The guide
Guide to inventory valuation in Switzerland
Inventory valuation drives a large share of a trading or manufacturing SME's profit. This guide explains the rules of the Code of Obligations, the accepted methods, the treatment of import costs and the room for manoeuvre on tax, with examples from Swiss practice.
What inventory valuation rules does the Swiss CO set?
The Code of Obligations sets three principles for inventory valuation. First, the ceiling: under art. 960a CO, inventories are recorded at most at their acquisition or production cost. Second, prudence: under art. 960c CO, if net realisable value, that is the expected selling price less the costs still to be incurred, is below cost at the balance sheet date, that lower value applies.
Third, consistency: art. 958c para. 1 no. 6 CO requires valuation methods to stay the same from one year to the next. A change is possible if justified, but it must be explained in the notes. Inventories are in principle valued individually, but the CO allows valuation by groups of similar items. Numezis applies these three principles to every movement, not once a year on an exported list.
FIFO, LIFO or average cost: which method should you choose?
With FIFO, first in, first out, issues consume the oldest purchases first: remaining stock is valued at the most recent prices. With LIFO, last in, first out, it is the opposite: stock keeps the old prices. Weighted average cost recalculates an average price at each receipt. FEFO, first expired, first out, follows expiry dates and suits perishable goods.
When prices rise, LIFO gives a lower stock value and therefore a lower profit, while FIFO gives a value closer to current prices. LIFO is accepted under Swiss accounting law but excluded under IFRS; under Swiss GAAP FER, check with your fiduciary. Average cost smooths fluctuations and remains the most common choice in SMEs. What matters is to choose a method that fits your real flows, then to stick with it.
How do you calculate the landed cost of an imported item?
The acquisition cost of an imported item is not limited to the price on the supplier's invoice. It also includes freight to your warehouse, transport insurance, customs duty, and forwarder and clearance fees. These costs must be allocated to the items received, by weight, volume, value or quantity depending on their nature.
Take a sealant bought at EUR 8.70 per unit, converted to CHF 8.15 at the day's rate. With CHF 0.54 of freight and CHF 0.26 of customs duty per unit, the landed cost is CHF 8.95. Import VAT of 8.1 %, collected by the FOCBS, is not part of it: a VAT-registered business recovers it as input tax. Numezis attaches the forwarder's invoice and the assessment notice to the receipt, allocates the costs automatically and updates the item's cost layer.
When must stock be written down under art. 960c CO?
A write-down is required as soon as an item's net realisable value falls below its cost at the balance sheet date. Typical causes are a lasting drop in selling prices, an outdated product or one replaced by a new model, damaged goods, an approaching expiry date or dead stock that will only sell at a heavy discount.
Net realisable value is calculated from the expected selling price, less the costs still needed to sell: discount, transport, commission. Numezis compares this value with each item's cost and produces the list of write-downs to consider, with the evidence behind them: turnover, latest sales, batches nearing expiry. The adjustment is prepared but only posted after approval. A write-down that is no longer justified can be reversed, up to the original cost.
What about the one-third goods reserve and hidden reserves?
In addition to the write-downs required by art. 960c CO, Swiss tax practice accepts in most cantons a flat-rate write-down on merchandise stock, known as the "one-third goods reserve" (Warendrittel): up to one third of the inventory value at cost or lower market value. This hidden reserve reduces taxable profit in the year it is created.
Two conditions are essential: a complete inventory list and an exact base value. The reserve is calculated on that base and must be tracked from year to year, because releasing it increases profit. Numezis provides the base value item by item and clearly separates the economic value of stock, the CO write-downs and the flat-rate reserve. The amount remains a decision to take with your fiduciary, according to your canton's practice.