Principles underlying financial statement reporting and notes
1. Fundamental principles underlying financial statement reporting
VP Bank Ltd, which has its registered office in Vaduz, was established in 1956 and is one of the three largest banks in Liechtenstein. Today, VP Bank Group 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 2016, VP Bank Group employed 738.3 persons, expressed as full-time equivalents (previous year: 734.4).
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 2016 financial statements were drawn up in accordance with International Financial Reporting Standards (IFRS). IFRS contain provisions requi- ring the Management of VP Bank Group to make assump- tions and estimates 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 the reported results and informational disclosures of VP Bank Group.
Changes in accounting and valuation principles and presentation
The annual financial statements were drawn up on the basis of the accounting and valuation principles used for the 2015 annual financial statements, with the exception of the forward components arising from certain foreign currency contracts which are now recorded under interest income (previously trading income). Furthermore, because of its increasing relevance, negative interest is reported sepa- rately as “interest income from financial liabilities” in interest income and “interest expense from financial assets” in interest expense. The comparative figures regarding prior years were restated accordingly. As a result of the reclassi- fication of above-mentioned foreign currency contracts, interest income in the 2015 prior year increased by CHF 3.9 million and trading income fell in the same prior-year period by the same amount. The amount recorded in 2016 under trading income amounts to CHF 5.3 million.
In addition, the presentation of the income statement (and segment reporting) was amended to conform to current practice in the sector. The sub-total “gross operating income” was replaced by the term “operating income”. Furthermore, the captions “depreciation and amortisation” and “valuation allowances, provisions and losses” are now recorded under “operating expense”. The prior sub-total “gross income” is dropped for the future. Because of the revised presentation, the sub-total “operating expenses” for 2015 of CHF 182.1 million increased to CHF 246.4 million. The other positions remain unchanged or are dropped.
There were no post-balance-sheet-date events that materially affected the balance sheet and income statement for 2016.
The Board of Directors reviewed and approved the consolidated financial statements in its meeting of 16 February 2017 and released it for publication. These consolidated financial statements will be submitted for approval to the Annual General Meeting of 28 April 2017.
2. Assumptions and uncertainties in estimates
IFRS contain guidelines which require certain assumptions and estimates to be made by the Management of 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 trends 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 accord- ingly. 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 1.1 million (prior year: CHF 0.6 million).
Changes in estimates
No material changes in estimates were made or applied. Further details on estimates are described in the tables included in the Notes (e.g. goodwill, litigation, taxes on income, retirement benefit schemes etc.).
3. Summary of the principal financial statement accounting policies
3.1. Principles of consolidation
Fully consolidated companies
The consolidated financial statements encompass the finan- cial statements of VP Bank Ltd, 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.
Method of capital consolidation
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 as of the date of acquisition or the date of establishment.
After 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 in associated companies
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 are accounted for at acquisition cost as of the date of acquisition. After 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 recognise 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 differ- ence between the realisable value of the share in the associated company and its carrying value is recorded as a charge to income.
3.2. General principles
Trade versus settlement date
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.
Foreign currency translation
Functional currency and reporting currency:
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 recognised in 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 drawing up the consolidated financial statements, balance sheets of Group companies denomi- nated in a foreign currency are translated into 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 in the statements of other comprehensive income and of cash flows. Foreign currency translation differences resulting from exchange rate movements between the beginning and the 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 translated 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 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 liabilities of these foreign companies and are translated at the closing rates prevailing on the balance-sheet date.
Domestic versus foreign
The term “domestic” also includes Switzerland.
Cash and cash equivalents
Cash and cash equivalents encompass the captions “cash and cash equivalents”, “receivables from money-market paper” with an initial maximum term of three months as well as “sight balances due from banks”.
3.3. Financial instruments
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 valued at amortised cost
- financial instruments at fair value with changes in value and impairment losses recorded in other comprehensive income (“fair value through 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. Since 1 January 2011, VP Bank Group has applied IFRS 9 (2010), and since 1 January 2015, has made early application of IFRS 9 (2013). Should the hedging conditions be met, VP Bank Group makes early application of hedge accounting in accordance with IFRS 9 (2013). IFRS 9 (2014) including the ECL model will be applied for the first time from the 2018 financial year onwards (see also Chapter 4).
