How to recognize financial assets correctly. An overview.
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Basically, Swiss GAAP FER differentiates between securities (current assets) and financial investments (fixed assets). The determinant factor is the holding period of the assets.
Financial assets, which shall be sold within the next 12 months or are held for trading purposes, must be recognized as securities within the current assets.
On the other hand, financial assets that will be held most probably for a period of more than 12 months, shall be recognized as fixed assets. Within this category there are different assets such as participations, securities and loans.
If the voting or the capital share is above 20 % a recognition as participation is required. Below this percentage, the respective financial assets are treated as securities.
Depending on the recognition chosen different valuation rules apply. If securities are accounted for within current assets, the must be recognized at their actual value (market price at balance sheet date). If no market value is available, the must recognised at cost and reduced by possible impairment losses. If accounted for as fixed assets, you have the choice between market value or cost, as valuation principle. Long-term loans, on the other hand, always have to be valuated at cost and be reduced by impairment losses, if necessary.
If securities (within current of fixed assets) are valued at market prices, a deviation from this principle is possible if for a security no market price is available. If this valuation principle is used, all value changes must be shown in the profit and loss statement in the period where they occur. This also applies for impairment losses on participations of over 20 % voting or capital share.
Basically, you must check on every reporting date if there are any signs of value impairment. If such signs exist, a so called “impairment-test” has to be executed. Within this test the attainable value of the asset is compared with its book value. For securities, the net-market value is decisive, whereas for loans the value in use is decisive. The higher value of the two counts as attainable. If this value is higher than the book value, no impairment has occurred. Important: An impairment-test only must be done for financial assets recognized at cost, because if market values are used the value changes are accounted for in every given period.
But if an impairment loss results it has to be accounted for in the profit and loss statement of the respective period.
A detailed and transparent disclosure of the valuation principles is important. Even more if there are choices concerning the valuation method available or if special circumstances occur (e.g. valuation of a participation below its cost).
If you have questions concerning recognition or valuation of securities or participations, or expert Fabio Iovoli is looking forward to help you along.
