Consolidated financial statements: when they are mandatory
When a company controls others, the individual financial statements are no longer enough to capture reality: what is needed is a single set of accounts that treats the group as if it were a single business. These are the consolidated financial statements. In Switzerland, the Code of Obligations sets out precisely when they are mandatory and when they can be dispensed with. Getting the assessment wrong exposes you to findings during the audit and to a distorted picture presented to banks and shareholders.
What consolidation is
The consolidated financial statements combine the accounts of the parent company and its subsidiaries while eliminating the internal relationships: mutual receivables and payables, revenues and costs between group companies, and profits not yet realised towards the outside. The result shows the assets, liabilities and profit of the group towards the outside world, without inflation due to “in-house” transactions.
The scope of consolidation includes the companies over which the parent exercises control, typically through the majority of votes or the power to determine the governing bodies.
When the duty arises
The Code of Obligations imposes group accounts on the legal entity that controls one or more businesses required to prepare annual accounts. The principle is simple: whoever leads a group must account for it as a whole.
The duty is reinforced in the presence of companies with listed securities, outstanding bonds, or where shareholders representing a qualified share of the capital request it, as well as for foundations and cooperatives of a certain significance.
Exemptions based on size
The law nonetheless grants an important size-based exemption. A parent company may be released from consolidation if the group, for two consecutive financial years, does not exceed two of the three thresholds that identify larger businesses: balance sheet total, turnover and average annual number of employees. In practice, small groups are not required to consolidate, save in particular cases.
There is also the exemption for sub-consolidation: if the company is itself controlled by another business that prepares consolidated accounts in accordance with recognised standards and includes the sub-group in them, the latter can avoid its own consolidation. However, the rights of minority shareholders and creditors to request it remain.
Note: even where the size-based exemption applies, the consolidated accounts must nonetheless be drawn up if requested by shareholders representing a qualified share of the capital, if necessary for a reliable assessment of the economic situation, or if the articles of association or a company body so provide.
Which standards to use
The consolidated accounts may be prepared under the rules of the Code of Obligations or under a recognised standard (Swiss GAAP FER, IFRS). When securities are listed or there are outstanding bonds, or when qualified shareholders request it, the law requires a recognised standard, which imposes the true-and-fair-view principle and prohibits the arbitrary hidden reserves allowed by the Code of Obligations.
The choice of standard must be kept consistent over time: changing it to steer the result runs counter to the required continuity.
The practical steps
Building consolidated accounts requires method:
- define the scope of the companies to be included;
- harmonise the accounting principles and closing dates;
- convert any financial statements in foreign currency;
- eliminate intra-group relationships and internal profits;
- highlight the shares of third parties (minorities) in the equity and in the result.
It is work that intertwines accounting, company law and, often, international taxation.
In summary
- Whoever controls other businesses must, in principle, prepare consolidated accounts.
- Groups below the size thresholds (two out of three, for two years) are exempt.
- The exemption lapses if qualified shareholders request it or if a reliable representation is needed.
- Listed securities and bonds require a recognised standard (FER or IFRS).
How we help you
We verify whether your group is required to consolidate, define the scope and prepare the consolidated financial statements under the Code of Obligations or a recognised standard, with the correct intra-group eliminations. Consolidate your group’s accounts.