Accounting Regulations | International Financial Reporting Standards (IFRS)

3. Accounting regulations: Swiss Code of Obligations and recognised financial reporting standards; differences and similarities

1. Commercial accounting regulations (Code of Obligations)

a) Principles, new accounting law

The new accounting law’s provisions entered into force on 1st January, 2013.

b) Recognised financial reporting principles

With regard to the form of accounting, the new accounting law refers, in Article 958c CO, to recognized financial reporting principles which should apply if no reliable conclusion can be drawn from the law. This dynamic reference to recognized financial reporting principles is to ensure that the accounting law always conforms to current practice understood as dutiful. Sources of recognized financial reporting principles referenced here include the Swiss Handbook of Auditing (HWP), a standard work for theory and practice. Arising is the question of the extent to which the provisions of IFRS can also be invoked to determine recognised financial reporting principles and the resultant, individual rules (cf. item 2.3.2).

2. Recognised financial reporting standards

a) Principles

Recognised financial reporting standards are norms of self-regulation issued by private organizations. The Swiss GAAP FER and IFRS are important in Swiss practice. Their use is also prescribed legally in some cases, for example, for listed groups which need to prepare their consolidated financial statement according to recognized standards. As a result, these norms of self-regulation turn into indirect statutory law due to mandatory application. The exact impact of this reference is investigated in sub-project A titled „Influence of IFRS on commercial accounting regulations“ (cf. item 2.3.2).

IFRS not only comprise international self-regulation standards, but also form part of EU law. In the European Union, IFRS are made authoritative not by references to their current status, but by incorporation of individual provisions into EU law.

b) Swiss GAAP FER

The Swiss GAAP FER are accounting standards for medium-sized and larger enterprises. Accounting according to Swiss GAAP FER is to convey a true and fair view of assets, financial position and profit situation. They govern key issues of accounting. The regulation density is lower than in IFRS; questions not treated are to be resolved in compliance with the prime objective of a true and fair view (which leads to the question whether IFRS rules should be consulted if the Swiss GAAP FER exhibit loopholes). The Swiss GAAP FER play a major role in Swiss practice; they are also discussed as part of the research project, but always in comparison to the related IFRS requirements.

c) IFRS

aa) Principles

Until March 2002, the IFRS were designated as an „International Accounting Standard“ (IAS). Now they are published under the title „International Financial Reporting Standards“ (IFRS). At the same time, „IFRS“ is a general term for the complete works comprising all legislation issued by the International Accounting Standards Board (IASB) as a regulatory authority. The International Accounting Standards Board (IASB) is a private organization; the IFRS are, above all, standards of (international) self-regulation. The IFRS consist of various individual standards. Each of these standards deals with a particular branch of accounting.

bb) EU-IFRS

In the EU, enterprises oriented toward capital markets have had to prepare their consolidated financial statements according to IFRS since 2005. Adoption of IFRS as EU law takes place not by direct reference to the current IFRS, but through a sort of autonomous reproduction. As a result, changes in IFRS must be adopted continuously by EU law. This inevitably leads to differences, whether as a result of a delayed adoption or waiver to reproduce certain developments. The term ‘EU-IFRS’ can be used for the IFRS adopted by the EU in order to better delimit adopted provisions from the IFRS. Due to their adoption in EU-IFRS, the IFRS are not only standards of self-regulation, but also European law whose influence on the Swiss legal system at best follows different rules

3. Similarities and differences between financial reporting as per CO (Swiss Code of Obligations) and IFRS

a) Similarities

Financial reporting is intended to present the economic position of the undertaking in such a manner that third parties can make a reliable assessment of the same the most reliable possible evaluation of assets and the profit situation. Financial reporting according to CO and IFRS has this objective alike; however, its implementation differs, particularly in terms of the level of accounting detail. The deeper level of detail in accounting as per CO enables balancing and offsetting which can disguise negative developments – refer to b) aa) further below.

Common to all regulations is the principle of the going concern. According to Article 958a, Section 1 CO, accounting is based on the assumption that an enterprise will continue operating for the next twelve months. If continuation is no longer possible, the evaluation procedure must be changed. According to Article 958a, Section 2 CO, accounting in this case must be based no longer on going-concern values, but liquidation values. This central principle also applies in IFRS. The twelve-month period in which continuation should be possible was ultimately taken over from IFRS by the new accounting law. In most cases, a change from going-concern to liquidation values causes a reduction in equity capital. The precepts of proper accounting furthermore include the principle of clarity and chronologically consistent accrual. In article 958b, Section 1 CO, the new law explicitly requires expenses and earnings to be entered separately depending on the date and nature of the transaction. The principle of consistency/comparability requires financial statements to remain comparable over time. The principle of consistency includes an obligation to state figures from previous years.

b) Differences

aa) Transparency-related differences

There are differences with regard to transparency-related principles. Financial reporting as per CO is certainly less transparent than financial reporting as per IFRS. With regard to the principle of faithful representation, disclosed information must be reliably represented in terms of IFRS business transactions and other events forming part thereof. For this reason, all transactions and circumstances must be registered completely, accurately and systematically. Each posting procedure must be verified by means of a document. Abstractly, these principles also apply under the code of obligations, but are greatly relativized by numerous exceptions, particularly in the context of hidden reserves. Ultimately, the offsetting prohibition disallows vertical summary. Article 960, Section 1 CO furthermore states that „assets and liabilities are normally valued individually, provided they are significant and not normally consolidated as a group for valuation purposes due to their similarity“. The term „normally“ here indicates that the offsetting prohibition does not apply absolutely, and that it is permissible to form evaluation groups. IFRS imposes a strict offsetting prohibition; in particular, it disallows assets with irregular developments in value from being merged into an evaluation group. The old accounting law allowed formations of such „evaluation groups“ with practically no restrictions. For the new law, the issue is still unclear; its resolution depends also on the extent to which IFRS principles are used to obtain an answer to the question.

bb) Prudence-related differences

The principle of prudence stipulates special care in the exercise of discretion during estimates required under uncertain circumstances, so that assets or income are not assessed too high, and debts or expenses are not assessed too low. Often, a contradiction arises between the principle of prudence and the objective of reliable evaluation of assets and the profit situation. According to the principle of prudence, an enterprise, in case of doubt, should rather present itself as poorer than in reality. This leads to a formation of hidden reserves. The principle of prudence is a fundamental evaluation criterion in the accounting regulations of CO, but not (explicitly) IFRS.

cc) Less cautious commercial accounting rules compared to IFRS

The fact that the principle of prudence in accounting as per CO can cause assets to be balanced below their real value leads to a general understanding that the provisions of CO are prudent, but those of IFRS rather not, because they seek to display the real value of assets. This always creates a risk of overvaluation, and consequently „inprudent“ accounting.

This standpoint of „CO careful – IFRS careless“ alone is not sufficient to mutually delimit the two systems of standards. There are numerous commercial valuation rules which violate the principle of prudence, and allow evaluations which are even less cautious than permitted by the IFRS rules. According to the code of obligations, securities can be revaluated, this being recognized in the net income statement, even if they are not available for trade; according to the relevant systems of rules, revaluations of securities recognized in the net income statement are only possible under this condition. According to the code of obligations, claims to payment under subscription are activated, whereas IFRS – cautiously – does not allow this activation. A formation of evaluation groups can conceal losses in the value of individual assets; IFRS provisions do not offer this possibility.