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GAZETTE
DECEMBER1980
COMPANY LAW NOTES
Fourth Council Directive on the Annual Accounts of
Certain Types of Companies (78/660/EEC)*
Background
The Fourth Directive, which deals with the content,
layout, audit and publication of the accounts of public
and private companies, was adopted by the Council of
Ministers of the EEC on 25 July, 1978. The
implementing legislation must be enacted by the Member
States before 15 August 1980 and it must enter into force
within a further eighteen months at the latest, i.e. by 15
February 1982. At present it seems unlikely that the Irish
legislation will be published much before the end of 1980,
but it should be possible for it to be enacted by the
ultimate target date of 15 February 1982.
The main purpose of the Directive is to require the
publication in standard form of certain financial
information relating to companies established in different
Member States, thus making such information available
in a comprehensible form throughout the EEC. However,
as many of its provisions are optional, the exact form in
which die Directive is likely to be implemented in Ireland
will not be known until the draft legislation is published.
Scope
In Ireland, the Directive will apply to public and
private companies limited by shares or by guarantee and
its most noticeable effect here will probably be the
requirement that private companies should publish their
Annual Accounts. The Directive does not apply to non-
profit-making organisations and Member States need not
apply its provisions to banks, other financial institutions
and insurance companies (as it is intended to introduce
special directives dealing with their accounts at some later
date). Member States are also allowed to require less
detailed disclosure of small and medium sized companies,
but no company can be entirely exempted merely on
grounds of size.
The Directive applies only to accounts of individual
companies and does not require consolidated accounts
since these are to be governed by the draft Seventh EEC
Directive on Company Law. Pending its adoption,
Member States may apply certain provisions of the
Fourth Directive to "affiliated undertakings".
The Directive lays down minimum standards; Member
States may therefore impose exacting requirements in
their national legislation should they wish to do so.
Content
The "Annual Accounts" referred to in the Directive
consist of the Balance Sheet, the Profit and Loss Account
and the Notes on the accounts. The over-riding require
ment is for the Annual Accounts to give a "true and fair
view" of the company's assets, liabilities, financial
position and profit or loss, even if this involves some
departure from the provisions of the Directive. This basic
principle of Irish accountancy practice, which is already
given the force of law by Section 149 of the Companies
Act, 1963, will therefore continue to operate after the
implementation of the Directive.
The Directive contains numerous provisions relating to
the contents of the Balance Sheet and Profit and Loss
Account as well as detailed definitions of many items to
be included in those accounts. These requirements will
not result in any major alteration of present Irish
accountancy practice, apart from the fact that such
matters will now be governed by law rather than by the
accountancy bodies' decisions as to what is necessary in
order to present a "true and fair view" of a company's
financial position.
The Directive also lays down strict rules relating to
valuation: the basic approach is that of historical cost
accounting, with specific provisions requiring the
company to be valued consistingly from year to year as a
going concern, such valuations to be carried out on a
prudent basis but taking accruals into account. Only
profits made at the Balance Sheet date may be included,
but account must be taken of all income and charges
relating to the financial year irrespective of the date of
receipt or payment; all forseeable liabilities and potential
losses must be taken into account and depreciation must
always be provided for. Member States may, however,
authorise or require the use of inflation accounting,
provided historical cost figures are also given for Balance
Sheet items such as fixed assets.
The Directive contains extensive requirements relating
to the contents of the Notes on the accounts. For
example, these must show details of companies in which
at least 20% of the share capital is held, details of move-
ments in the company's own share capital, long term
liabilities (i.e. those becoming due after more than five
years), financial commitments not included in the Balance
Sheets, turnover analysed by activity and geographical
market, employees analysed by category and directors'
emoluments and loans.
The company's Annual Report must include a review
of the company's business during the financial year and a
statement of important events since the year-end as well
as an indication of the company's likely future
development, its research and development activities and
information about acquisitions of its shares.
Layout
One of the move obvious effects of the Directive will be
seen in the new layout of the Balance Sheet and Profit and
Loss Account, which will have to be presented in strict
accordance with one of the formats prescribed in the
Directive.
There is a choice of vertical or horizontal layout for
both the Balance Sheet and the Profit and Loss Account
and, in addition, there are two possible forms of Profit
and Loss Account. Member States have the option of
allowing companies a choice between the layouts
permitted by the Directive or, alternatively, of requiring
the adoption of only one of them.
Audit
The Directive lays down as a general rule that all
• (O. J. L221 of 14.8.78).
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