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KPMG SWITZERLAND

Reading and understanding annual reports4th edition

KPMG International

KPMG International coordinates a globalnetwork of professional firms that offerAudit, Tax and Advisory services tailoredto the needs of specific industries. Theaim of the member firms of KPMGInternational is to turn knowledge intovalue, for the benefit of its clients, itsemployees and the capital markets.With around 113,000 employeesworldwide, these firms provide Audit,Tax and Advisory services in more than700 cities and 148 countries.

For further information, please visit www.kpmg.com

KPMG Switzerland

KPMG Switzerland’s activities aregrouped under KPMG Holding Ltd (the Swiss member firm of KPMGInternational). In Switzerland, KPMG has1,500 employees at 13 locations and is a leading provider of firm Audit, Tax andAdvisory services. Audit to create thetrust and transparency integral to goodcorporate governance; and Tax andAdvisory services to support successful,integral corporate management.

For further information, please visit www.kpmg.ch

2 Reading and understanding annual reports

“KPMG is the global network of professionalservices firms whose aim is to turnknowledge into value for the benefit of itsclients, its people and the capital markets.”

A guide to understanding annual reports

This brochure was designed to give the reader an understanding of the individual components of annual reports in question and answer form. To explain the way the various concepts work in practice, individual sections contain excerpts from a fictitious company’s annual financial statements and consolidated financial statements. The numbers on the left-hand side of these examples refer to specific questions.

Following the individual questions you will occasionally find references to specific parts of the report or consolidated financial statements, such as thenotes or directors’ report. These references tell you where you can usuallyfind the various topics or additional information. References to the notes, thecash flow statement, statement of changes in equity etc., therefore, alwaysrefer to the relevant parts of the consolidated financial statements.

The subject of corporate governance and its effect on accounting togetherwith the management and monitoring of companies are likewise discussed in a separate section. The last two sections of the brochure consider futuredevelopments in performance reporting and changes in Swiss company law.

“Results take unexpected tumble”,“AnyCompany barely in the black”,“Can AnyCompany survive?” These arethe kind of headlines we occasionallyread in the newspapers. But how cansuch a sudden downturn – and itsmagnitude – be explained? After all, thelast annual report showed increasingprofits and the auditors issued a “clean”report on their audit of the consolidatedfinancial statements.

An annual report provides informationabout a company’s development in thepast business year. However, it is notonly a retrospective: The presentationof the financial position and the resultsof operations, combined with thenumerous qualitative statements andadditional information, enable thereader to draw conclusions about thesustainability of the results and the company’s future performance.

The consolidated financial

statements are based on strict rulesand principles of accounting, whichserve to ensure the comparability andneutrality of financial reporting. Apartfrom this, the results are commentedon in the directors’ report.

The parent company’s financial

statements primarily serve the purposeof showing the distributable profit as wellas the basis for the parent company’stax declaration.

This publication is designed to helpanyone with an interest in business toread and understand annual reportsusing the example of a fictitious companyand to explain the responsibilities of the auditor.

Reading and understanding annual reports 3

No closed book. By any standards.

Contents

General questions and answers regarding the annual report 4

Questions and answers regarding corporate governance reporting 6

Questions and answers regarding the balance sheet 8

Questions and answers regarding the income statement 12

Questions and answers regarding the statement of changes in equity 16

Questions and answers regarding the cash flow statement 18

Questions and answers regarding the notes 20

The auditor’s role 24

An outlook on the performance reporting of the future 26

New developments in Swiss company law 29

Publication details 31

Why do the parent company’s

financial statements provide no

information about the group’s

financial performance?

The parent of the group is, in manycases, a non-operating company. In suchcases, the parent’s financial statements,which are drawn up in accordance withminimal legal requirements, simplyserve to determine the distribution ofprofits to the parent company’sshareholders and the assessment ofincome taxes on the basis of earningsresulting primarily from internal groupdividends and interest income. Assetsinclude cash and cash equivalents aswell as investments in and loans tosubsidiaries. Liabilities comprise externalfinancing by third parties and/or groupcompanies as well as equity. The parent’sprofit therefore does not directly dependon the group’s performance but ratheron the internal dividend policy and the interest rates on intragroup loansdetermined by group management. In addition, as the financial statementsare prepared under the historical costbasis, as required by company law,profits of subsidiaries do not result in anupward revaluation of the carryingamount of investments. Furthermore,Swiss law permits the creation andrelease of hidden reserves in the parentcompany’s financial statements, thus making an assessment of the truefinancial position and results ofoperations even more difficult.

What is the difference between

the parent company’s financial

statements and the consolidated

financial statements?

Unlike the parent company’s financialstatements, the consolidated financialstatements provide a comprehensiveinsight into the financial position, resultof operations and the cash flows of thegroup. The consolidated balance sheetprovides an aggregate status of all the subsidiaries’ assets and liabilities,measured on the basis of uniformcriteria. These assets and liabilitiesreplace the investments that appear inthe parent company’s balance sheet.The consolidated income statementaggregates the results of all thesubsidiaries, applying the same criteria,including all revenues, operatingexpenses, financial results and taxes.Profit distributions from subsidiaries –which are presented as income frominvestments in the parent company’sfinancial statements – as well as incomefrom interest on intra-group loans are infact simply a transfer of cash within the group and are therefore eliminatedin the consolidation process. After the elimination of all these group internaltransactions, the financial position andperformance are presented as if thegroup were one single company. Thisprocedure is referred to as consolidation.Besides the balance sheet and incomestatement, the cash flow statement,the statement of changes in equity andthe notes are further mandatorycomponents of consolidated financialstatements. In addition to the statement

What information does the

directors’ report provide?

The directors’ report is a verbal reportsubmitted by the board of directors orby the group’s senior managementmanagement. In particular, it discussesthe group’s business operations, financialsituation and future development.Unlike the financial statements, it alsoprovides an assessment of futureperformance. There is no obligation forthe directors’ report to be audited by thestatutory auditors and no specificstandards apply to its presentation.However, it is advisable for the groupauditor to read the directors’ reportcarefully to verify its consistency withthe consolidated financial statements.


General questions and answers regardingthe annual report

A group’s annual report – most Swiss companies listed on the stockexchange have a group structure – consists of a directors’ report, acorporate governance report, the consolidated financial statementsand the parent company’s financial statements.

Parent company’sfinancialstatements

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Parentcompany

Subsidiary

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Subsidiary

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Subsidiary

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of changes in equity, some consolidatedfinancial statements include a so-called“Statement of recognized income andexpenses” (for more detailed information,see pages 27 and 28). Taken as a whole,these components permit an in-depthanalysis of the group’s financialperformance and position.

Accounting standards

To date, Swiss law contains no detailedrules for the preparation of consolidatedfinancial statements but simply requiresthe disclosure of the consolidation andaccounting principles applied. Therefore,consolidated financial statements areusually prepared in accordance with otherregulations such as Swiss GAAP FER/ARR(Swiss accounting and reportingrecommendations), IFRS (InternationalFinancial Reporting Standards; previouslyIAS, International Accounting Standards)or US GAAP (US Generally AcceptedAccounting Principles). Companieswhose shares are listed in the mainsegment of the SWX Swiss Exchangehave to apply IFRS or US GAAP, with theexception of banks, which are subject to special legislation. The aim of all thesestandards is ensuring that the financialreporting presents a true and fair viewof the financial position, the results of operations and the cash flows (alsocalled “fair presentation”). However,significant differences exist betweenthese sets of standards, and withinsome standards also certain options. Asa result, it is necessary to examine indetail the accounting principles appliedby the group, which are set out in thenotes.

The significance of IFRS

IFRS’s, which are issued by theInternational Accounting StandardsBoard (IASB), are increasingly becomingthe globally adopted accountingframework. For example, their applicationis mandatory for listed companies in the European Union, Australia and Russiasince 2005 while other countries are inthe process of adopting these standards.

The IASB’s main aim is currently toharmonize these standards with USGAAP and thus achieve recognition ofthe IFRS by the US Securities andExchange Commission (SEC). This isexpected to take place by the end ofthis decade. This would greatly simplifyaccess to the New York Stock Exchange(NYSE) or the NASDAQ for non-UScompanies, as considerable costs areincurred when converting from IFRSto US GAAP.

The globalization of IFRS results in avast improvement in the comparabilityof consolidated financial statements.This was absolutely necessary given theincreasing importance of crossborderraising of capital. It also means that theimpact of national and cultural differenceson the application of IFRS should bereduced. Audit firms and the supervisoryauthorities of the relevant stockexchanges are committed to thesedevelopments.


What does the term corporate

governance stand for?

Corporate governance is the sum of theprinciples which support shareholders’interests, striving for transparency and essentially providing for appropriate“checks and balances”, and at thesame time allowing for judgment andefficiency at the highest echelons ofmanagement. In other words, corporategovernance comprises all the principlesand rules involved in the managementand supervision of a company.Companies listed on the SWX arerequired to provide information abouttheir corporate governance in a separatesection of the annual report. Forinformation regarding the corporategovernance report, see the followingdouble page feature.

Annual Report 2006 of AnyCompany Group

Contents

Letter to Shareholders 4

Directors’ Report 7

Business Review 8

Organization 32

Investor Information 45

Corporate Governance 47

Consolidated Financial Statements 2006 of AnyCompany Group 52

Consolidated Balance Sheet 53

Consolidated Income Statement 55

Consolidated Cash Flow Statement 56

Consolidated Statement of Changes in Equity 57

Notes to the Consolidated Financial Statements 58

Report of the Group Auditor 72

Financial Statements 2006 of AnyCompany Holding AG 73

Balance Sheet 74

Income Statement 75

Notes to the Financial Statements 76

Report of the Statutory Auditors 80

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What is the purpose of corporate

governance?

“Corporate governance in the broadersense of the term comprises all theprinciples and rules that are designed to ensure the functional effectivenessof a business in order to optimizeshareholders’ interests.”That is howthe “Swiss Code of Best Practice”,issued by the business federationeconomiesuisse, describes corporategovernance. Corporate governancedefines the relationships and mutualresponsibilities between shareholders,senior management and internal andexternal auditors. However, whilefocusing on control, supervisory andmotivational structures, corporategovernance is also intended to ensure acompany’s long-term competitiveness,funding and operational scope.

What has to be published?

To ensure that the critical informationregarding corporate governance isavailable in suitable form to institutionaland private investors, the “Directive onInformation Relating to CorporateGovernance” (DCG) issued by the SWX Swiss Exchange requires listedcompanies to disclose relevantinformation on:

■ Group structure and shareholders■ Capital structure■ Board of directors■ Senior management■ Compensations, shareholdings and

loans■ Shareholders’ participation ■ Changes of control and defense

measures■ Auditors■ Information policy

On 1 January 2007, a revised, simplifiedversion of the DCG was issued, whichwas also aligned with the Swiss Code ofObligations (CO). The revised Codeintroduces a requirement for listedcompanies to publish the remunerationpaid to members of the board ofdirectors and senior management in the notes to the financial statements.

If a listed company does not wish topublish some of the informationrequired by the directive, an individualand substantiated justification must beprovided in the annual report for eachinstance of such non-disclosure (theprinciple of “comply or explain”).

Who ensures that the information is

complete and accurate?

