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SaKo-RLE-II/19
SaKo-RLE-II/19Ch Six Exchange Regulations / Sanction CommissionSep 18, 2020
LR 51, DFR 6 | Violation of the applicable accounting standard Swiss GAAP FER | Omission of a material impairment of an investment (FER 20) and improper consolidation of an entity without control (FER 30), resulting in incorrect annual and interim financial statements | Gross negligence
SIX Exchange Regulation (SER) Hardturmstrasse 201 8005 Zurich
VS.
X.
(X. ) ☒ ☒ [address] [place]
The Sanctions Commission - [ ... ], Chairman, [ ... ], [ ... ], [ ... ], secretary - has rendered a decision as follows, following the sanction proposal submitted by SIX Exchange Regulations: ☒
1. X. ☒ violated the applicable financial reporting standard Swiss GAAP FER (Swiss GAAP FER 20, Swiss GAAP FER 30, and Swiss GAAP FER Framework) in a grossly negligent manner and thereby its obligations pursuant to Art. 51 LR in combination with Art. 6 DFR:
a. by not accounting for a material impairment on its investment in [Investment Entity] in the [20X1] Swiss GAAP FER annual financial statements;
b. by erroneously consolidating [Investment Entity] as a subsidiary starting [first day of the reporting period] [20X2] in the [20X2] Swiss GAAP FER interim financial state- ments; and
c. by materially misstating both the [20X1] Swiss GAAP FER audited annual and [20X2] Swiss GAAP FER unaudited interim financial statements that consequently did not give a true and fair view of X. _ 's financial situation and were thus unreliable. ☒
2. X. _ pay a fine of CHF 40,000 (Art. 61 para. 1, number 2 LR). ☒
3. ☒
X. shall bear the cost of SER for the enforcement procedure in the amount of CHF [ ... ] and the costs incurred by the Sanctions Commission in the amount of CHF [ ... ] (Ciph. 3.7 LocRB), cor- responding to a total amount of costs of CHF [ ... ].
The legally binding decision of the Sanctions Commission will be published on SIX Exchange Regu- lation AG's website in anonymous form (Ciph. 6 para 8 RP).
[ ... ]
1. On [date] [20X1], X .__ (X. _ , Company or Issuer) acquired an investment [ ... ] in [Investment ☒ ☒ Entity], a [place], [county], corporation, (the Investment) for a consideration of [currency] [amount]. As of [reporting period-end] [20X1], X. _ performed an impairment test for the Invest- ment in [Investment Entity] that contained mechanical errors, implausibly aggressive assumptions, and lacked due care in the process of its preparation. SER finds, and the Sako concurs, that as a result, the Investment has been materially overstated in the balance sheet and a material impair- ment expense was missing in the income statement of the [20X1] Swiss GAAP FER (FER) annual financial statements. X. _ restated in its [20X2] FER annual financial statements the carrying amount of [Investment Entity] from [currency] [amount] to [currency] [amount] and retrospectively recorded a material impairment of [currency] [amount] in the income statement for the financial year [20X1].
2. X. __ consolidated the Investment as of [first day of the reporting period] [20X2] even though ☒ X. _ did not possess control over [Investment Entity] in the first half-year of [20X2]. As a conse-
☒ quence, the [20X2] FER interim financial statements were materially misstated in the view of SER, and to which the Sako concurs, X. _ corrected this erroneous consolidation of [Investment Enti- ☒
ty] starting [first day of the reporting period] [20X2] in both its [20X2] FER annual financial state- ments and its [20X3] FER interim financial statements.
3. In accordance with Art. 51 Listing Rules (LR1) in conjunction with Art. 6 of the Directive on Finan- cial Reporting (DFR2), SIX Exchange Regulation AG's (SER) review is aimed at monitoring com- pliance of the issuers' financial statements with the applicable accounting standards.
4. The accounting standards applicable to X. _ 's [20X1] annual financial statements authorized for ☒
issue and published on [date] [20X2], to X. _ 's [20X2] interim financial statements authorized for issue on [date] [20X2] and published on [date] [20X2] and to X. _ 's [20X3] interim financial statements authorized for issue on [date] [20X3], initially published on [date] [20X3] as well as re- published as a corrigendum on [date] [20X3] are FER. ☒
5. After reviewing the [20X1] FER annual financial statements of X. _ , SER initiated a preliminary ☒ investigation on [date] [20X2], requesting clarification on various topics. X. _ timely filed its statement to the preliminary investigation on [date] [20X2] and a reply to additional questions by SER on [date] [20X2] and to further questions on [date] [20X2]. ☒
6. After having considered all the evidence, SER concluded that there were indications of a potential violation of the obligations set out by the applicable accounting standard (FER) in connection with X .__ 's [20X1] FER annual and [20X2] FER interim financial statements. Therefore, on [date] ☒ [20X3], SER opened an investigation. X. __ submitted its response statement dated [date] ☒
[20X3].
7. SER submitted the sanction proposal for comment to X. _ on [date] [20X4]. X. _ submitted its ☒ ☒ response on [date] [20X4], stating that X. __ agrees with the facts and findings and that X. ☒ does not oppose the legal analysis by SER but refrains from commenting on it. However, X. ☒ requests that the sanction shall be lowered taking into account the Company's current financial si- tuation.
1 Listing Rules (LR) dated 4 November 2016, entry into force 1 May 2017, and LR dated 4 April 2018, entry into force 25 May 2018
2 Directive on Financial Reporting (DFR) dated 15 September 2016, entry into force 1 May 2017, and DFR dated 20 March 2018, entry into force 1 May 2018
8. Upon request of the Sanctions Commission, X. _ provided, on [date] [20X4], as additional in- formation the Company's Annual Report [20X3], "all relevant press releases in [20X4]" and the last notification from the [place] Court concerning the suspended bankruptcy procedure, dated [date] [20X4].
