Depreciation and fixed assets: the rules

When a company buys a machine, a vehicle or a piece of software, that cost does not weigh entirely on the year of purchase: it is spread across the years in which the asset is used. This is the principle of depreciation, and together with the concept of the fixed asset it determines how investments are recorded in the balance sheet. These are technical rules, but with very concrete effects on the operating result and on taxes. Understanding them avoids both artificially inflating profit and paying more tax than necessary.

Cost or investment: what gets capitalised

The first question is whether an expense should be booked as a cost of the year or capitalised as a fixed asset. The distinction depends on how long the benefit lasts:

• An asset that helps generate income over several financial years and has a significant value must be recorded under assets (capitalised) and depreciated over the years.
• An expense that is used up within the year, or of modest amount, goes directly to cost.

Fixed assets fall into three groups: tangible (real estate, plant, machinery, vehicles, furnishings, hardware), intangible (patents, licences, software, trademarks) and financial (participations, long-term loans). Land is a special case: being an asset that is not consumed, it is generally not depreciated.

Why we depreciate

Depreciation reflects the principle of accrual: the cost of an asset must fall on the financial years that benefit from it, not on a single one. If you bought a machine worth CHF 200,000 and expensed it all in one year, that year’s result would collapse and the following ones would be artificially inflated, even though the same machine is being used. Depreciation spreads the cost across the estimated useful life of the asset, reflecting its loss of value through wear and obsolescence.

The methods of depreciation

The two most common methods are:

• Straight-line depreciation: a constant amount each year, equal to the purchase value divided by the useful life. Simple and predictable; an asset with a five-year useful life is depreciated at 20% per year on the initial value.
• Declining-balance depreciation (on residual value): a fixed percentage applied each year to the remaining book value. The amounts are higher at the start and fall over time, mirroring assets that lose value faster in their early years.

The choice of method and useful life must be reasonable and consistent over time: changing them at will to steer profit conflicts with the regularity required in keeping the accounts.

The Swiss tax aspect

In Switzerland accounting and tax are closely linked (the authoritative principle of the commercial balance sheet). The tax authorities publish maximum depreciation rates allowed by asset category, which vary depending on whether they apply to the purchase value or to the residual value. Depreciating within those limits is generally accepted for tax purposes; depreciating more requires justification. It is wise to check the applicable rates in your own canton and for your asset category, since they are a well-established practical reference. Well-planned depreciation is a legitimate tool for spreading the tax burden over time, not a trick.

Prudence and hidden reserves

The Code of Obligations requires assets to be recorded at no more than their purchase or production cost, less the necessary depreciation: this is the prudence principle. Swiss law also allows depreciation greater than what is strictly necessary, creating hidden reserves (the book value of the asset is lower than its real value). These are permitted within certain limits and represent additional prudence, but must be managed knowingly: they affect the true reading of net assets and, when the asset is sold, they emerge as profit.

Common mistakes

• Fully expensing investments that should be capitalised, depressing one year’s profit.
• Failing to depreciate assets that are now obsolete, keeping them in the balance sheet at an unrealistic value.
• Ignoring the reference tax rates and finding depreciation added back for taxation.
• Forgetting that land, as a rule, is not depreciated.

In short

• Capitalise assets with multi-year usefulness and significant value; expense the rest.
• Depreciation spreads the cost across the asset’s useful life.
• Straight-line or declining balance: choose a consistent method and keep to it.
• In Switzerland the reference tax rates guide deductible depreciation.
• The CO prudence principle is the overall framework.

How we help you

We set up for companies the correct accounting of fixed assets and depreciation plans that are consistent with the Code of Obligations and optimised for tax, in compliance with cantonal rules. Let us sort out your depreciation.