In its supervisory role as a self-regulatingorganization, the SWX verifies the completeness and accuracy of thepublished information as well as theappropriateness of explanations in theevent of the non-disclosure of individualitems. If the issuer violates the directive,the SWX is authorized to imposepenalties. These range from a reprimandto the delisting of the company. Theexternal auditors are not required by lawto verify the information that is to bepublished. However, in accordance withthe revised CO, the compensation ofthe board of directors and the seniormanagement must now (from businessyear 2007) be disclosed in the notes tothe financial statements and are thussubject to the normal audit proceduresby external auditors.

Why is there a requirement to

disclose the CVs of the members

of the board of directors and

senior management?

The publication of these CVs providesan insight into current and priorcommitments as well as cross-involvements with other companies andorganizations. Information about theeducation and professional backgroundof board members and about thecomposition of each committee, allowsto assess whether the board ofdirectors is balanced and able to actindependently and critically vis-à-vis thesenior management. It may also be


Questions and answers regarding the corporate governance report

In recent years, hardly any other term has had such an impact on theSwiss business community as corporate governance. Conflicts ofinterest are inherent to economic activity. They are particularlypronounced in publicly owned companies because of the large numberof anonymous shareholders. The guidelines assembled under theblanket term of corporate governance help harmonize the conduct ofbusiness leaders with the interests of the company’s owners.

possible to draw conclusions concerningthe availability of members of the boardof directors.

Does the law guarantee a reason-

able compensation policy with

regard to the board of directors and

to senior management?

No. Neither the CO, the DCG nor the“Swiss Code of Best Practice” offer aposition on the level of compensation ora statement what a “reasonable”compensation policy would be. TheDCG as a minimum requires disclosureof the content and procedures fordetermining salaries and stock optionprograms. It is, however, not the task ofthe stock exchange’s supervisory bodyor the external auditors to express anopinion on the extent or reasonablenessof management compensation. In 2006,in light of the current public debateconcerning the amounts paid asmanagement compensation, KPMGtogether with the University of St.Gallenconducted a survey of the processesand company internal discussionsconcerning the methods of determiningcompensation, the amounts of salariesand existing shortcomings in the waythis sensitive topic is handled. For moreinformation, visit www.kpmg.ch.

How do the relevant provisions help

protect shareholders in the event of

takeovers?

The DCG demands the disclosure of thecontents of any change-of-controlclauses included in arrangements andplans designed to benefit members ofthe board of directors and/or seniormanagement as well as other executives.These include “golden parachutes”which provide sizeable, one-offpayments in the event of a takeover.This disclosure obligation specificallyaims at the obvious conflict of interestsa board member may face in the eventof a takeover.

The law governing stock exchangetransactions contains further provisions

for shareholder protection. For example,any investor who exceeds the thresholdof 331/3 percent of voting rights in a listedcompany is obliged to issue a public bidoffer for all the company’s listed shares.When this 331/3 percent threshold is exceeded then a change of control ispresumed to have occurred. In suchsituations, the minority shareholdersshould obtain the possibility to terminatetheir investment. However, a company’sarticles may state that no such bid needbe issued if a takeover exceeds thethreshold of 331/3 percent (opting out) orthat such a bid is mandatory only whena percentage of up to 49% has beenreached (opting up). Nevertheless, theex post introduction of such clauses issubject to limitations. The DCG requiresdisclosure of any such opting-out oropting-up clauses in the corporategovernance section of the annual report.

Can the reader find out anything

about the independence of the

auditors?

The following details concerning theexternal auditors have to be disclosed inthe annual report:

■ The date on which the current auditmandate was acquired.

■ The date when the auditor in chargebecame responsible for themandate.

■ The total audit fees charged by theauditors in the year under review.

■ The total of the fees charged in theyear under review by the auditorsand/or their related parties foradditional services performed for theissuer or one of the issuer’ssubsidiaries.

■ A description of the instrumentsavailable to the board of directors thatassist in obtaining information on theactivities of the external auditors.

The auditor in charge – but not the auditfirm – must give up the mandate after a maximum of seven years. This rotationrule, which is set out in the “Swiss Codeof Obligations,” is intended to strengthen

the independence of the externalauditors. The details concerning fees,and in particular the ratio of audit toadvisory fees, may provide informationconcerning the importance of thecustomer relation and indicate thecomplexity of the audited company’sbusiness. The required details relate tothe holding company’s statutoryauditors as well as to the mandate ofthe group auditors. However, caution isadvised when comparing the audit feescharged by different audit companies:For example, Group A may work withonly one audit firm. In contrast, Group Bmay call on the services of severaldifferent audit firms, in which case onlythe consolidated audit fees of the groupauditors have to be published.

Following the lead given by the USlegislation, a supervisory body iscurrently being set up in Switzerland tomonitor audit companies and theiractivities. This should enhance auditquality and thus strengthen one of thefundamental aims of corporategovernance.


(for example of goodwill, trade accountsreceivable or inventories) are accountedfor as a function of the utilization of therespective assets. More recently, fairvalues – or current market values – are increasingly used in consolidatedfinancial statements. Today, mostsecurities are stated at their marketprice, derivatives at their fair value,investment property at fair value, andthe fair value of pension fund assets is used to calculate any employeebenefit liabilities from underfundeddefined benefit plans. When fair valuesare used, the question arises as towhether or not changes in value, i.e. thenon-realized profits and losses, arerecognized in the income statement.Statement of changes in equity, groupaccounting policies

Why have assets and liabilities

increased or decreased?

There may be various reasons forchanges in a consolidated balance sheetitem: purchase or sale of assets,increase or repayment of third-partyfinancial debt or equity, changes invaluation such as inventory write-downsor the depreciation of property, plantand equipment as well as changes inthe group of consolidated companies asa result of the acquisition or divestmentof subsidiaries. It is impossible tounderstand the changes in a balancesheet without studying the othercomponents of the consolidatedfinancial statements, in particular thecash flow statement and the notes. For example, an increase in inventoriesand a simultaneous decrease in tradeaccounts receivable could be related toa sharp decline in sales and a related

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build-up of goods on stock. Then again,increased inventory levels might also bedue to the acquisition of a subsidiary.Notes, cash flow statement

How does goodwill arise and

what is its effect on the consolidated

financial statements?

In the parent company’s balance sheet,the purchase of a subsidiary is recognizedas an investment at the cost ofacquisition (=purchase price includingtransaction costs). In contrast, in theconsolidated financial statements, theassets and liabilities (net assets) acquiredare recorded at their fair values at thedate of acquisition. These fair valuesrepresent the cost basis for theirsubsequent accounting. Any differencebetween the purchase price and the net assets is called goodwill, which iscapitalized and – depending on therelevant accounting standards – eitheramortized over a number of years (e.g.under Swiss GAAP FER) or is subject toan annual impairment test (e.g. IFRSand US GAAP).

The goodwill reflects the added value orfuture potential for which the acquiringcompany was prepared to pay over andabove the fair value of the net assets.Both IFRS and US GAAP require that thisamount – in the past simply aggregatedunder the heading “goodwill” – is now,as far as possible, assigned to identifiableintangible assets such as acquired R&D projects, customer lists, orderbacklog, brand and trade names etc.These intangible assets often have adeterminable useful life and are thereforesubject to a systematic, periodicamortization. In contrast, the remaining

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What is the basis of preparation of

the consolidated balance sheet and

the parent’s balance sheet?

Generally, the balance sheet is preparedunder the assumption that thecompany’s operations are ongoing(“going concern”). However, if theassumption of going concern is no longer justified (for example due toinsolvency), it is necessary to movefrom the general valuation rules to theliquidation value of assets and liabilities.The liquidation value (sometimesreferred to as break-up value) is usuallysignificantly below the ongoing businessvalues, thus generally resulting in overindebtedness or negative equity.

A group’s over indebtedness has no legalconsequences. However, it indicatesthat the value of the investments in theparent company’s balance sheet hasdecreased. If the parent company’sbalance sheet also presents an obviousover indebtedness, the judge must benotified in accordance with article 725,paragraph 2 of the Swiss Code ofObligations. The CO also provides for anearly warning system that obliges theboard of directors to propose financialrestructuring measures to the generalmeeting of shareholders if half of theshare capital and legal reserves are nolonger covered.

What is the basis of preparation

under the going concern assumption?

Traditionally, consolidated financialstatements are based on historical costs.On the basis of these values, depreciation(for example of equipment and buildings),amortization (for example of patentsand other intangible assets) andimpairments or valuation allowances


Questions and answers regarding the balance sheet

The consolidated balance sheet presents the group’s financial situation as of the balance sheet date – 31 December for most companies.

goodwill need only be written-down if the carrying amount can no longer bejustified on the basis of future discountedcash flows. The use of the impairmenttest concept in place of systematicamortization tends to improve theannual result. However, in the case ofunfavorable business developments,impairment losses on goodwill mayhave a considerable negative impact onresults.Notes

What are associated companies?

Companies in which the group has aninterest of between 20 and 50 percentare commonly referred to as “associatedcompanies”. Interests of this size givethe investor a significant, but not acontrolling, influence (this means, forexample, participating in financial andother policy-making decisions withoutbeing able to impose them). Suchinterests are not consolidated butrecognized in the consolidated financialstatements proportionate to the equityheld. If the company in question makesa profit, the carrying amount of theinvestment increases while a respectivefinancial income is recognized in the income statement. If the associatedcompany distributes a dividend, thecarrying amount of the investment isdecreased, while the group’s cashposition increases. By contrast, in theparent company’s financial statements,such investments are recorded at the cost of acquisition, adjusted for anyimpairment losses, and dividendsreceived are part of the financialincome.

Companies in which the investor holdsless than 20 percent of the voting rightsare generally presented as other financialassets.

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The terms printed in blue refer to therelevant sections in the annual report.

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Balance sheet of the parent company (CHF m) Dec. 31 2006 Dec. 31 2005

Cash and cash equivalents 8 25

Current assets 8 25

Investments in group companies 198 39

Investments in associated companies 3 3

Treasury shares 4 1

Non-current assets 205 43

Total assets 213 68

Miscellaneous liabilities – 1

Current liabilities – 1

Non-current financial liabilities 158 7

Provisions 1 2

Non-current liabilities 159 9

Total liabilities 159 10

Share capital 23 22

Additional paid-in capital 18 15

Retained earnings 13 21

Total equity 54 58

Total liabilities and equity 213 68

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Consolidated balance sheet (CHF m) Dec. 31 2006 Dec. 31 2005

Cash and cash equivalents 27 38

Marketable securities 2 4

Trade accounts receivable 66 121

Other receivables 12 28

Inventories 107 62

Current assets 214 253

Property, plant and equipment 101 69

Investment property 25 25

Goodwill 109 44

Investments in associated companies 16 11

Employee benefit assets 8 10

Deferred tax assets 11 9

Non-current assets 270 168

Total assets 484 421

Trade accounts payable 62 74

Tax liabilities 2 8

Current financial liabilities 31 17

Other liabilities 37 52

Current liabilities 132 151

Non-current financial liabilities 199 102

Provisions 8 12

Deferred tax liabilities 14 17

Non-current liabilities 221 131

Total liabilities 353 282

Share capital 23 22

Additional paid-in capital 18 15

Treasury shares (4) (1)

Retained earnings 76 88

Total equity attributable to shareholders of AnyCompany Holding AG 113 124

Minority interests 18 15

Total equity 131 139

Total liabilities and equity 484 421

What are deferred taxes?