9. X .__ is a company incorporated under [country] law with its registered office in [place]. The Company's [securities] are listed in the "[regulatory segment]" of SIX Swiss Exchange Ltd. X. signed a declaration of approval on [date] [20X3], accepting to be bound by the stock exchange's regulations, especially by the LR and the Rules of Procedure (RP3) in their most recent version (and on [date], A. __ Inc., the former name of the Company prior to the change to the current name).
10. The violation of the LR, any additional regulations thereto, or any implementation decrees thereof, may be sanctioned by one or more of the sanctions listed in Art. 61 LR (Art. 60 LR).
11. Competent to decide upon sanction proposals submitted by SER is the Sanctions Commission (SaKo) (Ciph. 3.4 and Ciph. 4 RP). According to Ciph. 6 para. 7 RP, the public will be informed of the investigation concluded by a legally binding sanction decision. In addition, the legally binding decision of the Sanctions Commission will be published on SER's website in anonymous form (Ciph. 6 para. 8 RP).
12. In accordance with Ciph. 6 para. 2 RP, SER has informed the public that an investigation had been initiated, upon dispatch of the sanction proposal to the Sanctions Commission.
13. Art. 49 and Art. 50 LR require issuers to publish annual and interim reports, comprising financial statements in accordance with the applicable financial reporting standard recognized by the regu- latory board (Art. 51 LR). The financial reporting standard chosen by X. _ and applicable to its annual and interim financial statements is FER. FER is a financial reporting standard recognized by the Regulatory Board (Art. 6 DFR).
14. SER has excluded the [20X1] FER interim financial statements of A. _ Inc. from the current investigation. Therefore, the [20X1] FER interim financial statements of A. _ Inc., including any possible errors therein, do not form part of this sanction proposal.
15. Furthermore, SER decided not to pursue any other possible errors pertaining to the [20X2] FER annual and [20X3] FER interim financial statements of X. _ and unrelated to those proposed for sanctioning in the present sanction proposal. In order not to unduly delay the sanction procee- dings, SER decided to to limit its sanction proposal to documented, verified, and, in the meantime, corrected errors in the [20X1] FER annual and [20X2] FER interim financial statements. SER considered in the proposal only those parts of X. _ 's [20X2] FER annual and [20X3] FER interim financial statements that include the correction of the errors made in the [20X1] FER annual and [20X2] FER interim financial statements and disregarded for this sanction proposal the remaining parts of the financial statements. However, SER reserves the right to open separate proceedings on the [20X2] FER annual and [20X3] FER interim financial statements or any other future financi- al statements of X. .
16. On [date] [20X1], X ._ acquired the Investment for a consideration of [currency] [amount]. The purchase agreement included three options:
3 Rules of Procedure (RP) dated 8 November 2019, entry into force 1 April 2020.
1) A short-dated-break-option giving the seller the right to revoke the agreement before [end of first month of the reporting period] [20X2] by paying [currency] [amount] in cash;
2) An option for the seller to repurchase the stake in [Investment Entity] for [amount] in cash, valid until [end of the fifth month of the reporting period] [20X2];
3) An option for X. __ to acquire an additional [ ... ]% interest in [Investment Entity], including full transfer of control of the board of directors and management, for a price of [currency] [amount]. ☒
In the consolidated balance sheet as per [annual reporting period-end] [20X1], the Investment in [Investment Entity] was presented under non-current assets as "[ ... ]" in the amount of the acquisi- tion costs of [currency] [amount].
17. SER started to request additional information from the Company on [date] [20X2] with a follow-up request on [date] [20X2]. One point raised related to the value of the Investment at [annual report- ing period-end] [20X1]. X. _ provided SER an impairment test for the Investment in [Investment Entity] for the year-end [20X1] valuation on [date] [20X2]. Within this impairment test, X. _ per- ☒ ☒ formed a value in use calculation based on the discounted cash flow method and used financial data for five plan years (FY), being FY[20X2] until FY[20X6]. The result of this impairment test was a net present value (NPV) for the Investment in [Investment Entity] as per [annual reporting peri- od-end] [20X1] of [currency] [amount] ([currency] [amount]) that indicated no impairment require- ment for the carrying amount of [currency] [amount] of X. _ 's investment in [Investment Entity] at the time.