Trading portfolios comprise shares, bonds, 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.
Financial instruments valued at amortised cost
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 valued at fair value (FVTPL)
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 captions “interest income from FVTPL financial instruments” and “dividend income from FVTPL financial instruments”.
Financial instruments at fair value with recording of changes in value and impairment losses through other comprehensive income (FVTOCI)
Investments in equity 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.
The OCI option is applied in the case of equity instruments with a long-term investment horizon of approx. ten years. Primarily in the case of private-equity investments, the focus is on long-term value generation. Dividends are reported in income from financial investments under the caption “dividend income from FVTOCI financial instruments”.
Loans granted to banks and clients
At the time of their initial recognition, loans to banks and clients 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. Interest on non- overdue loans are accrued and reported under interest income using the effective interest method.
The carrying value of receivables for which micro fair-value hedge accounting is applied is adjusted by the changes in fair value attributable to the hedged risk. In the cases when portfolio fair value hedge accounting is applied, the changes in fair value are recognised in the balance-sheet caption “other assets”.
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 accordingly and released to income 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.
Amounts due to banks and clients
Within the scope of micro fair-value hedge accounting, hedged liabilities are adjusted by the changes in fair value attributable to the hedged risk. In the cases when portfolio fair-value hedge accounting is applied, the changes in fair value are recognised in the balance-sheet caption “other liabilities”.
Derivative financial instruments
Derivative financial instruments are valued and reported in the balance sheet at their fair value. The fair value is determined on the basis of stock-exchange quotations or option pricing models. Realised and unrealized gains and losses are taken to income.
VP Bank Group deploys the following derivatives both for trading and hedging purposes. They may be subdivided into the following categories:
- Swaps: Swaps are transactions in which two parties swap cash-flows for a defined nominal amount during a period agreed in advance. Interest-rate swaps: Interest-rate swaps are interest-rate derivatives which protect fixed-interest-bearing instruments (e.g. non-structured, fixed-interest-bearing bonds or covered bonds) against changes in fair value as a result of changes in market interest rates.
- Currency swaps: Currency swaps comprise the swapping of interest payments which are based on the swapping of two base amounts with two differing currencies and reference interest rates and encompass in general also the swapping of nominal amounts at the inception or end of the contractually stipulated duration. Currency swaps are usually traded over-the-counter.
- Forward contracts and futures: Forward contracts and futures are contractual obligations to purchase or sell a financial instrument or commodities at a future date and at a stipulated price. Forward contracts are customised agreements which are transacted between parties over- the-counter (OTC). Futures, on the other hand, are standardised contracts which are entered into on regulated exchanges.
- Options and warrants: Options and warrants are contractual agreements as part of which the seller (writer) grants the acquirer, in general, the right but not the obligation, to purchase (call option) or sell (put option) a specified quantity of a financial instrument or commodity at a price agreed in advance on or prior to a stipulated date. The acquirer pays the seller a premium for this right. There are also options with more complex payment structures. Options can be traded over-the-counter or on regulated exchanges. They may also be traded in the form of a security (warrant).
VP Bank Group has applied IFRS 9 (2010) since 1 January 2011 and has made early application of IFRS 9 (2013) since 1 January 2015. Should the hedging conditions be met, VP Bank Group applies hedge accounting in accordance with IFRS 9 (2013).
In accordance with its Risk Policy, VP Bank deploys certain derivatives for hedging purposes. From an economic point of view, the opposing valuation effects resulting from the underlying and hedging transactions offset each other. As these transactions do not, however, correspond to the strict and specific IFRS provisions, there ensues an asymmetrical mapping in bookkeeping terms of the changes in value of the underlying transaction and the hedge. Fair-value changes of such derivatives are reported in trading and interest income, respectively, in the appropriate period.
The rules of hedge accounting can be used voluntarily. Under certain conditions, the use of hedge accounting enables the risk-management activities of a company to be mapped out in the annual financial statements. This occurs through the juxta-positioning of expenses and income from hedging instruments with those from the designated underlying transactions with regard to certain risks.