In many respects, the values reported inthe consolidated balance sheet differfrom those applied in the tax balancesheet. These differences, also known astemporary differences, do not impactthe company’s tax situation until theyare resolved. The majority of accountingstandards require the recognition of thistype of future tax effect, almost withoutexception, when the temporarydifference occurs or when its valuechanges. For example, if securities witha fair value of CHF 150 are carried in thetax balance sheet at the lower acquisitioncost of CHF 100 then the unrealized gain of CHF 50 is not taxable until thesecurities are sold. At this later point intime, the tax balance sheet will show a profit of CHF 50, which will then resultin a tax payment. As the gain of CHF 50has already been recorded in theconsolidated balance sheet in the formof an unrealized profit, the correspondingfuture tax expense must be recognizedin the same reporting period in the formof a deferred tax liability at the full taxrate. In contrast, future profits can beoffset against loss carryforwards, thusreducing future tax expenses. Thispotential receivable from the governmentcan be capitalized as a deferred taxasset if its realization is probable.Notes

For what purposes have provisions

been set up?

A provision represents a probableobligation arising from an event in thepast, whose amount and date of maturityare uncertain but can be estimated.Examples are warranties relating tosales, expected losses on existingcontracts, litigation risks, additional taxcharges or personnel costs (obligationsin respect of early retirement,restructuring costs such as severancepayments etc.). Given the aim of a “trueand fair view”, provisions for expectedoperating losses, the costs of relocatingproduction, future marketing projects,

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Does the consolidated balance sheet

of AnyCompany Group contain

financial instruments?

In general, a significant portion of theconsolidated balance sheet consists offinancial instruments. Apart from cashand cash equivalents, these includemarketable securities, trade accountspayable and receivable, minorityshareholdings (excluding investments inassociated companies), loans, financialliabilities and derivative financialinstruments (e.g. forward exchangetransactions, share options, interestrate swaps etc.)

In accordance with internationalaccounting standards, derivativefinancial instruments must be recordedin the consolidated balance sheet attheir fair value and are presented eitherseparately or, quite frequently, as part of other short-term receivables or(financial) liabilities. Depending onwhether or not these instruments servethe purpose of hedging futuretransactions or other purposes (e.g.trade), changes in the fair value arerecognized either directly in equity or inthe income statement. Accordingly, the background of the transactionand/or the underlying strategy pursuedby group management are relevant indetermining the accounting.Notes

Why are treasury shares presented

as a negative item in equity?

Under current Swiss law, treasuryshares represent an asset in the parentcompany’s financial statements; in theconsolidated balance sheet, however,they are deducted from the issuedcapital. Consequently, a purchase of thecompany’s treasury shares is treated asa capital decrease, even if this is only ofa temporary nature. Correspondingly,the subsequent sale of such shares isrecognized as a capital increase and anyexcess over or shortfall below theoriginal cost is not recognized as a profitor loss but within additional paid-incapital (capital reserves). This treatmentis based on the concept that transactionsin treasury shares represent either apayment received from shareholders orpayments made to shareholders, sincea company cannot make a profit or losson its own capital.Statement of changes in equity, Notes

What are employee benefit assets?

Assets relating to employee pensionplans either represent advance paymentsand loans to the pension fund orsurpluses in the plan that are consideredto be eligible for capitalization. Care isrequired when dealing with surpluses:these may be capitalized if the employercan make use of them in the form ofreimbursements or future reductions incontributions. In Switzerland, this isprimarily the case for readily availableemployer’s contribution reserves.These reserves may be funded byadditional contributions to the pensionplan and used in future years for thesettlement of employer’s contributions. Notes

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■ Are there any covenants in loanagreements, which, if breached,would require immediate repaymentof the interest-bearing liabilities? Notes

■ Is the group exposed to any significantforeign currency risks and how arethey hedged? Notes

■ Has the group issued or acquired derivative financial instruments orhas it made any speculative financialtransactions? Are there anyrepurchase obligations (e.g. for ownshares) that are not reflected in thebalance sheet? Accounting policies, Notes

■ Are there any contingent liabilities,e.g. for legal or warranty claims ordue to legal requirements (e.g.relating to environmental matters orhealthcare) which could impair thegroup’s financial situation? Notes


foreign currency risks or political risksmay not be set up since there is nopresent obligation. The measurement ofprovisions is, at times, subject toconsiderable uncertainty and may bepossible only by applying variousassumptions. Group management mustnot base its assessment on the worst-case scenario but must attempt tomake a best estimate of the expectedfuture outflow of resources. Significantuncertainties should be described in thenotes to the consolidated financialstatements.Notes

What are minority interests?

Minority interests relate to thepercentage of equity of subsidiariesowned by third-party shareholders. Inthe process of consolidation the balancesheets of subsidiaries are incorporatedat 100 percent in the consolidatedfinancial statements, irrespective of theactual capital share in these companiesheld by the group. Therefore, thecorresponding proportion of the equityand profit or loss pertaining to third-party shareholders is separately statedin the consolidated balance sheet andincome statement. Minority interestsdo not have to be repaid and are notsubject to interest payments. Therefore,they do not represent a liability for thegroup. At the same time, the group orparent company’s shareholders are notentitled to these interests. Consequently,they are stated within the group’s equitybut separate from the equity attributableto the parent company’s shareholders.

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Are the group’s retained earnings

available for distribution?

In principle, only the parent company’sretained earnings may be distributed,and only if they are not subject to anylegal restrictions and if the requiredliquidity is available. The group’s reservesare, on the one hand, determined byusing a different valuation basis (seeabove) and, on the other hand, aremostly contained in the balance sheetsof subsidiaries. They need first bedistributed to the holding company,which again requires sufficient liquidityand that the related reserves are freelyavailable.Notes

Other questions which investors

should ask about the balance sheet:

■ Does the group possess sufficientliquidity, assets that can be realizedin the short term or refinancingpossibilities to cover short-termliabilities? Balance sheet, Notes, Directors’ report

■ Are there any assets such asemployee benefit assets or deferred tax assets over which the group hasonly limited control and/or which maybe difficult or impossible to realize? Accounting policies, Notes

■ Have sufficient adjustments beenmade for debtors’ solvency risks andslow-moving goods?Notes

■ In the case of a recently acquiredcompany, when is the turnaroundexpected on which the recoverableamount of the goodwill depends?Has it already been necessary to recognize impairment losses?Income statement, Notes

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the corresponding provisions, theevaluation of whether a capitalized taxloss carryforward can actually berealized or the impairment testing forgoodwill.

In a tough competitive environment,companies look for new forms oftransactions and ways of providing theirgoods and services. Depending on thebusiness model, the recognition ofrevenue and gains may be subject tocertain risks. For example, in the case oflong-term construction contracts it isnecessary to ask whether a proportionof revenue and profits can be recordedduring the construction period itself. It is often unclear whether a sale can bedeemed to have been realized and theresulting gain can be posted. Sale andlease back transactions that lead to thesale and simultaneous leasing or rentingof an item of equipment generate cashand a gain or loss without there beingany change in the way the companyuses the equipment. Companies arealso increasingly turning to complexfinancial transactions, such as “selling”their debtor portfolios for financingpurposes, issuing guarantees, optionsor other securities. Standard setters andlegislators are finding it hard to keep upwith the furious pace of developments.For that reason, it is at times necessaryto interpret the standards in order todetermine the proper accounting for suchtransactions.

“Nature of expense” method or

“cost of sales” method?

The income statement can bepresented either in accordance with the“nature of expense” method or the“cost of sales” method. The former ismore commonly used in continentalEurope whereas the latter is primarilyapplied in the English-speaking world.According to the “nature of expense”method, the total output for the periodis presented inclusive of (as yet) unsoldproduction during the period (inventorychanges and capitalized production for own plant and equipment). This totaloutput is compared with the expensesarising during the period. In keepingwith the “cost of sales” method, onlythose goods and services that haveactually been sold during the period arepresented and compared with theassociated production costs.

There is a further difference in the wayincurred expenses are presented. In the“nature of expense” method, expensesare aggregated according to their nature(e.g. material costs, employee benefits,etc.), whereas in “the cost of sales”method, expenses are assigned to thecost centers: production, research anddevelopment, sales and administration.Consequently, only the “cost of sales”method allows the calculation of a grossmargin, defined as gross profit as apercentage of sales revenue. However,the operating result and net profit arethe same whichever method is used.

What needs to be considered

when comparing the income

statement with the prior year?

When analyzing changes comparedwith the previous year, the first questionto ask is whether there have been anychanges to the scope of consolidationwhich might lead to a distorted view.For example, the acquisition of acompany during the year under reviewcould result in an increase in sales whilesimultaneously reducing the consolidatedprofit due to the associated integrationcosts. The disposal of a subsidiary mayresult in a gain or loss due to thedifference between the derecognized(transferred) assets and liabilities andthe proceeds from the sale. In the caseof multinational groups, changes inexchange rates may also have asignificant impact on the profit and theprevious-year comparison. Furthermore,changes in accounting policies or theapplication of new standards may cloudthe previous-year comparison. In general,however, such changes have to beimplemented retrospectively, i.e. theprevious year’s income statementwhich is presented as a basis for thecomparison is restated as if the newpolicy had already been applied in theprevious year.Notes

How reliable is the net profit?

The net profit is heavily influenced bythe valuation of the assets and liabilitiesin the consolidated balance sheet. Thisvaluation is often subject to considerableuncertainty and a certain level ofjudgment and is generally the result ofmany different assumptions. Examplesinclude the valuation of investments,the assessment of legal disputes and

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Questions and answers regarding the income statement

The consolidated income statement provides an insight into thegroup’s business during the period between the balance sheet dates.

How sustainable are the profits?

Nowadays, it is common to talk about“normalized profit”. Analysts examinethe notes to the financial statementsand question the group management todetermine a profit figure free fromextraordinary, unusual or non-recurringtransactions and use this value as thebasis for valuing the company and itsshares. Companies often assist in theseefforts by incorporating additionalsubtotals in the income statement inorder, for example, to indicate operatingprofit before special items such asrestructuring costs, impairment lossesor losses resulting from the sale ofsubsidiaries. The standard-setters donot find this type of presentationconvincing. They do not consider suchspecial influences and volatility to beextraordinary and complain about thesubjective nature of these statements.They therefore prefer a qualitativeexplanation of unusual expenses,income, losses and profits in the notesto the consolidated balance sheet.Results from discontinued areas ofbusiness represent an exception here.These are stated separately from theresults for the company’s ongoingbusiness activity in accordance withinternational accounting regulations.

What do EBIT, EBITA, EBITDA stand

for?

They are commonly used subtotals inthe income statement and relate to thegroup’s operating performance. EBIT(earnings before interest and taxes)corresponds to the operating profitpresented in AnyCompany’s incomestatement, the operating result or theprofit before the financial result andincome tax. EBITA (earnings beforeinterest, taxes and amortization)describes the operating profit beforedeductions for amortization andimpairment losses relating to intangibleassets. EBITDA (earnings beforeinterest, taxes, depreciation andamortization) also excludes depreciation.The aim of these measures is to gain


an approximation to the operating cashflow by adding back the most importantnon-cash expenses to the operatingprofit. In the example for AnyCompanyGroup, EBITDA in 2005 was CHF 55million (operating profit CHF 14 million,depreciation and amortization CHF 9million and impairment of goodwill CHF32 million). However, the fact that thisamount differs quite significantly fromthe operating cash flow of CHF 63million can be seen from the cash flowstatement.