18. Furthermore, X. __ started consolidation of [Investment Entity] on [first day of the reporting peri- ☒ od] [20X2], even though the ownership interest remained [ ... ]. X. __ states three factors that ap- parently led to the change in the consolidation approach for [Investment Entity] as per [first day of the reporting period] [20X2], as compared to [annual reporting period-end] [20X1]:
· The close working relationship including sharing of offices and co-developing projects between [Investment Entity] and X. _ 's subsidiary [subsidiary]; ☒
· The financing of [Investment Entity] that has largely been assumed by X. _ group entities and/or related parties of X. _ , and; ☒ ☒
· Because "certain minority shareholders and Board Members of X. _ hold minority shareholding positions in [Investment Entity], either directly or indirectly through affiliate entities". ☒
19. When asked to substantiate these three factors, X. _ explained, in particular, (i) that the sharing of offices between X. _ 's subsidiary [subsidiary] and [Investment Entity] in fact only started on [date of the second-half-year reporting period] [20X2], (ii) that [Investment Entity]'s financing has largely been covered by B. __ Inc., which only became a subsidiary of X. _ on [date of the se- cond-half-year reporting period] [20X2], and (iii) that a minority shareholder of X. _ has provided financing to [Investment Entity] on [date] [20X2]. ☒ ☒ ☒ ☒
20. On [signing date renegotiated options] [20X2], X. _ signed renegotiated option agreements rela- ☒ ted to the acquisition of the Investment in [Investment Entity]. The former option 1 had already ex- pired on [signing date renegotiated options] [20X2]. Former option 2 was superseded through the renegotiated options and former option 3 had been replaced by newly agreed options that are described hereinafter. These new options signed on [signing date renegotiated options] [20X2] (Option A, B, and C) all have identical terms and conditions and provide for a total additional ow- nership stake of [ ... ]% in [Investment Entity]. In total, a consideration of [currency] [amount] would have to be paid upon exercise of these new options (A, B, and C) and the new call options (A, B, and C) are all valid from [date of the second-half-year reporting period] [20X2] until [date] [20X3]. These three new option agreements (A, B, and C) contain the following terms:
Signing Date
Seller
Option- Shares
Economic Interest of Option- Shares
Exercise Price Call and Put Option in [currency]
Call-Option Duration
Put-Option Duration
Option A
[signing date renegotia- ted opti- ons] [20X2]
C. Inc.
[quantity]
12%
[amount]
[date of the second-half- year reporting period] [20X2] until [date] [20X3]
[date] until [date][20X3]
Option B
[signing date renegotia- ted opti- ons] [20X2]
D. Inc.
[quantity]
18%
[amount]
[date of the second-half- year reporting period] [20X2] until [date] [20X3]
[date] until [date][20X3]
Option C
[signing date renegotia- ted opti- ons] [20X2]
E.
[quantity]
6%
[amount]
[date of the second-half- year reporting period] [20X2] until [date] [20X3]
[date] until [date][20X3]
These new options (A, B, and C) are exercisable at the discretion of X. _ 's board and would, af- ter the exercise of all options, give X. _ a total [ ... ]% share of the voting rights.
21. As a consequence of the proceedings initiated by SER, X. __ materially restated in its [20X2] FER annual financial statements the carrying amount of [Investment Entity] to [currency] [amount] and retrospectively recorded a corresponding impairment charge of [currency] [amount] as per [annual reporting period-end] [20X1].
22. Furthermore, as an additional consequence of the proceedings initiated by SER, [Investment Enti- ty] was no longer consolidated as of [first day of the reporting period] [20X2] in the [20X2] FER annual and [20X3] FER interim financial statements. X. _ disclosed in the [20X2] FER annual fi- nancial statements that the consolidation of [Investment Entity] as per [first day of the reporting pe- riod] [20X2] was erroneous and that the respective correction would also take place in the [20X3] interim consolidated financial statements, which was the case.
23. On [date] [20X2] X. __ provided SER with an impairment test for the Investment in [Investment Entity] related to its [20X1] FER annual financial statements based on a value in use calculation, as allowed by FER 20/4. However, SER estimates that the value in use calculation contained a mechanical error, implausible aggressive terminal growth rate and other assumptions, and was prepared without due care. Overall, the erroneous test led X. _ to the wrong conclusion not to recognize a necessary material impairment charge on its [Investment Entity] investment in the [20X1] FER annual financial statements.
24. X. __ used an enormously aggressive terminal growth rate of 10% in the impairment test for the Investment in [Investment Entity] as per year-end [20X1]. A terminal growth rate of 10% implies that the free cash flow of the [Investment Entity] business after [20X6] would be growing indefini- tely, year on year, by 10%.
25. Both FER 20/23 and FER Framework/32 require the use of reliable and probable assumptions in an impairment test in order to avoid presenting distorting or arbitrary information in financial statements.
26. The terminal value is frequently the most significant part of the NPV resulting from a discounted cash flow model. This is particularly the case for a business such as [Investment Entity]'s, which generates very little, or even negative, cash flows during the detailed planning period. On an un- discounted basis, the terminal value of [Investment Entity] amounts to [currency] [lower three-digit amount], compared to a total undiscounted value generated during the 5-year (FY [20X2] - FY [20X6]) planning period of [currency] [low two-digit amount]. Discounted at the rate of [discount ra- te] used by X. __ in the impairment test, the terminal value accounts for approximately [currency] [amount] or 88% of the total NPV of [currency] [amount].
27. SER stresses that it is therefore particularly important that the terminal growth rate, which is the key assumption determining the terminal value, is reliable and probable as required by FER 20/23. It is commonly understood in valuation theory that the terminal growth rate cannot be higher than the growth rate of the economy in which a company operates. This is based on the logical as- sumption that no business will ever be able to outgrow the overall economy into perpetuity.
28. X. __ failed to substantiate the very aggressive terminal growth rate of 10% used in the impair- ☒ ☒ ment test for the Investment in [Investment Entity] as per [annual reporting period-end] [20X1]. No reasonable calculation or relevant external sources stating a 10% growth rate were provided by X. __ , supporting the use of such an enormous terminal growth rate. Furthermore, comparing this aggressive 10% terminal growth rate with the estimation of the International Monetary Fund (IMF) for the [relevant market] (which is the main country of operations for [Investment Entity]) for [20X7] of [low single digit number]% illustrates the implausibility of the used 10% terminal growth rate by X ._. ☒
29. Changing the terminal growth rate used in the impairment test for X. _ 's Investment in [Invest- ☒ ment Entity] as per year-end [20X1] from 10% to the [low single-digit number]% stated above, re- sults in a decrease of the NPV for X. _ 's [ ... ] stake in [Investment Entity] to [currency] [amount] instead of the original [currency] [amount]. However, the terminal growth rate was not the only ag- gressive assumption in the original impairment test. The growth rates in the plan years FY [20X2] to FY [20X6] ranging from [two-digit number]% to [four-digit number]% were also rather aggressive and have not been considered in the error estimation. Reducing or probability-weighting these planned cash flows would also lead to a lower NPV and correspondingly to a higher impairment.