A hedging relationship qualifies for hedge accounting if all of the following qualitative attributes are fulfilled:
- the hedging relationship consists of eligible hedging instruments and eligible underlying transactions;
- at the inception of the hedging relationship there is a formal designation and documentation of the hedging relationship and the company’s risk-management strategy and objective for this hedge;
- the hedging relationship meets the effectiveness requirements.
The hedging relationship must be documented at inception. The documentation must encompass, in particular, the identification of the hedging instrument and of the hedged underlying transaction as well as designating the hedged risk and the method to determine the effectiveness of the hedging relationship. In order to qualify for hedge accounting, the hedging relationship must satisfy the following effectiveness requirements at the inception of the hedging period:
- there must exist an economic relationship between the underlying transaction and the hedging instrument;
- default risk does not dominate the changes in value resulting from the economic hedge; and
- the hedge ratio accurately reflects the quantity of the underlying transaction used for the actual economic hedge as well as the quantity of the hedging instrument.
Derivative financial instruments are employed by the Group for risk management principally to manage interest-rate and foreign-currency risks. Whenever derivative and non- derivative financial instruments fulfil certain criteria, they may be classified as hedging instruments and indeed to hedge fair-value changes in recognised assets and liabilities (fair-value hedge accounting), to hedge fluctuations in anticipated future cash-flows which are allocated to recognised assets and liabilities (cash-flow hedge accounting) or to hedge a net investment in a foreign business operation (hedge of net investments).
Fair value hedge accounting
IFRS 9 provides for the use of fair value hedge accounting to avoid one-sided resultant effects for derivatives which serve to hedge the fair value of on-balance-sheet assets or liabilities against one or several defined risks. Subjected to market risk and/or interest-rate risk, in particular, are the Group’s credit transactions and its portfolio of securities insofar as they relate to fixed interest-bearing paper. Interest-rate swaps are used primarily to hedge these risks. In accordance with fair value hedge accounting rules, the derivative financial instruments deployed for hedging purposes are valued at fair value as market values of derivative hedging instruments. For the hedged asset and/or hedged liability, the opposing changes in fair value resulting from the hedged risk are also to be recognised in the balance sheet. The opposing valuation changes from the hedging instruments as well as from the hedged underlying items are recognised in the income statement as gains/losses from hedge accounting. That portion of the changes in fair value which is not related to the hedged risk is dealt with in accordance with the rules pertaining to the respective valuation category.
Cash flow hedge accounting as well as portfolio fair-value hedges were used neither in the current financial year, nor the prior year.
Debt securities issued
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 less 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 VP Bank Ltd, Vaduz, held by VP Bank Group are disclosed as treasury shares and the acquisition cost thereof is deducted from shareholders’ equity. The difference between sales proceeds of treasury shares and the related acquisition cost is shown under capital reserves.
Repurchase and reverse repurchase transactions
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.
Securities lending and borrowing transactions
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. Securi- ties 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.
3.4. Other principles
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.
Impairment in the value of non-current assets
The value of property and equipment is reviewed whenever it appears that the carrying value is over-valued because of occurrences or changed circumstances. If the carrying value exceeds the realisable value, an extraordinary write-down is made. Any subsequent recovery in value is taken to income.
The value of goodwill is reviewed at least once a year. If the carrying value exceeds the realisable value, an extraordinary write-down is made.
Property and equipment
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 less 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.
Depreciation and amortisation is charged on a straight-line basis over the estimated useful lives:
5 to 8 years
3 to 7 years
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.
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 capitalizable 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 amounts so capitalised are amortised on a straight-line basis over their useful lives. The period of amortisation is three to seven years.
Other intangible assets include separately identifiable intangible assets arising from business combinations, as well as certain purchased client-related assets and the like and are amortised on a straight-line basis over an estimated useful life of five to ten years. Other intangible assets are recorded in the balance sheet at purchase cost at the time of acquisition.
Current and deferred taxes
Current income taxes are computed based on the applicable laws on taxation in the individual countries and are booked as expenses in the accounting period in which the related profits arise. They are shown as tax liabilities in the balance sheet.
The taxation effects of temporary 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 temporary 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 temporary 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 netted 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 tax 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 temporary 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 authori- ties; amounts are netted insofar as the maturities corres- pond.
