Switzerland’s position at the centre of European trade, combined with the CHF’s status as a safe-haven currency that regularly appreciates against the EUR and USD, makes foreign currency management a practical operational matter for a large proportion of Swiss companies. A manufacturing business selling into the eurozone, a services firm invoicing in USD, or a Swiss subsidiary of a foreign group reporting in a parent currency all face the same fundamental challenge: the business earns or pays in multiple currencies, but the accounts are kept and reported in CHF.
Getting multi-currency accounting right is partly a technical accounting question and partly a risk management question. This article covers both.
Functional Currency and Presentation Currency
The starting point is defining the functional currency: the currency of the primary economic environment in which the company operates. For most Swiss companies, the functional currency is CHF. The company’s costs are predominantly in CHF, its financing is in CHF, and its primary market pricing reference is CHF. Even if a portion of revenue is in EUR or USD, if the economic substance of the business is CHF-denominated, CHF is the functional currency.
The functional currency matters because it determines how foreign currency transactions are treated in the accounts. When a CHF-functional-currency company invoices a German client in EUR, that EUR receivable is a foreign currency item in the Swiss accounts. It is initially recorded at the spot rate on the invoice date, subsequently remeasured at each balance sheet date, and settled at the rate on the payment date. Each step potentially creates a foreign exchange gain or loss.
For subsidiaries of foreign groups, the functional currency may differ from CHF. A Swiss subsidiary of a US group whose revenues, costs, and management direction are USD-denominated may have USD as its functional currency even though it is legally incorporated in Switzerland. The functional currency determination requires judgment and should be documented, as it affects both the accounting treatment of FX items and the translation of the subsidiary’s accounts into the group’s presentation currency.
Transaction-Level FX: The Three Accounting Moments
Every foreign currency transaction in a CHF-functional-currency company passes through three accounting moments, each of which may create an exchange difference.
Initial recognition. The transaction is recorded at the spot exchange rate on the transaction date. A EUR 50,000 invoice raised on a date when EUR/CHF is 0.960 is recorded as a CHF 48,000 receivable.
Balance sheet remeasurement. At each balance sheet date (month-end for management accounts, year-end for statutory accounts), monetary items denominated in foreign currencies (receivables, payables, cash balances, loans) are remeasured at the closing rate. If EUR/CHF has moved from 0.960 to 0.948 between invoice date and month-end, the CHF 48,000 receivable is now worth CHF 47,400. The CHF 600 difference is an unrealised FX loss posted to the P&L.
Settlement. When the EUR 50,000 is received and converted to CHF, it is recorded at the rate on the payment date. Any difference between the previously remeasured carrying value and the settlement amount is the realised exchange difference, also posted to the P&L.
The separation of unrealised remeasurement gains and losses from realised settlement differences is important for management reporting: unrealised items will reverse when the underlying transaction settles, while realised items are permanent. Presenting them separately in the management P&L gives management a clearer view of the recurring FX impact versus the timing-related volatility.
Common Sources of FX Gain and Loss in Swiss Companies
Trade receivables in foreign currency. A Swiss exporter invoicing in EUR or USD carries the FX risk from invoice date to collection date. If the CHF appreciates (as it regularly does against the EUR), receivables lose CHF value between invoicing and collection. This is the most common source of FX loss for Swiss export businesses.
Foreign currency bank accounts. Companies that hold EUR or USD bank balances remeasure them at each period end. A EUR account held as a natural hedge against EUR payables creates offsetting FX movements in receivables and payables, but if EUR balances are held speculatively or without a matching liability, they represent a pure FX exposure.
Foreign currency loans. A CHF-functional company with a EUR-denominated loan remeasures the loan at each period end. If the EUR strengthens against CHF, the CHF value of the loan increases, creating an FX loss. For companies with significant EUR debt, this can be a material P&L item.
Intercompany balances. As covered in the previous article, intercompany balances in foreign currencies create FX movements in the individual entity accounts that need to be tracked and, at consolidation, understood in the context of group FX risk.
Hedging: When It Makes Sense for Swiss SMEs
Hedging foreign currency risk is a risk management decision, not an accounting decision, but it has significant accounting implications and belongs in the CFO and controller’s domain.
The case for hedging is strongest when: the FX exposure is material relative to the company’s profit (a 3% EUR/CHF movement that affects 40% of revenue can easily wipe out a quarter of the profit margin), the exposure is predictable and the hedging instrument matches it reasonably well, and the cost of the hedge is justified by the volatility reduction it provides.
The most common hedging instruments for Swiss SMEs are forward exchange contracts and natural hedges.
Forward contracts. An agreement to exchange a fixed amount of foreign currency at a predetermined rate on a future date. A Swiss exporter expecting EUR 500,000 of collections over the next six months can sell EUR 500,000 forward at today’s rate, eliminating the uncertainty about the CHF equivalent of those collections. The cost is the forward premium or discount, which reflects the interest rate differential between the two currencies.
Natural hedges. Rather than using financial instruments, a natural hedge matches foreign currency revenues against foreign currency costs. A company that earns EUR and has EUR-denominated suppliers, staff, or lease payments has a natural offset. The controller’s role is to quantify the natural hedge position: how much of the EUR exposure is covered by EUR costs, and what is the residual net EUR exposure that may require financial hedging.
For most Swiss SMEs, natural hedges are the starting point and often the primary tool. Financial hedging instruments add complexity (hedge accounting under OR or IFRS, mark-to-market of derivative positions) and cost that is not always justified for companies below CHF 20M to CHF 30M in revenue.
FX in the Management Report
The management P&L should present FX gains and losses in a way that helps management understand the underlying business performance versus the currency impact.
The standard approach is to show the operational P&L at a constant exchange rate (the budget rate or the prior year rate) alongside the reported P&L at actual rates. The difference between the two is the currency translation effect, which is shown as a separate line. This presentation separates what the business did operationally from what the currency did, which is the distinction management needs to make sound decisions.
For businesses with significant FX exposure, a dedicated FX section in the management report - showing the net open position by currency, the period gain/loss, and the year-to-date cumulative impact - gives management and the board the visibility to make informed hedging decisions rather than discovering a large FX loss at year-end.
Year-End and the Statutory Accounts
At year-end, the OR requires that all monetary assets and liabilities denominated in foreign currencies be translated at the year-end closing rate, and that exchange differences be recognised in the income statement. The OR permits, but does not require, recognising unrealised gains; unrealised losses must be recognised (consistent with the OR prudence principle). In practice, most Swiss companies recognise both gains and losses at year-end.
The translation of foreign subsidiary accounts into the group presentation currency at consolidation follows the closing rate method for the balance sheet and an average rate for the P&L, with the resulting translation difference taken to equity (translation reserve). This is a standard consolidation treatment that the controller managing a Swiss group needs to be comfortable with.
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Alessandro Ratzenberger is a fractional CFO and business controller based in Zurich, with 15 years of operational finance experience at Dufry Group and Bomi (UPS Group).
