Swiss GAAP FER 30 (consolidated financial statements) under scrutiny
The FER expert committee is currently scrutinizing the Swiss GAAP FER 30 standard on consolidated financial statements for any adjustment needs. They will make a final decision sometime in mid-2018 whether it requires revision or not.
FER project processes
At the same time the Foundation for the Commission for Financial Reporting Standards reworked its internal processes and governance, it also restructured the project process. In the future, topical projects will undergo two subsequent phases:
- Phase 1: Analysis
The analysis phase should be seen as a pre-project phase in which either an existing expert recommendation is reviewed for its topicality, relevance, completeness and/or an interpretative guide is drawn up for a current and important topic .
- Phase 2: Project implementation
Phase 2 is the actual project phase in the classical sense, during which a technical recommendation is prepared, which is then published as a consultation draft, adjusted and finally published.
It is the FER expert committee that initiates the analysis phase. The FER expert committee then defines a task force to undertake the steps in question. Based on the results of the analysis, the FER expert committee then decides whether Phase 2 should be started and a project should be implemented. Alternatively, the FER expert committee may also conclude that there is no need for adjustment, so that there are no further steps after Phase 1.
Outstanding issues regarding Swiss GAAP FER 30
In its press release dated 5 December 2016, the FER expert committee listed its open projects for 2017 and – to no one’s surprise – announced that the first existing standard to be subjected to a review procedure would be Swiss GAAP FER 30 (consolidated financial statements).
Just like the other FER standards, Swiss GAAP FER 30 is brief and concise. All requirements related to the consolidated financial statements (including business combinations and equity accounting) are treated in a mere 9 pages. Meanwhile, IFRS covers the same topic in several different standards with the according heft (specifically, IFRS 3 Business Combinations, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 Investments in Associates and Joint Ventures).
Because the rules of Swiss GAAP FER 30 are short and based on principles, many questions remain open (in some cases, even fundamental ones). The following list shows a non-exhaustive overview of some of the most discussed problems regarding corporate transactions:
|First-time consolidation||In the case of retroactive clauses in purchase contracts (e.g. transfer of risks and rewards retroactively as at 1 January), is a first-time consolidation as at that date possible?|
|Purchase price allocation||Do only the assets previously recognized by the acquired company have to be revalued or, as in IFRS 3, do assets not previously recognized (e.g. patents, trademarks, customer contracts) also have to be taken into account?|
|Transaction costs||Can transaction costs (e.g. legal advice, due diligence) be recognized as part of the purchase price or do they have to be recognized in the income statement?|
|Earn-out||In the case of recognized earn-out liabilities, should subsequent adjustments due to changes in estimates be recognized in the income statement or offset against goodwill?|
|Negative goodwill||Can negative goodwill be recognized immediately in the income statement or should the company create provisions (to be released over a certain period of time)? Is it also possible to offset it against equity?|
|Disclosure of minority interests in over-indebted subsidiaries||Should minority interests with the corresponding share in negative equity be eliminated or is the so-called ‘waterline accounting’ applicable (i.e. disclosure of negative minority interests only for explicit obligations to make additional contributions, otherwise at zero)?|
|Step acquisitions||In a step acquisition, does goodwill have to be calculated separately for each acquisition step or should goodwill be recalculated once the buyer has full control of the target?|
|Share sale leading to loss of control||If a company sells shares held in a company and thus loses control, should the remaining shares be recognized at their current value or its pro rata carrying amount (pro rata net assets plus pro rata goodwill)?|
|Purchase of minority interests||In the case of an acquisition of minority interests, is the difference between the purchase price and the carrying amount to be recognized in equity or as goodwill?|
|First-time recognition of affiliated companies||Do the net assets of affiliated companies have to be revalued at the time of acquisition in the same way as for fully consolidated companies?|
|Foreign exchange differences on disposal of a foreign subsidiary||Are the cumulative translation differences recognized directly in equity to be released through the income statement when a subsidiary is sold (so-called recycling) or, if necessary, to be transferred to retained earnings without affecting net income?|
The general principle laid down in the Swiss GAAP FER is that open questions have to be answered based on the framework concept and that the answers must be based on the objectives of “relevance to decision-making” (Section 5 of the framework concept) and the “true & fair view” (Section 6 of the framework concept). However, because the rule is so generic, it is inevitable that for some very specific questions there may be several possible answers, which limits the comparability of financial statements under FER. The required disclosure of the selected procedure in the notes can only partially compensate for this lack of comparability and regularly presents the analysts with challenges.
In practice, the concrete answers to open questions are often based on other accounting standards, which are committed to the true & fair view and which provide a binding answer to the question. More often than not, the solutions are based on IFRS (or IFRS for SME) as these are well known in Switzerland on the one hand, and have a relatively high degree of granularity on the other hand.
Appraisal and outlook
Just as with other FER standards, Swiss GAAP FER 30 is also principle-based and does not contain any individual case regulations. In view of the sometimes highly complex practical issues that arise (mostly in connection with the acquisition or the sale of companies), a more binding regulation of the central open issues would be desirable for reasons of better comparability.
It remains to be seen whether the FER expert committee decides to adjust the standard and to bridge these gaps once the review procedures has been completed. However, it would be naive to expect a quick solution: according to the FER expert committee’s press release of 22 June 2017, the interested public will be called upon to provide input on how urgent this revision is only in Q4/2017. The decision whether to start a project will only take place in 2018 (presumably during the June meeting). The project implementation will then most likely take another two years.
According to Communication no. 2/2017 of April 2017, SIX Exchange Regulation will also examine Swiss GAAP FER 30 and has declared the accounting in connection with acquisitions as a key topic for the review of the 2017 financial statements under Swiss GAAP FER. Depending on the results, there may also be some adjustment pressure from this side.