Statutory auditor’s report on the audit of the consolidated financial statements
To the General Meeting of VP Bank Ltd, Vaduz
We have audited the consolidated financial statements of VP Bank Ltd and its subsidiaries (the Group) which comprise the consolidated income statement, consolidated statement of comprehensive income, consolidated balance sheet, consolidated changes in shareholders equity, consolidated statement of cash flow and notes for the year ended 31 December 2017, including a summary of significant accounting policies (pages 121 to 185) – and the consolidated annual report (pages 117 to 120).
In our opinion the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2017, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS) and comply with Liechtenstein law.
Basis for opinion
We conducted our audit in accordance with Liechtenstein law and International Standards on Auditing (ISAs). Our responsibilities under those provisions and standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report.
We are independent of the Group in accordance with the provisions of Liechtenstein law and the requirements of our audit profession, as well as the IESBA Code of Ethics for Professional Accountants, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.
We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the consolidated financial statements.
Valuation of due from customers
Area of focus
As of 31 December 2017 the amount Due from customers is CHF 5.6 billion or 44% of the Group‘s balance sheet, of which CHF 3.3 billion relate to Mortgages and CHF 2.3 billion to Other loans.
Due from customers are valued at amortized cost, which equates to the fair value at the time the loans were granted. An allowance for credit losses is considered in case of a credit deterioration of the counterparty or country. An allowance for credit losses is reported as a decrease in carrying value of a loan on the balance sheet. Collective allowances and provisions are recorded to cover poten- tial, yet unidentified credit risks. All impaired loans are reviewed at least annually. Any subsequent changes to the amounts and timing of the expected future cash flows compared with prior estimates result in a change in the allowance for credit losses. Judgment is used in making assumptions about timing and amount of impairment losses.
The magnitude of the mentioned balance sheet items involves the exercise of significant judgment and is of particular importance from an audit perspective.
Our audit response
We tested the design and operating effectiveness of the key controls over the process for granting and monitoring loans. We also assessed the process and controls over the identification of non-performing loans.
We selected a sample of individual loans and independently performed impairment testing and evaluated the assumptions used for the calculation of allowances for credit losses. In addition, we evaluated the appropriateness of the accounting principles used and examined the disclosure in the notes to the consolidated financial statements.
Fair value measurement of financial instruments
Area of focus
The Group recognizes financial instruments at fair value, particularly in the balance sheet items Trading portfolio, Derivative financial instruments and Financial instruments at fair value.
Fair values are based on quoted market prices if an active market exists. If no active market exists, fair values are determined by reference to listed quotes or external pricing models (level 2). The use of valuation models is highly dependent on the assumptions applied, including interest rates, forward rates, swap rates, spread curves, volatilities and estimates of future cash flows. The determination of these assumptions involves the exercise of significant judgment.
Due to the judgmental nature and the magnitude the mentioned balance sheet items are of particular importance from an audit perspective.
Our audit response
We assessed the selection process for the key assumptions used for valuation and tested them on a sample basis with the assistance of our valuation specialists. In addition, we performed combined model and parameter tests, i.e., we validated the Group‘s measurements using independent valuation models and inputs. We also tested the fair values available in an active market on a sample basis, including comparing values to available market data.
Completeness and measurement of provisions for legal proceedings and other matters
Area of focus
As of 31 December 2017 the Group recognizes provisions for legal proceedings and other matters of CHF 15.9 million.
The Group is involved in various legal, regulatory and administrative proceedings arising within the course of normal business operations.
The Group establishes provisions for pending and threatened legal proceedings and other matters if the management is of the opinion that such proceedings are more likely than not to result in a financial obligation or loss, or if the dispute for economic reasons should be settled without acknowledgment of any liability on the part of the Group and if the amount of such obligation or loss can already be reasonably estimated. In isolated cases in which the amount cannot be estimated reliably due to the early stage of the proceedings, the complexity of the proceedings and/or other factors, no provision is recognised, but the case is disclosed as a contingent liability.
The recognition and measurement of provisions and the measurement and disclosure of contingent liabilities in respect of legal proceedings and other matters requires significant judgment.
Our audit response
We assessed the processes and the controls related to the identification, evaluation and measurement of provisions for legal proceedings and other matters.
On a sample basis, we evaluated the Group’s analysis of pending and threatened legal proceedings and other matters. We also obtained and assessed correspondence directly from external legal counsel. In addition, we assessed the disclosure in the notes to the consolidated financial statements.
Other information in the annual report
The Board of Directors is responsible for the other information in the annual report. The other information comprises all information included in the annual report, but does not include the consolidated financial statements, the stand-alone financial statements and our auditor’s reports thereon.
Our opinion on the consolidated financial statements does not cover the other information in the annual report and we do not express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information in the annual report and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
Responsibility of the Board of Directors for the consolidated financial statements
The Board of Directors is responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with IFRS and the provisions of Liechtenstein law, and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the Board of Directors is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Liechtenstein law and ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Liechtenstein law and ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made.
Conclude on the appropriateness of the Board of Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.
We communicate with the Board of Directors or its relevant committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide the Board of Directors or its relevant committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with the Board of Directors or its relevant committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report, unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
Report on other legal and regulatory requirements
The consolidated annual report corresponds to the consolidated financial statements and contains no significant incorrect information according to our assessment.
We recommend that the consolidated financial statements submitted to you be approved.
Ernst & Young Ltd
(Auditor in charge)
Swiss Certified Accountant
Berne, 28 February 2018