{"id":31585,"date":"2024-06-24T12:07:57","date_gmt":"2024-06-24T10:07:57","guid":{"rendered":"https:\/\/fidulex.ch\/?p=31585"},"modified":"2024-07-25T13:33:38","modified_gmt":"2024-07-25T11:33:38","slug":"latent-reserve","status":"publish","type":"post","link":"https:\/\/fidulex.ch\/en\/latent-reserve\/","title":{"rendered":"Latent reserves: definition and examples"},"content":{"rendered":"
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Definition<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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The Swiss Accounting and Financial Reporting Act permits the creation of so-called \"hidden reserves\".<\/p>

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.<\/p>

They can be created through additional depreciation and provisions set aside for replacement purposes or to ensure the company's continued operation.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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Creation of hidden reserves<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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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.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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Examples<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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Provisions<\/h3>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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Unrealized reserves may be created as part of provisions to protect the company against various disputes.<\/p><\/div><\/div>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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Building reserves<\/h3>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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A reserve on a building or fixed asset can be created by applying a rate lower<\/strong> to the external rate.<\/p>

Earnings will therefore be affected by the difference. Consequently, it will be reduced.<\/p><\/div><\/div>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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Release of undisclosed reserves<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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The dissolution of hidden reserves results in too little being spent (too high a return) on the external balance sheet, resulting in too high a profit.<\/div>
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The annual financial statements of every Swiss company are expected to present a true and fair view of the company's assets and liabilities, financial position and results of operations.<\/div>
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To ensure that creditors and employees are not misled as to the true nature and profitability of operations, public limited companies are required to disclose in a note to the financial statements the dissolution of hidden reserves when these have had a significant impact on the balance sheet. Auditors are also in a position to help avoid this type of oversight.<\/div><\/div>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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Frequently asked questions about hidden reserves<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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\n\t\t\t\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/i><\/span>\n\t\t\t\t\t\t\t\t<\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\tAre hidden reserves legal in Switzerland?<\/a>\n\t\t\t\t\t<\/h3>\n\n\t\t\t\t\t

Yes, hidden reserves are legal in Switzerland.<\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t\t

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\n\t\t\t\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/i><\/span>\n\t\t\t\t\t\t\t\t<\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\tWhy are hidden reserves allowed?<\/a>\n\t\t\t\t\t<\/h3>\n\n\t\t\t\t\t

Hidden reserves are a real asset for companies.<\/p>

They can be dissolved in difficult times, protecting the company against losses.<\/p>

In addition, hidden reserves reduce shareholders' equity, which in turn reduces a company's profit and tax burden.<\/p>

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\n\t\t\t\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/i><\/span>\n\t\t\t\t\t\t\t\t<\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\tHow do you create a latent reserve?<\/a>\n\t\t\t\t\t<\/h3>\n\n\t\t\t\t\t

There are two ways of creating a latent reserve:<\/p>