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Annual financial statements 2022: a simple guide to valuation principles

In this article we explain the valuation principles in simple terms: the principle of prudence, the rules for receivables and inventory, accounting for foreign currency, and the use of standard write-downs. Understanding these concepts helps you prepare clearer financial statements that are more useful for managing your business.
e4yeasy4you4 min read
A simple explanation of annual financial statements

At the end of the financial year, every business draws up its annual financial statements, which give a snapshot of its financial and economic position. They include assets, liabilities, equity and debts, and are essential for understanding whether a business is healthy or whether there are risks to keep an eye on.

Valuing the items on the balance sheet can seem complicated — especially when it comes to machinery, vehicles, inventory or investments — because the values entered cannot simply be chosen freely. Under Article 959 of the Swiss Code of Obligations, financial statements must be prepared "completely, clearly and concisely, in accordance with generally accepted commercial principles" so that they give a reliable picture of economic reality.

Valuation principles for annual financial statements

The principle of prudence

The first valuation principle is the principle of prudence. This means that when it is not clear what value to assign to an item, it is better to take the more cautious estimate. In practice:

  • a business must not be overvalued;
  • when there is uncertainty, it is better to assume lower equity and profits;
  • as a result, debts and expenses may come out higher.

This rule helps identify foreseeable losses and risks at an early stage, avoiding surprises later on.

Valuing assets at acquisition or production cost

For most business assets, the value entered on the balance sheet is the acquisition or production cost. In other words, a value cannot be inflated just because it "seems" higher.

There are, however, exceptions to this rule, such as:

  • listed assets (which can be valued at market price)

This distinction matters most for businesses holding securities or financial assets whose value fluctuates.

Foreign currency and exchange rates

If an account is held in foreign currency, it must be entered on the balance sheet using the official exchange rate on 31 December. The year-end balance must match the actual bank statement, taking into account the exchange rate on that day.

Trade receivables and write-downs

Trade receivables must match the open items in the accounting ledger. Depending on their nature and the likelihood of non-payment, you can set up a bad debt provision (delcredere). The Swiss tax authorities approve a default write-down of:

  • 5% for domestic receivables
  • 10% for foreign receivables

These percentages help make the valuation of amounts that might not be collected more prudent.

Inventory and stock reserves

Inventory can be valued on a prudent basis: it is permitted to record it at up to one-third below the purchase price as a stock reserve. If you use this method, it must be disclosed in the notes to the financial statements.

Work in progress and unbilled services

Work in progress and services that have not yet been invoiced must be included on the balance sheet at production cost. This allows you to correctly reflect the economic value of work that has been completed but not yet billed to the client.

Equity investments and reorganisations

Equity investments in other businesses must generally be valued at acquisition cost. An exception applies in the case of corporate reorganisations provided for under Article 670 of the Swiss Code of Obligations, which may require special treatment.

Accrued and deferred items

When you have paid for:

  • a service or bill relating to the new year
  • services that have not yet been collected

these amounts must be taken into account on the balance sheet as accrued or deferred items. For example:

  • accrued assets
  • accrued liabilities
  • warranty provisions
  • deferred processing items
  • tax provisions

These items help allocate costs and revenue to the correct accounting period.

Why it is important to follow these principles

An accurate, prudent valuation of the annual financial statements makes it possible to:

  • show the real economic and financial position of the business
  • avoid overstatements that hide risks
  • comply with the requirements of Swiss law under Article 959 of the Code of Obligations

Financial statements should not be a creative document: they need to be reliable, transparent and useful, both for you and for fiduciaries, auditors and financial institutions.

How easy4you can help

For many SMEs, valuing the balance sheet can be complicated, especially when it comes to:

  • international receivables
  • inventory and stock
  • investments and fixed assets

easy4you supports businesses in preparing, reviewing and valuing their annual financial statements, with close attention to compliance and accounting prudence. Our support includes:

  • analysis of balance sheet items
  • advice on write-downs
  • clear explanations of accounting principles
  • ongoing assistance throughout the year-end close

Conclusion

Annual financial statements are more than just an accounting document: they are a management tool. Understanding and correctly applying valuation principles helps you better understand the health of your business and make more informed decisions.

Would you like advice on your year-end close and valuation criteria? Contact us for a free appointment.

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