Update

New financial reporting law: what’s happening in practice


The entities have moved over to the new financial reporting law as the basis of their statutory financial statements. In the course of implementing the new rules, a number of pitfalls have emerged – and not just the fact that it’s no longer possible to value investments on a group basis.

Roger Kunz

Roger Kunz

Partner, Assurance

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.

Individual valuation

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.

Appropriation of retained earnings for financial statements in foreign currencies

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 balance sheet date
  • the date of the auditors’ report
  • the date of the annual general meeting deciding on the distribution of a dividend

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:

Figure 1: Example of the presentation of equity and appropriation of retained earnings
USD Exchange rates USD/CHF CHF
Equity 400 0.800 320
Statutory capital reserves 200 0.800 160
Retained earnings 20 0.800 18
Exchange difference –16
Annual profit 120 108
Total equity 740 590
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
View figure

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:

Figure 2: Possible proposal for the appropriation of retained earnings

The board of directors proposes a dividend of USD 120. On the basis of the statutory provisions this is limited to a maximum of CHF 110 (using the exchange rate on the date of the AGM).

Proposed appropriation of retained earnings USD CHF
Distributable 140 110
Proposed dividend –120
Carried forward to new account 20
View figure

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).

Disclosure of own shares taking account of reserves from capital contributions

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 FTA1 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.

Figure 3: Example of disclosure of an undertaking’s own shares
Shareholders’ equity 20
Statutory capital reserves
Capital contribution reserves 40
Other reserves 160 200
Statutory retained earnings 30
Voluntary retained earnings/accumulated losses 50
Own capital shares
From capital contribution reserves –40
Other –10 –50
Total shareholders’ equity 250

(Source: Circular 29a of the Swiss Federal Tax Administration (FTA) dated 9 September 2015)

View figure

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 FTA1 and the EXPERTsuisse financial reporting commission, the solution shown takes account of the requirements of both tax and commercial law.

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Roger Kunz

Roger Kunz

Partner, Assurance

+41 58 792 22 08

Summary

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.

  1. Swiss Federal Tax Administration