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Hidden Reserves - Curse or Blessing?
The principle of prudence is a fundamental principle of Swiss accounting and at the same time a Swiss peculiarity. Even under the accounting law that has been in force since January 1, 2013, the formation of so-called hidden reserves to ensure "the lasting prosperity of the company" is explicitly permitted under Art. 960a (4) of the Swiss Code of Obligations.
In good times, this offers a welcome opportunity to reduce the taxable profit. In this context, receivables and inventories are often written down in the amount accepted under tax law, provisions that are no longer necessary are not reversed or, if liquidity permits, employer contribution reserves are paid in. The latter became more important in times of negative interest rates as a means of withdrawing excess liquidity and thus saving interest as well as taxes. In less good years, the hidden reserves can finally be dissolved. A cushion can therefore be created for less good times and taxes can be saved in good years by structuring the financial statements in a sensible way.
The crux of the matter is that hidden reserves do not have to be disclosed and are therefore "silent". This makes it much more difficult to assess how a company actually stands. The notes to the annual financial statements, in which the release of such reserves must be disclosed, can help in this assessment. However, the creation of such reserves remains unknown to the readers of the annual financial statements, and it is not apparent to them how high the level of hidden reserves actually is. It is therefore practically impossible to make a concrete assessment of the annual result and the substance of a company. Recognised accounting standards such as Swiss GAAP FER or international accounting standards based on the true and fair view principle provide a remedy here. Under these standards, which prevail internationally and which make hidden reserves a Swiss peculiarity, the formation of reserves that do not necessarily reflect reality is not permitted. Accordingly, there is no way around a recognized standard in order to be able to assess the actual condition of a company. In order for the company management to have knowledge of the actual situation, at least an inventory of the hidden reserves must be kept. This is not only for the sake of internal transparency, but also in order to be able to comply with the legal obligation to disclose any liquidation.
For the person reading the balance sheet, hidden reserves may be a curse, but for a company they are a blessing.
We will be happy to assist you with any questions you may have regarding the design of financial statements, the introduction of accounting in accordance with a recognized standard, or the interpretation of annual financial statements.
Reto Käser
Partner
Certified Public Accountant
Reto Käser
Partner, Head of Team Alternate
Swiss Certified Accountant
Master of Arts HSG in Accounting and Finance
T +41 31 329 20 53
rka@core-partner.ch