Principles of proper accounting - principle of prudence

Creditor protection is highly emphasized in Swiss law of obligations. Learn more about the precautionary principle – a basic principle of proper accounting.

Principles of Proper Accounting

According to Art. 959 of the Swiss Code of Obligations, the following principles of proper accounting apply: completeness and accuracy, clarity and materiality, and caution. The principle of caution includes the realization, impairment, and the lower of cost or market principle. Due to the predominant role of creditor protection in the law of obligations, the precautionary principle is of great importance.

Realization Principle

According to the realization principle, profits and losses must only be recognized when they are actually realized. Neither unrealized gains nor impending losses may be disclosed.

Imparity Principle

As the name suggests, the imparity principle leads to unequal treatment between unrealized gains and losses. According to the imparity principle, foreseeable losses should be taken into account as soon as they are recognizable – thus before they occur (so-called loss anticipation). Impending losses must be shown, for example, through depreciations or the formation of provisions. Profit realization is handled the same way as under the realization principle.

Lowest or Highest Value Principle

If two or more possible valuation approaches are considered, the lower value must be chosen for assets and the higher value for liabilities. While the imparity principle is a limitation of the realization principle, the lowest or highest value principles are each specifications of the imparity principle.

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