Principles underlying financial statement reporting

Verwaltungs- und Privat-Bank Aktiengesellschaft, which has its registered office in Vaduz, was established in 1956 and is one of the three largest banks in Liechtenstein. Today, it has subsidiaries in Zurich, Luxembourg, the British Virgin Islands, Singapore and Hong Kong, as well as representative offices in Moscow and Hong Kong. As of 31 December 2013, VP Bank Group employed 705.8 persons, expressed as full-time equivalents (previous year: 706.9).

Asset management and portfolio advisory services for private and institutional investors, as well as lending, constitute its core activities.

Values disclosed in the financial statements are expressed in thousands of Swiss francs. The 2013 financial statements were drawn up in accordance with International Financial Reporting Standards (IFRS). IFRS contain guidelines which require assumptions and estimates to be made by VP Bank Group in drawing up the consolidated financial statements. The most important fundamental principles underlying financial statement reporting are described in this section in order to show how their application impacts on the reported results and informational disclosures.

There were no post-balance-sheet-date events that materially affected the balance sheet and income statement for 2013.

The Board of Directors reviewed and approved the consoli­dated financial statements in its meeting of 19 February 2014 and released it for publication. These consolidated financial statements will be submitted for approval to the Annual General Meeting of 25 April 2014.

Since 1 January 2013, the following new or revised standards and interpretations have taken effect:

The revised standard requires that the component parts of other comprehensive income be split into two categories; into gains or losses, which will be recorded subsequently in the statement of income (recycling), and those which will never be reflected in the statement of income.

The new provisions are designed to enable the reader of financial statements to assess the impact on the financial situation of the company (or possible impact) of set-off agreements, including rights to set off financial assets and financial liabilities.

The new standard replaces the previous standard IAS 27 “Consolidated and Separate Financial Statements” as well as SIC 12 “Consolidation – Special-Purpose Entities”. It creates a uniform definition for the concept of control and thus a uniform basis for defining the existence of parent-subsidiary relationship and the corresponding impact on the scope of consolidation. Furthermore, IFRS 10 clarifies a number of issues which had not been addressed previously, for example, principal-agent relationships.

The new standard focuses on the rights and obligations arising under joint arrangements. It differentiates between joint business activities in which each partner records his share in the balance sheet and income statement and joint entities which are reflected in the consolidated financial statements in accordance with the equity method of accounting.

The new standard contains the disclosure provisions relating to shareholdings in subsidiary companies, associates, joint arrangements and non-consolidated structured entities. The disclosures should assist the reader of financial statements to be able to estimate the nature and risks inherent in interests in other entities as well as their financial impact.

The new standard contains uniform and consistent provisions on determining fair value and it is to be applied whenever a standard demands or permits measurements of fair value and/or disclosures regarding fair value. Fair value equates to the price that would be realised in an orderly transaction between market participants at the date of measurement in the event of a sale of the asset or which would be paid in transferring the liability. Fair value thus relates to measurements based upon market values.

The new standard also includes additional disclosure requirements concerning the determination of fair value. Furthermore, numerous disclosures as to financial instruments are henceforth required in interim financial statement reporting. 

With the exception of IAS 1 and IFRS 13, the new standards had no impact on financial statement reporting. IFRS 13 did not impact the fair value of recognised assets and thus did not impact shareholders’ equity and consolidated results.

In 2012, VP Bank Group resolved to implement, prior to its effective date, IAS 19R “Employee Benefits” and the changes flowing therefrom.

As a result of this decision, the 2011 comparative figures were restated in compliance with the transitional provisions of par. 173 IAS 19R.

Numerous new standards, revisions and interpretations of existing standards were published which are mandatory for accounting periods beginning on 1 January 2014 or sub­sequently. The following new or revised IFRS Standards or Interpretations are either currently being analysed or are of no signi­ficance to VP Bank Group. With the exception of IAS 36, VP Bank Group did not elect to make use of the possibility of an early adoption of these amendments. 