30. ☒ X. __ based its calculation of the terminal year in its [20X1] year-end value in use calculation for the Investment in [Investment Entity] on the FY[20X5] instead of FY[20X6] plan year. However, fi- nance theory requires the terminal value in a value in use calculation to be based on the terminal plan year used. This correction would by itself, thereby ignoring the adjustments described above, increase the so-called headroom that reflects the difference between the carrying amount in the accounting records and the calculated NPV in an impairment test. Only once this headroom is consumed, does an impairment charge need to be recorded according to FER 20/3. A correspon- ding correction of the impairment test for [Investment Entity] as per [annual reporting period-end] [20X1] using the assumptions used by the Company, which however as mentioned above are not considered by SER to be realistic, would have increased the NPV for the Investment in [Invest- ment Entity] as per [annual reporting period-end] [20X1] to [currency] [amount] as compared to the original [currency] [amount].
31. X. __ explained in its answer dated [date] [20X2] that [Investment Entity]'s business plans are ☒ prepared by local management and approved by the local board. Furthermore, X. _ 's response ☒ dated [date] [20X2] does not mention any approval process or actual approval of [Investment Enti- ty]'s impairment test by the management or the board of X. _. According to SER, this suggests that no formal approval process or supervision existed regarding [Investment Entity]'s business plans and assumptions used in the underlying data for the impairment test performed as per [an- nual reporting period-end] [20X1].
32. The submitted minutes of the meetings of the board of directors of X. _ in [20X1] and [20X2] do not reveal any critical assessment of the impairment tests or their impact on the financial state- ments of X. __. According to the minutes dated [date] [20X2], the [20X1] annual financial state- ments got directly approved. Furthermore, the minutes of the meeting dated [date] [20X2] are the only reference to an assessment of X. _ 's board of directors of the [20X1] annual financial statements.
33. In addition, other impairment tests performed by X. __ for its remaining investments as per year- end [20X1], whose overall effects are immaterial and were thus not considered by SER in the sanction proposal, contained mechanical errors as well. For instance, one test compared an old NPV to a new NPV of the same project instead of comparing the CGU's NPV to its carrying amount, as would be required by applying a proper impairment test according to FER 20/3. The above illustrates that the shortcomings in X. __ 's processes and controls for performing impair- ment tests are numerous.
34. The preceding paragraphs demonstrate the missing due care of X. _ in the preparation of the impairment test of [Investment Entity] for the year-end [20X1]. The very ambitious, not probability- weighted free cash flow growth rates of [two-digit number]% to [four-digit number]% in the first five years, as well as the highly aggressive 10% terminal value growth rate, were neither challenged nor checked by X. __ 's management and demonstrate an inadequate process and the lack of the necessary due care. As a consequence, the valuation of [Investment Entity] has been significantly overstated in the [20X1] FER annual financial statements.
35. SER concludes, that the lack of due care in the process of preparing the [20X1] year-end impair- ment test for [Investment Entity] above caused the errors. The combined correction of these two errors, i.e. using the IMF's growth rate of [low single-digit number]% instead of the implausible ag- gressive 10% as terminal growth rate and calculating the terminal value based on the last plan year leads to an NPV for X. __ 's Investment in [Investment Entity] as per [annual reporting peri- od-end] [20X1] of a maximum of [currency] [amount] instead of the original [currency] [amount]. As a consequence, a highly material impairment charge has not been recognized in the [20X1] FER annual financial statements of X. _ was missing in the consolidated balance sheet as well as consolidated income statement of the [20X1] FER annual financial statements.
36. As described, X. __ restated the [20X1] year-end figures in the [20X2] FER annual financial statements, which resulted in a new impaired carrying amount for [Investment Entity] of [currency] [amount] as per [annual reporting period-end] [20X1]. This amount is significantly below the NPV of [currency] [amount] calculated by SER stated above. However, the terminal growth rate was not the only aggressive assumption in the original impairment test. The growth rates in the plan years FY [20X2] to FY [20X6] ranging from [two-digit number]% to [four-digit number]% were also rather aggressive and have not been considered in the error estimation. Reducing or probability- weighting these planned cash flows would lead to a lower NPV and correspondingly to a higher impairment. Hence, the restatement provided by X. _ has been deemed reasonable by SER.
Sako concurs with the reasoning provided by SER.