What is an impairment?

The commonly applied accountingstandards require the monitoring of therecoverability of long-term assets. An

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asset is considered to be impaired if itscarrying amount exceeds both the netselling price (fair value minus costs tosell) and its future discounted cashflows (value in use). Once indicators ofsuch an impairment are identified, it isnecessary to calculate the recoverableamount accordingly (“impairment test”)and if applicable to recognize animpairment loss. This type of calculationmay be prompted, for example, bytechnical obsolescence, new or betterproducts by competitors or insufficientyields.

The assessment of the recoverableamount of goodwill is particularlycomplex since, on the one hand, thisrelates to entire business segments or

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Income statement of the parent company (CHF m) 2006 2005

Income from investments in subsidiaries 2 9

Operating expense (2) (2)

Financial expense (1) –

Financial income 6 4

Extraordinary income: release of provisions 2 –

Net profit 7 11

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7

Consolidated income statement (CHF m) 2006 2005

“Nature of expense” method

Revenue 364 419

Other operating income 4 4

Increase/(decrease) in finished goods and work-in-process (2) 7

Operating income 366 430

Cost of materials (149) (172)

Personnel expenses (130) (129)

Depreciation and amortization (9) (12)

Impairment loss on goodwill (32) –

Other operating expenses (32) (51)

Operating profit 14 66

Financial expense (9) (5)

Income from investments in associated companies 5 –

Other financial income 2 13

Profit before tax 12 74

Income tax (4) (12)

Net profit 8 62

Attributable to:

Shareholders of AnyCompany Holding AG 5 52


CHF CHF

Earnings per share (undiluted) 0.22 2.36

Earnings per share (diluted) 0.21 2.36

Does the consolidated net profit

represent the actual performance?

The income statement only indicatespart of the group’s financial performance.Established accounting stadards allowcertain components of performance tobe recorded directly in equity. Theseadditional gains and losses, which aredisclosed in the statement of changesin equity, should also be taken intoaccount when assessing theperformance. Statement of changes in equityFor more information on performancereporting, see pages 26 to 28.

What is the difference between

the normal or undiluted and the

diluted earnings per share?

The normal, or undiluted, earnings pershare indicate the amount of theconsolidated profit that is attributable tothe parent company’s shareholders perordinary share outstanding. The dilutedearnings per share also takes into accountall the potential ordinary shares whichwould result in profit dilution if all optionsand conversion rights were exercised.In this context, the term “dilution”refers to the reduction in the profit pershare due to an increase in the totalnumber of shares.Notes

Which division contributed most/

least to profits?

Listed companies are obliged to presentcertain performance factors (revenue,operating result) for each segment.Segment reporting is usually performedon a divisional basis and/or bygeographical areas. It permits a moredetailed insight into what may be thevery different performances of a group’sbusiness segments or geographicalregions.Quantitative and qualitative detailsconcerning the segments that gobeyond the scope of the notes can befound in the director’s report.

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entities and, on the other, it reflectsevaluations of an acquisition’s futurepotential. IFRS and US GAAP requiregoodwill to be subjected to an annualimpairment test. This type of test callsfor numerous assumptions that are, to some extent, subject to judgment.For this reason, the notes need to includedetailed disclosures on impairmentsand the associated calculations.

Are financial expenses synonymous

with interest expenses?

In addition to interest expenses, financialexpenses often include realized andunrealized foreign exchange losses andimpairment losses relating to non-consolidated investments, loans andother financial investments.

And how are interest expenses

determined?

Interest expenses often include morethan just the agreed interest paymentson financial liabilities. For example, if a 1 percent loan of a nominal amount of CHF 100 million is issued at CHF 90million (discounted) for a period of 10years with transaction costs amountingto CHF 2 million, then the company hasa net cash inflow of CHF 88 million.After 10 years, the nominal amount ofCHF 100 million is repaid. In thisexample, the annual interest expenseconsists of 1 percent on CHF 100 millionand an annual amortization of thedifference between the amount initiallyobtained and the amount to be repaid.This difference (CHF 100 million –CHF88 million =CHF 12 million) is expensedover a period of 10 years and increasesthe loan to the amount owed atrepayment date. International accountingstandards require disclosure of the so-called “effective interest rate” whichreflects this total interest burden.Notes

3

Why is income tax stated separately?

The income tax presented in the incomestatement includes, on the one hand,the tax liability arising from the statutoryor tax results of the period under reviewas well as tax arrears or credits fromprevious periods (together referred toas current tax) and, on the other hand,changes in deferred tax assets andliabilities recognized in the incomestatement. This tax is exclusively income-related. Other taxes, such as taxes oncapital or non-reclaimable value addedtax are included in operating expenses.To determine the group’s effective tax burden, it is necessary to considerincome tax in relation to the profitbefore taxes. Both IFRS and US GAAPdemand that the notes contain detailedqualitative statements on this subject.Notes

Why is the net profit attributed to

the parent company’s shareholders

and to minority shareholders?

The shareholders’ entitlement to dividendpayments is based on the profits of thecompany in which they hold shares. Theconsolidated financial statementscombine a number of companies as ifthey formed a single entity. By presentingthis attribution, the consolidatedfinancial statements point out the shareof the group result that is attributable tothe subsidiaries’ minority shareholders.

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How are share-based payments

to employees or members of

the board of directors recorded?

Many companies compensate theirleading employees partly in the form ofoptions or shares of the company. In thepast, this type of remuneration wasoften not recognized in the incomestatement, sometimes with the argumentthat it is ultimately the parent company’sshareholders who bear these coststhrough the dilution of their own shares.However, modern internationalaccounting standards consider suchpayments to be a group expense. Thisexpense is measured on the basis of thecurrent market value at the time theoptions or free shares are granted and isrecorded in the income statement overthe time during which the employee isrequired to work for the company.

Why does the extraordinary release

of provisions recorded in the parent

company’s income statement not

appear in the consolidated financial

statements?

Provisions formed by the holdingcompany may relate to investment risks.These must be removed from theconsolidated financial statements wherethe carrying amounts for investments in subsidiaries are replaced by theirassets and liabilities and because, withinthe framework of a “true and fair view”,provisions may not be recognized forgeneral risks. However, in the case of the release of a provision which alsoexisted in the consolidated financialstatements, international accountingstandards do not permit this to bereferred to as “extraordinary”transactions. Instead, the provisionmust be released in the line item inwhich it was previously created (e.g. asa reduction in other operating expensesin the case of a legal dispute). Thetransaction must also be disclosed inthe table that shows the changes in

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provisions which can be found in thenotes to the consolidated financialstatements.Notes


should ask about the income

statement:

■ Are there any significant unusual ornon-recurring expenses or incomesuch as provisions for restructuring,impairments, profits or losses, e.g.from the disposal of subsidiaries,which put a different perspective onthe prior-year comparison and thesustainability of the net profit? Notes

■ Does the income statement, e.g. in the financial result, contain anyunrealized gains or losses (e.g.foreign currency differences, gainsand losses from the measurement of the fair value of securities andderivative financial instruments)? Notes

■ How realistic is the expected long-term yield of the pension plan assetson which the calculation of thepension expense as an element ofemployee benefit expenses isbased? Notes

■ What is the relation of the effectivetax expense to the expectedconsolidated tax expense. What arethe reasons for material changes in tax expenses?Notes

■ Are there any risks which could negatively influence future profits oreven jeopardize the group’s existence(technological developments, imageproblems, quality problems, claimsfor damages etc.)? Statements about uncertainties,contingent liabilities or the summaryof movements in provisions in the notes and possibly also in the directors’ report

Consolidated income statement (CHF m) 2006 2005

“Cost of sales” method

Revenue 364 419

Cost of sales (240) (265)

Gross profit 124 154

Marketing, sales and administrative expenses (79) (77)

Research and development expenses (33) (10)


Other operating expense (2) (5)

Operating profit 14 66

Financial expense (9) (5)

Income from investments in associated companies 5 –

Other financial income 2 13


Income tax (4) (12)

Net profit 8 62

Attributable to :

Shareholders of AnyCompany Holding AG 5 52


CHF CHF

Earnings per share (undiluted) 0.22 2.36

Earnings per share (diluted) 0.21 2.36

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Performance factors comprise not onlythe net profit as per the incomestatement but also certain unrealizedgains and losses which, based on theapplicable accounting standard, do notaffect the income statement but arerecorded in equity either definitively orup to the point of their realization. Theseitems include, for example:

■ Foreign currency translationdifferences as explained above

■ The increase in the value of property,plant and equipment to its fair valuenot recognized in the incomestatement

■ Adjustments of employee benefitliabilities and assets not recognizedin the income statement (see page 22)

■ The “parking” in equity of changes in fair values of financial investmentswhich are available for sale

■ The “parking” in equity of unrealizedgains and losses from hedges relatingto future transactions. These aretransferred to the income statementat the time at which the underlyingtransaction affect the incomestatement (hedge accounting).Comments on the incomestatement, Accounting policies,Notes

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What does equity consist of?

Equity arises from paid in capital (sharecapital and capital reserves or sharepremiums) as well as generated capital(retained earnings including accumulatedforeign currency translation differences).The company’s treasury sharesrepresent a correction to the issuedshare capital. Equity also includes theminority interests attributable to third-party shareholders of subsidiaries.

What is the origin of accumulated

foreign currency translation

differences?

The accumulated foreign currencytranslation differences result from theconversion of the financial statementsfor the purpose of consolidation andfrom the long-term financing of foreignsubsidiaries. On the one hand, the netassets (=equity) of a foreign subsidiaryat the start of a business year have to beconverted at the new exchange rateprevailing at the end of the year. Thesame applies to movements in equity,including net profit, which are stated atthe average exchange rate in theconsolidated financial statements. Inorder to capture the resulting short-termvolatility of resources that are in factintended to be long-term, these foreigncurrency effects are included directly inequity in the consolidated financialstatements. When a foreign subsidiaryis sold, the accumulated foreign currencygains (or losses) are transferred to the income statement (so called“recycling”) and either increase ordecrease the gain on the sale.

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What are the reasons for changes

in equity?

In principle, changes in equity can be divided in transactions with share-holders, changes in accounting in theform of restatements and performanceitems.

Transactions with shareholders comprisecapital increases and decreases (includingthe purchase and sale of treasury shares)and profit distributions.

Restatements include changes to theaccounting policies and the correctionof material errors. As a matter ofprinciple, both types of restatement areperformed retroactively, i.e. through an adjustment, not affecting the incomestatement, of the assets and liabilities atthe starting date of the preceding period as if the new accounting policieshad always been applied or the error hadnever occurred. The profit presented inthe previous year may also be subject toadjustment. This enables the comparisonof two periods presented. Changes inaccounting and valuation methods areonly permitted if this is due to theintroduction of a new standard or if theyprovide a more relevant picture of the company’s business activity. Thecorrection of errors should not beconfounded with the amount of judgmentrequired in connection with the valuationof balance sheet items. In general, suchre-assessments must be recognized in the income statement. Examples oferrors are mathematical mistakes madein the past or if important informationwas simply overlooked. The retroactivecorrection of errors is so conspicuousthat it is normally only applied in seriouscases.


