German Accounting

Introduction We are on the precipice of a fundamental globalisation step. The important and continued globalisation of investment has led to the development of internationally applicable standards and codes of practice. The international demand for standardised regulatory systems and processes has many benefits; however countries have been largely unwilling to adopt the international standards and codes for various reasons. (Mansfield, 2004)

This report will focus on Germany and its current rate of adoption of the international accounting practices, whilst observing their history and cultural influences that have impacted on their current practices today. We have chosen Volkswagen to demonstrate Germany’s current standards and practice. A history of German accounting

The Franciscan monk Luca Pacioli (1445 - 1514) published the first book on double entry bookkeeping (DEB) in 1494. (Derks, 2008, p. 205). German economic historian Werner Sombart (1863 - 1941) said that DEB was ‘one of the most beautiful discoveries of the human spirit’ (Funnell, 2001, p. 55). German accounting has been dominated by a series of competing theories of accounting. (Kupper, 2005, p. 346) The French Ordonnance de Commerce of 1673 and the 1807 Code de Commerce can be regarded as the roots of accounting principles and regulations in Germany.

The first General German Commercial Code, enacted in 1861, has much in common in terms of accounting with its French counterpart. The predominant purpose of accounting in the early days was to show the wealth of an entity, primarily to enable creditors to evaluate their risks. The principle of creditor protection has been the central concern of accounting in Germany. Because of this, financial reporting in Germany has always been focused on the complete presentation of all assets and liabilities making the balance sheet the predominant financial statement.

In Germany, the definition of income is not revenues minus expenses, but the difference between the opening amount and the closing amount (Haller, 2003. p.91). The legal system in Germany is highly codified and prescriptive because it is based on the Roman law system. (Radebaugh, 2006. p. 68) In code law countries accounting law tends to be rather general and does not provide much detail regarding specific accounting practices and in some cases no guidance at all. (Doupnik, 2009. p.32).

Until 1985 the Stock Corporation Law of 1965 (AktG) was the sole codified source of accounting regulation, legally these regulations had no impact on entities which were not share-issuing public companies (AG). (Haller, 2003. p. 94) The Accounting Directives Law (Bilanzrichtlinien-Gesetz) of the 19 December 1985 implemented at the same time the fourth, seventh and eight EU directives in Germany. A significant feature of the Fourth Directive is its detailed requirements concerning the principles and application of conventional historical cost accounting and the implementation of the “true and fair principle”.

This legal codification and harmonization of accounting provisions led to the consolidation all general accounting rules into a single source: the Handelsgesetzbuch or HGB, Commercial Code. (Nobes, 2004. p. 252) Since this comprehensive restructuring of accounting regulations, effective on 1st January 1986, the HGB has become the predominant source of codified accounting rules. (Haller, 2003. p. 94) Now Germany with a population of 82,369,548, (2008 est.), has the world’s third largest economy by GDP behind America and Japan. Germany has nine stock exchanges - Berlin Stock Exchange, Bremen Stock Exchange, Dusseldorf Stock Exchange, Frankfurt Stock Exchange (Deutsche Borse AG), Hamburg Stock Exchange, Hanover Stock Exchange, Munich Stock Exchange, Stuttgart Stock Exchange, Xetra Stock Exchange . (Yahoo Finance, 2009) The share market index is called the DAX which comprises of 30 companies. Daimler-Chrysler became the first German company to list on the New York Stock Exchange in 1993, this decision split corporate Germany in two. (Harnischfeger, 2000) Some German companies felt they had been betrayed by Daimler by agreeing to comply with US Securities and Exchange Commission rules, while others deeply admired Daimler for taking such a bold step. Now, many German companies are listed on the NYSE, but US listings remain one of the most secretive and politically sensitive topics. On the surface the problem appears to be about diverse accounting systems. However deep down, this merely symbolises different corporate histories, corporate structures and attitudes towards shareholders. (Harnischfeger, 2000).