Principles underlying financial-statement reporting and notes
1. Fundamental principles underlying financial statement reporting
VP Bank Ltd, which has its registered office in Vaduz, Liechtenstein, was established in 1956 and is one of the three largest banks in Liechtenstein. Today, VP Bank Group possesses subsidiaries in Zurich, Luxembourg, the British Virgin Islands and Hong Kong, a branch in Singapore as well as a representative office in Hong Kong. As of 31 December 2018, VP Bank Group employed 868.4 persons, expressed as full-time equivalents (as of the end of the previous year: 799.5).
Asset management and investment consulting 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 2018 financial statements were drawn up in accordance with International Financial Reporting Standards (IFRS). IFRS contain provisions requiring the Management of VP Bank Group to make assumptions and estimates in drawing up the consolidated financial statements. The most important fundamental principles underlying financial-statement reporting are described in this section to show how their application impacts the reported results and informational disclosures of VP Bank Group.
Restatement of the 2016 Consolidated Financial Statements
As part of the preparatory work for the 2018 annual financial statements, VP Bank Group discovered an error in the 2016 consolidated financial statements. Pursuant to IAS 8.42, material errors arising in prior financial years are to be corrected retroactively. Whenever an error occurred prior to the earliest accounting year presented, the opening balances of assets, liabilities and shareholders’ equity are to be restated for the earliest prior period presented.
In computing deferred and current taxes arising in connection with the merger with Centrum Bank in 2015, a difference of CHF 4,049 million arose in 2016 because of erroneous system mapping in the consolidated financial statements. As a result, the tax expense in 2016 was understated and thus the Group net income overstated. The effect was corrected retroactively in the balance sheet as of 1 January 2017. As a result of the adjustment, the provision for tax liabilities as of 1 January 2017 was increased from CHF 3,892 million to CHF 7,941 million and as of 31 December 2017 and accordingly as of 1 January 2018 from CHF 2,007 million to CHF 6,056 million. The shareholders’ equity as 1 January 2017 declined from CHF 936,938 million to CHF 932,889 million and as of 31 December 2017 and therefore as of 1 January 2018 from CHF 994,180 million to CHF 990,131 million, respectively. The undiluted and diluted earnings per registered share A for 2016 declined by CHF 0.67 and per registered share B by CHF 0.07.
Post balance-sheet date events
On 26 October 2018, VP Bank Ltd and Catella Bank S.A. entered into an agreement whereby VP Bank in Luxembourg will acquire the private-banking activities in Luxembourg of Catella Bank. The transaction was consummated on 1 February 2019. The details thereof are set out in Note 46.
The Board of Directors reviewed and approved the consolidated financial statements in its meeting of 14 February 2019. These consolidated financial statements will be submitted for approval to the Annual General Meeting of 26 April 2018.
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 developments arising from probable future events. Actual future occurrences may differ from these estimates.
Changes in accounting estimates
No material changes in accounting 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 financial 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 netted 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 associates
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 entity are accounted for at acquisition cost. After acquisition, the carrying value of the associate 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 associate.
In applying the equity method, the Group ascertains whether it is necessary to recognise an additional impairment loss for its investments in associates. As of each balance-sheet date, the Group determines whether objective indications exist that the investment in an associate may be value-impaired. Should this be the case, the difference between the realisable value of the share in the associate and its carrying value is dealt with in the income statement.
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.
Functional currency and reporting currency:
The consolidated financial statements are expressed in Swiss francs.
The foreign-currency 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 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 in 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 captions (excluding shareholders’ equity) are translated into the Group reporting currency at the rate of exchange prevailing as of the balance-sheet date. Individual captions of 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 dealt with in shareholders’ equity (income reserves) without impacting income.
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 over 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 classification 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 has made early application of hedge accounting in accordance with IFRS 9 (2013). IFRS 9 (2014) including the ECL model is applied for the first time from the 2018 financial year onwards (see also Chapter 4).
Trading portfolios comprise equity 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 in income from trading activities after deduction of related transaction costs. Interest and dividends from trading activities are recorded under trading 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 caption 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 met, a financial instrument may also be designated and recorded in 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 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 measurement thereof is made at amortised cost, with the effective interest method being applied. Interest on non-overdue loans is accounted for using the accrual method 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.
Valuation allowances for credit risks pursuant to IFRS 9 Impairment
Bases of modelling expected credit losses
The methodology of International Financial Reporting Standard 9 Impairment to determine valuation allowances for credit risks replaces the previous methodology of individual and portfolio-based valuation allowances in accordance with IAS 39.
In contrast to the provisions of IAS 39, in addition to the already incurred loss, the concept of the expected credit loss or ECL is now introduced. In accordance with IFRS 9 Impairment, the expected credit loss must be recognised already at the time of consummation of the transaction.
