In the realm of financial reporting, adhering to the Swiss Generally Accepted Accounting Principles (GAAP) is crucial for maintaining transparency, accuracy, and compliance. The Swiss GAAP closing process plays a pivotal role in ensuring that a company's financial statements are prepared in accordance with these standards. In this guide, we'll delve into the intricacies of Swiss GAAP closing and provide you with a step-by-step approach to successfully execute this process.
Should I follow IFRS or Swiss GAAP in Switzerland?
In Switzerland, you should prepare the financials based on Swiss GAAP. Typically, IFRS is reserved for entities which are listed publicly on stock exchanges. The local GAAP of a jurisdiction is sufficient for closing the financials of private companies.
Step 1: Reconciliation of FIAT Accounts
Begin the Swiss GAAP closing process by reconciling all FIAT accounts to ensure that the balances are accurate. This involves comparing account balances recorded in the general ledger with supporting documents such as bank statements, invoices, and payroll records. Any discrepancies should be thoroughly investigated and resolved before proceeding.
Step 2: Reconciliation of Crypto Accounts
Make sure all your crypto assets are reconciled by comparing the balance on your closing period with the balance on either the blockchain explorers (Etherscan), crypto exchanges (Kraken) or wallets (MetaMask). These balances should be matched 1 to 1.
Step 3: Adjust Accounts Payable
If you are closing 2022, there could be some bills received in 2023, which technically we're expenses incurred in 2022. You can accrue these bills in 2022 to reduce tax liability. Similarly if bills were received in June 2022 and meant for an entire year, you should push half of the bill’s expense in 2023.
You can also book expenses such as accounting and audits done in 2023 for the 2022 financial years as that is work done for 2022 and this will lead to reducing your tax liability. Be sure that each entry should have proper documentation explaining the rationale behind the adjustment.
Step 4: Adjust Accounts Receivable or Defer Revenue
If you are closing 2022, there could be some invoices to customers which were invoices in 2023 for work done in 2022. These invoices need to be counted in 2022 and therefore need to be accrued for. Similarly if customers were invoiced in June 2022 and the invoice was meant for an entire year’s service, you can push half of the invoice revenue into 2023 reducing your tax liability.
Depending on your customer agreements, you can also push some of the revenue into a Proof of Concept account on your balance sheet and not recognize the revenue in the immediate year. Be sure that each entry should have proper documentation explaining the rationale behind the adjustment.
Step 5: Ensure you have an invoice or receipt for each transactions
In Switzerland, you need to apply an invoice or receipt to each transaction. An auditor would be lenient if you have the majority of your invoices or receipt and are missing a few but you should make an effort to include all invoices and receipt. In addition, don't mix up an invoice with a reminder notice. Reminder notices do not qualify as invoices and you need to go find the real the invoices with details on vendor, customer, description, amount and any VAT applicable deductions.
Keep in mind that screenshots of e-banking interfaces or credit statement do not count as an invoice or a receipt.
Step 6: Reconcile your credit card statements
Credit card statements alone cannot serve as viable documentation for transactions. You need to ensure that an invoice or receipt is allocated to each transaction on the credit card statement. These invoices or receipts can be saved in a shared Google Drive and do not need to be individually uploaded into the accounting system but simply as a reference in case of future audits.
Step 7: Calculate Depreciation and Amortization
Calculate depreciation and amortization expenses for applicable assets based on their useful lives. Swiss GAAP requires companies to use a systematic and rational method to allocate the cost of these assets over time. Document the calculation process and rationale behind the chosen method.
You can reference the depreciation rates of assets on the Swiss Law Website. You an use this rate to depreciation the asset fully until it is off your balance sheet and the expense is realized on your income statement.
Step 8: Book holiday and overtime accruals
Holiday and overtime accruals are recorded to account for the future vacation days and extra time worked that employees have earned but have not yet taken or been paid for. The accrual reflects the company's obligation to provide paid time off to employees for holidays and vacations and additional compensation owed to employees for their extra work.
You can calculate this by identifying the hourly rate of the employee multiplied by the number of overtime hours or holiday hours owed to the employee. To calculate the hourly rate of a monthly employee for example, simply take the monthly salary of the employee dividing it by 160 hours (if they work 100%, if 80% take a pro-rata of 160).
Step 9: Optimise for taxes by booking accruals
In Switzerland, you are permitted to book cost accruals in 2022 for cost you will pay in 2023. For example, if you know you will pay bonuses on January 2023, you can book an accrual in December 2022 to lower your tax liability. The idea is that these costs are for work performed in 2022 and so they belong in the 2022 financial year only to be paid out however in 2023.