• IFRS 10 – Investment Entities
• IFRS 14 – Regulatory Deferral Accounts
• IAS 19R – Employee Benefits (Risk Sharing)
• IAS 32 – Offsetting of Financial Instruments
• IAS 36 – The amendment regarding Recoverable Amount Disclosures for Non-Financial Assets was adopted prematurely
• IAS 39 – Novation of Derivatives and Continuation of Hedge Accounting
• Annual Improvements – 2010–2012 cycle
• Annual Improvements – 2011–2013 cycle
• IFRIC 21 – Levies.

No material changes in estimates were made or applied. 

The consolidated financial statements encompass the financial statements of Verwaltungs- und Privat-Bank Aktiengesellschaft, Vaduz, as well as those of its subsidiary companies, which are all presented as a single economic unit. Subsidiary companies which are directly or indirectly controlled by VP Bank Group are consolidated. Subsidiary companies are consolidated as of the date on which control is transferred and deconsolidated as of the date control ends.

During 2013, the shareholdings in IGT Intergestions Trust reg. Vaduz, Proventus Treuhand und Verwaltung AG, Vaduz, FIB Finanz- und Beteiligungs-AG, Vaduz as well the 60 per cent equity share in VP Bank and Trust Company (BVI) Limited, Tortola were sold. These companies are no longer included in the scope of consolidation. The shareholding in VP Bank (BVI) Limited, Tortola was increased from 60 per cent to 100 per cent.

Capital consolidation is undertaken in accordance with the purchase method, whereby the shareholders’ equity of the consolidated company is set off against the carrying value of the shareholding in the parent company’s carrying value as of the date of acquisition or the date of establishment. Subsequent to initial consolidation, changes arising from business activities which are reflected in the current results of the accounting period in the consolidated financial statements are allocated to income reserves. The effects of intra-group transactions are eliminated in preparing the consolidated annual financial statements.

The share of non-controlling interests in shareholders’ equity and Group net income is shown separately in the consolidated balance sheet and income statement.

Shareholdings on which VP Bank Group exercises a material influence are recorded using the equity method. A material influence is generally assumed to exist whenever VP Bank Group holds, directly or indirectly, 20 to 50 per cent of voting rights. 

According to the equity method of accounting, the shares of an enterprise upon acquisition are accounted for at acquisition cost. Subsequent to acquisition, the carrying value of the associated company is increased or reduced by the Group’s share of the profits or losses and of the non-income-statement-related movements in the shareholders’ equity of the associated company.

In applying the equity method, the Group ascertains whether it is necessary to record an additional impairment loss for its investments in associated companies. As of each balance-sheet date, the Group ascertains whether objective indications exist that the investment in an associated company may be value-impaired. Should this be the case, the difference between the realisable value of the share in the associated company and its carrying value is recorded as a charge to income.

IFRS contain guidelines which require certain assumptions and estimates to be made by VP Bank Group in drawing up the consolidated financial statements. The assumptions and estimates are continually reviewed and are based upon historical experience and other factors, including anticipated developments arising from probable future events. Actual future occurrences may differ from these estimates.

A review of collectability is undertaken at least once a year for all loans of doubtful collectability. Should changes have occurred as to the amount and timing of anticipated future payment flows in comparison to previous estimates, the valuation allowance for credit risks is adjusted accordingly. The amount of the value impairment is measured essentially by reference to the difference between the carrying value and the probable amount which will be recovered, after taking into account the proceeds of realisation from the sale of any collateral. A change in the net present value of the estimated future monetary flows of +/–5 per cent increases or decreases, respectively, the amount of the valuation allowance by CHF 1.0 million (prior year: CHF 1.2 million).

The trade-date method of recording purchases or sales of financial assets and liabilities is applied. This means that transactions are recorded in the balance sheet as of the date when the trade is entered into and not on the date when trade is subsequently settled.

