Provisions for warranty obligations and major repairs

In order to record expenses or losses relating to the accounting period to be closed on an accrual basis, provisions can be formed in the company. Provisions are borrowed capital and must therefore be distinguished from value adjustments, which are adjustment items and serve to take account of the risk of losses on certain current assets (e.g. bad debt allowances). When forming provisions, the principle of accrual must be strictly observed and thus a catch-up of provisions from previous tax periods is generally excluded. 

Article 960e II of the Code of Obligations contains the following commercial law requirements for the creation of provisions:

• past event;
• expected cash outflow in future financial years;
• The amount of the cash outflow can be reliably estimated.

If the provision is no longer justified, it does not have to be reversed according to the CO. 

In order for the provisions to also be recognised for direct federal taxes, they must:

• informally be recorded in the books of account;
• be justified in business terms in material respects;

In contrast to the Code of Obligations, provisions that are no longer justified must be released, otherwise they are added to the taxable profit (taxed hidden reserve).   

Provisions are regulated differently at the cantonal level. This article shows some of the cantonal differences with regard to provisions for guarantees and major repairs.

Guarantee provisions

Warranty and guarantee obligations arise from contracts of sale and contracts for work and services in that the seller or manufacturer of an economic good is liable to the buyer for defects in the delivered item. The buyer's claims may be based on statutory or contractual warranty obligations or on business goodwill.

Provisions for guarantees serve to take into account guarantee obligations that actually or probably existed on the balance sheet date and whose fulfilment can be seriously expected, but whose extent is still uncertain. 

As a rule, the extent of the permissible guarantee provision must be estimated. It can be self-calculated and based, for example, on empirical figures from previous years. The assumptions must be substantiated and the basis for the calculation (e.g. extent of actual claims in the past) must be disclosed.

Provided that the company demonstrably provides warranty services and has no recourse claims, a lump-sum provision can be formed in most cantons (including BE, ZG, LU, SO, BL, BS, SG). The cantonal flat rate is usually 1% - 2% of the annual turnover with third parties. Some cantons set the rates per industry (e.g. for manufacturing companies, construction, Accounting- and auditing companies).

Provisions for repairs / major maintenance

In principle, provisions for equipment or buildings are not permissible, as reductions in value resulting from constant use and ongoing wear and tear are taken into account by the permissible depreciation. However, if damage has occurred in the previous business year and the repair can only be carried out in the following year, a provision is to be made to the extent of the presumed costs.  

Even in the case of major repairs to properties, e.g. renovation work that is actually planned in the near future, provisions can be made in most cantons. Many cantons allow a lump-sum provision without proof and link its calculation to the building insurance sum or the book value. The lump sum rates as well as the maximum duration for the formation of a provision vary from canton to canton.

In the canton of Bern, for example, a lump-sum provision of a maximum of 2% of the building insurance value is recognised and can be formed for a maximum of 8 years. The canton of Solothurn, on the other hand, does not apply flat rates for major repairs as a percentage, but only provisions for specific projects, which must be documented, e.g. by means of quotations, and can be spread over 2 years. The canton of Thurgau, among others, has another requirement, where no depreciation may be made on the object in question for the provision to be recognised.

Most cantons also know so-called upper limits for the reserve portfolio per property, e.g. the cantons of Zurich and Zug with 15%, the canton of Thurgau with 10% of the building insurance value or the canton of Lucerne with 5% of the book value.

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Due to the cantonal differences described above, we recommend that you carefully examine the regulations regarding provisions on the occasion of the annual financial statement so that the expense is recorded as realistically as possible, the tax burden is optimised and a possible set-off by the tax authority is avoided. We will be happy to advise you on this.