To this purpose, all assets side exposed to a potential credit risk and not already measured at fair value, the changes in which are taken to income, are to be allocated to one of three stages:
stage 1 (performing)
stage 2 (under-performing)
stage 3 (non-performing)
Upon settlement or purchase, the financial instruments in question are initially classified as “performing” (stage 1). Should the credit risk of the financial instrument increase significantly during its term, the position is considered as “under-performing” (stage 2). Should a counterparty be in default or a further payment appear improbable, the asset is to be classified as “non-performing” (stage 3).
For stage 1, the expected credit loss is to be computed and recognised based on credit occurrences expected over 12 months, for stages 2 and 3, on the other hand, over the remaining term of the instrument.
The expected credit loss in accordance with IFRS 9 must represent an undistorted probability-weighted amount which was determined through the evaluation of a series of possible scenarios as well as taking the time value of money into consideration. Furthermore, all available information on past events and current conditions are to be appropriately taken into account.
Implementation of IFRS 9 Impairment in VP Bank
The methodology of IFRS 9 Impairment has been applied by VP Bank since 1 January 2018 and replaces the previous approach under IAS 39 of individual and portfolio-based valuation allowances. Its implementation by VP Bank is based on internally defined models in accordance with the principles and requirements of the Standard.
All asset positions exposed to a potential credit risk and not already measured at fair value are covered. These include, in particular, amounts due from banks and clients, financial investments measured at amortised cost, money-market receivables and cash and cash equivalents. Falling under the new standard are off-balance-sheet positions such as credit and performance guarantees and irrevocable credit commitments.
In VP Bank, the modelling of expected credit losses is undertaken according to specific balance-sheet segments. During the process of segmentation, a distinction is made whether an external or internal rating exists.
In the case of positions with an external rating of Moody’s or Standard & Poor’s, the latter is used as the principal criterion for the allocation to a particular stage. In accordance with internal guidelines, positions considered as investment grade are allocated to stage 1. Should a rating move outside the investment-grade segment or should it be in non-compliance with the requirements for deposits with banks or financial investments, stage 2 shall apply. Should external rating agencies issue a default rating, the instrument drops to stage 3.
In the case of positions with an internal rating of VP Bank, the allocation is made on the basis of whether the debtor is in default of payment regarding interest and/or amortisation of capital. From the moment a payment is overdue for 31 days or more, the position falls into stage 2, and if it is more than 90 days overdue to stage 3. In addition, a deterioration of the internal rating or a classification as a credit with an enhanced risk of default is used for the stage allocation.
In the case of positions which are not internally nor externally rated to which primarily lombard loans belong, risk management is conducted primarily in relation to the collateral. Any payment default by the debtor regarding interest and/or amortisation of capital in excess of 30 and 90 days, respectively, or the classification as a credit exposed to enhanced risk serve as criterion for the stage allocation. In addition, any collateral shortfalls for these positions are taken into account.
In the case of positions for which financial collateral or a guarantee from an externally rated third party exist, the credit risk of the debtor is substituted by that of the guarantor or third party (substitution approach). In this case, the stage allocation results from a combination of the aforementioned criteria.
In VP Bank, the modelling of the ECL is undertaken in principle at the level of the individual transaction and on the basis of various parameters (in particular, probability of default, loss given default, amount of receivable and discount rate).
Wherever possible, reference is made to external data to determine the default probabilities. This is particularly the case whenever an external rating exists. Internal ratings reproduce, to an approximate extent, external ratings. The estimation of the loss given default focusses on the value of the collateral securing the credit. In the case of unsecured receivables with an external rating, assumptions based upon market-related considerations are made.
As an alternative to a separate determination of the default probability and loss given default, a loss rate approach to compute the ECL can be applied for individual portfolios. This concerns primarily lombard credits. In such cases, VP Bank uses a combined loss rate.
In addition to the use of past and current information to estimate the ECL, VP Bank also takes into account prospective information, in particular forecasts of future economic developments.
For externally-rated positions, the ECL is initially estimated on the basis of cyclical parameters. The use of prospective information is based on existing early-warning systems and modifications to default probabilities. In addition, rating outlooks are taken into consideration.
For positions with an internal rating, the ECL is also estimated on the basis of prospective, cyclical parameters. In the case of mortgage-backed credits and related contingent liabilities, for example, this concerns primarily the loss given default. In this manner, possible movements in real-estate prices are depicted.
The computation of the ECL is based upon one base and two alternative scenarios which map differing macroeconomic conditions. The base scenario reflects the future economic development which is estimated to be the most probable whilst an up and down scenario represents a relative improvement or deterioration, respectively, of the macroeconomic situation. The assumed probabilities of occurrence of the up and down scenario are identical.
