Strangely enough, accounting is not in line with tax where a substance-based analysis prevails, at least on the lessee’s side (de Brébisson, 2018). Tax law has evolved, sometimes inspired by IFRS concepts such as the substance principle (Rossignol, 2007). On the lessor’s side though, tax law retains a formal approach, which allows for a fiscal deficit over the first years of the contract.
Supposed to produce a faithful image, with an economic definition of assets, they keep formal treatments for specific contracts. Ultimately, the two notions of “economic substance” in the Directive and “economic view” in the German tradition mean the same, at least in the likely operationalization within the German language game. The purpose of a legally coherent determination is prevailing over the information purpose of any other kind. However, at the same time, the traditional German language game is challenged by some scholars who argue that the German economic view and the UK SoF concept, while comparable, differ insofar as SoF can lead to the override of a given legal framework (Zwirner, 2014).
However, Kamla and Komori (2018) primarily call for interdisciplinary accounting researchers engaged in cross-cultural research to “help raise awareness of their role and identity as ‘cultural brokers’” (p. 1874). We show that similar concepts following close objectives ultimately have opposite consequences on the authority of accounting rules. The question is to understand who should define and reveal this substance to the users of financial information.
Nobes and Stadler (2018) support their arguments with reference to translations of the term “impairment,” from IAS 36, into 19 official translations. They innovate by then exploring the terms used for impairment in annual reports translated into English. They find, inter-alia, that the terms used in translations of IAS 36 are often too wide. This may be the reason, then, for the fact that many of the annual reports use terms (to denote impairment) that do not correspond to the English, as used in IAS 36, and may be misleading. They further provide evidence that this leads to errors in databases, such as Worldscope, where information on impairment may not be captured.
In this sense, those six countries show a civil law way to integrate this principle, while the UK only acknowledges a concept already taken for granted. We find here the traditional opposition between civil law environments, where the telos is under central hands (law, tax and judge), and common law systems, where the substance should be revealed by either party in a contract. A second practical contribution is to consider the detailed implications of the theory in the specific application of SoF in EU Member States. The paper adds to the debate around the existence of a Pan-European accounting community. It questions its very existence, or at best highlights its fragmentation, using the experience of the Accounting Directive and its supposed introduction of common accounting principles into national standards. The example of the SoF in seven Member States, exemplary for 28 countries, 24 languages and different political, economic, and legal backgrounds, showed apparent discrepancy in the understanding and use of this concept.
In this zone, they argue, “both disciplines are at once source and target as ideas from both disciplines are edited, fused and translated back into target disciplines” (p. 1981). Considerable differences in accounting for leases or own shares, for instance, illustrate that in areas where accounting for the substance rather than the form is frequently required, still no harmonization exists for countries. Finance leases are expensed in France and Italy; own shares are shown in assets in France and Poland.
As demonstrated by recent studies (Stadler and Nobes, 2014), country factors have the greatest influence on IFRS policy choice and the fact that national patterns were observed raises questions as to the potential to achieve the initial goal of harmonization. We chose not to include, in the scope of this issue, translation in the metaphorical sense (e.g. Callon, 1984; Latour, 1994). However, we did not restrict the scope to interlingual translation, but include translation across cultures and disciplines, as well as wider implications of language use, and meaning, for accounting.
However, the telos-based application of the economic view in tax law and in financial accounting is not always identical (e.g. Wüstemann and Wüstemann, 2012). It is important to remember that the underlying philosophy behind UK accounting has been close to the underlying philosophy of IFRS for many decades (and of course vice versa). This means that in broad terms, the UK collective representation, or the UK language game, is not very different from the corresponding IFRS-based versions.
There is no common European (accounting) community yet, but there is a variety of differently overlapping sub-communities, which goes across different countries. This situation, and not merely bad translation, represents a significant obstacle to harmonization. In this statement, the economic view is understood to be part of the legal system and only to exist within the context – and therefore, language game – of the legal system. The consensus today is that the economic view is a general juridical method of teleological interpretation of law (e.g. Beisse, 1981; Florstedt et al., 2015). In other words, in the German system the production of an institutional fact that reduces a multitude of collective intentionalities to one “acceptable” is delegated to jurisprudence.