Revenues from services are recorded when the related service is rendered. Portfolio management fees, securities account fees and similar revenues are recorded on a pro-rata basis over the period during which the service is rendered. Interest is recorded in the period during which it accrues. Dividends are recorded as and when they are received.

The consolidated financial statements are expressed in Swiss francs. 

The foreign-exchange translation into the functional currency is undertaken at the rate of exchange prevailing as of the date of the transaction. Translation differences arising from such transactions and gains and losses arising from translation at balance-sheet date rates for monetary financial assets and financial liabilities in foreign currencies are charged to the income statement. 

Unrealised foreign-currency translation differences in non-monetary financial assets are part of the movement in their fair value.

For the purpose of the preparation of the consolidated financial statements, balance sheets of Group companies denominated in a foreign currency are translated in Swiss francs at the year-end exchange rate. Average exchange rates for the reporting period are applied for the translation of income-statement captions as well as those of the statements of other comprehensive income and of cash flows. Foreign-currency translation differences resulting from exchange rate movements between the beginning and end of the year and the difference in annual results at average and closing exchange rates are recognised in other comprehensive income. 

All balance-sheet items (excluding shareholders’ equity) are converted into the Group reporting currency at the rate of exchange prevailing as of the balance-sheet date. The individual items in the income statement are translated at average rates for the period. Foreign-currency differences arising from the translation of financial statements expressed in foreign currencies are offset against shareholders’ equity (income reserves) without impacting on operating results. 

Foreign-currency translation differences arising in connection with net investments in foreign companies are reflected under shareholders’ equity. Upon disposal, such foreign-currency translation differences are recorded in the income statement as a part of the gain or loss on disposal.

Goodwill and fair value adjustments from acquisitions of foreign companies are treated as receivables and payables of these foreign companies and are translated at the closing rates prevailing on the balance-sheet date.

The term “domestic” also includes Switzerland.

VP Bank Group is organised into four business segments: Client Business Liechtenstein, Client Business International, Chief Operating Officer (COO) and Corporate Center. External segment reporting reflects the organisational structure of VP Bank Group and the internal reporting to the manage­ment. It forms the basis used by the Group’s decision-makers.

Direct revenues and expenses are allocated to the business units. The recharging of costs and revenues between the business units is made on the basis of internal transfer prices, actual recharges or on prevailing market conditions. It is reviewed annually and adjusted to reflect changes in economic conditions. Revenues and costs of cross-segment services which cannot be allocated directly to individual segments are recorded in the segment of Corporate Center. Furthermore, entries relating to the consolidation are recorded in the Corporate Center. Geographic segment reporting is under­taken in accordance with the principles of branch accounting and reflects the segments Liechtenstein and Switzerland, Rest of Europe and Other Countries.

Cash and cash equivalents encompass the items cash on hand, receivables arising from money-market paper and sight balances with banks.

VP Bank Group subdivides the financial instruments, to which traditional financial assets and liabilities as well as equity capital instruments also belong, as follows:

• Financial instruments to be recorded via the income statement (“fair value through profit or loss” (FVTPL)) – “trading portfolios” and "financial instruments at fair value"
• Financial instruments at amortised cost
• Financial instruments at fair value with changes in value and impairment losses recorded in other comprehensive income (FVTOCI)

The allocation of financial instruments is made at the time of initial recognition using the criteria set out in IFRS 9.

Trading portfolios comprise shares, debentures, precious metals and structured products. Financial assets held for trading purposes are valued at fair value. Short positions in securities are disclosed as liabilities arising from trading portfolios. Realised and unrealised gains and losses are recorded under income from trading activities after deduction of related transaction costs. Interest and dividends from trading activities are recorded under interest income. Fair values are based on quoted market prices if an active market exists. Should no active market exist, the fair value is determined by reference to traders’ quotes or external pricing models.