Loans from banks and clients
Whenever micro fair-value hedge accounting is applied, secured 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 measured 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 sub-divided 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 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 term. 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) and IFRS 9 (2014), respectively. There were no changes between these two versions.
In accordance with the Risk Policy of the Group, 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 guidelines, there ensues an asymmetrical representation, 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 applied voluntarily. Under certain conditions, the use of hedge accounting enables the risk-management activities of a company to be represented 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, a formal designation and documentation of the hedging relationship is at hand which makes reference to 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 each 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 defined criteria, they may be classified as hedging instruments and namely, 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 or anticipated transactions occurring with a high degree of probability (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. Exposed 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 at fair value deployed for hedging purposes are recorded as market values from 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 issuance price and measured subsequently at amortised cost.
At the time of their initial recording, debentures are recognised at their fair value less transaction costs. The fair value equates to the consideration received. Subsequently, they are measured at amortised cost for balance-sheet 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 term 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. Changes in fair value are not recognised. 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 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 for those where VP Bank Group acts 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 acts 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 attributable 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, plant and equipment is always reviewed whenever the carrying value appears to be over-valued because of occurrences or changed circumstances. If the carrying value exceeds the realisable value, a valuation allowance is recorded. Any subsequent recovery in value is taken to income.
The intrinsic 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, plant and equipment
Property, plant and equipment comprises bank premises, other real estate, furniture and equipment, as well as IT systems. Property, plant and equipment is measured at acquisition cost less operationally necessary depreciation and amortisation.
Property, plant 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 9 years
3 to 7 years
The depreciation and amortisation methods and useful lives are subject to review at each year-end.
Purchases of minor value 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, plant and equipment are disclosed as other income. Losses on sale lead to additional depreciation and amortisation on property, plant and equipment.
In the case of a business combination, should the acquisition costs be greater than the net assets acquired 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 annual review for any required valuation allowances. The recognition 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 taxation laws in the individual countries and are booked as expense 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 will be 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 netted 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 anticipated from the utilisation of estimated future realisable loss carry-forwards are capitalised. The probability of realising expected taxation benefits is considered when valuing a capitalised asset for future taxation relief. Tax 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 tax savings from future estimated 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 of actual taxation liabilities and tax claims and the taxes are levied by the same taxing authorities; amounts are netted insofar as the maturities correspond.
Retirement pension plans
VP Bank Group maintains several retirement pension plans for employees domestically and abroad, among which there are both defined-benefit and defined-contribution plans. In addition, there are schemes for long-service anniversaries which qualify as other long-term benefits to employees.
The computation of accrued amounts and amounts due to these pension funds is based on 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 take account of 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 actuarial interest rate with the pension liability or plan assets at the beginning of the year. In the process, capital flows of less than one year and movements thereof 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, respectively. The recognised pension assets are limited to the present value of the economic benefit to 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 liability is recognised as of the balance-sheet date. Movements in present values are recorded directly in the income statement as personnel expense.
Employer contributions to defined-contribution 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 2018, the following new or revised Standards or Interpretations have taken effect:
Changes to IFRS 2014-2016 (“Improvements to IFRS 2014–2016 Cycles”)
In December 2016, the IASB published several amendments to existing IFRS as part of its annual improvement project “Improvements to IFRS 2014–2016 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.
IAS 9 – Financial Instruments
The allocation of the financial instruments is made at the time of their initial recognition in accordance with the criteria of IFRS 9. VP Bank Group has made premature application of IFRS 9 (2010) since 1 January 2011, and of IFRS 9 (2013) since 1 January 2015. If the hedging conditions are met, VP Bank Group has adopted prematurely hedge accounting in accordance with IFRS 9 (2013). The amendments between IFRS 9 (2013) and IFRS 9 (2014) concerning the classification and measurement of debt securities at fair value through OCI (FVTOCI), which did not yet exist in IFRS 9 (2013), had no impact on the preparation of financial statements. Accordingly, there is no statement of reconciliation for the new IFRS 9 (2014) concerning classification and measurement (phase 1) as well as hedge accounting (phase III).
Application of IFRS 9 – Provisions regarding impairment (phase II)
On 1 January 2018, IFRS 9 Impairment replaced the individual and portfolio-based valuation allowances computed in accordance with IAS 39. The new Standard encompasses all positions on the assets’ side and off-balance-sheet positions which are exposed to a potential credit risk and not already measured at fair value, the changes in which are taken to income. On 1 January 2018, the individual and portfolio-based valuation allowances in accordance with IAS 39 were de-recognised over equity and the expected credit losses in accordance with IFRS 9 Impairment were re-recognised over equity. The resultant after-tax effect of de-recognition and re-recognition resulting from IFRS 9 Impairment amounted to CHF 0.044 million which was recorded directly over equity.
The following tables show the allocation of material balance-sheet positions falling under the scope of IFRS 9 Impairment into individual stages as well as the valuation allowances (pre-tax) as computed under the standard as of 31.12.2017.