Questions and answers regarding the statement of changes in equity

The statement of changes in equity provides information about increases and decreases of equity, reserves and minority interests.

What is the group’s

overall performance?

The overall performance consists of thenet profit and the gains and losses recognized directly in equity, which arepresented separately in the statement of changes in equity. For more information, see also“Performance reporting” on pages 26and 28.

Is the equity identical to the actual

value of the whole group?

This is not quite the case. Theincreasing use of fair values in theconsolidated financial statements, forexample with regard to financialinstruments, investment property,employee benefit liabilities, etc., leadsto a certain approximation of equity and the enterprise value. However,value increases in the majority of itemsof property, plant and equipment andinternally generated goodwill (ownbrands, know-how, research pipeline,customer base, competitive advantages,etc.) are not (yet) taken into account.After all, this goodwill reflects thegroup’s future potential but it may notbe capitalized because of the lack of areliable valuation. As a result, themarket capitalization (number of sharesmultiplied by the stock exchange price)is the closest to the current value forlisted groups and reflects investors’expectations concerning the group’sfuture profitability.

4


should ask about the statement of

changes in equity:

■ What types of shares (ordinaryshares, preference shares, shareswith preferred voting rights, etc.)make up the share capital and whatare the associated rights andobligations on the part of the share-holders and the group?Notes

■ What is the group’s dividend policy? Possibly directors’ report (disclosureof payout ratios), statements madeto the general meeting

■ What is the background of transactionsinvolving treasury shares (share pricesupport measures, speculation,share-based compensation plans,repurchase obligations, etc.) and arethe treasury shares held for a specific

purpose (e.g. for mergers andacquisitions) or freely available? Notes

■ Does equity contain elements ofperformance that should moreproperly be recognized in the incomestatement (e.g. an accountingchange which should have beenrecognized in the form of a valueadjustment)? Knowledge of the accounting standards on which the consolidatedfinancial statements are based

■ Is distribution of the group’s reservessubject to legal restrictions and, if so,to what extent?Notes


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Statement of changes in equity (CHF m)

AnyCompany Group

Equity on 1.1.2005 22 15 – 38 4 79 5 84

Effect of changes

in accounting policies – – – 5 – 5 – 5

Adjusted equity on 1.1.2005 22 15 – 43 4 84 5 89

Dividends to shareholders – – – (9) – (9) – (9)

Purchase of treasury shares – – (1) – – (1) – (1)

Foreign currency translation differences – – – – (2) (2) – (2)

Total income and expense recognized

directly in equity – – – – (2) (2) – (2)

Net profit – – – 52 – 52 10 62

Total recognized income and expense – – – 52 (2) 50 10 60

Equity on 31.12.2005 22 15 (1) 86 2 124 15 139

Capital increase 1 3 – – – 4 3 7

Dividends to shareholders – – – (15) – (15) (3) (18)

Purchase of treasury shares – – (3) – – (3) – (3)

Revaluation of property – – – 6 – 6 – 6

Gains/losses from hedgingof future transactions – – – (5) – (5) – (5)

Foreign currency translation differences – – – – (3) (3) – (3)

Total income and expense

recognized directly in equity – – – 1 (3) (2) – (2)

Net profit – – – 5 – 5 3 8

Total recognized income and expense – – – 6 (3) 3 3 6

Equity on 31.12.2006 23 18 (4) 77 (1) 113 18 131

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plant, equipment and financial assets(incl. securities) as well as interestincome and dividends received in cash.These are therefore transactions in thecontext of fixed asset management thathave an effect on liquidity. Acquisitionsand sales of consolidated subsidiaries arealso shown in this section by presentingthe purchase price or the proceeds fromthe sale, minus the cash and cashequivalents acquired with the subsidiary– or disposed of in the event of a sale.

What is the free cash flow?

The cash flow statement sometimescontains a subtotal referred to as freecash flow. In practice, this term isdefined as the difference between thecash flow from operating activities andthe cash flow from investing activities.It represents the amount which remainsavailable after the deduction ofinvestments from the operating cashflow to settle obligations vis-à-viscreditors and shareholders, i.e. to repaydebts and pay dividends.

What information can be derived

from the cash flow from financing

activities?

Financing activities include the acquisitionand repayment of equity and externalfunding, interest payments and dividenddistributions. Since the group’s treasuryshares are deducted from equity, thepurchase or sale of treasury sharesshould not be presented as an investingactivity but instead is shown as a

4

Based on the cash flow statement,

how is the cash flow determined?

Unfortunately, the term “cash flow” isnot used consistently in practice. Itgenerally refers to the operating cashflow, i.e. the cash flow from operatingactivities. Sometimes, it simply describesa rough approximation to the operatingcash flow (e.g. net profit plusdepreciation). In the true sense of theword, the cash flow comprises all the changes in cash and cash equivalents.It is essential that the investorunderstands how the cash flow wasdetermined.

How liquid are cash and

cash equivalents?

In accordance with internationalaccounting standards, cash and cashequivalents include cash and funds inpostal and bank accounts on the onehand and, on the other, cash equivalentssuch as call deposits, fixed-termdeposits or money market instruments,provided these have an original term of less than 90 days and that significantfluctuations in their value are unlikely. In compliance with these standards,marketable securities may not beincluded in cash and cash equivalents;instead their movements are presentedas cash flows from investing activitiesor, possibly, operating activities (in terms of “working capital”).

1

Why is the cash flow from operating

activities relevant?

The operating cash flow indicates thegeneration and/or consumption of cashand cash resulting from procurement,production, administration and revenuerecognition activities. It comprises thepart of the operating profit which has aneffect on liquidity as well as all changesto the net working capital. The so-calledindirect method is often used tocalculate the part of the operating resultthat has an effect on liquidity. In thiscase – as in the example presented forthe AnyCompany Group – net profit is,on the one hand, reconciled to theoperating profit by adding back the taxexpense and the financial result and, on the other, is adjusted for the effectsof transactions of a non-cash nature,such as depreciation, the creation ofprovisions, etc. Alternatively, it is possibleto apply the direct method (which isused less frequently in practice) thatdiscloses cash receipts from customersand cash payments for staff costs,material costs, etc.

To the extent that it has an effect onliquidity, the financial result (in particularinterest expenses and income) is oftenassigned to the financing or investingactivities.

What information does the cash flow

from investing activities provide?

The group’s investing activities includecash purchases and sales of property,

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Questions and answers regarding the cash flow statement

The cash flow statement provides an overview of the cash and cashequivalents that have entered and left the company during the periodunder review. It is commonly presented in three sections showing the group’s operating, investing and financing activities. For the parentcompany’s financial statements, which comply with minimum legal requirements, a cash flow statement is not required.

financing activity like any other capitaldecrease or capital increase.

What is the influence of foreign

currency translation differences

on the cash flow statement?

The amount of cash and cash equivalentsheld by foreign subsidiaries at thebeginning of the period is translated atthe year-end rate of the previous year.Items of profit or loss and changes inbalance sheet positions (investments,divestments, financing activities,repayments) of foreign subsidiarieswhich are included in the cash flowstatement and which result in anincrease or decrease in cash and cashequivalents must be converted at theaverage rate for the period underreview. In contrast, the cash and cashequivalents held by foreign subsidiariesare translated at the prevailing rate atbalance sheet date. The resultingdifferences in the amount of cash andcash equivalents are set out separatelyat the end of the cash flow statement.

Why do increases and decreases in

balance sheet items not correspond

to the changes apparent from the

balance sheet?

These discrepancies are due partly tothe differing translation of balance sheetitems recorded in foreign currencies(converted at the rate on the balancesheet date) and transactions (convertedat the average rate). In addition, althoughchanges in the scope of consolidation(acquisitions and sales of subsidiaries)are stated in a single line in the cash flowstatement (see also “What informationdoes the cash flow from investingactivities provide?”), they actually relateto a large number of balance sheetitems. Furthermore, transactions thathave no effect on liquidity also result inchanges in the balance sheet, forexample the acquisition of assetsfinanced by finance leasingagreements, which do not require anycash at the time of the acquisition.

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See example in the section to the notes


should ask about the cash flow

statement:

■ Has the group been able to generatecash and cash equivalents from itsbusiness activities? Have theseresources been used for investmentsor to repay external capital or equity? Cash flow statement

■ Is the group able to meet itsobligations and repay loans andinterest on time? Cash flow statement, summary ofmaturities in the notes, possibly disclosure of credit limits and the

free cash flow in the notes or thedirectors’ report

■ Is the assessment of the useful life ofproperty, plant and equipment realistic? Accounting policies, investingactivities based on the analysis ofproperty, plant and equipment in the notes

■ Are there any significant capitalcommitments that lead to an outflowof funds in the future?Notes

■ Have the right investments beenmade at the right time and at areasonable cost? Possibly directors’ report


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Cash flow statement (CHF m) 2006 2005

Any Company Group

Net profit 8 62

Reconciliation to operating profit:

Income tax expense 4 12

Financial expense 9 5

Financial income (2) (13)

Non-cash income and expenses:

Depreciation 9 12

Impairment loss on goodwill 32 –

Gains from sale of property, plant and equipment (1) –

Income from investments in associated companies (5) –

Release of provisions, net (5) (3)

Use of prepaid employer’s contributions 2 –

(Increase) in employee benefit assets – (1)

Changes in net working capital:

Increase/(decrease) in current receivables 89 (7)

(Increase) in inventories (23) (3)

(Decrease) in current non-interest-bearing liabilities (39) (6)

Income tax:

Income tax paid (15) (12)

Cash flow from operations 63 46

Purchase of property, plant and equipment (29) (24)

Proceeds from sale of property, plant and equipment 3 1

Purchase of intangible assets – (4)Acquisition of subsidiaries

net of cash and cash equivalents acquired (56) (7)

Sale of securities 2 –

Interest received 2 11

Cash flow from investing activities (78) (23)

Share capital increase 4 –

Dividends paid (18) (9)

Transactions in treasury shares (3) (1)

Capital contributions by minorities 3 –

Increase in financial liabilities 25 10

Interest paid (8) (3)

Cash flow from financing activities 3 (3)

Translation differences 1 –

(Decrease)/increase in cash and cash equivalents (11) 20

Cash and cash equivalents at the beginning of the year 38 18

Cash and cash equivalents at the end of the year 27 38

balances must be disclosed in the notes.International standards further requirethe disclosure of the compensation ofthe members of the Group Managementand the Board of Directors in the notesto the consolidated financial statements(as of 2007, the Swiss Code ofObligations requires that listed companiesdisclose similar details in the notes tothe parent company’s financialstatements. See also “New developments in Swisscompany law”, pages 29 to 30.

What is the purpose of the analysis

of fixed and intangible assets?

The analysis presents gross changes inproperty, plant and equipment andintangible assets, i.e. on the basis ofcost of acquisition and accumulateddepreciation. Changes to the scope ofconsolidation (acquisitions/sales ofsubsidiaries), other additions, disposals(sales, scrapping), depreciation,impairment losses and foreign exchangedifferences are set out separately. Withthe exception of transactions that haveno effect on liquidity (purchases or salesin the form of exchanges or financeleasing transactions), it should bepossible to reconcile additions anddisposals with the cash flow statementwhen taking account of gains andlosses from disposals. Explanations ofsuch non-cash transactions are requiredby international standards.

