Depreciation Methods in Switzerland

As your business acquires assets, it is essential to understand the concept of depreciation and how to record it. Depreciation is a means of accounting for the decrease in the value of assets over time due to usage, wear and tear, obsolescence, etc.

In this article, we will explore the various depreciation methods used in Switzerland, why depreciation is important, the types of depreciation, methods for calculating depreciation, and how to record depreciation.

In accounting, depreciation refers to the estimated decrease in value of an asset over time. Put another way, it is an accounting method which allocates the cost of an asset over its useful life as opposed to just the year in which it was bought. These two definitions effectively mean the same thing, because the decrease in value of an asset during a year also represents the portion of the cost of that asset which is ‘incurred’ in that specific year.

Depreciation is recorded as a non-cash expense that reflects the loss of value of an asset due to usage, wear and tear, and obsolescence. Depreciation is not only applied to tangible assets such as buildings, vehicles, and equipment, but also to intangible assets such as patents, copyrights, and trademarks.

There are various ways in which an asset can lose value over time. Examples include:

• Normal wear and tear,
• Obsolescence,
• Physical damage,
• Expiry of IP rights,
• Changes in market conditions or demand,
• Damage due to weather, natural disasters, etc.

These forms of depreciation can be broadly categorised into two main types: scheduled depreciation and unscheduled depreciation.

There are two main methods for calculating depreciation: Linear depreciation and degressive depreciation.

Linear Depreciation

Linear depreciation is the simplest and most commonly used method of depreciation. It calculates depreciation as a fixed percentage of the asset's original acquisition cost over its estimated useful life. The asset is therefore depreciated by the same amount each year.

For example, if a company purchases a machine for CHF 10,000 with an expected useful life of 10 years and no salvage value, the annual depreciation would be CHF 1,000 (10,000 / 10). The depreciation is recorded as an expense on the income statement (debit entry) and reduces the asset's book value on the balance sheet (credit entry).

Degressive Depreciation

The method of degressive depreciation is based on the premise that an asset's value decreases more rapidly in the early years of its life and slows down as it ages. In other words, the amount written off as depreciation decreases every year. Degressive depreciation can be said to be a closer reflection of reality but is more complicated to calculate and record.

There are two types of degressive depreciation: declining balance and sum-of-the-years'-digits.

The declining balance method is the more common of the two types of degressive depreciation methods. It differs from the method of linear depreciation, in that instead of calculating the depreciation each year as a fixed percentage of the asset’s acquisition value, it calculates it as a percentage of its current book value- that is, its value after accounting for each subsequent depreciation entry.

For example, let’s suppose the same company in the previous example instead uses a 20% declining balance depreciation rate on the machine with an initial cost of CHF 10,000:

• The first year's depreciation would be CHF 2,000 (20% of the initial cost of CHF 10,000), leaving a book value of CHF 8,000.
• The second year's depreciation would be CHF 1,600 (20% of the book value of CHF 8,000), leaving a book value of CHF 6,400.
• The third year’s depreciation would be CHF 1,280 (20% of the book value of CHF 6,400), leaving a book value of CHF 5,120. And so on…

As you can see, this method results in higher depreciation expenses in the early years of the asset's life, reflecting the fact that assets generally lose value at a faster rate in those years. It is important to note that the depreciation rate is usually chosen to be approximately twice that of the corresponding linear method.

The sum-of-the-years'-digits method is another, less common type of degressive depreciation. It calculates depreciation based on the sum of the years of an asset's useful life.

For example, if a machine has a useful life of 10 years, the sum of the years' digits would be 55 (1+2+3+4+5+6+7+8+9+10). In the first year, the depreciation would be 10/55 of the asset's cost, in the second year, 9/55, and so on until the final year, when the depreciation would be 1/55 of the asset's cost.

Comparison of Different Depreciation Methods

Both the linear method and degressive methods of depreciating assets are used in Switzerland, and each have their relative advantages and disadvantages, as well as situations where they are more appropriate and useful.

Linear depreciation is easy to calculate and understand, which is why it is the most widely used method even though it might not accurately reflect reality.

Linear methods are used for most low-value fixed assets, where the small discrepancy of the linear method from reality does not result in a significant difference in the depreciation calculation. Here, the costs and effort of using degressive depreciation methods are not worth the small improvement in accuracy.

Degressive depreciation methods, on the other hand, better reflect the fact that an asset may lose value at a faster rate in the early years of its life and are therefore seen as a more accurate way to account for an asset's actual depreciation. The main downside of degressive depreciation methods is that they can be more complex to calculate and understand. It is also important to note that, although they may be a closer reflection of reality, no method of calculating depreciation can perfectly represent the actual loss in value of an asset over time, which depends on a multitude of constantly changing factors.

Degressive depreciation methods are usually used for higher-value fixed assets which tend to lose value much more rapidly in the early years of life, and where a greater level of accuracy is important and warrants the extra cost and effort involved.

Swiss law requires companies to record depreciation in their financial statements to accurately reflect the value of their assets. Companies are required to follow the Swiss Code of Obligations (CO), the Federal Direct Tax Act (DBG), or other recognized standards, such as Swiss Generally Accepted Accounting Principles (GAAP) when recording depreciation.

Art. 62 of the DBG stipulates the following points on depreciation, among others:

1. Depreciation of assets is allowed, provided it is recorded in the books of the business or in special depreciation tables if there is no commercial accounting.
2. Depreciation should be calculated according to the actual value of the individual assets or distributed in accordance with their expected useful life.
3. Depreciation on assets that have been overvalued to compensate for losses can only be recorded if revaluation is permitted under commercial law.
4. Depreciation on production costs is added back to taxable income if they are no longer justified.

Furthermore, the DBA also sets out standard depreciation rates on the book values (i.e., degressive depreciation rates) of different types of assets. It is important to note that these figures only serve as guidelines, and there may also be cantonal deviations. The linear depreciation rates on the acquisition value are determined by halving the corresponding degressive rates.