Retirement pension plans
VP Bank Group maintains several retirement pension plans for employees in Liechtenstein and abroad, among which there are both defined-benefit and defined-contribution plans. In addition, there are plans for long-service anniversaries which qualify as other long-term benefits to employees.
Recorded receivables from and liabilities to these pension funds are computed on the basis of statistical and actuarial calculations by 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 considered 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 less the effects contained in net interest expense. Revaluation components are recognised in the statement of comprehensive income and cannot be reclassified to income 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.
4. Changes in financial statement accounting policies and comparability
New and revised International Financial Reporting Standards
Since 1 January 2016, the following new or revised standards or interpretations have taken effect:
Improvements to IFRS 2012–2014 Cycles
In September 2014, the IASB published numerous amendments to existing IFRS as part of its annual improvement project “Improvements to IFRS 2012–2014 Cycles”. These encompass both amendments to various IFRS impacting the recognition, measurement and disclosure of business transactions as well as terminological and editorial corrections. The amendments have no material impact on the consolidated financial statements.
IFRS 11 – Joint Arrangements (amendments to IFRS 11)
With the recording of acquisitions of shares in joint business ventures (amendments to IFRS 11), IFRS 11 is amended with the result that the acquirer of shares in a joint venture constituting a business venture as defined in IFRS 3 is to apply all the principles relating to the accounting for busi- ness combinations from IFRS 3 provided that these are not in contradiction to the guidelines set out in IFRS 11. The amendments have no material impact on the consolidated financial statements.
In December 2014, the IASB published amendments to IAS 1 “Presentation of Financial Statements” (“IAS 1”) as part of an initiative to improve annual financial statements regarding presentation and note disclosures. These amendments make it clear that the principle of materiality is to be applied to the whole financial statements in their entirety, that professional estimates in determining disclosure items are to be applied and that the inclusion of non-material items can lead to a reduced effectiveness of note-disclosure items. The amendments to IAS 1 have only an impact on Group’s note disclosures.
International Financial Reporting Standards which are to be introduced in 2017 or later
Numerous new standards, revisions and interpretations of existing standards were published, the application of which is compulsory for accounting periods commencing on or after 1 January 2017. The following new or amended IFRS standards and/or interpretations are currently being analysed or are without significance for VP Bank Group. VP Bank Group did not avail itself of the possibility of early adoption thereof.
IFRS 9 (2014) – Financial Instruments
This standard contains provisions relating to the recogni- tion, measurement, de-recognition and hedge accounting. On 24 July 2014, the IASB published the final version of the Standard during the completion of various phases of its comprehensive project on financial instruments. Thus, the previous accounting for financial instruments under IAS 39 “Financial Instruments: Recognition and Measurement” can now be replaced completely by the accounting requirements of IFRS 9.
The latest published version of IFRS 9 replaces all previous versions. The first-time binding adoption thereof is foreseen for accounting periods beginning on or after 1 January 2018. Subject to local rules, early application thereof is allowed. Previous versions of IFRS 9 may be applied prematurely within a limited period (if not done already) provided that the relevant date for the initial adoption in this regard is not prior to 1 February 2015.
The rules concerning a portfolio fair-value hedge against interest-rate risks in accordance with IAS 39 are not replaced by IFRS 9. Against this background, the possibility exists of continuing to apply optionally the rules for a portfolio fair-value hedge against interest-rate risks in accordance with IAS 39 or even undertaking the mapping of hedging relationships in accordance with the general rules of IAS 39.
VP Bank Group has applied IFRS 9 (2010) since 1 January 2011 and has made early adoption of IFRS 9 (2013) from 1 January 2015 onwards. Should the hedging conditions be met, VP Bank Group has opted for the early adoption of hedge accounting in accordance with IFRS 9 (2013). The entire new IFRS 9 must be adopted as from 1 January 2018 onwards. VP Bank Group is currently analysing the impact of the provisions not implemented yet.
Application of IFRS 9 Impairment
The expected credit-loss method under IFRS 9 replaces the current valuation allowances for credit risks of VP Bank. The computation and reporting of provisions for default risks (collectability) will be performed for the last time using the current methodology as per 31 December 2017. On 1 January 2018, the valuation allowance for collectability will be de- recognised over equity and expected credit losses in accordance with IFRS 9 recognised under equity. Changes to expected credit losses will thereafter be recorded in the income statement.
