Corporate governance and earnings management ... - CEREG

The first German law concerning goodwill was an emergency law of July 19, 1931. It
added a new article to the Commercial Code (article 261) prohibiting recognition of internally
generated goodwill as an asset, and (merely) allowing acquired goodwill to be recognized as
such only on condition it was then amortized by “appropriate annual amortization charges”.
According to Greve (1933, p. 35) and Take (1939, p. 116), this law simply gave formal
expression to the dominant doctrine of the time.
The measures introduced in 1931 were included without amendment in the law (AktG) of
1937 (article 133, paragraph 5), and then almost without amendment in the law (AktG) of
1965 (article 153, paragraph 5). The only noteworthy difference is that in 1965, the law
stipulated that the systematic amortization against goodwill entered as an asset must be at
least one-fifth annually. This remained applicable until 1985.
This very strict position (purely static in nature) stands out all the more because of its stark
contrast with the approach taken by the tax administration. As early as the late 19 th century,
the Preussische Oberwaltungsgericht refused systematic amortization of goodwill, and
demanded a “real-value reduction” (Rechtmann, 1926, p. 128). In 1930, the Reichsfinanzhof
(the Reich’s financial court) stated that goodwill was a “living thing” and unlike commercial
law, refused any decrease in book value not due to actual loss of value (Greve, 1933, p. 75-
79). On the same lines, the Reichstfinanzhof issued a ruling on July 29, 1931 that goodwill
“does not lose value regularly over time” and cannot therefore be amortized, only “written
down if necessary”. The tax law of 1934 confirmed and even reinforced this position: in
replacing the concept of gemeine Wert (sales value) with the concept of Teilwert (value in
use) for impairment testing, it made it even more difficult for the taxpayer to prove loss of
value. Take (1939, p. 120) calls this a “probatio diabolico” (impossible evidence).
To justify non-amortization, German tax courts invoked the “exchange theory”
(Austauschtheorie) that there was no boundary between acquired and created goodwill,
meaning that any loss of value in acquired goodwill could be offset by new created goodwill
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