Investments where the objective consists of holding the financial asset in order to realise the contractual payment flows therefrom and which are made up solely of interest as well as the redemption of parts of the nominal value are recognised at amortised cost using the effective interest method. 

A financial investment recognised at amortised cost is classified as being value-impaired whenever it is probable that the total contractually agreed amount due will not be collected in full. Causes giving rise to an impairment loss can be counterparty-specific or country-specific. Whenever impairment occurs, the carrying value of the financial investment is reduced to its realisable value by charges to income and is reported under the item “income from financial investments”. 

Interest is recognised in the period when it accrues using the effective interest method and is reported in interest income under “interest income from financial instruments at amortised cost”.

Financial instruments not meeting the aforementioned criteria are recorded at fair value. The ensuing gains/losses are reported in “income on financial instruments at fair value” under “income from financial investments”.

Insofar as the criteria of IFRS 9 are not met, a financial instrument may be designated and recorded under this category upon initial recognition.

Interest and dividend income are recorded in “income from financial investments” under the items “interest income from FVTPL financial instruments” and “dividend income from FVTPL financial instruments”.

Investments in equity capital instruments are recognised in the balance sheet at fair value. Changes in value are taken to income, except in those cases for which VP Bank Group has decided that they are to be recognised at fair value through other comprehensive income. 

Dividends are reported in income from financial investments under the item “dividend income from FVTOCI financial instruments”.

At the time of their initial recognition, loans are valued at their effective cost, which equates to fair value at the time the loans are granted. Subsequent valuations are made at amortised cost, with the effective interest yield method being applied.

Value-impaired loans are amounts outstanding from clients and banks where it is improbable that the debtor can meet its obligations. The reasons for an impairment in value are of a nature which is specific to the counterparty or country. Interest on value-impaired loans is recorded throughout the period during which the interest accrues. A valuation allow­ance for credit risks is recorded as a reduction in the carrying value of a receivable in the balance sheet. The amount of the reduction in value is measured essentially by reference to the difference between the carrying value and the amount which will probably be recovered after taking into account the realisable proceeds from the disposal of any applicable collateral. For off-balance-sheet positions, on the other hand, such as a fixed facility granted, a provision for credit risks is recorded under provisions. Global valuation allowances exist to cover latent, as yet unidentified credit risks on a portfolio basis. A collectability test is performed at least once a year for all non-performing receivables. Should changes have occurred as to the amount and timing of anticipated future flows in comparison to previous estimates, the valuation allowance for credit risks is adjusted and recorded in the income statement under valuation allowances for credit risks or release of valu­ation allowances and provisions that are no longer required.

A loan is considered to be overdue or non-performing if a material contractually agreed payment remains outstanding for a period of 90 days or more. Such loans are not to be classified as value-impaired if it can be assumed that they are still covered by existing collateral.

VP Bank Group demands an appropriate margin on the collateralising of assets. This margin must be set in such a manner that changes in market values, market volatility, debtor creditworthiness and counterparty risk are appro­priately taken into account and, as a result, the receivables are backed by adequate collateral at all times.

VP Bank Group assigns all customary types of loans into the three categories of collateral “marketable”, “non-marketable” or “unsecured”.

• Marketable: mortgage collateral up to a maximum of two-thirds of the official market value / bank appraisal or appraisal of a recognised expert; quoted securities; account monies (current account, deposit account, fidu­ciary, call money); precious metals; medium-term bonds; repurchase values of life-assurance policies; bank guarantees (from banks with open credit limit).
• Non-marketable: mortgage collateral up to a maximum of 80 per cent of the official market value/bank appraisal or appraisal of a recognised expert.
• Unsecured: all credits without collateral; sureties; unquoted securities; cession of debtor receivables; purchase price residual receivables; receivables arising from letters of credit; discount bills.Types of collateral which are not mentioned are deemed to be “unsecured”. Group management ensures that the moni­toring of credits is appropriate to the risks assumed in the credit business. The collectability of the collateral is subject to regular review. Changes in the creditworthiness of the borrower are reviewed on an ongoing basis.

