Financial Reporting and Accounting
Harmonization in Germany and the UK:
A Comparative Analysis
PATRICIA MCCOURT AND GEORGE W. RADCLIFFE
Divergence in financial reporting practice between Germany and the UK would not be regarded by many as a contentious issue or an important source of friction between the two countries either in public debate or in negotiation within the institutions of the European Union. In fact, however, the financial statements of enterprises have also been a significant and fundamental determinant of two variables which have been the subject of widespread and sometimes acrimonious debate in recent years, namely levels of investment and corporate taxation.
Efficient capital investment at national or international level is dependent upon reliable financial information. The primary source of this information is the financial statements produced by major economic entities. Assessment of these entities’ comparative economic performance, as a prelude to investment, involves an analysis of their financial statements. Therefore, if national accounting practices differ significantly, international investment decisions may be distorted and accounting diversity may represent as significant an obstacle to the free movement of capital as many of the direct restrictions whose abolition was required by the 1957 EEC Treaty.1
The effective incidence and burden of a tax are usually debatable but it is indisputable that both the tax rate and the tax base are significant determinants of these. Since accounting profit is the basis for computing tax on business incomes in most jurisdictions including Germany and the UK, any divergence in national accounting practices will result in differences in the bases of business taxation. Therefore harmonization of corporate tax rates in the European Union may lead to increased inequity in the incidence of taxes if national accounting practices are not harmonized. As the Ruding Committee recognized, ‘any proposals regarding harmon-
1 EEC Treaty, Article 67(1), now consolidated (in part) as Article 56(1).