Hidden Reserves - Dissolution and Legal Basis

original publication on December 24, 2012; updated on March 06, 2013‍

In the external financial reporting, the resolution of hidden reserves results in the expenses being too low or the revenue too high, and thus the profit being overstated. The journal entries for the creation of hidden reserves listed in the previous blog post need to be reversed accordingly.

The existence of hidden reserves affects the balance sheet, while their changes (creation or dissolution) affect the profit and loss statement.

The creation of hidden reserves is permitted in Switzerland. Legal bases are:

• OR 674 II: Hidden reserves are permissible as far as the consideration of the permanent thriving of the company or the alignment of as consistent a dividend as possible justifies it, taking into account the interests of the shareholders.
• From OR 959c it is also evident that the formation of hidden reserves is permissible. Thereafter, the annex includes details regarding the hidden reserves.
• The principle of caution is explicitly stated in OR 958c. This means that in case of doubt, the financial situation of the company must be presented as worse than it actually is. Assets and revenues are therefore rather to be undervalued, liabilities and expenses are to be overstated. Resulting from the principle of caution are the maximum valuation regulations of the Code of Obligation. Lower valuations are generally always allowed under commercial law (but not under tax law).