37. The following table shows, using the Company's own estimate of the required impairment at [an- nual reporting period-end] [20X1] of the Investment, the material effect of the restatement in the [20X2] FER annual financial statements of X. _ of the [20X1] figures:
in [currency]
Original
Adjustment
Restated figu- res for [20X1] in [20X2]
Effect on original figures of [20X1] (original x% too high/low)
figures for [20X1]
Operating result (EBIT)
-[amount]
-[amount]
-[amount]
80.0% too high
Result before income tax
-[amount]
-[amount]
-[amount]
108.8% too high
Net result
-[amount]
-[amount]
[amount]
99.6% too high
Total assets
[amount]
-[amount]
[amount]
21.5% too high
Total equity
[amount]
-[amount]
-[amount]
170.9% too high
38. According to FER 30/2 subsidiaries are to be consolidated. A subsidiary is a company that is con- trolled by the parent (FER 30/45). Control is established either by a majority of voting rights (FER 30/46) or by other means, such as contractual arrangements or a majority in the board (FER 30/47). No such means of establishing control as mentioned in the standard were in place for X .__ over [Investment Entity] during the interim reporting period up to [interim reporting period- end] [20X2]. ☒
39. The reasons a) to c) below, which, according to X. _ 's [20X2] FER interim financial statements, were establishing control and triggering consolidation of [Investment Entity] as of [first day of the reporting period] [20X2], are according to SER invalid when assessing control under the FER rules (specifically FER 30/45 to FER 30/47) for the following reasons:
a) The close working relationship including sharing of offices and co-developing projects between [Investment Entity] and X. 's subsidiary [subsidiary]:
X. _ provided no evidence as to why working relationships and/or the sharing of office ☒ space should establish control. Hence, this argument is unsubstantiated in the view of SER. Furthermore, X. _ stated that the sharing of offices only started on [date of the second- half-year reporting period] [20X2], i.e. only after the end of the interim period presented in the [20X2] FER interim financial statements of X. __. Therefore, irrespective of whether the working relationship and sharing of offices would be a valid argument regarding control over a subsidiary, an event after the end of the interim reporting period does not trigger consoli- dation at any date during the interim period.
b) The financing of [Investment Entity] that has largely been assumed by X. _ group entities and/or related parties of X. :
This referred financing has mainly been provided by B. _ Inc., an entity that has only be- en acquired by X. _ on [date of the second-half-year reporting period] [20X2], i.e. after the interim period end of the [20X2] FER interim financial statements of X. _ being [interim reporting period-end] [20X2]. Thus, the financing after the balance sheet date by a related party or a subsidiary does not constitute that X. _ has control over [Investment Entity] in the first half-year of [20X2].
c) Because "certain minority shareholders and Board Members of X. hold minority share- holding positions in [Investment Entity], either directly or indirectly through affiliate entities": X. ☒ does not control its shareholders, whether minority or majority or any other share- holders, but its shareholders control X. __. Consequently, X. __ does not control any companies controlled by its shareholders. Therefore, also this argument does not constitute that X. __ had control over [Investment Entity] as of [first day of the reporting period] [20X2] or during the first half-year of [20X2].
40. Furthermore, the option agreements that were in place could (help to) establish control through potential voting rights, but only if such options were exercisable during the reporting period in question. Options that become exercisable only after the reporting period cannot be considered in the reporting period to establish control.
41. Due to the short-dated-break-option valid until [end of first month of the reporting period] [20X2], neither significant influence nor control could have existed for X. _ over [Investment Entity] until the expiration of this option, i.e. on [beginning of the second month of the reporting period] [20X2], as the seller could have revoked the agreement by paying [currency] [amount] at its sole discreti- on. Moreover, the second option, prevented X. __ from establishing control before [end of fifth month of the reporting period] [20X2], as it gave the seller a repurchase right that was only cancel- led by the new option agreements signed on [signing date renegotiated options] [20X2]. The third option that enabled X. _ to acquire an additional [ ... ]% stake in [Investment Entity] was also re- placed by the new option agreements signed on [signing date renegotiated options] [20X2]. How- ever, the latter only became exercisable on [date of the second-half-year reporting period] [20X2],
hence after the interim reporting period ending on [interim reporting period-end] [20X2] of the [20X2] FER interim financial statements. Therefore, both the former option agreements and the recent option agreement do not substantiate control of X. _ over [Investment Entity] in the first half-year of [20X2].
42. It appears that the above inadequate arguments supporting consolidation of [Investment Entity] during the first-half of [20X2] were supported by X. _ 's board of directors, as it approved the [20X2] FER interim financial statements of X. _ on [date][20X2]. ☒
43. SER finds, and Sako concurs, that the insufficient and unfounded argumentation of X. _ , toge- ther with the missing challenge of the consolidation assessment regarding [Investment Entity] by X. __ 's management and board of directors for the [20X2] FER interim financial statements lead ☒ to the conclusion that the respective process and specific knowledge of the applicable financial reporting standard FER is inadequate at the level of both management and board of directors. Overall, this erroneous process and insufficient knowledge led to wrong and thus unreliable finan- cial statements (contrary to FER Framework/32) that do not give a true and fair view of the issu- er's financial position (contrary to FER Framework/6).
44. Subsequent to questions raised by SER, X. __ confirmed that the consolidation of [Investment ☒ Entity] starting [first day of the reporting period] [20X2] in its [20X2] FER interim financial state- ments was erroneous. X. _ corrected the erroneous consolidation of [Investment Entity] in the first half-year [20X2] in its [20X2] FER annual and [20X3] FER interim financial statements.
45. In essence, SER states that the inadequate process regarding the assessment of control over [Investment Entity] by X. _ led to the wrong conclusion regarding the existence of control in the first half-year [20X2] and consequently to the erroneous consolidation of [Investment Entity] start- ing [first day of the reporting period] [20X2] (contrary to FER 30/2 and FER 30/45-47). This er- roneous consolidation resulted in materially erroneous [20X2] FER interim financial statements of X. ☒ _ that did not present a true and fair view of the company (contrary to FER Framework/6) and were thus unreliable (contrary to Framework/32).