Derivative financial instruments are valued at their fair value and disclosed in the balance sheet. The fair value is deter­mined on the basis of stock-exchange quotations or option pricing models. Realised and unrealised gains and losses are charged to income.

After initial recognition, a financial guarantee contract is valued at the higher of the following two amounts: the provision that would have to be established if there is a probable outflow of resources, and a reliable estimate of that obligation can be made; or, the amount initially recognised minus the cumulative amortisation recognised on the income statement.

VP Bank Group does not apply hedge accounting.

Medium-term notes are recorded at their issue price and measured subsequently at their amortised cost. At the time of their initial recording, debentures are recorded at their fair value minus transaction costs. The fair value equates to the consideration received. Subsequently, they are valued at amortised cost for balance-sheet reporting purposes. In this connection, the effective interest method is employed in order to amortise the difference between the issue price and redemption amount over the duration of the debt instrument.

Shares in Verwaltungs- und Privat-Bank Aktiengesellschaft, Vaduz, held by VP Bank Group are disclosed as treasury shares under shareholders’ equity and deducted at acquisition cost. The difference between sales proceeds of treasury shares and the related acquisition cost is shown under capital reserves.

Repurchase and reverse repurchase transactions serve to refinance or finance, respectively, or to acquire securities of a certain class. These are recorded as an advance against collateral in the form of securities or as a cash deposit with collateral in the form of own securities. 

Securities received and delivered are only recorded in the balance sheet or closed out when the control over the contractual rights (risks and opportunities of ownership) inherent in these securities has been ceded. The fair values of the securities received or delivered are monitored on an ongoing basis in order to provide or demand additional collateral in accordance with the contractual agreements.

Financial instruments which are lent out or borrowed and valued at fair value and in respect of which VP Bank Group appears as principal are recorded in the balance sheet under amounts due to/from customers and banks. 

Securities lending and borrowing transactions in which VP Bank Group appears as agent are recorded under off-balance-sheet items. 

Fees received or paid are recorded under commission income.

Provisions are only recorded in the balance sheet if VP Bank Group has a liability to a third party which is to be attributed to an occurrence in the past, if the outflow of resources with economic benefit to fulfil this liability is probable, and if this liability can be reliably estimated. If an outflow of funds is unlikely to occur or the amount of the liability cannot be reliably estimated, a contingent liability is shown.

The value of property and equipment and other assets (including goodwill and other intangible assets) is reviewed at least once a year, as well as whenever it appears that the carrying value is over-valued as a result of occurrences or changed circumstances. If the carrying value exceeds the realisable value, an extraordinary write-down is made.

Property and equipment comprises bank premises, other real estate, furniture and equipment, as well as IT systems. Property and equipment is valued at acquisition cost minus operationally necessary depreciation and amortisation. 

Property and equipment is capitalised provided its purchase or manufactured cost can be determined reliably, it exceeds a minimum limit for capitalisation and the expenditure benefits future accounting periods.

The Bank’s premises are real estate which is held and used by VP Bank Group to render services or for administrative purposes, while other real estate serves to generate rental income and/or achieve capital gains. Whenever a property serves partially as own premises for the Bank and partially as other real estate, the criteria as to whether both portions can be sold individually shall apply in determining to which classification it belongs. If a partial sale is possible, each part shall be recorded accordingly. Should each part be incapable of being sold individually, the entire property shall be classified as the Bank’s premises, unless the portion used as bank premises is insignificant.

Depreciation and amortisation is charged on a straight-line basis over the estimated useful lives:

The depreciation and amortisation methods and useful lives are subject to review at each year-end. 

Minor purchases are charged directly to general and adminis­trative expenses. Maintenance and renovation expenses are generally recorded under general and administrative expenses. If the expense is substantial and results in a signi­f­icant increase in value, the amounts are capitalised. These are depreciated or amortised over their useful lives. Gains on disposal of property and equipment are disclosed as other income. Losses on sale lead to additional depreciation and amortisation on property and equipment.