Impediments to harmonization are therefore found not only in the varying applications of the law, but at the prior stage in the wording of the law itself and in the impossibility of “noise-free” linguistic communication of this wording of the law. The situation could be explained by the historical and cultural contexts of the development of accounting in Poland (Kosmala, 2005; Kosmala-MacLullich, 2003; Wojtowicz, 2015). This history includes the times of governmental interventionism, with emphasis on credit protection and tax collection (Second Republic 1918–1939), including significant German influences. During the centrally planned economy period from the late 1950s, accounting was reduced to bookkeeping based on the legal form of the transactions.
This is linked to the economic and cultural Italian context where the main source of financing is the banking system rather than capital markets. The key objective of safeguarding creditors influenced the role of accounting information and supported the primacy of property rights. In this respect, the legal approach has prevailed even over the Italian economic doctrine. Following Wittgenstein, this explains also the initial ambiguity of the first introduction of the principle in Italy due to its different language game root, and its limited use in practice, which still remains after the implementation of the Directive.
In spite of this – or perhaps even because of it – the UK enactment can be seen as the British being British, in accordance with long tradition and practice, fully consistent with – but in no way constrained by – the published text of the Directive. Instead, the European Directive was in a sense the new and potentially threatening scenario. Based on this concept of social facts, both animals hunting together and the European Union Parliament issuing a Directive are examples of social facts, involving collective intentionality. Institutional facts are the result of the collective attribution by human beings of status functions to parts of reality. Indeed, human beings have the capacity to ascribe functions to objects only by virtue of the collective assignment (Searle, 2006).
Yet, it is one entirely constructed as an expression of the teleological method of civil law – in this case historically mostly focused on the needs of tax law and not on the needs of investors or other stakeholders as far as these go beyond principles that are already part of the legal system. Prior wordings are very much retained, and the (French) wording of the Directive seems deliberately and totally ignored. Finally, there is no overall substance principle, which the Directive proposes, but former sincerity (sincérité) remains, for which the Directive gave no requirement at all. There is, however, a case-by-case “substance-based” treatment of a number of specific types of transaction, although with contradicting rules. The situation may not induce misunderstanding of SoF which is known in consolidation, and may be involved in individual accounts, even if not formally acted on as a principle.
Even in civil law countries such as Austria, we find borrowings from the UK SoF principle, and as Poland with Germany, and Romania with France and Russia demonstrate, there were identical developments at certain times in history. Taking up such similarities and differences would require the building up of epistemic communities around shared meanings across Europe, and sensitivity to the area of application and the boundaries of a certain language game for certain concepts covering several countries in Europe. Using the philosophical lenses, we actually question the common understanding of the SoF principle. The use of different wordings, especially when these wordings existed before the Directive, the lack of any definition at the European level and the resulting variety in practical rules, all tend to confirm that different communities within Europe share different frames of social and institutional facts. They are, however, overlapping between countries, such as the tax background of the principle in Austria and Germany; the communist past in Poland and Romania; civil law in Austria, France, Germany and Italy.
(2003), “On economic reality, representational faithfulness and the ‘true and fair override’”, Accounting and Business Research, Vol. Currently, the accounting of unlisted companies, for both individual and consolidated statements, is regulated by the enactment of the Accounting Directive22. First, while new philosophy of language and accounting in some countries, it expanded worldwide through the use of IFRS2.
Germany and Austria both have a strong tax background in their respective SoF principles, and a tradition of non-codification; the almost literal implementation of the Accounting Directive in Austria, however, is in contrast to the non-explicit implementation in Germany. This suggests consistency with the proposition of overlapping/conflicting social realities/language games as developed in Section 2. Accounting practices vary not only across firms, but also across countries, reflecting the respective legal and cultural background. The purpose of this paper is to argue that different wordings in national laws, and different interpretations of similar wordings in national laws, can be explained by taking recourse to the philosophy of language, referring particularly to Searle and Wittgenstein. A way out of this malaise could be to be much more attentive to the national differences and similarities and in accepting that harmonization can only take place in identical or at least similar language games. There are perhaps similarities which are best described by Wittgenstein’s metaphor of family resemblances (e.g. Baker and Hacker, 2009).
They will always emanate from some explicit or implicit attitude, belief or framework (substance in some sense). The user of the resulting financial statements must try to make sense of them, through the fog of subjective uncertainty which our theoretical exposition demonstrates. Comparisons between the results of different subjective uncertainties, which investors and other decision makers crucially have to make, will in the general case be even more difficult if the mind-set (perceived or unperceived substance) of the rules is unfathomable.
