A company closes out the fiscal year with financial statements. The results provide insight into the company’s financial situation. The financial statements are primarily used for the company’s tax purposes, but they are also valuable to the company itself, as they enable it to make realistic plans and take significant decisions based on the information they provide. Potential investors can also use the financial statements to gain insight into the company’s financial position.
What are financial statements?
The annual financial statements—whether as a company’s individual financial statements or as consolidated financial statements for a group of companies—present the financial results for the year. As the culmination of the accounting process, they compile financial reporting documents that must be audited, certified, and, under certain circumstances, disclosed (see Disclosure Requirements). The annual financial statements are included in the annual report, although the components and scope of the report depend on the size of the company.
Generally speaking, there are four components of financial statements:
- Income
- Expenses
- Assets
- Deferred Revenue
Components of the Financial Statements
Annual financial statements typically include the following components:
- Balance Sheet (Art. 959 OR): presents the company’s financial position by listing its assets and liabilities, and also includes payroll accounting.
- Income Statement (Art. 959b of the Swiss Code of Obligations): presents the company’s financial performance. It can be presented as a production income statement or a sales income statement.
- Notes (Art. 959c of the Swiss Code of Obligations): supplement and explain the other components of the financial statements. They may, for example, include disclosures, breakdowns, and explanations regarding items on the balance sheet and the income statement.
- Statement of Cash Flows (Art. 961b of the Swiss Code of Obligations): provides a detailed breakdown of changes in cash and cash equivalents resulting from operating, investing, and financing activities.
- Management Report (Art. 961c Swiss Code of Obligations): presents the company’s business performance and financial position from perspectives not covered in the other sections, such as the order and contract situation, research and development activities, extraordinary events, a risk assessment, and the company’s future prospects.
The financial statements may be prepared in one of Switzerland’s official languages or in English. Monetary amounts should be stated in the national currency or in the functional currency (i.e., the currency that is central to the business operations). If a functional currency is used, the amounts must also be stated in Swiss francs. The notes to the financial statements should then list the exchange rates used and explain them if necessary.
Who is required to prepare annual financial statements?
Sole proprietorships and partnerships with annual revenue of less than 500,000 Swiss francs, as well as foundations and associations, are exempt from preparing an annual report (see Art. 957 of the Swiss Code of Obligations). They may submit a simple income and surplus statement to the tax office.
Companies that are registered in the commercial register and are required to maintain general accounting records must prepare annual financial statements at the end of each fiscal year. In addition to the balance sheet, income statement, and detailed notes, larger companies must also include a cash flow statement and a management report. Furthermore, companies such as AGs or GmbHs are subject to additional disclosure requirements (see below).
Accounting Standards: IFRS, Swiss GAAP FER, and US GAAP
The three most important accounting standards recognized and relevant in Switzerland are:
- IFRS (International Financial Reporting Standards)
- Swiss GAAP FER (Swiss Generally Accepted Accounting Principles)
- U.S. GAAP (Generally Accepted Accounting Principles in the United States)
Small and medium-sized private-sector companies, in particular, use Swiss GAAP FER because it allows for leaner and less complex financial reporting compared to the more complex IFRS. Although larger companies are increasingly switching to Swiss GAAP FER, the 2019 Swiss Performance Index shows that IFRS is the most widely used standard at 54%, followed by Swiss GAAP FER at 33% and U.S. GAAP at 5%. Large publicly traded companies continue to prefer using IFRS because it allows for more internationally comparable financial reporting than Swiss GAAP FER.
How do you prepare financial statements?
Large companies that have their own accountant or even their own accounting department usually have these employees prepare the annual report. Those who lack the time or the necessary expertise often hire a tax advisor to prepare the financial statements. The cost of a certified public accountant depends on the number of hours worked, the effort required to gather information, the number of supporting documents, and whether the tax return and VAT return are included. It also makes a difference whether billing is based on hourly rates or flat fees.
Here’s an example: The cost of a trustee for a small GmbH with two employees averages about 2,300 francs per year. On top of that, there may be one-time setup costs ranging from 300 to 500 francs. A public limited company (AG) with 10 employees and 100 documents per month incurs average annual costs of about 7,200 Swiss francs and one-time setup costs of approximately 500–800 Swiss francs.
To avoid such costs, many small businesses and sole proprietors use modern accounting software to prepare their annual financial statements—or at least to lay the groundwork for them.
Here’s How Year-End Closing Works with payroll+
payroll+ AG assists companies with their year-end financial statements by allowing them to record payroll+ AG’s invoices as third-party personnel costs or as payroll expenses, including social security contributions. Companies that employ freelancers or contractors through payroll+ record these expenses as third-party personnel costs, while small and medium-sized enterprises (SMEs) use the wage expense category, including social security contributions, because they continue to hold the employment contracts with their employees.
Preparatory Steps for the Year-End Financial Statements
The annual financial statements are a comprehensive document, and preparing them takes some time. The better the documents are prepared, the faster the financial statements can be finalized. Starting the preparatory work early ensures an optimized process and a smooth workflow when compiling the necessary documents. The following preparatory steps are recommended:
- Preparation of an inventory of actual asset and liability values
- Credit Check on Customer Receivables
- Calculation and Posting of Depreciation
- Accruals (transitory items)
- Recognition of Provisions
The reconciliation of accounts, as well as the review and correction of the results of day-to-day bookkeeping, culminates in the preparation of a trial balance of all annual transaction figures. To this end, the corresponding supporting documents and records must also be collected and organized in a clear and concise manner.
Once this preparation is complete and an appendix and a management report have been prepared, the annual financial statements are submitted to the person responsible for accounting within the company for review and, following a favorable assessment, are signed by that person. In the case of corporations, the annual financial statements must be submitted to the supervisory board and approved by it before they can be filed.
Where do you file the annual financial statements?
The annual financial statements are submitted electronically to the appropriate tax office using a specialized software program.
When must the annual financial statements be prepared?
The annual financial statements are prepared at the end of each fiscal year. In Switzerland, a fiscal year runs from January 1 through December 31 or from July 1 through June 30 of the following year. The report must be submitted within six months after the end of the fiscal year.
Requirement to Disclose Annual Financial Statements
The disclosure requirement is governed by Article 958e of the Swiss Code of Obligations. If the company has outstanding bonds or equity securities listed on a stock exchange, the annual financial statements must be published in the Swiss Official Gazette of Commerce or made available to anyone who requests to inspect them within one year. All other companies are required to make the annual financial statements available only to creditors who can demonstrate a legitimate interest.