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With the transitional period elapsing on 31 December 2014, most entities moved over to the new financial reporting law for their 2015 statutory financial statements. Some of the pitfalls had been clear in the run-up to the new legislation, others could hardly have been foreseen. Although they are by no means the only problems that have emerged, in this article we focus on three of the key issues.
Under the old law, it had become common practice to net losses and gains in the value of assets of the same type within the same balance sheet item. This meant that valuation losses on individual investments or properties only had to be recognised in profit and loss if they could not be offset by corresponding (unrecognised) gains on the same type of assets. So it only made sense to do valuations on a group basis if gains were possible for the balance sheet item in question in the first place – as is the case, for example, with investments or properties where the difference between the acquisition price and the market value could result in a gain. The maximum figure for loans and equity-like loans, by contrast, is the nominal value. So no gains are possible for this item, meaning that it is de facto not possible to value loans on a group basis. Even under the old rules it was not permissible to do group valuations across multiple balance sheet items.
The abolition of group valuation for investments and properties was seen as one of the main changes in the run-up to the new financial reporting law, and was the subject of a heated debate. While it’s true that the change has led to painful impairments for some undertakings, the broad mass of companies haven’t been affected in practice. Firstly, this might have something to do with the generous transitional period, which gave companies plenty of time to do the necessary restructuring or reorganisation. Secondly, the new rules don’t absolutely require individual valuation; what they do is raise the question of the correct unit for valuation. If assets are usually measured together because of their similarity, this is also deemed to be an appropriate unit under the new rules. What’s important is that the requirements are met with regard to similarity and economic unity. Transparent disclosure is also seen as a must.
Under the new financial reporting law an undertaking is permitted to present its financial statements in the functional (foreign) currency. However, if it does so it must also present the figures in Swiss francs (CHF) and specify the exchange rates used for the conversion. The accounting and financial reporting legislation was revised independently of company law. The result is that the nominal share capital of a Swiss company limited by shares can only be denominated in Swiss francs. This means that all threshold values relevant to creditor protection related to the nominal share capital must also be expressed in CHF.
For any threshold values oriented to the balance sheet, it’s relatively straightforward to do this on the basis of the additional information in CHF, which has to be disclosed in any case. Things get more critical when it comes to calculating freely disposable equity in CHF in connection with the appropriation of retained earnings. Here the question arises as to the date – and by extension the exchange rate – used as the basis for calculating freely disposable equity in CHF. The following options are available:
The following example illustrates the problem: It shows the equity of Company A on the balance sheet date in USD, the presentation currency, as well as in CHF:
|USD||Exchange rates USD/CHF||CHF|
|Statutory capital reserves||200||0.800||160|
|Freely disposable equity on the balance sheet date||140||110|
|Proposed dividend||USD||Exchange rates USD/CHF||CHF|
|On the balance sheet date||120||0.900||108|
|On the date of the auditors’ report||120||0.950||114|
|On the date of the AGM||120||0.975||117|
If a dividend is planned, the company must have enough freely disposable equity on the balance sheet date (in foreign currency and in CHF). Company A in Figure 1 has USD 140 (retained earnings plus profit for the year) in freely disposable equity on the balance sheet date or CHF 110 (retained earnings minus translation difference plus annual profit); paying the planned dividend of USD 120 doesn’t appear to be a problem.
However, the development of exchange rates has to be taken into account too. The planned dividend of USD 120 is equivalent to CHF 114 on the date of the auditors’ report, and as high as CHF 117 on the date of the AGM if exchange rates continue their upward trend. In both cases, the figure of CHF 110 in freely disposable equity is exceeded. Since neither the board of directors nor the auditors can predict the way exchange rates will have developed by the date of the AGM, the following approach is advisable:
The board proposes the appropriation of retained earnings of USD 120, adding a maximum in CHF:
In Figure 2, the appropriation of retained earnings in our example would result in a dividend of CHF 110 or USD 112.82 (CHF 110 divided by an exchange rate of 0.975).
The rules on minimum structure under the new financial reporting law require the disclosure of an undertaking’s own capital shares as a separate negative item at the end of shareholders’ equity. According to Circular 29a of the Swiss Federal Tax Administration (FTA), however, only the disclosure of the undertaking’s own capital shares as a negative item under legal reserves will avoid income or withholding tax implications, for example, when the shares are cancelled. So the question arises as to whether there is a way for an undertaking to disclose its own shares that satisfies the requirements of both tax and commercial law.
The FTA and the EXPERTsuisse financial reporting committee have agreed to a compromise whereby an undertaking’s own shares are disclosed as a negative item at the end of shareholders’ equity separate from the other equity items. At the same time, the undertaking must specify the share it formed from capital contribution reserves.
|Statutory capital reserves|
|Capital contribution reserves||40|
|Statutory retained earnings||30|
|Voluntary retained earnings/accumulated losses||50|
|Own capital shares|
|From capital contribution reserves||–40|
|Total shareholders’ equity||250|
(Source: Circular 29a of the Swiss Federal Tax Administration (FTA) dated 9 September 2015)
In Figure 3, it should be noted that a) capital contribution reserves recognised for tax purposes were recognised and disclosed accordingly and b) that sufficient capital contribution reserves were available on the date the undertaking’s own capital shares were acquired. Accurate documentation is required, especially if reserves are formed from capital contributions in the course of the year.
According to the FTA and the EXPERTsuisse financial reporting commission, the solution shown takes account of the requirements of both tax and commercial law.
The new financial reporting law has definitely brought greater transparency. In certain respects it has also raised some interesting questions. Some of the options (for example, presenting financial statements in a foreign currency) to some extent run contrary to the notion of creditor protection. Fiscal neutrality might be seen as a key element of the new law, but the details of the different rules have to be coordinated. Even if the changeover has cost companies a considerable amount of money and effort, it has been worth it, as it has resulted in much more meaningful financial statements.