Income statement by nature or by function (art. 959b Swiss Code of Obligations)

Swiss law allows a company to choose between two income statement formats: the cost-of-sales method (Umsatzkostenverfahren), which allocates expenses across sales, R&D and administrative functions, and the nature-of-expense method (Gesamtkostenverfahren), which keeps homogeneous lines such as personnel costs or rent without allocating them by function. Art. 959b CO, together with Swiss GAAP FER and IFRS, permits both formats.

‍

This freedom of choice contrasts with US GAAP, which mandates the cost-of-sales method. In financial due diligence, this difference in presentation directly complicates comparing a Swiss EBITDA prepared by nature with that of a US comparable or a target presented by function, requiring restatement before any margin comparison.

‍

The restatement typically involves reclassifying personnel costs and rent presented by nature into sales, production and administrative functions, in order to rebuild an EBITDA comparable to sector multiples calculated on function-based peers. The exercise is especially sensitive given that the level of detail available in Swiss accounts, often lighter, does not always allow a fine breakdown.

‍

For a Swiss owner preparing a transfer, knowing which format their accounts use, and its consistency with the comparables applied in business valuation, avoids a mismatch between the displayed margin and the margin actually comparable for a buyer, a topic covered in our article on normalised EBITDA.