As of 31.12.2017, the credit loss allowances of VP Bank Group, computed in accordance with IFRS 9 Impairment, amount to CHF 2.2 million for stage 1, CHF 20.7 million for stage 2 and CHF 41.7 million for stage 3, or a total amount of CHF 64.6 million.
The following table shows the valuation allowances per 31.12.2017 as well as the netting as per 01.01.2018 with IFRS 9 phase 2.
Credit loss allowances
31.12.2017 / 01.01.2018
In accordance with IFRS 9, a restatement of the prior year’s figures was dispensed with.
Supplementary information can be found in the Annual Report of VP Bank Group for 2017, Changes in Financial-Statement Reporting Principles and Comparability, in the section International Financial Reporting Standards which must be introduced in 2018 or subsequently, in the sub-section Application of IFRS 9 Impairment on page 135.
IFRS 15 – Revenue 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 more 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 financial years commencing on or after 1 January 2018. The introduction of IFRS 15 had only little impact on the recognition, recording, presentation and disclosure in VP Bank Group. Insofar as material, the inclusion of further revenue captions will lead to a more detailed presentation of the types of revenue shown under commission and service income.
International Financial Reporting Standards, which are to be introduced in 2019 or later
Numerous new standards, revisions and interpretations of existing Standards were published, the application of which is mandatory for accounting periods commencing on or after 1 January 2019. 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 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 operating leases. 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 largely apply with the result that here the differentiation between finance leases and leasing agreements will continue to be made as at present with the related differing accounting consequences. IFRS 16 replaces IAS 17 as well as the related interpretations and is to be applied for the first time for accounting periods beginning on or after 1 January 2019. The effect of this new standard on VP Bank Group is not considered as material. VP Bank Group will apply the modified retrospective approach in accordance with which, at the time of initial application, the leasing liability and the right of use asset (RoU) will be recognised at the net present value of the outstanding leasing instalments on the basis of the incremental borrowing rate. Leasing arrangements for the rental of real estate, office premises as well as motor vehicles exist. Total assets will increase by some CHF 36 million. From 2019 onwards, depreciation and amortisation (approx. CHF 6 million) and interest expense (approx. CHF 0.5 million) will replace rental expense (approx. CHF 6 million) under the new standard.
IAS 19 – Employee benefits, adjustments resulting from amendment, curtailment or settlement of retirement benefit plan
The modification of the accounting provisions in IAS 19 concerns benefits payable to employees in the event of a modification, curtailment or settlement of a defined-benefit retirement-benefit plan. In future, in the case of a modification, curtailment or settlement of a defined-benefit retirement-pension plan, it will be mandatory that the current service cost and net interest cost for the remaining business year be recomputed using the current actuarial assumptions which were used for the necessary revaluation of the net liability (asset). Furthermore, supplementary disclosures were incorporated which clarify the impact of a modification, curtailment or settlement on the asset ceiling requirements. The modifications take effect in respect of accounting periods beginning on or subsequent to 1 January 2019.
The Interpretation is to be applied to taxable profits (tax losses), tax assessment bases, unused tax-loss carry-forwards, unused tax credits and tax rates whenever uncertainty as to the tax treatment under IAS 12 exists. An entity shall apply discretion in determining whether each tax treatment individually or several tax treatments are to be assessed jointly. The decision shall be based on which approach enables a better prediction to remove the uncertainty.
An entity shall consider whether it is probable that the taxing authority involved will accept the respective tax treatment (or combination of tax treatments) which it has applied or intends to apply in its tax declaration.
If an entity concludes that it is not probable, then it shall use the most probable value for the tax treatment. The decision should be based on which method helps to better predict the resolution of the uncertainty.
IFRIC 23 takes effect for accounting periods beginning on or after 1 January 2019. Earlier adoption is permitted but VP Bank Group will not avail itself of this possibility. The amendments, once applied, will have no material impact on the consolidated financial statements of VP Bank Group.
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 achieve 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 risk tolerance and thus the health and the very existence of the Group and manages all risks within the annual risk budget laid down by the Board of Directors. Thanks to its strong capital base, 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 projects 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 able to maintain its robust capitalisation as well as its credit rating and continues to create sustainable value for the shareholders.
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 2018 aggregated CHF 4.5 billion as compared to CHF 3.8 billion in the prior year. Core capital as of 31 December 2018 was CHF 942.8 million as compared to CHF 976.6 million in the prior year. The overall equity ratio declined by 4.8 percentage points from 25.7 per cent at 31 December 2017 to 20.9 per cent at 31 December 2018. Both as at 31 December 2017 and 31 December 2018, VP Bank Group was adequately capitalised in accordance with the respective guidelines of the FMA and the BIS currently in force.