Corporate governance and earnings management ... - CEREG

was “not merely immaterial but also imaginary” (Hatfield, 1913, p. 115). He recommended
rapid write-off against profit, in view of its uncertain nature.
3.1.3. Germany: the static phase (1880 - 1985)
Germany was the country with by far the longest initial phase: from 1880 to 1985. This
pure static phase can be divided into two sub-phases.
a) First sub-phase, 1880 - 1931: static approach in practice but not in the law
Prior to 1931, the law made no reference to treatment of goodwill, leaving only doctrine
and court rulings as our sources.
Doctrine
The history of the accounting treatment of goodwill in Germany cannot be fully understood
without reference to the country’s accounting tradition. This tradition dates back to the 1850s
and 1860s, the period that saw Germany’s first Commercial Code (1857). At the time the
German lawmakers, under the influence of Napoleonic lawyers, adopted a static view of
accounting: no item could be recognized as an asset unless it would have an individual market
value (the separate saleability approach) in the event the company ceased to exist, i.e. went
bankrupt, hence the term static (Richard, 1996, p. 31, 33). As a result of this doctrine most
intangibles, particularly goodwill, that were not separable from the company and had no
individual market value, had to be expensed immediately. This was to be the dominant
practice for a great many years.
In around 1900, the “old” static doctrine was still present and still outlawing recognition of
any goodwill, not only acquired but also created goodwill (Greve, 1933, p. 20). The only
major voices raised in favor of recognizing acquired goodwill came from precursors of the
dynamic doctrine such as Simon and Fischer (Greve, 1933, p. 22).
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