46. X. _ has calculated that the effects of the erroneous consolidation of [Investment Entity] starting ☒ [first day of the reporting period] [20X2] on the [20X2] FER interim financial statements of X. ☒ to be as follows:
in [cur- rency]
Actual figures in the [20X2] FER interim financial statements
Reversal of [Investment Entity]'s [20X2] interim financi- al statements
Reversal of the consolidation adjustments regarding [In- vestment Entity]
Result X. without the consolidation of [Investment Entity]
Total Adjust- ments"
Total Adjust- ments in % of actual figures (actual figures x% too high/low)
Consolidated income statement
Total revenue
[amount]
-[amount]
[amount]
[amount]
-[amount]
12.1% too high
EBIT
-[amount]
[amount]
[amount]
-[amount]
[amount]
66.5% too low
Income tax
-[amount]
-[amount]
Net result
-[amount]
[amount]
[amount]
-[amount]
[amount]
64.1% too low
Basic and diluted earnings per share (in [currency] per share)
-[amount]
-[amount]
-[amount]
63.2% too low
4 Calculated by SER
in [cur- rency]
Actual figures in the [20X2] FER interim financial statements
Reversal of [Investment Entity]'s [20X2] interim financi- al statements
Reversal of the consolidation adjustments regarding [In- vestment Entity]
Result X. without the consolidation of [Investment Entity]
Total Adjust- ments"
Total Adjust- ments in % of actual figures (actual figures x% too high/low)
Consolidated balance sheet
Total current as- sets
[amount]
-[amount]
[amount]
-[amount]
22.5% too high
Total non-current assets
[amount]
-[amount]
[amount]
[amount]
[amount]
13.1% too low
Total current liabi- lities
[amount]
-[amount]
[amount]
-[amount]
12.1% too high
Total non-current liabilities
[amount]
-[amount]
[amount]
[amount]
-[amount]
8.6% too high
Total equity attri- butable to owners
-[amount]
[amount]
[amount]
[amount]
[amount]
144.3% too low
Non-controlling interests
[amount]
[amount]
Consolidated cash flow statement
Net cash used in / from operating activities
-[amount]
-[amount]
[amount]
62.4% too low
Net cash used in / from investing activities
[amount]
-[amount]
-[amount]
289.6% too high
Net cash used in / from financing activities
[amount]
-[amount]
-[amount]
486.5% too high
47. According to SER, X. ☒ failed to perform an adequate impairment test for the Investment in [In- vestment Entity] as per year-end [20X1]. X. __ consequently failed to recognize a material impair- ☒ ment on the Investment in [Investment Entity] and thus violated the requirements of FER 20/4 and FER 20/23. As a result, X. _ presented [20X1] FER annual financial statements that were neither in ☒ conformity with FER's underlying principle of reliability (FER Framework/32) nor with the fundamental purpose of financial statements to give a true and fair view of the issuer, as set forth in FER Frame- work/6.
48. In X. __ 's defense it has to be considered that X. _ corrected and restated the [20X1] figures by ☒ ☒ recognizing an impairment of [currency] [amount] on [Investment Entity]'s acquisition costs in their [20X2] FER annual financial statements.
49. SER states that X. _ also failed to adequately assess the existence of control in accordance with FER 30/45-47 over the same Investment in [Investment Entity] in its [20X2] FER interim financial statements. X. ☒ ☒ consequently erroneously consolidated [Investment Entity] as a subsidiary in its [20X2] FER interim financial statements. As a result, X. _ presented [20X2] FER interim financial statements that were neither in conformity with FER's underlying principle of reliability (FER Frame- work/32) nor the fundamental purpose of financial statements to give a true and fair view of the issu- er, as set forth in FER Framework/6. ☒
50. In X. __ 's defense it has to be considered that X. __ corrected this error in its [20X2] FER annual and [20X3] FER interim financial statements where a restatement was made that reversed [Invest- ment Entityl's erroneous consolidation in the first half-year of [20X2].
51. The Company does not dispute that both the impairment assessment for [Investment Entity] as per year-end [20X1] and the control assessment for [Investment Entity] in the [20X2] half-year report and subsequent consolidation were false. These errors constitute material errors to both the [20X1] FER audited annual and [20X2] FER unaudited interim financial statements of X. _. These statements were therefore misleading and were not giving a reliable, true and fair view of X. _ 's financial posi- tion and financial performance. Furthermore, these errors would have been avoided by a diligent pro- cess in the financial statements' preparation and/or with the adequate FER-knowledge of the ma- nagement and/or board of directors.
52. The annual financial statements are one of the most important instruments for investors to assess and analyze the financial situation of a company. Therefore, it is of the utmost importance to present fairly, in all material aspects, the financial position of a company (see e.g. decision of the Sanctions Commission dated 29 January 2020 (SaKo-RLE-IV/18), number 44; dated 13 August 2013 (SaKo 2013-AHP-I/12), number 33; and dated 28 June 2012 (SaKo 2012-AHP-II/11), number 56).
53. The error in the [20X1] FER audited annual financial statements authorized for issue and approved by its auditors on [date] [20X2] is material. There is a significant impairment expense missing that also significantly affects the balance sheet. Due to this error in the [20X1] FER annual financial state- ments, the net result has been overstated by 99.6%, total assets have been overstated by 21.5%, and total equity by 170.9%. The erroneously performed impairment test and the resulting missing im- pairment expense for X. _ 's Investment in [Investment Entity] as per [annual reporting period-end] [20X1] are clear violations of the applicable accounting standard, FER.