Operating leasing expenditures (rights and duties arising from ownership relating to the object of the leasing contract remain with the lessor) are charged to the general and administrative expenses.

At present, there are no receivables or payables in connection with financing leases.

In the case of a takeover, should the acquisition costs be greater than the net assets acquired and valued in accordance with uniform Group guidelines (including identifiable and capitalisable intangible assets), the remaining amount constitutes the acquired goodwill. Goodwill is capitalised and subject to an annual review for any required valuation allowances. The recording of goodwill is made in the original currency and is translated on the balance-sheet date at rates prevailing at year-end.

Purchased software is capitalised and amortised over three to seven years. Minor purchases are charged directly to general and administrative expenses.

Internally generated intangible assets such as software are capitalised insofar as the prerequisites for capitalisation set forth in IAS 38 are met, i.e. it is probable that the Group will derive a future economic benefit from the asset and the costs of the asset can be both identified and measured in a reliable manner. Internally produced software meeting these criteria and purchased software are recorded in the balance sheet under software. The capitalised values are amortised on a straight-line basis over their useful lives. The period of amortisation is three to seven years.

Intangible assets with undefined estimated useful lives are reviewed at least once a year for any required valuation allowances. At present, VP Bank Group has not recorded any intangible assets with unlimited useful lives. 

Other intangible assets include separately identifiable intangible assets arising from acquisitions, as well as certain purchased client-related assets, etc., and are amortised on a straight-line basis over an estimated useful life of 5 to 10 years. Other intangible assets are recorded in the balance sheet at purchase cost at the time of acquisition. On each balance sheet date, or whenever there is reason to do so, a review is made as to whether there are indications of a possible impairment in value or of a change in the estimated useful life. Should such indications exist, it is ascertained whether the carrying value is completely recoverable. Should the carrying value exceed the realisable value, a write-off is made.

Current income taxes are computed on the basis of the applicable laws on taxation in the individual countries and are booked as expenses in the accounting period in which the related profits are recorded. They are shown as tax liabilities in the balance sheet.

The taxation effects of timing differences between the values attributed to the assets and liabilities as reported in the consolidated balance sheet and their values reported for tax reporting purposes are recorded as deferred tax assets or deferred tax liabilities. Deferred tax assets arising from timing differences or from the utilisation of tax loss carry-forwards are only recognised when it is probable that sufficient taxable profits are available, against which these timing differences or tax loss carry-forwards can be offset.

Deferred tax assets and tax liabilities are computed using the rates of taxation which are expected to apply in the accounting period in which these tax assets will be realised or tax liabilities will be settled. 

Tax assets and tax liabilities are only offset against each other if they relate to the same taxable entity, concern the same taxing jurisdiction and an enforceable right of offset exists.

Deferred taxes are credited or charged to shareholders’ equity if the tax relates to items which are directly credited or debited to shareholders’ equity in the same or another period. 

The taxation savings expected from the utilisation of esti­mated future realisable loss carry-forwards are capitalised. The probability of realising expected taxation benefits is taken into account when valuing a capitalised asset for future taxation relief. Taxation assets arising from future taxation relief encompass deferred taxes on timing differences be­tween the carrying values of assets and liabilities in the con­solidated balance sheet and those used for taxation purposes as well as estimated future realisable loss carry- forwards. Deferred taxation receivables in one sovereign taxation jurisdiction are offset against deferred taxation liabilities of the same jurisdiction if the enterprise has a right of offset between actual taxation liabilities and tax claims and the taxes are levied by the same taxing authorities; amounts are offset insofar as the maturities correspond.

VP Bank Group maintains a number of retirement pension plans for employees in Liechtenstein, Switzerland and abroad, among which there are both defined-benefit and defined-contribution plans.

