Interesting times have arrived in Switzerland’s foreign exchange markets. But how does the lifting of the Swiss franc – Euro cap affect 2014 financial statements and planning?

As many Swiss businesses finalize their 2014 financial statements, a series of questions arise. Implications span the finance director’s remit – from impairment testing to cost of capital, from dividend distribution to procurement, and from business planning to tax matters.

2014 financial statements: are additional disclosures required?

As a post-balance sheet event, if the SNB’s decision is relevant to a user’s understanding of the financial statements, it may need disclosing in the notes. Taking impairment tests as an example, valuations performed in connection with the 2014 balance sheet will not requiring adjusting. The SNB’s decision could, however, require a test to be performed in 2015, which may need disclosing in the notes to the 2014 financial statements.

Is the company’s ability to distribute dividends affected?

The short answer is yes, it might be. If the company incurred significant foreign exchange losses, operating losses or impairments since the year-end, equity might be lower. Planned distribution of available earnings must take this into account.

Impacts on business planning may be more extensive

A currency appreciation affects impairment testing, management reporting (annual budgets and mid-term planning) and liquidity planning and much more. Potentially significant is the impact on pending capital expenditure, working capital or mergers & acquisitions. Might they be delayed, and are there any financing implications? Considerations include addressing ad hoc questions from stakeholders – especially if an earnings call is imminent. Your Investor Relations department should be equipped with the requisite responses as soon as is practical.

What immediate actions may be useful regarding foreign exchange risk management?

Identify and measure all foreign exchange risk exposures in your group, including net exposures from a group perspective. Determine which exposures are hedged / unhedged and if this suits your risk appetite. Review whether your existing hedging strategy fits with the new environment, developing a new hedging approach where necessary to cope with the volatility from a short, mid and long-term perspective. A Risk Reporting Cockpit could help measure and report your risk KPIs.

Might it be good news for procurement?

The Swiss franc has gained considerable purchasing power, which could be a positive. Assess current contracts and purchase orders, and identify opportunities to source from suppliers in weaker currencies or renegotiate prices with existing suppliers in such currencies. Analysis of cost structures of bought-in materials and services could be useful, as well as a currency index for key materials.

What are the general tax implications?

Highly relevant is whether any value adjustments are needed on assets as at the 2014 year-end. Swiss tax follows Swiss statutory accounts. The implications of write-downs and losses must be clearly understood, such as the revaluation of investments covered by claw-back. Any losses might impact distributable reserves. In terms of transfer pricing, dramatic impacts are conceivable in individual entity income statements that have been used to a stable exchange rate. Look at inter-company relationships from a foreign exchange perspective.

Pay particular attention to consolidated positions. Currency hedging is typically performed as a group function. However, tax authorities take a country-by-country view.

Summary

Swiss-based businesses have a long experience in coping with a strong currency. This experience should help us find satisfactory, sustainable answers to current challenges. We should all be prepared to answer questions from employees and other stakeholders in light of business uncertainties that have arisen. It is important that we have a clear answer where possible and that a rational response is provided that is based on professional insight.

Further information: Website with webcast recording and professional articles on SNB’s decision
http://www.kpmg.com/CH/en/topics/Pages/snb-euro-cap.aspx

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