Hidden reserves: creation, release and disclosure under Art. 959c CO
As at: · fastview ag, Suhr
Professionally responsible: Marco Zanetti and Reto Ackermann, fiduciaries and auditors, fastview ag
Hidden reserves are the difference between the value at which an asset or a provision is carried in the balance sheet and its higher or lower actual value. The CO permits them within narrow limits and requires only one disclosure in the notes: the net amount by which they were released, if the result thereby appears substantially more favourable. This page explains types, creation and release, works through an example and shows the movement schedule.
What hidden reserves are
Hidden reserves arise in two ways: assets are carried in the balance sheet below their value, or liabilities and provisions are carried higher than they need to be. In both cases the reported equity is smaller than the actual equity. They are called “hidden” because they are not apparent from the financial statements.
The CO expressly permits them. For replacement purposes and to secure the long-term prosperity of the company, additional depreciation and value adjustments may be made, and these need not be reversed when they are no longer necessary (Art. 960a para. 4 CO). The same applies to provisions: provisions that are no longer justified need not be released (Art. 960e para. 4 CO). Anyone closing under Swiss GAAP FER does not have this leeway; there the true and fair view applies, and hidden reserves are not permitted.
Types of hidden reserves
| Type | How it arises | Example |
|---|---|---|
| Compulsory reserves | from the valuation rules: at most acquisition or production cost | land whose market value exceeds the acquisition cost |
| Discretionary reserves | from prudent estimation within the permitted range | warranty provision at the upper end of the range |
| Arbitrary reserves | deliberately lower valuation under Art. 960a para. 4 CO | additional depreciation on machinery |
| Replacement reserves | depreciation to finance more expensive replacement assets | vehicle fleet with rising replacement prices |
For tax purposes a distinction must be made: part of the hidden reserves is accepted by the tax authorities, such as a flat-rate value adjustment on inventories (“one-third inventory reserve”) or a flat-rate allowance for doubtful receivables. Anything beyond that is added back and carried as a taxed hidden reserve. The rates differ by canton and case; the practice of the competent tax administration is authoritative.
Creation and release
A hidden reserve is created when the difference between carrying amount and actual value increases, and released when it decreases. This often happens without a separate entry: a smaller inventory with the same flat-rate deduction releases part of the inventory reserve, and the result is correspondingly higher. Anyone who manages hidden reserves properly in the closing therefore records the balance per reserve per year; the change shows what was created and what was released.
Disclosure in the notes: Art. 959c para. 1 no. 3 CO
To be disclosed in the notes is the total amount of released replacement reserves and of other hidden reserves released beyond that, to the extent that it exceeds the total amount of newly created reserves of this kind, if the result achieved is thereby presented substantially more favourably. What counts is therefore the net release: releases less new creations of the financial year. A net creation need not be disclosed. Whether the release is material you assess in relation to the result for the year.
Example: inventory and allowance for doubtful receivables
A trading company values its inventory at one third below cost and forms a flat-rate allowance for doubtful receivables of 5 % on its receivables, although after individual review only CHF 4'000 is at risk. Amounts in francs:
| Reserve | Derivation | Prior year | Reporting year | Change |
|---|---|---|---|---|
| Inventory | cost 300'000 and 240'000 respectively, carried at two thirds | 100'000 | 80'000 | −20'000 release |
| Allowance for doubtful receivables | 5 % on 280'000 and 400'000 respectively, 4'000 needed | 10'000 | 16'000 | +6'000 creation |
| Total | 110'000 | 96'000 | −14'000 |
On balance, hidden reserves of CHF 14'000 were released. If the reported annual profit is CHF 50'000, it would be CHF 36'000 without this release; the result thus appears substantially more favourable, and the disclosure belongs in the notes, for example as follows: “In the reporting year, hidden reserves of around CHF 14'000 were released on balance; the reported overall result is correspondingly higher than it would have been without this release.”
Movement schedule and export in nunia
In nunia you manage the hidden reserves per engagement on a separate page. For each reserve you record a name, the balance per financial year and, if desired, a balance sheet account and an income statement account. nunia calculates the total and the change from the prior year per year and shows, for the reporting year, the sum of creations, the sum of releases and the net amount.
- Notes: if there is a release on balance, nunia preselects the disclosure under Art. 959c para. 1 no. 3 CO in the notes to the financial statements and inserts the amount into the sample text; in the case of a net creation, the disclosure remains deselected.
- Movement schedule: export as Excel with the sheet “Movement schedule” (balances per year, formulas for total and change) and as PDF.
- Deferred taxes: a second sheet lists the loss carry-forwards with their expiry year (seven years) and calculates the deferred tax from the amount still available for offset and the chosen rate.
- Analysis: the assigned accounts determine where a reserve comes into play in the business analysis, for example in the operating result or below it.
What nunia does not decide: whether a reserve is accepted for tax purposes, how high it may be and whether a release is material. This assessment remains with you. What the analyses look like in nunia is shown in the tutorial video “Analysis”.
Connection with other closing topics
The disclosure on hidden reserves is one of several in the notes; the whole process is described in Preparing financial statements. In the case of a loss of capital or over-indebtedness it may become necessary to disclose hidden reserves in an interim balance sheet; more under Loss of capital and over-indebtedness. For the tax value of unlisted shares, the share valuation under Circular No. 28 uses the net asset value, into which taxed hidden reserves may flow. And anyone checking how much can be distributed looks at the appropriation of profit: only what appears in the balance sheet as freely disposable equity can be distributed.
This page summarises the legal situation in simplified form and does not replace advice in the individual case. The law, the articles of association and current practice are authoritative.
Frequently asked questions
What are hidden reserves?
The difference between the carrying amount of an asset or a provision and its higher or lower actual value. The reported equity is thereby smaller than the actual equity.
Must the release of hidden reserves be disclosed in the notes?
Yes, if on balance more was released than newly created and the result is thereby presented substantially more favourably (Art. 959c para. 1 no. 3 CO). The net amount must be disclosed.
Are hidden reserves permitted under Swiss GAAP FER?
No. Swiss GAAP FER requires a true and fair view; hidden reserves are not permitted there. The CO permits them under Art. 960a para. 4 and Art. 960e para. 4 CO.
How does nunia help with hidden reserves?
nunia manages the reserves per year, calculates creation, release and net amount, preselects the disclosure in the notes with the amount in the case of a net release, and exports the movement schedule as Excel and PDF.
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