Another example is accounting costs that you will pay in 2023 for work performed on your 2022 financials. These costs can be booked in 2022 using a cost accrual. You can even book risk mitigation costs. For example, an auditor or company can book a cost accrual for legal expenses in 2022 for potential lawsuits they will have to pay in 2023 for work that was done in 2022.
It is important however to ensure that such accruals are cleared in 2023 (i.e the following year) because an auditor will flag this as malpractice. For example, if book bonuses in a 2022 cost accrual be sure to pay out such bonuses in 2023. If you don't pay the full amount of the bonus accrual, be sure to carry over the difference to your income statement to recognize a gain.
These accruals will help lower your tax liability in 2022 so it is beneficial to assess such an option if you have gains in that particular taxable year. If you have no gains and are reporting a loss, you can skip this step.
Step 10: Accurate Asset Valuation
Swiss GAAP mandates the use of fair value measurement for certain assets. Evaluate assets such as investments, intangible assets, and property, plant, and equipment to determine their current fair market value.
Properly document the valuation methods used and any assumptions made. Book the change to reflect the new asset value on your balance sheet and your income statement.
Step 11: Realized Net Gain Loss for Crypto
For crypto businesses, be sure to book your realized net gain loss on crypto assets that have been sold or traded or even used as payment to pay contractors. Any crypto asset that has left your wallet or exchange, needs a corresponding net gain loss booking.
Be aware, this cannot be done by simply taking the value of your crypto at year end and subtracting it with the value of crypto at the beginning of the year. This is not an accurate calculation of Net Gain Loss and you will get into issues with the authorities if such an approach has been taken.
In order to calculate Net Gain Loss, be sure to track your cost basis using either accounting method FIFO or ACB. Tools such as Zenled and CoinTracking help with this topic.
Step 12: Unrealized Net Gain Loss for Crypto
Yes there is a difference between realized and unrealized net gain loss. Realized net gain loss means you have incurred an actual gain or loss from the sales, payment or trade of your crypto asset.
Unrealized net gain loss is simply the paper value of a crypto asset and you have not yet lost or gained on this crypto asset any FIAT loss or gain. In Switzerland, you are permitted to record an unrealized net gain loss at year end which can ultimately reduce your tax liability.
Be aware, this cannot be done by simply taking the value of your crypto at year end and subtracting it with the value of crypto at the beginning of the year. You need to identify the unrealized net gain loss on each individual crypto asset which has a different value on the date it was purchased.
Let's assume you have three investments:
- Investment A: Initial Value = CHF 5,000, Current Market Value = CHF 6,000
- Investment B: Initial Value = CHF 10,000, Current Market Value = CHF 9,000
- Investment C: Initial Value = CHF 15,000, Current Market Value = CHF 18,000
- Unrealized Gain for A = CHF 6,000 - CHF 5,000 = CHF 1,000 (Gain)
- Unrealized Loss for B = CHF 9,000 - CHF 10,000 = -CHF 1,000 (Loss)
- Unrealized Gain for C = CHF 18,000 - CHF 15,000 = CHF 3,000 (Gain)
Net Unrealized Gain = CHF 1,000 + (-CHF 1,000) + CHF 3,000 = CHF 3,000
Step 13: Reconcile your Swiss payroll accounts
If you are running payroll in Switzerland, then you are surely paying money to the authorities which include AHV or AVS payments, insurance payments, pension payments and potentially source tax (Quellensteur or Tax a Source).
These deductions are reduced from your employees salary each month but the liability is on you to declare them to the authorities. If you are booking accruals each month for your payroll entries, you will submit a declaration to insurance, pension or government authorities for which they will tell you if you paid too much or too little based on the payroll you have executed throughout the year. The booking of reconciliation can be booked in 2022 rather than 2023 when you will receive the invoice.
If you are not booking accruals for payroll, then invoices from insurance, pension or government authorities which are received in 2023 can be recognized in 2022 for payroll that was executed in 2022 ultimately again reducing your tax liability.
Step 14: Reconcile your VAT Accounts
If you are filing VAT quarterly in 2022, the following year in 2023 you are permitted to file a 5th VAT declaration up until June 2023. This 5th VAT declaration is meant for 2022 and therefore you can book an accrual in 2022 to help reduce your tax liability as this VAT declaration is meant for 2022.
Also if you are booking accruals for the VAT that you are reporting and you have a residual balance at year in 2022, please ensure to take this residual balance to your P&L and recognize the difference.
Step 15: Review any intercompany transfers
One of the most critical considerations in intercompany transfers is determining an appropriate transfer price for goods, services, or assets exchanged. The transfer price should reflect the fair market value to ensure that profits are appropriately allocated among subsidiaries and to avoid tax-related issues.