Recorded receivables from and liabilities to these pension funds are computed on the basis of statistical and actuarial calculations of experts. 

As regards defined-benefit pension plans, pension costs are determined on the basis of various economic and demo­graphic assumptions using the projected unit credit method, which takes into account the number of insurance years actually earned through the date of valuation. Amongst the computational assumptions taken into account by the Group are inter alia, the expected future rate of salary increases, long-term interest earned on retirement assets, retirement patterns and life expectancy. The valuations are undertaken annually by independent actuaries. Plan assets are re-measured annually at fair values.

Pension costs comprise three components:

• service costs which are recognised in the income statement;
• net interest expense, which is also recognised in the income statement; and
• revaluation components which are recognised in the statement of comprehensive income.

Service costs encompass current service costs, past service costs and gains and losses from non-routine plan settlements. Gains and losses from plan curtailments are deemed to equate to past service costs. 

Employee contributions and contributions from third parties reduce service cost expense and are deducted therefrom provided that these derive from pension plan rules or a de facto obligation.

Net interest expense corresponds to the amount derived from multiplying the discount rate with the pension liability or plan assets at the beginning of the year. In the process, capital flows of less than one year are taken into account on a weighted basis.

Revaluation components encompass actuarial gains and losses from the movement in the present value of pension obligations and plan assets. Actuarial gains and losses result from changes in assumptions and experience adjustments. Gains and losses on plan assets equate to the income from plan assets minus the amounts contained in net interest expense. Revaluation components also encompass movements in unrecognised assets minus the effects contained in net interest expense. Revaluation components are recognised in the statement of comprehensive income and cannot be booked as earnings in future periods (recycling). The amounts recognised in the statement of comprehensive income can be reclassified within shareholders’ equity. 

Service costs and net interest expense are recorded in the consolidated financial statements under personnel expense. Revaluation components are recognised in the statement of comprehensive income.

The pension liabilities or plan assets recognised in the conso­l­idated financial statements correspond to the deficit or excess of funding of defined-benefit pension plans. The recognised pension assets are limited to the present value of the economic benefit of the Group arising from the future reduction in contributions or repayments. Liabilities arising in connection with the termination of employment are recognised at the time when the Group has no other alternative but to finance the benefits offered. In any event, the expense is to be re­corded at the earliest when the other restructuring cost is also recognised. For other long-term benefits, the present value of the acquired commitment is recorded as of the balance-sheet date. Movements in present values are recorded directly in the income statement as personnel expense.

Employer contributions to defined-benefit pension plans are recognised in personnel expense at the date when the employee becomes entitled thereto.

The stock-ownership plan enables employees to subscribe annually to a defined number of bearer shares in Verwaltungs- und Privat-Bank Aktiengesellschaft, Vaduz, at a preferential price subject to a four-year restriction period on selling. Upon expiry of the sales restriction period, or at the time of resignation from VP Bank Group, the related shares become freely available. As the employees are therefore ultimately able to take up the shares at any time and in full, the expense arising from the employee stock-ownership plans is recorded in full at the time of their respective allocation. The number of bearer shares which can be subscribed to depends upon the years of service and management level.

The purchase price is determined annually in relation to the market value of the bearer shares on the Swiss Exchange (ex-dividend). The shares issued in this manner derive either from the portfolio of VP Bank Group or are acquired for this purpose over the stock exchange. The resulting expense is charged directly to personnel expense.