1

What is the purpose of studying

the accounting policies?

In the summary of accounting policies,the group explains, among other things,which accounting framework it uses(e.g. IFRS, Swiss GAAP FER, US GAAP),how the scope of consolidation is definedand what accounting and valuationprinciples are applied. For example,information may be provided about thechoice of available options in accountingor about the extent to which fair valuesare used in the consolidated balancesheet.

It is also interesting to ask whether andwhy companies have been excludedfrom consolidation. For example, so-called “special purpose entities” orfoundations may be set up for complexfinancing transactions, but are sometimesnot consolidated. However, it isimperative that they are included in thescope of consolidation if the risks andrewards associated with thesetransactions remain with the group.

Which purpose serve the explana-

tions of individual items of the

consolidated financial statements?

The explanations present the compositionof individual balance sheet and incomestatement line items and describe thereasons for significant changes to theprior year. Of particular importance arethe summaries of movements requiredby a number of different standards, forexample the analysis of property, plantand equipment or the summary ofmovements in provisions. Other

disclosures of interest are those relatingto financial risk management as well asthe status of employee benefits andincome taxes.

What important additional informa-

tion can be found in the notes?

Informative details concern the so-calledoff-balance sheet transactions. Theserefer to transactions and uncertaintieswhich (as yet) have no impact on thebalance sheet. Examples are obligationsin respect of non-cancellable, long-termrental agreements (“operating leases”),capital commitments, legal disputes,warranties, joint and several guaranteesand other contingent liabilities. Readersof the notes should be able to identifythe major risks facing the group andhow these risks may affect theconsolidated financial statements and inparticular the earnings and cash flows.

What are “related parties”?

A related party is a party – either a naturalor legal person – which may have asignificant influence on the company’sfinancial or operating decisions. Thisincludes, for example, majority share-holders, members of the board ofdirectors and the senior nanagement aswell as any companies in which thesehave a controlling interest. Transactionswith related parties cannot automaticallybe compared with those undertakenwith independent third-parties since, asa result of the special relationship, theconditions may not necessarily be “atarm’s length”. Consequently, transactionswith related parties and any outstanding


Questions and answers regarding the notes

The notes to the consolidated financial statements consist of a summary of the accounting policies applied, comments on individualitems included in the financial statements and additional information.The notes are an integral part of the consolidated financial statements.

What conclusions can be drawn

from the summary of movements

in provisions?

For each significant category ofprovisions, the summary of movementsin provisions indicates the creation, theutilization (not recognized in the incomestatement) and the release (recognizedin the income statement) of provisionsduring the period under review.Significant releases of no longer requiredprovisions may be due to inaccuracies in the creation of provisions or tounexpected positive developments.Such releases should be explained if theyhave a material influence on the incomestatement. Uncertainties associatedwith the different provision categoriesand the expected timing of outflow ofresources should be described.

What does the cash outflow for

acquisitions refer to?

Acquisitions of subsidiaries can have asignificant effect on the consolidatedfinancial statements. They shouldtherefore be explained in detail in thenotes. The cash outflow presentedequals the purchase price for theacquired enterprise, reduced by thetransferred cash and cash equivalentsthat are now included in the consolidatedfinancial statements. This amount iscompared with the acquired assets andliabilities including goodwill. Thebreakdown of the cash outflow foracquisitions enables the reader tounderstand the changes in balancesheet items compared to the amountspresented in the cash flow statement.The influence of an acquisition on the balance sheet, will thus becomeapparent.

The same principle is applied to thedisposal of subsidiaries although, ofcourse, in the opposite direction.

3

2


Analysis of fixed and Total

intangible assets (CHF m) Other property,

AnyCompany Group plant and plant and

Real estate* equipment equipment Goodwill Total

Cost

January 1, 2006 91 62 153 44 209

Additions due to acquisition 10 1 11 97 108

Other additions 20 9 29 – 29

Revaluation 6 – 6 – 6

Disposals – (6) (6) – (6)

Translation differences (2) (1) (3) – (3)

December 31, 2006 125 65 190 141 343

Accumulated depreciation and

impairment losses

January 1, 2006 25 34 59 – 59

Depreciation 2 7 9 – 9

Impairment losses – – – 32 32

Accumulated depreciation on disposals – (4) (4) – (4)

Translation differences – – – – –

December 31, 2006 27 37 64 32 96

Net carrying amounts

January 1, 2006 66 28 94 44 138

December 31, 2006 98 28 126 109 235

Summary of movements in provisions (CHF m) Legal OtherAnyCompany Group Warranties disputes provisions Total

January 1, 2006 7 4 1 12

Creation and increases 2 1 – 3

Utilization – (1) – (1)

Release (4) (3) (1) (8)

Additions due to acquisition 2 – – 2

December 31, 2006 7 1 – 8

Acquisition of consolidated companies (CHF m) 2006

AnyCompany Group

Cash and cash equivalents 8

Receivables 27

Inventories 20

Property, plant and equipment 11

Current non-interest-bearing liabilities (1)

Financial liabilities (86)

Provisions (2)

Deferred tax liabilities and assets, net (10)

Total acquired net assets/(net liabilities) (33)

Goodwill 97

Total cost of the acquisition 64

Minus cash and cash equivalents acquired (8)

Cash outflow, net 56

1

2

3

* including investment property


What is the status of obligations

relating to employee benefits?

The disclosures on employee benefitobligations reveal a variety of informationincluding any deficits or surpluses indefined benefit pension plans (“fundedstatus”) determined on the basis ofuniform criteria as well as thecomponents of the pension expenseand changes in the group’s employeebenefit liabilities and assets. Post-employment benefit or pensionliabilities must be recognized in thebalance sheet in the case of definedbenefit pension plans, i.e. when pre-determined benefits are promisedand the employee is exposed to neitherthe actuarial nor the investment risk.The “funded status” compares thepresent value of this obligation with thefair value of the pension fund assets inorder to determine any surplus or deficitthat is to be recorded in the company’sbalance sheet. Any deficits must berecognized if the company is subject toany legal or constructive obligation torecapitalize the fund either by increasingits contributions or by an extra lump-sum payment. In the example provided,there is a surplus of CHF 34 million atthe balance sheet date of which thegroup considers CHF 8 million eligiblefor capitalization because, for example,it has prepaid employer’s contributions,i.e. is able to reduce its futurecontributions to this extent.

When recognizing changes in deficits orsurpluses, it is possible to apply the so-called corridor approach. This may leadto an obligation not included in full in the balance sheet because there is adelay in the recording of a deteriorationin the status. This approach is justifiedby the fact that this balance sheet itemrepresents a very long-term commitmentand therefore short-term fluctuationsneed not be accounted for. The use ofthe corridor approach and the amount ofthe as yet unrecognized improvementor deterioration of the status aredisclosed in the notes.

4

As an alternative to the corridor approach,IFRS now allow to recognize the effectsof the actuarial reassessmentimmediately in equity, without this havingany effect on the income statement.This has the advantage that deficits orsurpluses that are eligible for capitalizationare stated in full in the balance sheet atthe balance sheet date without theneed to charge the income statementwith the short-term and often significantvolatility that results from the periodicreassessment. In this case, the actuarialgains and losses, together with the netprofit and other gains and lossesrecognized directly in equity, form partof the overall performance which has to be stated separately.See also the comments on thestatement of changes in equity andperformance reporting.

When does the group have to repay

its debts?

It is possible to draw conclusions aboutthe cash flows resulting from the group’sfinancing activities and its liquiditysituation from the disclosure of maturitydates of interest-bearing liabilities. Whenconsidering the financial liabilities, it isalso of interest to examine the prevailingconditions (interest rates, loan conditions)in order to assess future cash flows andany foreseeable shortfalls in liquidity.However, disclosure of any unusedcredit limits is not mandatory, althoughthis could provide valuable informationon the group’s financing potential.

5

How much tax does the group pay?

Depending on the accounting frameworkapplied, the notes to the income taxsituation may include a reconciliationfrom the expected tax rate to theeffective tax rate (“tax ratereconciliation”). The expected tax ratecorresponds to the weighted average of all locally applicable tax rates.The effective tax rate is calculated onthe basis of the income tax expensepresented in the consolidated incomestatement as a proportion of the profit before tax. Among others, thefollowing factors can influence theeffective tax rate compared with theexpected tax rate:

■ Expenses recorded in the consolidatedfinancial statements, which havereduced profit but cannot be deductedfor tax purposes, increase theeffective tax expense (e.g. expensesresulting from goodwill impairment).

■ Income recorded in the consolidatedfinancial statements that hasincreased profit but is not subject totax reduces the effective taxexpense (e.g. government grants).

■ Non-capitalized tax loss carryforwardsfrom previous periods that have beenset off with profits of certainsubsidiaries reduce the effective taxexpense.

6


In accordance with internationalstandards, tax losses carried forwardwhose positive effect cannot becapitalized because of uncertaintiesregarding potential future offsets needto be disclosed. This allows determiningpotential future reductions in theeffective tax expense. In the examplepresented, a potential tax reduction of CHF 8.3 million (36 percent of CHF 23 million) can be assumed if all the loss carryforwards can be offsetagainst profits in the future.


should ask about the notes:

■ What are the reasons for changes inthe accounting policies and valuationmethods?

■ Has the acquisition of subsidiariesresulted in an increase in goodwill?How is this goodwill justified? Howmuch has the acquired companycontributed to the earnings of thegroup during the current businessyear?

■ What was the basis for determiningan impairment loss, i.e. therecoverable amount of goodwill, and what are the reasons for theimpairment?

■ Are the provisions for warranties, legal disputes, loss orders, tax risks,etc. sufficient? Have any significantamounts of provisions been released?

Pension costs and employee benefit asset (CHF m) 2006 2005

AnyCompany Group

Determination of the surplus:

Present value of the defined benefit obligation (275) (280)

Fair value of plan assets 309 320

Surplus 34 40

Of which not capitalized (26) (30)

Capitalized employee benefit asset 8 10

Breakdown of pension costs:

Current service costs 22 18

Employee contributions (5) (5)

Interest on obligation 4 3

Expected return on plan assets (4) (4)

Amortization of actuarial gains/losses – –

Unrecognized reduction in surplus (4) –

Total cost of defined benefit plans 13 12

Cost of defined contribution plans 5 4

Total pension costs 18 16

Employee benefit asset included in the balance sheet:

January 1 10 10

Cost of defined benefit plans (13) (12)

Employer’s contributions 11 13

Use of prepaid employer’s contributions 2 –

Benefits paid (2) (1)

December 31 8 10

Interest-bearing liabilities (CHF m) Maturity (years) 31.12.06 31.12.05

AnyCompany Group up to 1 up to 5 over 5

Bank liabilities 15 63 35 113 64

Mortgage loans 13 58 19 90 46

Other interest-bearing liabilities 3 18 6 27 9

Total 31 139 60 230 119

Tax rate reconciliation 2006

AnyCompany Group in %

Average expected tax rate for the group 36%

Effect of non-deductible expenses 5%

Effect of tax-exempt income (1%)

Use of unrecognized tax loss carryforwards (7%)

Effective tax rate 33%

Expiry of tax loss carryforwards whose

tax effect was not capitalized: CHF m

2007 3

2008 5

2009 –

2010 4

2011 or later 11

Total 23

4

5

6

Report of the group auditors

The report of the group auditors is theresult of the audit of the consolidatedfinancial statements that is available tothe public. It follows a standard text set out by IFAC (International Federationof Accountants) and the nationalassociation (Swiss Institute of CertifiedAccountants and Tax Consultants). Thereport identifies the object of the audit(the consolidated financial statements),clarifies the responsibilities, describesan audit and leads to the auditor’sopinion in the fourth paragraph. Thisparagraph expresses the auditor’s –unqualified or qualified – opinion thatthe financial statements give a true andfair view in accordance with theapplicable accounting framework andthe law. In rare cases, the auditors willexpress an adverse opinion or even adisclaimer of opinion. Wheneveranalyzing consolidated financialstatements, it is advisable to read thereport of the group auditors in order toidentify whether the auditors havepointed out any transgressions ofaccounting standards that impair a “trueand fair view” or whether they highlightsignificant uncertainties with regard to measurement or any going concernproblem.

