although the new strategy is designed for the long-term, a first report on its effectiveness 
will be presented at the end of 1997. The strategy may then be adapted, having regard to 
the results contained in the report. This is why the present financial plan is limited to 
1996 and 1997. 
5 CLASSIFICATION OF EXPENDITURE OR REVENUE 
5.1 Compulsory/Non-compulsory expenditure 
Non compulsory expenditures. 
5.2 Differentiated/Non-differentiated appropriations 
Non differentiated appropriations. 
5.3 Type of revenue involved 
No revenues involved. 
6 TYPE OF EXPENDITURE OR REVENUE 
The expenditures involved are made up of the costs relating to the additional staff, the 
missions necessary, and the services provided by a specialised consultant, as indicated in 
point 10. The costs shown in the tables below only refer to the Commission's 
expenditure. It is assumed that Member States will support all other expenditures linked 
to this strategy and not included in this financial plan. 
100% subsidy : NO 
Subsidy for joint financing with other sources in the public and/or private 
sector: NO 
Interest subsidy: NO 
Other: NONE 
Should the operation prove an economic success, is there provision for all or 
part of the Community contribution to be reimbursed? NO 
Will the proposed operation cause any change in the level of revenue? If so, 
what sort of change and what type of revenue is involved? NO 
7 FINANCIAL IMPACT: 
NO IMPACT ON PART B OF THE BUDGET 
A.O 
8 Fraud prevention measures 
Given the nature of the action, no specific fraud prevention measures are necessary. 
9 Elements of cost-effectiveness analysis 
9.1 Specific and quantified objectives; target population 
The actions will ensure: 
— for European companies with an international vocation which are looking for a listing 
in non-EU capital markets, the possibility of presenting one set of financial 
statements. This will reduce their costs. 
— for other companies, the improved comparability of consolidated accounts. This will 
foster competitiveness inside the EU and will ultimately also benefit SME'S which 
are looking for outside capital. 
9.2 Grounds for the operation 
The proposed new strategy is based on the principles of subsidiarity and proportionality 
and will establish enhanced cooperation between the Commission and the Member States 
and between the Member States themselves in the accounting sector. The approach 
proposed in the Communication has been selected after all possible alternatives have 
proven to be impractical. 
The new accounting strategy will be based on common positions, obtained through an 
increased number of meetings of the Contact Committee on the Accounting Directives 
and its sub-committees. These common positions will have a multiplicatory effect as, 
when adopted by Member States, will be applied by limited liability companies based 
therein. 
The above-mentioned meetings will be held in different Member States, who will support 
the related costs. As a consequence, the Commission will only have to provide for the 
missions of its officials participating in these meetings. 
9.3 Monitoring and evaluation of the operation 
An evaluation of the action will be made in 1997, based on a report prepared by the 
Commission on the work carried out during the period 1996-1997. 
M 
10 ADMINISTRATIVE EXPENDITURE (SECTION III, PART A OF THE BUDGET) 
Actual mobilization of the necessary administrative resources will depend on the 
Commission's annual decision on the allocation of resources, taking into account the 
number- of staff and additional amounts authorized by the budgetary authority. The 
allocation of supplementary resources is to be considered in the context of priorities to be 
decided by the Commission within the limits of the budgetary means «available in the 
annual budget. 
10.1 Effect on the number of posts 
Type of post 
Officials or 
temporary 
staff A 
B 
C 
Other resources 
Total Staff to be assigned to 
managing the operation 
Permanent 
posts Temporarv 
posts 
1 
2 
3 Source 
Existing 
resources in 
the DG or 
department 
concerned 
2 
2 Additional 
resources 
1 
1 Duration 
1997 
1996-
1997 
The implementation of the new strategy requires staff resources. Because of the 
specialised nature of the work, an A grade END is needed for the period 1996-1997. 
Technical assistance of a specialised consultant for two years (1996+1997) is also 
necessary. On the basis of the experience acquired in 1996, the resources needed for 1997 
will have to be reassessed, possibly with the engagement of an A grade temporary post. 
s>\.. 
10.2 Overall financial impact of additional human resources 
ECU 
Amounts Method of calculation 
(ECU) 
Officials 
Temporary staff (Titles A1, A2, 100.000 1 'A' Temporary post for 1 year 
A5) (1997) 
Other resources 
Total 100.000 
The cost of the staff to be assigned to managing the operation through the use of 
existing resources in DG XV has been estimated as follows: 
- Technical assistance (A 1178) 
- National Experts (A 1520) 
Total 200.000 Ecus 
70.000 Ecus 
270.000 Ecus (1996 - 1997) 
(1996 - 1997) 
10.3 Increase in other administrative expenditure as a result of the 
operation 
ECU 
Budget heading Amounts Method of calculation 
(ECU) 
- Missions (A 130) 51.000 
- Meetings (A 2510) 24.000 2 meetings (1996 +1997) 
Total 75.000 
Mission costs include cost of transportation and daily allowance costs for two officials of 
grade A. 28 Missions of two days (and one night) each have been forecasted. Costs are 
calculated in constant Ecus (base 1995). 
The cost of Meetings represents the cost of one additional meeting of the Contact 
Committee on the Accounting Directives per year. The Contact Committee at present 
holds two meetings per year, at an annual cost of 24.000 Ecus. 
^3 

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ISSN 0254-1475 
COM(95) 508 final 
DOCUMENTS 
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Catalogue number : CB-CO-95-601-EN-C 
ISBN 92-77-96192-9 
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