The new standard encompasses all asset positions which are subject to potential credit risk and are not already recorded at fair value over the income statement. This includes particularly loans to clients, receivables due from banks and financial investments measured at amortised cost. Also affected are off-balance-sheet positions, such as credit commitments and guarantees.
The introduction of the new standard places high demands on VP Bank regarding methods, data and systems. To fulfil the requirements, VP Bank is creating the necessary bases. This concerns, in particular, the following areas:
- further development and adaptation of internal models and methods to compute expected credit losses whilst taking account of regulatory and accounting guidelines
- ensuring the availability of the internal data required (inter alia, default probability, loss given default, exposure at default by instrument)
- computation of expected losses on the basis of prospective information (e.g. impact of the macro-economic environment on the expected loss)
- implementation of a system to compute expected credit losses for the individual business transactions on the basis of internal models
- definition of an operating model to compute the expected losses for the current financial reporting.
The preparations for the introduction of the standard in VP Bank were commenced at the end of 2015. This will occur in 2017 within the framework of a Group-wide project encompassing the following significant phases:
- conception of a framework for modelling expected credit losses
- implementation of the framework, in particular the preparation of in-house bank data and analyses as well as the technical and substantive implementation of a systems-based solution
- changes to the process organisation (operating model)
- application with the context of disclosure.
The adoption of IFRS 9 Impairment will have an impact in the 2018 financial year on the equity and income statement of VP Bank. The extent thereof depends primarily on the methodology selected, the underlying parameters and on the scenario assumptions and cannot be conclusively quantified at the present time. VP Bank will further analyse the impact during 2017 on the basis of the available prospective information.
Various studies suggest that the volatility of the income statement will increase in future as a result of fluctuating impairment losses. The initial adoption of IFRS 9 Impairment will have an adverse effect on the equity and thus the regulatory equity ratio of the bank.
IFRS 15 – Revenues from Contracts with Customers
IFRS 15 prescribes when and in which amount a company reporting under IFRS is to recognise revenue. In addition, it is demanded from companies preparing annual financial statements that more informative and relevant disclosures be made available than at present. In this respect, the standard offers a single, principles-based, five-stage model which is to be applied to all contracts with clients.
IFRS 15 was issued in May 2014 and is to be applied for all financial years commencing on or after 1 January 2018.
IFRS 16 – Leases
The International Accounting Standards Board has published IFRS 16 “Leases” which regulates the accounting for lease arrangements. For lessees, the new standard provides for a new accounting model which does away with a differentiation between finance leases and rental contracts. In future, most leasing agreements will require to be recognised in the balance sheet. For lessors, the rules of IAS 17 “Leases” will continue to apply with the result that a differentiation between finance leases and leasing agreements will continue to be made as currently with the related differing accounting consequences. IFRS 16 replaces IAS 17 as well as the related interpretations and is to be adopted for the first time for accounting periods beginning on or after 1 January 2019. Early adoption is possible insofar as IFRS 15 “Revenues from Contracts with Customers” is adopted simultaneously.
IAS 12 – Amendments relating to Recognition of Deferred-Tax Liabilities for Unrealised Losses
With the amendments relating to the recognition of deferred- tax liabilities for unrealised losses, the following matters are clarified:
- unrealised losses in the case of a debt instrument which is measured at fair value, but for which acquisition costs constitute the valuation basis for tax purposes, lead to deductible temporary differences. This applies irrespective of whether the holder expects to recover the carrying value by holding it until maturity and collecting all contractual payments or whether he intends to sell it.
- the carrying value of the asset does not represent the upper limit for estimating probable, future taxable gains.
- in estimating future taxable gains, tax deductions from the reversal of deductible temporary differences are to be subtracted.
- A company is to evaluate a deferred tax asset in combination with other deferred tax assets. Whenever taxation law limits the realisation of tax losses, a company is to evaluate a deferred tax asset in combination with other deferred tax assets of the same (admissible) type.
The amendments take effect for accounting periods commencing on or after 1 January 2017. Early adoption is permitted. As transitional relief, a company is allowed, in the case of the initial adoption, to add the equity changes to the revenue reserves in opening balance sheet of the earliest indicated comparative period without having to split these between revenue reserves and other components of equity.
