Hidden Reserves in Switzerland: Legal Framework, Practices, Transparency and Tax Implications
1) Definition and core concept of Hidden reserves in Switzerland
In Switzerland, hidden reserves are the gap between the economic value of assets/liabilities and their reported carrying amount. They most often arise from undervaluation of assets (additional depreciation, conservative inventory valuation, retention at historical cost) and/or overvaluation of liabilities/provisions (prudence provisions), in line with the prudence principle. Hidden reserves are explicitly permitted under Swiss accounting law and are a national particularity.
2) Legal basis in the Swiss Code of Obligations (CO)
Prudence & measurement. Art. 960a para. 4 CO authorizes additional depreciation and value adjustments “to ensure the company’s long-term prosperity” and allows not releasing adjustments that are no longer necessary.
Notes & transparency. When the net release of hidden reserves has a material positive impact on profit, it must be disclosed in the notes. In practice, only the difference between reserves released and newly created must be disclosed (a “netting” effect).
Official references. Presentation, measurement and notes requirements are read together with Arts. 958 et seq. CO (structure, principles), Arts. 960 et seq. CO (measurement), Art. 959c CO (content of the notes).
3) How are hidden reserves created?
a) Undervaluation of assets
- Depreciation beyond economic impairment.
- Prudent inventory valuation (conservative methods, write-downs).
- Property, plant and equipment kept at cost despite higher market value.
b) Overvaluation of liabilities/provisions
- Prudence provisions in excess of the expected risk.
- Conservative estimates of future obligations.
Practical summary. Hidden reserves result from additional write-downs and/or provisions permitted by law; their net positive release must be presented in the notes when it materially affects profit.
4) Why do companies use them?
Benefits (SMEs/SECO).
- Smoothing earnings over years.
- Buffer in difficult periods (loss-absorption capacity).
- Implicit self-financing and dividend restraint (retaining resources).
Limits/Risks.
- Reduced transparency for third parties (banks, investors, creditors).
- Potential manipulation of reported performance.
- Weaker comparability between companies and over time.
5) What do frameworks beyond the CO say?
- Swiss GAAP FER aims at a true & fair view and restricts arbitrary hidden reserves. Adopting FER implies greater transparency (justified methods, richer disclosures).
- SME practice. Hidden reserves remain common under the CO, but are more constrained under FER (justified provisions, disclosures in the notes).
- Doctrine/Big Four. Operational definition: the gap between carrying amounts and maximum amounts permitted by law; stronger expectations for governance and note disclosures.
6) Transparency: notes and governance
- Notes (CO). Disclose the net release when it materially increases profit.
- Governance. The board should oversee the prudence policy, the magnitude of reserves and their dynamics(creations/releases), especially around sensitive events (dividends, acquisitions, bank covenants).
- Shareholder rights. In some cases, a minority can demand additional information; hence the need for internal traceability of estimates.
7) Helpful distinctions
- Hidden reserves vs. fluctuation reserves (e.g., on securities): fluctuation reserves are open and disclosed; they are not “hidden” reserves.
- Internal vs. published accounts: when hidden reserves exist, economic equity (internal view) is higher than published equity.
8) Tax implications (Geneva / RFFA focus)
Since RFFA (01.01.2020), Geneva allows the declaration and management of hidden reserves (including goodwill) when exiting privileged tax regimes (or entering ordinary taxation). In practice:
- Advance ruling/confirmation by the tax authority.
- Tracking in the return, with possible deferral/spread of effects.
- GeTax/CSI guidance: rules for carryforward and limits to tax reductions from declared reserves.
Conclusion: anticipate and document to secure the tax treatment.
9) Illustrative example
Case. An industrial company books additional depreciation on machinery and sets up a prudence provision for litigation.
Year N effect. Book value of machinery < economic value; liabilities > expected risk ⇒ hidden reserves exist.
Year N+1 effect. Disposal of an asset with a gain and litigation closed at lower cost ⇒ net release of hidden reserves, profit increases; include a note disclosure if the effect is material.
10) Good practices (SMEs & groups)
- Document the prudence policy (depreciation, provisions), methods and assumptions.
- Calibrate: prudence ≠ arbitrariness; support with tests and analyses (obsolescence, useful lives, risk matrices).
- Monitor the notes: track net releases and their effects; avoid surprises for stakeholders.
- Anticipate taxes (RFFA/cantons): quantify early, secure via rulings/communications with the authority.
- Assess FER: if the goal is a true & fair presentation (banks, investors), reduce hidden reserves and enhancedisclosures.
11) Key takeaways
- Hidden reserves are legal in Switzerland (Art. 960a para. 4 CO) and stem from the prudence principle.
- They smooth earnings but reduce transparency; the CO requires a minimum disclosure (net release).
- Swiss GAAP FER limits the practice: greater justification and visibility.
- There are tax stakes (RFFA/Geneva): plan and document.
Services by My Swiss Company – Swiss Fiduciary (Accounting & Tax Expertise)
My Swiss Company SA, Swiss Corporate Services Provider and RISTER, Geneva Fiduciary support SMEs and groups in designing, managing and auditing hidden reserves at the intersection of the CO – Swiss GAAP FER – cantonal taxation:
- Accounting & reporting: depreciation policies, inventory measurement, provisions (models, controls, CO notes).
- Framework conversion: CO → Swiss GAAP FER, gap analysis, transition plan, in-house training.
- Transactions & M&A: hidden-reserve due diligence (earnings quality, EBITDA normalization, purchase price adjustments).
- Tax: RFFA dossiers (Geneva & other cantons), advance rulings, GeTax/CSI follow-up, impact modelling, Swiss VAT reportings.
- Governance & internal control: estimation policies, audit trails, review committees, preparation for lender reviews.
👉 Contact us for an express diagnostic (2–3 hours): mapping of hidden reserves, transparency risks and value-creation levers (financial reporting, bank negotiations, M&A).
FAQ – Hidden Reserves in Switzerland
Q1. Are hidden reserves permitted?
Yes. The CO (Art. 960a para. 4) permits additional adjustments and the non-release of adjustments that are no longer necessary, in the spirit of prudence.
Q2. Must they be disclosed in the financial statements?
Their creation is not published. However, a net release that materially increases profit must be disclosed in the notes.
Q3. Are hidden reserves allowed under Swiss GAAP FER?
FER targets a true & fair view and restricts arbitrary hidden reserves. Prudence can be maintained when justified, with stronger disclosures and documentation.
Q4. What are the main risks?
Reduced transparency, limited comparability, and potential concerns from lenders/auditors in case of unusual magnitudes or opportunistic creation/release cycles.
Q5. How do they interact with tax (Geneva/RFFA)?
When exiting a privileged tax status (or entering ordinary taxation), certain hidden reserves (incl. goodwill) may be declared. The procedure should be planned and documented to secure deferral and deductibility.
Q6. How should an SME start in practice?
- Inventory prudence areas (PPE, inventories, provisions).
- Quantify the economic vs carrying amount gap.
- Formalize a policy (thresholds, useful lives, methods).
- Prepare a note template for net releases.
- Anticipate tax effects and communication with banks/third parties.