Definition
The Swiss Accounting and Financial Reporting Act permits the creation of so-called "hidden reserves".
Unrealized reserves correspond to the difference between book values and the maximum amounts authorized for assets, or the amounts required for liabilities, under accounting law.
They can be created through additional depreciation and provisions set aside for replacement purposes or to ensure the company's continued operation.
Creation of hidden reserves
Hidden reserves are built up either by undervaluing assets (e.g., by recording inventories at a value lower than their economic value, or by excessive depreciation, e.g., by underestimating the useful life of assets or omitting to revalue them at market value), or by overestimating liabilities (e.g., by setting aside excessive provisions). This artificially reduces the company's economic profitability.
Examples
Provisions
Unrealized reserves may be created as part of provisions to protect the company against various disputes.
Building reserves
A reserve on a building or fixed asset can be created by applying a rate lower to the external rate.
Earnings will therefore be affected by the difference. Consequently, it will be reduced.
Release of undisclosed reserves
Frequently asked questions about hidden reserves
Are hidden reserves legal in Switzerland?
Yes, hidden reserves are legal in Switzerland.
Why are hidden reserves allowed?
Hidden reserves are a real asset for companies.
They can be dissolved in difficult times, protecting the company against losses.
In addition, hidden reserves reduce shareholders' equity, which in turn reduces a company's profit and tax burden.
How do you create a latent reserve?
There are two ways of creating a latent reserve:
to assets: listing a property at a value below market value - thus undervaluing the property
- liabilities: by recording the asset at a value higher than the amount of the liability - thus overvaluing the debt
What are the different types of hidden reserves?
There are several types of reserves.
Discretionary reserves: These reserves are created when assets are deliberately undervalued and liabilities deliberately overvalued.
Administrative reserves: These reserves are created by decision of the Board of Directors. They are intended to guarantee the continuity of operations during a difficult period.
Compulsory (or automatic) reserves: Mandatory reserves result from the ceilings set by the Swiss Code of Obligations (Art. 960 CO).