In the example presented, the auditorsdraw attention to a material uncertaintyconcerning the company’s ability tocontinue as a going concern. There maybe various reasons for this type ofuncertainty: There may be refinancing

1

The expectation gap

The explanations on the previous pagesindicate just how much consolidatedfinancial statements are based on judgments. The reported resultsrepresent a combination of actual orexpected cash flows and valueadjustments. Wherever such judgmentis required, it is also necessary to makean assessment of future developments.It is true to say that “accounting is anart, and not a science”.

Faithful representation, understandabilityand prudence are key accountingconcepts which companies and theirauditors must bear in mind at all times.In view of the accelerated pace at whichour environment is developing,accounting standards can merely providea framework for fair presentation. Thereis room for interpretation and the use of common sense. However, even theapplication of the most rigorousaccounting standards cannot alwaysprovide an early warning of impendingcompany crashes, as recent economichistory illustrates.

An audit should provide reasonableassurance that the financial statementsas a whole are free of materialmisstatements. However, an auditorcannot provide absolute assurancesince the limitations inherent to an audit(the use of samples, limitations to theeffectiveness of company internalcontrols, non-detection of deceptionand fraud, judgments, etc.) mean thereis always a risk that material

misstatements may remain undetectedeven if the audit is performed withdiligence.

The significance of the auditor’s

report

It is the auditor’s task to audit transactionsand balances on the basis of samples,to critically review the accountingpolicies and to form an opinion whetherthe consolidated financial statementsand the statutory financial statementshave been prepared in accordance withthe relevant accounting standards. Auditors must be independent of thecompany they are auditing. They haveto know and understand the companyand its business model. There is an increasing need for them to haverecourse to specialists, for examplewhen assessing tax provisions, verifyingthe impact of complex contractualarrangements on accounting orreviewing the valuation of businesssegments and the related goodwill.Their work is characterized by the needto weigh up various arguments and best and worst-case scenarios. Theyprovide management with a mirror and take care that entrepreneurialoptimism does not stand in the way of abalanced view of the financial positionand results of operation.


The auditor’s role

As one of the bodies required by law, the external auditors contributesignificantly to the confidence in a company or its external reporting.However, even they cannot avert losses or even bankruptcy.

problems which result in a liquidityshortfall, changes in legislationexpected to adversely affect the entityor major technological problems.Despite these uncertainties, the auditorswere able to express an unqualifiedopinion because they concluded thatthese problems were adequatelydisclosed in the notes. The correspondingnote is of great importance for theinterpretation of the group’s financialposition and results of operation.

Fraud and error

The responsibility for preventing anddetecting fraud lies with the Board ofDirectors (and possibly its AuditCommittee) and the company’smanagement. By law, these bodieshave to design, implement, enforce andmonitor internal control instrumentsthat ensure the correct conduct ofactivities. Under the supervision of theresponsible bodies, the managementshould set the right tone (“tone at thetop”), create a culture of honesty andethical behavior and set up an appropriateInternal Control System (ICS) to ensurethat fraudulent activities in the companycan be prevented or detected.

Auditors must go about their work witha critical attitude and with professionalskepticism. They need to pay attentionto circumstances which increase therisk of material misstatements in thefinancial statements. When planningthe work, the auditor discusses with histeam the company’s susceptibility tomisstatements as a result of fraud. It isalso necessary to make inquiries withthe board of directors and the seniormanagement whether they are awareof any fraud affecting the company, onhow they assess the risk of materialmisstatements due to fraud and whatmeasures they have introduced toexercise their oversight.

When the auditor identifies amisstatement which is due to fraud orsuspected fraud then he should


Report of the Group Auditors to the General Meeting of

AnyCompany Holding AG

As group auditors, we have audited the consolidated financial statements (balance sheet,

income statement, statement of changes in equity, cash flow statement and notes) for the year

ended December 31, 2006.

These consolidated financial statements are the responsibility of the board of directors. Our

responsibility is to express an opinion on these consolidated financial statements based on our

audit. We confirm that we meet the legal requirements concerning professional qualification

and independence.

Our audit was conducted in accordance with Swiss Auditing Standards and with the International

Standards on Auditing (ISA)1, which require that an audit be planned and performed to obtain

reasonable assurance about whether the consolidated financial statements are free of material

misstatement. We have examined on a test basis evidence supporting the amounts and

disclosures in the consolidated financial statements. We have also assessed the accounting

principles used, significant estimates made and the overall consolidated financial statement

presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements give a true and fair view of the financial

position, the results of operations and the cash flows in accordance with

………………………………………2 and comply with Swiss law.

We recommend that the consolidated financial statements submitted to you be approved.

Without qualifying our opinion, we draw attention to note ... in the financial statements which

indicates the existence of a material uncertainty which may cast significant doubt about the

company’s ability to continue as a going concern. If the ability to continue as a going concern

would not be possible, the consolidated financial statements would have to be prepared on the

basis of liquidation values.

AUDITORS

NAME NAME

Swiss Certified Accountant Swiss Certified Accountant

Auditor in charge

PLACE, DATE

1 The reference to international standards on auditing iscommon for consolidated statements that are preparedin accordance with IFRS.

2 Reference to the applicable accounting framework (e.g.Swiss GAAP FER or International Financial ReportingStandards [IFRS]).

communicate these matters as soon aspracticable to the appropriate level ofmanagement.

Auditors also have an obligation toprovide information to the generalmeeting, although this is limited byconfidentiality requirements.

The audit is a significant contribution to corporate governance and riskmanagement of a company.

1


■ The income statement is the resultof changes to balance sheet items,i.e. it is the outcome from drawingup the balance sheet. As such, itreflects changes in the values ofassets and liabilities and expected(accrued) or already realized gainsand losses without, however, clearlydistinguishing between these.Changes in value include, for example,adjustments to the value of goods(included in costs of goods sold),allowances for bad debts (possiblypresented as part of financialexpenses), the creation and releaseof provisions (present in variousincome statement line items) as wellas depreciation and impairment losses.These are all to a certain extent amatter of judgment and require moreor less complex assumptions such asthe determination of the useful livesof fixed and intangible assets or anestimate of the future costs ofcleaning up contaminated land thatneed to be provided for. The realizedresults include income (e.g. revenuefrom sales that have already beenpaid for), expenses (e.g. productioncosts relating to the products sold),gains (e.g. from the disposal ofassets) and losses (e.g. from the saleof subsidiaries). In connection withthe recognition of revenue, it is oftennecessary to deal with complexityconcerning the transfer of risks andrewards associated with soldproducts.

■ Under all current accounting standards,the balance sheet is based on a mixedaccounting approach that uses bothhistoric costs and fair values. Forexample, under IFRS, some balancesheet items such as inventories,property, plant and equipment orfinancial liabilities are all stated at(amortized) cost. At the same time,IFRS requires that other balancesheet items such as share portfolios,derivative financial instruments or biological assets (plantations,livestock, vineyards, etc.) are valuedat their fair or market values. Otherbalance sheet items, such asinvestment property, certaincommodities/inventories or property,plant and equipment, may either be recognized at amortized cost or atfair value. This mixed approach leads to a complex statement ofresults, which in some cases makescomparisons difficult.

■ In addition, as a result of the currentstandards, some changes in thevalue of assets recognized at fairvalue are recorded directly in equity.These include, for example, theincrease in value of property, plantand equipment for own use, changesin the fair value of certain securitiesnot held for trading purposes, or thevalue changes of derivative financialinstruments acquired for hedgingfuture transactions. Furthermore,translation differences resulting from

the conversion of foreign subsidiaries’financial statements for consolidationpurposes are also recorded directly inequity. Other changes in value arerecognized in the income statement,for example the change in the fairvalue of biological assets, investmentproperty or securities held for tradingpurposes.

■ Amongst those changes in value thatare directly recognized in equity,there are some which are transferredto the income statement at the timeof disposal or the recognition of animpairment loss (this practice isknown as “recycling”). They aretherefore only temporarily “parked”in equity before being realized. Suchchanges include accumulated foreigncurrency translation differenceswhich are recycled when a subsidiaryis sold; losses on securities whichare initially recorded in equity but aresubsequently transferred to thefinancial result in the incomestatement when a significant orprolonged decline in the fair valueprovides evidence of impairment;gains and losses on hedginginstruments which are transferred tothe income statement once theunderlying hedged transaction is alsorecognized in the income statement(so-called “hedge accounting”).Although these reclassifications fromequity to the income statementaffect the profit, they do not increase

An outlook on the performance reporting of the future

In principle, a group’s performance is reflected in the income statement.This statement subdivides performance into the operating result, the financial result and the expenses and income from income-relatedtaxes. This traditional income statement, which is the norm today, is impaired by a number of uncertainties and sometimes even deficiencieswhich reduce its information value.


or decrease the total equity amount(i.e. the retained earnings). Otherchanges in value that are recordeddirectly in equity, such as therevaluation of property, plant andequipment or designated intangibleassets and certain adjustments ofemployee benefit liabilities are neverrecycled to the income statement.

Consequently, the profit as presented inthe income statement does not in itselfprovide a well-rounded picture of agroup’s performance. On the one hand,the various judgments and estimates,external influences and volatilitiesrequire a qualitative explanation in thenotes or in the directors’ report. On theother, the profit in the income statementmust be considered in connection withthe changes in value recorded in equity.

These shortcomings have beenrecognized by the publisher of the IFRS,the International Accounting StandardsBoard (IASB). Consequently, it is alreadypossible to draw up a so-called“Statement of recognized income andexpense” which presents a totalperformance measure by adding theprofit from the income statement to theincome and expense items recognizedin equity. This form of presentationreduces the amount of information tobe presented within the statement of changes in equity to the extent thatthis “only” reflects the transactionswith shareholders (capital increases ordecreases, distributions, purchase andsale of treasury shares), the totalperformance (“Total recognized incomeand expense”) and any restatementsresulting from changes in accountingpolicies or the correction of an error.

