The international standards and Swiss GAAP FER, like the CO, require the principle of prudence to be applied. Even so, they are fundamentally different from the CO rules in that they aim for a fair representation of an entity’s financial position. The CO is domestic legislation that places the emphasis on the principle of prudence in the interests of creditor protection. It permits hidden reserves on the basis of depreciation and provisions that are generally higher than under other standards. Added to this, financial statements produced in accordance with the CO are much less detailed.
Impact of the revised Swiss Code of Obligations
At the end of 2011 the Swiss parliament approved the revision of the financial reporting legislation. The new rules under the CO apply independently of legal form but vary according to the size of the entity. The revised standards entered into force on 1 January 2013. They have to be implemented for individual annual accounts from the 2015 financial year onwards, and for consolidated accounts from 2016.
The revised CO affects the annual financial statements for listed parent companies. There are two changes that may have a substantial impact:
- Presentation of a company’s own shares. These rules have been adapted in line with IFRS and Swiss GAAP FER. An undertaking’s own shares are no longer to be carried as assets, but are to be shown separately as a reduction in shareholders’ equity.
- Valuation of assets such as shareholdings. Previously these could be valued as a group. In future they will generally have to be valued on an individual basis.
In some cases the presentation of an entity’s own shares will result in a considerable reduction in shareholders’ equity. On the other hand it still remains to be seen whether the introduction of individual valuation will have any significant impact on the financial statements published by listed parent companies. Very few listed companies had adopted the new accounting law for their published 2014 financial statements. The revised CO sets down additional requirements for larger entities. These rules, based on the rules for ordinary audits, apply to entities exceeding two of the three 20-40-250 thresholds in two successive years. In other words:
- a balance sheet total of more than CHF 20 million
- sales revenues of more than CHF 40 million
- more than 250 full-time positions as an annual average.
In the future larger companies will have to produce accounts under one of the financial reporting standards mentioned above if they haven’t already adopted a standard recognised by the CO for their consolidated financial statements. In practice these additional requirements will not have a major impact.
IFRS and US GAAP converging
The IASB, the body responsible for IFRS, has issued a number of new rules in recent years. IFRS 9, for example, sets down clear requirements for the valuation of financial instruments. IFRS 10, 11 and 12 brought amendments to the rules and explanations relating to consolidation.
There have been other changes to IFRS related to revenue recognition. In 2018, IFRS 18 Revenue from Contracts with Customers will enter into force. At many companies this will lead to changes in the amount of revenue recognised and the point at which it is recognised, which might mean they have to adapt or even replace their IT systems. Debate continues on the introduction of a new standard governing the accounting policies applicable to leases. This is likely to lead to an increase in balance sheet total (in some industries massive increases), because a right to use a leased asset will have to be recognised as an asset and a financial liability.
Financial reporting, both in Switzerland and internationally, has undergone a major evolution over the last decade. The most significant trend is the growing convergence between IFRS and US GAAP. IFRS was originally principles-based, whereas US GAAP was primarily rules-based. While there are still substantial differences between the two positions, they have got closer as each set of standards has adopted elements and characteristics of the other.
IFRS is the most widely used standard in the world. Although it has its roots in Europe, nowadays it is also used on other continents, notably Asia and Australia. The dominance of IFRS came about because in 2007 the US Securities and Exchange Commission removed the requirement for non-US companies to reconcile their IFRS-compliant financial reports with US GAAP. In many countries IFRS is now also permitted for non-listed companies as well.
Varying transparency requirements
IFRS contains a number of transparency requirements that are much more detailed than those laid down under Swiss GAAP FER and the Swiss Code of Obligations. The CO, for example, requires the disclosure of liabilities vis-à-vis pension schemes, while IFRS requires a great deal of detailed information relating to pension plans, which can take up several pages and is barely comprehensible for laypeople reading the report. This raises the question of whether the core messages are readily identifiable in such a wealth of information. IFRS also insists that all entities controlled by a parent company be included in the group of consolidated companies. This means foundations and pension funds, which are deemed to be independent entities under Swiss law, also have to be included in the consolidated financial statement. While this economic point of view is common internationally, it disregards local legislation.
The obligation to disclose provisions for ongoing litigation can also be problematic: the published information might reveal management’s expectations of the outcome to the adverse party, meaning that the entity required to disclose may suffer a tactical disadvantage in the dispute. Not only this, but the amount of the provision and the timing of its recognition will vary depending on the law or standard adopted. A provision for pending legal costs will often be recognised earlier under the CO than under IFRS.
These two examples of the various transparency requirements show that the different financial reporting standards and legal requirements can only be compared to a limited extent. Management should take account of this when choosing the standard the company adopts.
Divergent messages
Any change in a company’s chosen financial reporting standard will impact the role of management. Given that compiling a business report is one of the non-transferable and inalienable duties of the board of directors – thus also including responsibility for accounting and financial planning – its members also have to engage with the new rules. Responsibility for the business report includes critically reviewing and approving the financial statements and annual report, including the financial section.
An analysis of annual reports shows that more and more companies are communicating in the form of core messages about their financial results, using figures that cannot be disclosed in this form in the audited financial statements. For example, pharmaceutical companies often exclude intangible amortisation from their core results to be able to present the underlying business more clearly. Management’s rationale in such cases is that the income statement, which includes amortisation, and the cash flow statement, which is not affected by amortisation, do not paint a sufficiently clear picture of business performance.
If there are discrepancies between messages in the explanatory section of an annual report (see Management report) and the financial section, additional explanations have to be supplied. If the trend towards individual messages based on core results beyond the scope of the audited financial report continues, it will eventually no longer be possible to compare companies and their strategies. It also puts into question the goal of financial reporting: to create transparency. This gets lost once dense rules and regulations specifying detailed requirements are no longer sufficient and companies have to start defining the information required to present the development of their business in an understandable form. This is too much to expect from financial analysts, investors and other interested readers. Only financial reports produced on the basis of the same standards and requirements can be readily compared.
