SWISS ACCOUNTING STANDARDS

Andrew Chamberlain

THE SHIFT• When it comes to choosing between the International

Accounting Standards (IAS) 19 and the local US General Accepted Accounting Principles (GAAP) system, Swiss sponsors have recently shown inclination for the lesser used local standards, with IAS19 proving less beneficial for Swiss second-pillar pensions

• Stephen Bouvier, in his article on Swiss accounting standards, explores this paradigm shift with a critical comparison of both standards in respect to second-pillar pensions

• Typically, Swiss retirement provision is designed around cash-balance plans, officially known as final-salary plans, which ensure lifetime pensions with the perks of long-term disability and widows benefits

• Legally speaking, a Swiss second-pillar provision classifies almost all Swiss plans under the defined-benefit (DB) umbrella, making them eligible for IAS 19 Employee Benefits, from an accounting standpoint

• However, the Head of Mercer’s Swiss retirement practice, Willi Thurnherr points out the lower statutory rate than the standard 2-3% range results in underfunding in both GAAAP and and International Financial Reporting Standards [IFRS]

• Fortunately, under the Swiss legal system, most schemes are sufficiently funded

• While IFRS determines the discount rate by applying high-quality corporate bond rate, the Swiss discount rate is based on expected return on plan assets

• In the long run however, the focus goes shifts away from market-based valuation as experts point out a Swiss company’s true pension funding position is understated in the statutory liability measure

• Insuring the DB liability is another possible approach, even though there is always a chance of a sponsor transferring risk to an insurer

• A notable difference between IAS 19 and the Swiss statutory model is the method of calculation of liability for scheme members

• Swiss law holds sponsors accountable for scheme members and more than 95% of Swiss plans are cash balance plans with guarantee, while IAS 19 requires sponsors project unit credit to DB schemes

• Willi Thurnherr noted that one of the biggest hurdles of adopting IAS 19 was that according to Swiss plans, employer contributions increase with age, while IAS 19 avoids the back-end loading effect by attributing future contributions increases equally over time

• In Switzerland, when employees leave services, all accrued benefits are sent to them in the form of account balance and the liability of the employers is simply the balance amount in the winding down scheme, ridding them of all future liabilities

• In retrospect, it makes sense for Switzerland and its system to go against norms and choose local GAAP instead of IAS 19 and IFRS. G20, World Bank, the IMF, the Basel Committee, IOSCO and IFAC share the unified vision of sharing a globally applicable single set of accounting standards

• However, an research conducted by IFRS Foundation indicates that out of 138 jurisdictions, 10 nations remain uncommitted to having a single set of global accounting standards and Switzerland is one of these 10 nation

• The Swiss stock exchange, SIX conveniently remains flexible to both the standards, depending on the business and the requirements of the issuer

• Two primary listed commercial enterprises are the Main Standard and the Domestic Standard, allowing distinction between entities

• IFRS is typically be under Main Standard, while GAAP under Domestic and because of the transparency of GAAP, SIX has been experiencing a steady shift of listing towards the Domestic Standard since 2012, giving Swiss system the hope of making it the only standard someday

- Andrew Chamberlain

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