This comprehensive performancestatement might therefore have thefollowing structure:

Example: Swiss Industry Group

Statement of recognized income and expense for business year 2009

(in CHF. 000)

2009 2008

Profit for the year 39100 33700

Other recognized income and expense:

Exchange differences ontranslating foreign operations(a) 1250 –750

Available-for-sale financial assets(a) -500 8000

Cash flow hedges(a) –4000 –350

Gains on property revaluation 300 200

Actuarial losses on definedbenefit pension plans –100 –800

Share of other recognized income andexpense of associates(b) 80 –70

Income tax relating to components ofother recognized income and expense 600 –1400

Other recognized income and expense, net of tax –2370 4830

Total recognized income and expense 36730 38530

Total recognized income and expense attributable to 36730 38530

Shareholders of Swiss Industry AG 30500 35000


(a) This example provides a summarized presentation,whereby the changes in value for the current period and the effects of recycling are explained in the notes.Alternatively, a gross presentation may be chosen.

(b) This amount includes the share of other recognizedincome and expense of associated companies.

Example of a statement of recognized income and expense in accordance with Exposure Draft to

IAS 1 as a complementary performance statement.


In addition, the IASB recently proposedto incorporate the above-mentionedcondensed “Statement of recognizedincome and expense” or a comprehensiveincome statement as a mandatorycomponent of all IFRS consolidatedfinancial statements. The comprehensivestatement consists of the traditionalincome statement and the income andexpense items directly recorded in equity and could be presented asshown on the right.

These improvements and suggestionscurrently only deal with questionsconcerning the formal presentation ofprofit. The key aspects of performancereporting, such as the presentation of operating revenues (“managementperformance”) separately fromrevaluations that are partly determinedon the basis of fair values, questionsregarding the meaningful use of fairvalues and whether certain performanceitems should actually be recognized inequity and later transferred to theincome statement, as well as the inter-relation between the income statementand the cash flow statement and howthese two performance statementsshould complement each other, remainas challenges for the future.

Example: Swiss Industry Group

Statement of recognized income and expense for business year 2009 (in CHF. 000)

2009 2008

Revenue 980000 905000

Increase/decrease in inventories –6000 5000


Total income 982500 916500

Cost of materials 420000 380000

Other operating expense 180000 170000

Personnel expenses 250000 242000

Depreciation 46500 44800

EBIT 86000 79700

Income from investments in associated companies 1500 1200

Interest expenses –44000 –42000

Interest income 5000 4000


Income tax expense –9400 –9200

Profit for the year 39100 33700

Other recognized income and expense:

Exchange differences on translating foreign operations(a) 1250 –750

Available-for-sale financial assets(a) –500 8000

Cash flow hedges(a) –4000 –350

Gains on property revaluation 300 200

Actuarial losses on definedbenefit pension plans –100 –800

Share of other recognized income andexpense of associates(b) 80 –70

Income tax relating to components ofother recognized income and expense 600 –1400

Other recognized income and expense,

net of tax –2370 4830

Total recognized income and expense 36730 38530

Profit attributable to: 39100 33700



Total recognized income and expense attributable to: 36730 38530



Earnings per share in CHF 37 39

Diluted earnings per share in CHF 32 34

Example of a statement of recognized income and expense in accordance with Exposure Draft to

IAS 1 as a single statement.

(a) This example provides a summarized presentation,whereby the changes in value for the current period andthe effects of recycling are explained in the notes. Alternatively, a gross presentation may be chosen.

(b) This amount includes the share of other recognizedincome and expense of associated companies.


The new or modified laws relate to thefollowing aspects:

■ Audit requirement for legal persons■ Internal control systems for

companies■ Approval and supervision of auditors ■ Disclosure of payments to members

of the board of directors and to seniormanagement, and

■ Full revision of the law governing limited liability company (GmbH) andfurther adaptations to the SwissCode of Obligations (CO) incl.specifications for conducting riskassessments.

What do the new provisions

governing audit obligations entail?

Currently, a company’s legal form is thecriterion that determines whether or notthe annual financial statements and theaccounting records must be audited byan external auditor. More specifically,

the audit requirement has so far appliedto corporation (AG) irrespective of theirsize but not to LLCs (GmbHs). In thefuture, a company’s economic relevancewill determine the audit requirement,the audit scope and the requirementswhich the auditors must fulfill in termsof independence. The new provisionsapply to corporations, LLCs, cooperativesocieties, partnerships limited by shares,associations and foundations. Therevised law distinguishes between thefollowing four categories of companies:

■ Publicly held companies■ Companies of economic relevance

which are required to prepareconsolidated financial statements orwhich exceed two of the followingvalues in two consecutive fiscal years:Total assets of CHF 10 million, salesof CHF 20 million or 50 full-timeemployees

■ Small and medium-sized companies

■ Very small companies, i.e. small andmedium-sized companies which donot, on average, have more than tenfull-time employees annually.

The requirements placed on the auditare more or less exacting depending on the size of the company: Small,medium-sized and very small companiescan, in the future, make do with a so-called limited audit based primarily onsurveys, analytical audit procedures andlimited tests of details. Very smallcompanies can even forego an auditaltogether provided all of the equityholders of the company agree.

What is an ICS and why is it subject

to legal requirements?

The Internal Control System (ICS) is an important corporate managementtool: it comprises all the processes,methods and measures put in place bymanagement in order to ensure thecorrect conduct of business activity. TheICS forms part of the operating processesand covers all levels of the company.The ICS makes an important contributionto good corporate governance.

In the past, the ICS has not been explicitlymentioned in the CO. However, thegeneral accounting principles haveimplicitly required the presence ofcertain internal controls. The new auditlaw now obliges the auditors to checkas part of a normal audit whether an ICSexists. The CO does not stipulate anyspezifications for an ICS. Consequently,the company management must or can determine the nature and scope ofinternal controls itself.

New developments in Swiss company law

In 2007, the Swiss economy will see a number of new or revised laws,some of which relate closely to corporate governance. The followingtwo pages provide an overview of the most important new regulations.

New or modified law Effective

Audit law and changes to the CO Second half of 2007with reference to internal control systems or beginning of 2008

Audit Supervision Act (ASA) Partially on November 1, 2006remainder expected in 2007

Transparency concerning payments Effective for business to members of the board of years beginning on January 1, 2007directors and senior management (“Transparency Act”)

Law on LLCs and other adaptations Second half of 2007 to the CO (including “minor revision of or beginning of 2008company law” incl. specifications forconducting risk assessments, changes to thelaw governing cooperative societies)

What does the Audit Supervision Act

(ASA) govern?

Firstly, the ASA introduces an approvalprocedure under which a supervisoryauthority checks whether auditors and audit companies comply with thelegal requirements relating to audits.Furthermore, the auditors of publiclyheld companies are subject to statesupervision and are reviewed by thesupervisory authority at least every threeyears. They are also subject to specialregulations concerning independence.

This law has emerged in the light of themore rigorous requirements now setout in US legislation and will simplifyinternational cooperation in this area.

What will the new regulations con-

cerning transparency contribute?

The new provisions in the CO requirelisted companies to publish informationon compensation, credits and loans to members of the board of directors,the advisory council and the seniormanagement in the notes to the annualfinancial statements. Payments toformer members of the board ofdirectors, the advisory council and thesenior management must be disclosedif they depart from normal commercialpractice or are related to the previouslyexercised activity.

Some of this information has alreadybeen required by the SWX SwissExchange as part of corporategovernance reporting. Some of thesedetails are now to be transferred to theaudited notes to the annual financialstatements. However, the new legalprovisions go materially further than thepreviously applicable SWX requirements.For example, the total compensationpaid must be disclosed individually foreach member of the board of directors.Furthermore, any payments or loans toindividuals who are closely related withmembers of the board of directors,advisory council or senior managementmust now be disclosed if they deviatefrom standard commercial practice.

Why is the law relating to LLCs be-

ing revised?

Since the last revision of company lawin 1991, LLCs have grown in importance.However, the corresponding articles inthe legislation were last adapted in 1936and were no longer appropriate fortoday’s economic world.

LLCs are now, effectively, personallyowned stock companies. The members’personal and subsidiary liability for theauthorized capital has been abolishedand the liability now resides exclusivelyin the corporate assets. The CHF 2million capital “ceiling” has also beenabolished. Only one person is nowrequired for setting up a LLC. It is alsoeasier to transfer shareholders’ equity.An official authentication is no longerrequired. Instead, a simple writtenconfirmation suffices. A single memberof the company may now also holdmultiple shares. In contrast to acorporation, it is possible to introducecalls for additional contributions,subsidiary obligations and veto rights.

This legal form continues to be suitableprimarily for small companies. With a minimum capital commitment of CHF 20,000, the members can play arole in economic life without incurringthe risks of personal liability.

What do the specifications relating

to risk assessment contain and what

is their aim?

In the notes to the financial statements,companies have to explain their riskassessment procedure. Risk assessmentforms part of risk management andcontributes to the monitoring and controlof corporate risks. The new provisionsapply to all publicly held companies andother businesses which are required toproduce notes in accordance withcompany law.

As is the case for the ICS, the law doesnot set out any detailed rules but insteadentrusts the board of directors with the design of the risk assessment

procedure. However, it is expected totake an in-depth view of the specificrisks the company in question is facing.The new provisions apply only to thoserisks which are of significance for theevaluation of the annual financialstatements. A certain discretionaryscope is left regarding the content andextent of the information disclosed inthe notes. Companies might thereforedecide simply to indicate the riskassessment process or instead todescribe all the existing significant risks.

What does the future hold?

One of the most important ongoingprojects is the comprehensive revisionof corporate and accounting law, whichis set to introduce a wide variety of newdevelopments. A key aspect is animprovement in corporate governance,for example by strengthening share-holders’ rights to scrutinize companyactivity and obtain information, and anupdating of the ruling on admissionrights to general meetings. The projectalso includes a comprehensive revisionof accounting law. A preliminary draftlegislation was submitted for publiccommenting, but the subsequentprocedure and a concrete schedule arenot yet known at the time of thispublication.



Editor:KPMG LtdCorporate CommunicationsBadenerstrasse 172Postfach8026 Zurich 4

Order code: 011 631 [email protected] Telephone +41 44 249 31 31Telefax +41 44 249 30 04www.kpmg.ch

«Reading and understanding annualreports» is published in English, German and French 4th edition, February 2007

Design: MetaDesign, ZurichCover picture by: Alexander Sauer,ZurichEnglish adaptation: Michael Johnson,Copywrights, ZurichPrinted by: NZZ Fretz AG, Schlieren

Philipp Hallauer

Chairman of the Board,Swiss CertifiedAccountant,KPMG Switzerland

Authors:

Susanne Haas

Senior Manager,Swiss CertifiedAccountant,KPMG Switzerland

Stefan Mathys

Senior Manager,Head Public Relations,KPMG Switzerland

kpmg.ch

The information contained herein is of a general nature and is not intended to address the circum-stances of any particular individual or entity. Although we endeavor to provide accurate and timelyinformation, there can be no guarantee that such information is accurate as of the date it isreceived or that it will continue to be accurate in the future. No one should act on such informationwithout appropriate professional advice after a thorough examination of the particular situation.

© 2007 KPMG Holding Ltd, a Swiss corpora-tion and a member firm of the KPMG networkof independent member firms affiliated withKPMG International, a Swiss cooperative. Allrights reserved. Printed in Switzerland.

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