A long-term and value-oriented compensation model exists for Group Executive Management and second-level execu­tives. In accordance with this model, the compensation of Group Executive Management comprises three components:

1. A fixed base salary component which is contractually agreed between the Nomination & Compensation Committee (a committee of the Board) and each member of Group Executive Management. To be added to the base salary are the contributions made by VP Bank to the executive insurance scheme and pension fund.
2. A variable performance-related portion (Short-Term Incentive STI) depending on the annual value creation of VP Bank Group. It is allocated on the basis of qualitative individual criteria and financial Group targets. The financial Group targets are weighted by some two-thirds. The STI is paid annually in cash.
3. A long-term variable management equity-share plan (Long-Term Incentive LTI) settled in the form of bearer shares of VP Bank. The basic principles thereof are the focus on value creation (economic profit) and the long-term commitment of management to a variable salary component in the form of shares. The number of shares which are vested after a period of three years is directly dependent on the development of the economic profit of VP Bank Group. This takes account of capital- and risk-related costs. The target setting is carried out on the basis of an external perspective. The starting point in this connection is the target yield on the market value. Thus, depending on the financial trend, a greater or lesser number of shares are allocated. The factor ranges from a minimum of 0.5 to a maximum of 2.0. The basis for calculating expenses for management stock participation consists of the number of shares, the goal-achievement factor and the current price of the stock at the time the goals were set. The market value is based on the closing price of the SIX-listed bearer shares as recorded on the date of the grant. The monetary benefit settled in shares at the end of the plan is also dependent on the stock price of the VP Bank bearer shares. The bearer shares required to service the LTI equity share plan are either taken from the portfolio of treasury shares of VP Bank Group or are purchased on the Stock Exchange.

As required by the accounting provisions of IFRS 2, LTI is treated as share-based payment transactions settled in the form of equity instruments. The expense related to the LTI is calculated over the vesting period with an offsetting amount in capital reserves. Assumptions are made regarding the rate of forfeiture, which is regularly adjusted over the vesting period so that at the end thereof only the expense for the rights actually vested is recorded.

The undiluted earnings per share are arrived at by dividing the net profit or loss of the reporting period attributable to the shareholders by the weighted average number of shares outstanding in this period (minus treasury shares).

The diluted earnings per share are computed using the same method; however, the parameters are adapted in order to reflect the potential dilution which would result from the transformation or exercising of options, warrants, convertible bonds or other contracts involving the shares.

The focus of value-oriented risk management is to achieve a sustainable return on the capital invested and one which, from the shareholders’ perspective, is commensurate with the risks involved. To reach this goal, VP Bank supports a rigorous dovetailing of profitability and risk within the scope of the management of its own equity resources; it consciously abandons the goal of gaining short-term interest advantages at the expense of the security of capital. VP Bank avoids extreme risks which can jeopardise the ability to bear risk and in this respect the health and existence of the Group, and manages all risks within the annual risk budget laid down by the Board of Directors. Thanks to the strong capitalisation, VP Bank can invest in the expansion of its business. In managing the equity resources, VP Bank measures both the equity required (minimum amount of equity to cover the Bank’s risks in accordance with the requirements of applicable supervisory law) and the available eligible equity (VP Bank’s equity is computed in accordance with the criteria of the supervisory authorities) and project their future development. Equity resources which the Bank does not need for its growth or business activities are returned through dividend payments according to their long-term policy. Thus, through active management, VP Bank is in a position to maintain the robust capitalisation as well as the credit rating and continue to create sustainable value for the shareholders.

The determination of the required capital and tier capital is carried out on the basis of the IFRS consolidated financial statements, whereby unrealised gains are deducted from core capital. Total capital (core capital and supplementary capital) must amount to a minimum of 8 per cent of the risk-weighted assets.

Risk-weighted assets as of 31 December 2013 aggregated CHF 4.1 billion as compared to CHF 3.9 billion in the prior year. Core capital as of 31 December 2013 was CHF 840.8 million as compared to CHF 834.0 million in the prior year. The overall equity ratio decreased by 1.1 percentage points from 21.5 per cent as at 31 December 2012 to 20.4 per cent at 31 December 2013. Both as of 31 December 2013 and 31 December 2012, VP Bank Group was adequately capitalised in accordance with the respective guidelines of the FMA (Financial Market Authority of Liechtenstein) and the BIS (Bank for International Settlements).