On 23 December 2011 the Swiss Parliament enacted the new accounting law, which became effective on 1 January 2013. These new provisions are contained in the 32nd title of the Swiss Code of Obligations (CO).
The new law includes some changes that are relevant for commodity trading companies, particularly with respect to the application of valuation principles. Under the new law, assets with a quoted market price or another observable market price in an active market may be valued at these prices in subsequent valuations, even if these are above the nominal value or the acquisition price. Up to now, this has only been allowed for listed securities accounted for as current assets. The Swiss Federal Council Opinion lists examples of assets with an observable market price, such as securities, precious metals and commodities; this restrictive list has been extended to other assets with observable market prices in an active market. The requirements in order to qualify as “active market” include a high number and frequency of transactions, homogenous products, virtually no entrance and exit barriers, observable prices and transparency on pricing mechanism and low transaction cost. Although judgment is required, many commodity markets will meet these requirements.
Through the introduction of this valuation choice, the new accounting law takes first steps to a true and fair view of the financial position and results of operations. For many commodity trading companies, reporting commodity positions at fair value is already common practice for risk management and internal purposes. Furthermore, banks prefer this approach as it gives better insight in the economic performance of the company. Applying these principles to the external reporting under Swiss CO allows companies to better align the internal reporting with the external reporting and to better explain the real economic performance.
Other changes included in the new law that are relevant to consider relate to:
- the option to present the financial reporting in the currency relevant to the entity’s business activities (functional currency) instead of in Swiss francs (translation is still required)
- the minimum structure of the balance sheet and income statement
- the additional information to be included in the notes
- the requirement for larger companies to prepare a cash flow statement and management report
Companies still have some time to implement the new legislation. It will be applicable to financial statemets as of and for the financial year 2015. Entities also have the possibility of early adoption should they wish to.