54. The error in the [20X2] FER unaudited interim financial statements authorized for issue on [date] [20X2] and published on [date] [20X2] is material. The erroneous consolidation of [Investment Entity] starting [first day of the reporting period] [20X2] materially affects the whole [20X2] FER interim finan- cial statements. Due to this error, in the [20X2] FER interim financial statements the net loss has be- en overstated by 64.1%, basic and diluted loss per share have been overstated by 63.2%, total equity attributable to X. _ 's owners has been understated by 144.3%, net cash used from operating activi- ties has been overstated by 62.4%, and net cash used in / from investing as well as from financing activities have been overstated by 289.6% and 486.5%. This erroneous consolidation is a clear viola- tion of the applicable accounting standard, FER.
55. By overstating X. _ 's Investment in [Investment Entity] in the [20X1] FER annual financial state- ments and by erroneously consolidating [Investment Entity] in the [20X2] FER interim financial state- ments, both mentioned financial statements were neither reliable nor presenting a true and fair view about X. __ 's financial position, and represent serious breaches of the applicable accounting stan- dard, FER.
56. The LR require issuers to ensure compliance with the LR, additional rules, and related implementing decrees at all times (cf. Art. 60 LR). In the present case, it should be noted that the issue at stake is the sanctioning of a legal entity and not of a natural person. The issuer shall be sanctioned if it is ac- cused of not having taken all necessary and reasonable organizational precautions to prevent a breach of the obligations entered into under the LR. Accordingly, the assessment of fault is performed
according to largely objective standards. The conduct of the natural persons or bodies acting on be- half of the issuer is attributed to the issuer (see decisions of the Sanction Commissions dated 29 Ja- nuary 2020 (SaKo-RLE-IV/18), number 48; dated 8 October 2018 (Sako 2018 SaKo-RLE-IV/17), number 30; dated 14 April 2015 (Sako 2015-AhP-1/15), number 19; dated 30 July 2010 (SaKo 2010- CG-II/10, Sako 2010-MP-1/10), number 13; sanction notice of SIX Exchange Regulation AG dated 20 December 2019 (SER-RLE-III/19), number 32; dated 28 November 2017 (SB-RLE-III/17), number 39; dated 20 June 2016 (SB-RLE/II/16), number 51; dated 12 August 2013 (SER-KTR-FOR-I/13), num- ber 28; dated 4 February 2013 (SER-MT II/12/SER-AHP I/12/SER-Listing I/12), number 103).
57. Anyone who violates the relevant provision consciously acts intentionally. An issuer acts with conditi- onal intent if it does not directly intend to violate an obligation, but at least accepts the likelihood of a violation (see decisions of the Sanctions Commission dated 2 August 2019 (Sako AhP-1/19), number 51; dated 28 June 2012 (Sako 2012-AHP-II/11), number 46; sanction notice of SIX Exchange Regu- lation AG dated 20 December 2019 (SER-RLE-III/19), number 33; dated 28 November 2017 (SB- RLE-III/17), number 40; dated 20 June 2016 (SB-RLE/III/16), number 49; dated 18 April 2016 (SB- RLE/I/16), number 30; dated 11 October 2013 (SER-AHP-I/13), number 48; dated 12 August 2013 (SER-KTR-FOR-I/13), number 26; dated 4 February 2013 (SER-MT II/12/SER-AHP I/12/SER-Listing I/12), number 101).
58. A person who has not considered the consequences of his conduct or has not taken them into consideration due to carelessness acts negligently (see decisions of the Sanctions Commission dated 29 January 2020 (SaKo-RLE-IV/18), number 49; dated 2 August 2019 (Sako AhP-1/19), number 52; dated 8 October 2018 (Sako 2018 SaKo-RLE-IV/17), number 31; dated 13 August 2013 (SaKo 2013- AHP-I/12), number 36; sanction notice of SIX Exchange Regulation AG dated 20 December 2019 (SER-RLE-III/19), number 34; dated 28 November 2017 (SB-RLE-III/17), number 41; dated 20 June 2016 (SB-RLE/II/16), number 50; dated 18 April 2016 (SB-RLE/I/16), number 31; dated 21 August 2014 (SER-MP-I/14), number 22; dated 11 October 2013 (SER-AHP-I/13), number 48; dated 12 Au- gust 2013 (SB-KTR-FOR-I/13), number 27; dated 4 February 2013 (SER-MT II/12/SER-AHP I/12/SER-Listing I/12), number 102).
59. In the assessment of the degree of fault, the consistent practice is to expect from listed companies, compliance with stock exchange regulations without further ado. The responsible employee must be familiar with all relevant regulations, including the applicable accounting standard, comments, and practice of the stock exchange bodies (see decisions of the Sanction Commission dated 29 January 2020 (SaKo-RLE-IV/18), number 50; dated 2 August 2019 (SaKo AhP-I/19), number 53; dated 14 Ap- ril 2015 (Sako 2015-AHP-1/15), number 26; dated 13 August 2013 (SaKo 2013-AHP-1/12), number 37). Based on the issuers' duty of care, every issuer is expected to be familiar with the applicable stock exchange rules, commentaries and practice of the judicial bodies. Any breach of the rules and regulations must raise a presumption of negligence of the issuer in failing to discharge its duty of care (see decision of the Sanctions Commission dated 29 January 2020 (SaKo-RLE-IV/18), number 50; cf. decisions dated 2 August 2019 (SaKo-AhP-I/19), number 53; sanction notice of SIX Exchange Regu- lation AG dated 20 December 2019 (SER-RLE-III/19), number 35; dated 28 November 2017 (SB- RLE-III/17), number 42; dated 11. October 2013 (SER-AHP-I/13), number 49; dated 4. February 2013 (SER-MT II/12/SER-AHP I/12/SER-Listing I/12), number 104).
