Principles of accounting and valuation, disclosures on risk management

Accounting and valuation follow the prescriptions of the Liechtenstein Persons and Companies Act, as well as the Liechtenstein Banking Act and its related Ordinance.

In accordance with the valuation policies laid down, all business transactions are recorded in the Bank’s accounts as of their trading date. Forward contracts are recorded under off-balance-sheet transactions as of their settlement or value date. 

Income and expenditure in foreign currencies are converted into Swiss francs at their respective daily rates; assets and liabilities are converted at the rates prevailing at year-end. Foreign-exchange gains and losses resulting from revaluation are recorded in the income statement.

Recording is made at nominal values minus any applicable unearned discount in the case of money-market paper. Valuation allowances are established to cover identifiable risks taking into account the principle of prudence. Individual and lump-sum valuation allowances are deducted directly from the related balance-sheet positions. 

Interest overdue for more than 90 days is provided for and recorded in the income statement as and when received.

Receivables from clients are recorded in the balance sheet at their nominal values minus any applicable valuation allowances. A receivable is considered as being value-impaired when there is a probability that the total contractually owed amount is no longer recoverable. 

A valuation allowance is recorded in the balance sheet as a reduction of the carrying value of the receivable to its probable realisable value. On the other hand, provisions for credit risks are established for off-balance-sheet positions. In add­ition to individual valuation allowances, VP Bank Ltd creates lump-sum individual valuation allowances as well as lump-sum valuation allowances to cover latent credit risks. 

A review of collectability is undertaken at least annually for all non-performing loans.

Trading portfolios of securities and precious metals are valued at the quoted market price as of the balance-sheet date. 

Portfolios of securities and precious metals classified as current assets are valued at the lower of cost and market. Inter­est on interest-bearing securities is reflected in the interest income items, dividend income in the current income from securities items. Gains and losses from revaluation are disclosed in the item gains/losses arising from financial transactions.

Equity shareholdings in companies owned by the Bank representing a non-controlling interest held on a long-term basis are recorded as participations. Participations are valued at acquisition cost minus economically required valuation allowances.

The existing majority shareholdings of VP Bank Ltd are recorded as shares in affiliated companies. Shares in affiliated companies are valued at acquisition cost minus economically required valuation allowances. 

These affiliated companies are fully consolidated for the purposes of the published consolidated financial statements.

Value-enhancing expenditures in connection with the acqui­sition and installation of software are capitalised and amort­ised on a straight-line basis over the estimated service life of three to seven years. Self-developed intangible assets are not capitalised. Minor purchases are charged directly to general and administrative expenses.

Property and equipment encompasses buildings used by the Bank, other real estate, furniture and equipment as well as IT installations. Investments in new and existing property and equipment are capitalised and valued at acquisition cost. Minor purchases are charged directly to general and administrative expenses.

In subsequent valuations, property and equipment is recorded at acquisition cost, minus accumulated depreciation and amort- ­isation. Depreciation and amortisation is charged on a systematic basis over the estimated useful lives (buildings used by the Bank and other real estate: 25 years; furniture and equipment: 8 years; computer hardware: 3 years; software: 3 to 7 years). The property and equipment is reviewed annually for impairment in value.

Other assets and liabilities include the positive and negative replacement values, respectively, of all financial derivative instruments open at the balance-sheet date arising from nostro transactions as well as over-the-counter contracts (OTC) arising from transactions on behalf of clients. In add­ition, these positions include balances of various settlement and clearing accounts.

Valuation allowances and provisions are established to reflect identifiable risks, as dictated by the principle of prudence. Individual and lump-sum valuation allowances for receivables from banks and clients as well as on mortgage receivables are deducted directly from the corresponding asset position. Provisions are raised for receivables subject to a country risk as dictated by the principle of prudence.

Provisions for general banking risks are prudently established reserves to cover latent risks arising from the normal course of business of the Bank. As required by the prescriptions governing financial statement reporting, they are shown as a separate item in the balance sheet. Changes thereto are disclosed separately in the income statement.

Amounts disclosed as off-balance-sheet items are stated at nominal values. Lump-sum provisions exist in the balance sheet for latent default risks.

VP Bank Ltd is exempted from drawing up a statement of cash flow as a result of the obligation to prepare consolidated financial statements (Art. 24l FL-BankV). The consolidated statement of cash flow of VP Bank Group is a part of the consolidated financial statements.

There were no material occurrences having an impact on the balance sheet and income statement to be reported for the 2014 financial year.

VP Bank Group is counting on further growth through acqui­sitions. After receiving the required supervisory authority approval from the Liechtenstein Financial Market Authority, VP Bank Ltd, Vaduz, acquired 100 per cent of the shares of Centrum Bank AG, Vaduz, on 7 January 2015. The acquisition price was CHF 60 million. Following this transaction, Centrum Bank AG, Vaduz, will become a wholly owned subsidiary of VP Bank Ltd, Vaduz. The legal merger between VP Bank Ltd and Centrum Bank AG will be completed effective 30 April 2015. The purchase price allocation (under IFRS) in connection with the acquisition of Centrum Bank is currently being prepared. The definitive calculation and disclosure of the required financial information for acquired assets and liabil­ities along with any goodwill or negative goodwill (bargain purchase) resulting from the merger with Centrum Bank, will be presented in the interim financial statements on 30 June 2015. Consolidated reporting will commence on 30 June 2015. 

Marxer Foundation for Bank Values, the former sole owner of Centrum Bank AG, will receive an ownership interest in VP Bank Ltd based on the value of the share purchase price. The Board of Directors of VP Bank Ltd, Vaduz, will therefore convene an extraordinary general meeting of shareholders on 10 April 2015 and request a corresponding capital increase. 

The Swiss National Bank’s decision in January 2015 to elim­inate the Swiss franc’s minimum exchange rate against the euro and to shift the target range of the three-month LIBOR has had no impact on the 2014 financial statements. These moves have nevertheless resulted in significant market distortions. This difficult environment will pose a significant challenge for VP Bank Ltd and affect business trends. However, VP Bank Ltd is well positioned and is taking concrete steps to address these challenges. 

The implementation of the Basel III regulations takes effect in Liechtenstein on 1 February 2015 and imposes stricter capital and liquidity requirements on credit institutions. As a system­ically important bank in Liechtenstein, VP Bank must satisfy additional capital buffer requirements. VP Bank’s current tier 1 ratio of 20.5 per cent more than satisfies the 13 per cent level required under the Basel III regulations in Liechtenstein as of 1 February 2015 and continues to represent a high level of stability and security.

Appropriate risk management is the basic prerequisite for the sustainable development and continuing success of VP Bank Ltd, Vaduz. By “appropriate” it is to be understood that VP Bank Ltd, as a value-oriented enterprise, although it takes on financial, operational and business risks in a conscious manner, does not hinder growth through innovation and initiatives, but realistically evaluates and realises profit opportunities. 

<The principles for identifying, evaluating, controlling and monitoring financial, operational and business risks apply to VP&nbsp;Bank Ltd to the same extent as to the subsidiary com­panies and exactly mirror the risk management and control framework of VP&nbsp;Bank Group, for which reason reference is made at this point to the commentaries on <link 631>risk management of VP Bank Group .