Swiss tax authorities require intercompany transactions to adhere to the arm's length principle, which means that the transactions should be conducted as if they were between unrelated parties in an open market.
In consolidated financial statements, intercompany transactions are eliminated to prevent double counting of revenues, expenses, assets, and liabilities. This provides a clear picture of the overall financial performance of the entire corporate group.
Step 16: Book a Swiss tax accruals
Once your Swiss financials are finalized, you can book a Swiss tax accruals which will help reduce your tax liability. Each Kanton will typically have a webpage where you can put in your profit and capital amounts to calculate your tax rate. You can check out Kanton Zurich's page or even the one in Kanton Obwalden's page. You'll need to know the profit you made for the year plus also enter your equity which you'll find on your balance sheet. This will give you an estimate which then you can book on the balance and P&L to reduce your tax liability and hopefully clears once you receive your final invoice.
Step 17: Book a legal reserves
In Switzerland, as soon as a company makes a profit, it is legally required to book a portion of that profit as a legal reserve in the equity side of their financials. The company is required to match 20% of total share capital as a legal reserve once it started generating profits.
So if you incorporated a GmbH for example, you would likely have 20,000 as share capital and the first 4,000 CHF of profit you make would need to be booked into a legal reserve in an equity account not to be touched.
If you incorporated an AG for example, you would likely have 100,000 as share capital and the first 20,000 CHF of profit you make would need to be booked into a legal reserve in an equity account not to be touched. If you did a fundraise in your AG and your share capital increased to 1,000,000 CHF then the matching legal reserve would need to be 200,000 CHF.
If you intend to issue dividends from the profits which exceed 10% of the profit amount, you would need to increase the legal reserve to 50% of the share capital. So if you made 600,000 CHF in profit and want to issue more than 60,000 CHF in dividends, you would need to move 50,000 CHF into your legal reserve account to meet the 50% share capital threshold assuming you incorporated an AG without raising additional financing rounds.
Step 18: Prepare Financial Statements
Compile the financial statements, including the balance sheet, income statement, additional information known as Notes and updates on accumulated profits. These statements should accurately reflect the company's financial position and performance for the reporting period.
Step 19: Consider if you need a Swiss audit
The main legislation governing auditing requirements in Switzerland is the Swiss Code of Obligations (CO). Publicly traded companies in Switzerland are subject to mandatory external audits. For private companies which exceeds two of the following thresholds in two consecutive fiscal years is required to have its financial statements audited:
- Balance sheet total of CHF 20 million
- Sales revenue of CHF 40 million
- 250 full-time employees on an annual average
Auditors in Switzerland must be licensed by the Swiss Federal Audit Oversight Authority (ECA).
Step 20: How to file Swiss corporate tax return?
Each canton in Switzerland has its own tax return forms and guidelines. Obtain the appropriate tax return form from your cantonal tax authorities or their official website.
Please note that the online submission of corporate tax returns is not yet available in all cantons. You can check with your local tax authorities to see if they offer this service.
The following Swiss cantons allow you to submit your corporate tax return online:
- Appenzell Ausserrhoden
- Appenzell Innerrhoden
- St. Gallen
When submitting your corporate tax return online in Switzerland, the online tax filing platform typically provides you with a calculation of the estimated tax liability based on the information you enter into the tax return form. This estimation gives you an idea of how much tax you might owe based on the data you've provided. However, please note that the calculated amount is usually an estimate and is subject to review and adjustment by the tax authorities during their assessment process. The actual tax liability might differ
In Switzerland, businesses are typically assigned a unique tax identification number by the local tax authorities of the respective canton in which they are registered. This tax identification number is used for tax-related purposes, including filing tax returns, making tax payments, and communicating with tax authorities. In some kantons, you will receive a formal notification or letter from the tax authorities containing your tax identification number.
Step 21: Attach your financial statements
When filing Swiss corporate tax, be sure to also send your financials statements along with the tax return which should be signed by the president of the board. A wet signature is advisable however if not possible then a digital signature will also suffice.
Executing a Swiss GAAP closing requires a meticulous approach and adherence to specific principles to ensure accurate financial reporting. The above simply lists some general aspects to look out for but each company is specific in their business dealings and so there is no standard checklist to follow that is applied to all.
By understanding the Swiss GAAP principles, preparing a comprehensive closing schedule, reconciling accounts, making necessary adjustments, valuing assets, and meticulously preparing financial statements, you can successfully navigate this process. Remember, accurate and transparent financial reporting not only ensures compliance but also provides stakeholders with valuable insights into your company's financial health.