60. Neither X. _ 's impairment test of the Investment in [Investment Entity] as per year-end [20X1] nor its assessment of control and the resulting conclusion on the consolidation of [Investment Entity] in the [20X2] interim financial statements are in accordance with FER (specifically FER 20 and FER 30). Therefore, the respective financial statements are not reliable and do not give a true and fair view of the financial position and performance of the Company (contrary to FER Framework/6 and FER Framework/32).
61. As set out above, X. _ 's procedures for both testing the Investment in [Investment Entity] as per ☒ [annual reporting period-end] [20X1] for impairment and for analyzing the existence of control over [Investment Entity] in the first-half [20X2] lacked the necessary due care and suggest a lack of the necessary expertise regarding the applicable accounting standards for the preparation of financial statements. The impairment test contained basic mechanical errors as well as assumptions that were clearly recognizable as improbable and unreliable. The assessment of control was performed based on criteria that were obviously not in line with FER.
62. X. __ 's behavior must therefore be qualified as grossly negligent. ☒
63. When determining the sanction, the impact of the sanction on the party concerned has to be taken into account. In order to assess the impact, the economic performance of the issuer is considered. An issuer with a lower economic performance will tend to be more affected by the same fine than a com- pany with a comparatively higher economic performance. For the determination of the impact, eco- nomic key figures can be taken into consideration, e.g. EBIT, net income, operating cash flow, cash and cash equivalents, or equity (see decisions of the Sanctions Commission dated 29 January 2020 (SaKo-RLE-IV/18), number 54; dated 2 August 2019 (SaKo AhP-I/19), number 68; dated 8 October 2018 (SaKo 2018 SaKo-RLE-IV/17), number 39; dated 28 June 2012 (Sako 2012-AHP-II/11), num- ber 63 et seq., and dated 8 December 2011 (SaKo 2011-AHP-I/11, SaKo 2011-CG-I/11), number 37).
64. In the latest [20X3], [20X2] and [20X1] FER consolidated annual financial statements of X. _ , the Company reports the following economic performance and financial figures: ☒
in [currency]
[20X3] FER annual financial state- ments
[20X2] FER annual financial state- ments
[20X1] restated FER annual financial statements
Net cash used in / from operating activi- ties
[amount]
-[amount]
[amount]
Total cash flow for the period
-[amount]
-[amount]
[amount]
Cash and cash equivalents as per balan- ce sheet date
[amount]
[amount]
[amount]
EBIT
-[amount]
-[amount]
-[amount]
Net profit/(loss)
[amount]
-[amount]
-[amount]
Total equity
[amount]
-[amount]
-[amount]
65. On [date] [20X4], X. _ published a press release on its website, according to which the Bankruptcy ☒ Court of the [place] has declared bankruptcy over the Company. The decision relates to a claim for [ ... ] by [ ... ] in the amount of [currency] [amount]. The existence of the claim is currently subject to a civil proceeding in [place]. The claim is disputed by the Company. On [date] [20X4], X. _ informed the public that the Appeals Court of [place] has suspended the bankruptcy procedures.
66. In view of the economic ratios described above and considering the bankruptcy proceedings, the sensitivity to sanctions of the Company is determined to be very high. Therefore, the Sanctions Commission agrees to a substantially lower sanction compared to prior sanctions with the same se- verity of breach of regulations and degree of fault.
67. In calculating the sanction, any previous sanctions of the last three years can be taken into account (Ciph. 2.6 para. 4 RP). In favor of the issuer, it should be noted that no sanctions were imposed on X. _ during this period. ☒
68. In favor of X. _ it has to be noted that X. _ restated and impaired the carrying amount of [Invest- ☒ ☒ ment Entity] to [currency] [amount] as per [annual reporting period-end] [20X1] in its [20X2] FER an-
nual financial statements. Within this restatement, the overvaluation by [currency] [amount] is recog- nized and presented as impairment of investments.
69. Furthermore, in note [ ... ] of the [20X2] FER annual financial statements, X. _ confirms the errone- ☒ ous consolidation of [Investment Entity] as per [first day of the reporting period] [20X2] and states that the corresponding correction will also take place in the [20X3] interim consolidated financial state- ments, which was the case. Therefore, no more erroneous consolidation of [Investment Entity] in the first half-year [20X2] is visible in the [20X2] FER annual and [20X3] FER interim financial statements.
70. Art. 61 para. 2 LR provides that in determining the sanction to be imposed, due consideration must be given, in particular, to the severity of the breach and to the degree of fault. When setting the level of fines, the Sanctions Commission also takes into account the impact of the sanction on the party con- cerned. Art. 61 para. 1 LR provides for the possibility to impose a fine, which may amount up to CHF 1 million (in case of negligence) and up to CHF 10 million (in case of wrongful intent).
71. Considering that X. __ acted with gross negligence which resulted in serious breaches of the ☒ applicable accounting standard FER and taking into account the high impact of the sanction on X .__ and its positive behavior after the violations, Sako imposes a fine of CHF 40'000 on the company in accordance with Art. 61 para. 1 number 2 LR. ☒
72. In case of sanction proceedings, charges are determined based on the expenditure incurred by the plaintiff (SER), adopting an hourly rate of CHF 300 per person (Ciph. 3.7 in connection with Ciph. 4.1 of the List of Charges Regulatory Bodies" (LocRB)). In the present case, charges of SER amount to CHF [ ... ].
73. The costs of the Sanctions Commission amount to CHF [ ... ] and shall be borne by X. _ as well. ☒
[Place], 18. September 2020
The Chairman:
The Secretary:
[Sig.] Chairman
[Sig.] Secretary
5 List of Charges Regulatory Bodies (LocRB) dated 11 September 2019, entry into force 1 January 2020
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