What are hidden reserves?

Hidden reserves are essentially equity that is not apparent on the balance sheet. This involves overestimating expenses and underestimating revenues. This reduces the reported value of a company.

Forming hidden reserves

Hidden reserves are formed, for example, by undervaluing assets. Thus, they display a lower value in accounting than they actually are in reality. This can be achieved, for example, through excessive depreciation or simple appreciation of properties.

Hidden reserves can also exist on the liabilities side of the balance sheet. For example, increased provisions for taxes or legal costs can be made.

A concrete example:

If a company buys a property for CHF 250,000, the property is reported in the balance sheet at this value. Should the value of the property increase to CHF 350,000 over time, silent reserves of CHF 100,000 are automatically created.

Resolving hidden reserves

Often, hidden reserves dissolve on their own. When assets on which hidden reserves were formed are sold, the reserves are automatically resolved. Of course, a company can also intentionally dissolve hidden reserves when correcting assets and liabilities in the balance sheet.

Why are hidden reserves allowed?

Hidden reserves strengthen companies. They can be dissolved in bad years to help the company prevent losses. Moreover, hidden reserves reduce equity, which ultimately also lowers the annual profit and tax burden of a company.