IAS 7 – Statement of Cash Flows, Changes resulting from the Disclosure Initiative
The amendments in the disclosure initiative (amendments to IAS 7) pursue the goal that a company shall make disclosures in order to enable addressees of financial statements to evaluate changes in financial liabilities.
To achieve this goal, IASB requires that the following changes in third-party debt as a result of financing activities are to be disclosed (to the extent necessary): (i) changes in the case of cash-flows from financing activities; (ii) changes as a result of gaining or losing control over subsidiaries or other companies; (iii) effect of changes in foreign currency rates; (iv) changes in fair values; and (v) other changes. The amendments take effect for financial years beginning on or after 1 January 2017.
IFRS 2 – Share-Based Payments, Changes to Classification and Measurement
In classifying and valuing business transactions settled through share-based payments (amendments to IFRS 2), the following clarifications and amendments are included:
Recording of cash-settled share-based payments containing a performance condition:
Until now, IFRS 2 contained no guidance on how vesting conditions affect the fair value of liabilities for cash-settled share-based payments. The IASB has now included guidance in the standard and introduced financial statement accounting policies for cash-settled payments which follow the same approach as in the case of accounting for payments settled with equity securities.
Classification of share-based payments which are settled through the withholding of tax:
The IASB has included an exemption in IFRS 2 in that a share-based payment in the case of which the company settles the share-based payment agreement by the withholding of taxes, is to be classified fully as being equity-settled if the share-based payment would have classified as being equity-settled had it not had the attribute of being settled through the withholding of tax.
Accounting for modifications to share-based payment transactions from cash-settled to equity-settled transactions:
Until now, situations in which a cash-settled payment transaction is transformed into an equity-settled payment transaction as a result of changes in the terms and conditions are not addressed separately. The IASB has issued the following clarification:
- in the case of such modifications, the liability originally recognised for the cash-settled payment is derecognised and the equity-settled share-based payment is recognised at its fair value as of the modification-date, to the extent services have been rendered up to the modification date.
- any differences between the carrying amount of the liability as of the modification date and the amount recognised in equity at the same date are to be recognised in the income statement for the period immediately.
The amendments take effect for accounting periods beginning on or after 1 January 2018.
5. Management of equity resources
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 its 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.
Within the framework of the authorisation given to it by the Annual General Meeting of Shareholders of 24 April 2016, VP Bank Ltd resolved to increase the number of its own shares through a further share repurchase programme up to 10 per cent of the share capital. VP Bank Ltd thus picks up from the two successful programmes from 2015. The repurchases of the registered shares A which will last from 7 June 2016 to 31 May 2017, at the latest, are to be made over the regular trading line of SIX Swiss Exchange.
As part of the public repurchase programme, VP Bank Ltd is prepared to repurchase up to a maximum of 120,000 registered shares A. At no time, however, will it hold more of its own registered shares A than it is allowed to hold within the framework of the above-mentioned authorisation by the Annual General Meeting (up to a maximum of 601,500 shares which equals 10 per cent of all registered shares A).
The registered shares A so repurchased are to be used for acquisitions or treasury management purposes. VP Bank Ltd has commissioned Zürcher Kantonalbank to undertake the repurchase of the listed registered shares A.
Up until 31 December 2016, VP Bank Ltd has repurchased 81,786 registered shares A from the repurchase programme. As of 31 December 2016, VP Bank Group held a total of 593,777 registered shares A and 127'812 registered shares B. This equates to a share of 9.17 per cent of the outstanding share capital and 6.0 per cent of the voting rights.
The determination of the required capital and tier capital pursuant to Basel III is undertaken based on 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 13 per cent of the risk-weighted assets.
Risk-weighted assets as of 31 December 2016 aggregated CHF 3.5 billion as compared to CHF 3.7 billion in the prior year. Core capital as of 31 December 2016 was CHF 938.5 million as compared to CHF 911.2 million in the prior year. The overall equity ratio increased by 2.7 percentage points from 24.4 per cent at 31 December 2015 to 27.1 per cent at 31 December 2016. Both as at 31 December 2015 and 31 December 2016, 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) currently in force.