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 owns subsidiary companies in Zurich, Luxembourg, the British Virgin Islands and Hong Kong, a branch in Singapore, and a representative office in Hong Kong. As of 31 December 2020, VP Bank Group employed 917.1 persons, expressed as full-time equivalents (as of the end of the previous year: 873.7).

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 2020 annual report was drawn up in accordance with the International Financial Reporting Standards (IFRS).

 

Adjustment of the consolidated annual report as of 1 January 2019

In the reporting year, there was a reassessment of the tax treatment of past transactions that changed the Group structure. This led to the creation of additional tax pro­visions of CHF 5.8 million. As they can be traced to past errors, the formation of such additional tax provisions is charged to the previous periods.

Pursuant to IAS 8.42, material errors arising in previous financial years are to be corrected retroactively. When­ever an error has 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. 

The effect was retroactively corrected on the balance sheet to 1 January 2019. As a result of the adjustment, the tax liability increases from CHF 7.0 million to CHF 12.8 million as of 1 January 2019, and from CHF 6.2 million to CHF 12.0 million as of 31 December 2019 and 1 January 2020, respectively. Shareholders’ equity decreased from CHF 981.6 million to 975.8 million as of 1 January 2019, and from CHF 1,032.0 million to CHF 1,026.3 million as of 31 December 2019. 

In addition, one subsidiary reclassified other assets to accrued receivables and prepaid expenses in the on- balance-sheet assets and reclassified other liabilities to accrued liabilities and deferred items in the on-balance- sheet liabilities as follows: As of 31 December 2019, CHF 8.2 million was reclassified from other assets to accruals and deferrals. As of 1 January 2019, other assets decreased by CHF 6.5 million from CHF 23.6 million to CHF 17.1 million. Accruals and deferrals increased by the same amount from CHF 28.1 to CHF 34.6 million as of 1 January 2019. As of 31 December 2019, CHF 5.9 million was reclassified from other liabilities to accruals and deferrals. As of 1 January 2019, other liabilities decreased by CHF 4.3 million from CHF 132.7 million to CHF 128.4 million. Accruals and deferrals increased by the same amount from CHF 36.5 to CHF 40.8 million as of 1 January 2019.

 

Post-balance-sheet-date events

On 8 July 2020, VP Bank (Luxembourg) SA signed and announced an agreement to acquire the private banking division of Öhman Bank S.A. in Luxembourg. The trans­action was successfully completed as planned on 1 January 2021 and will close in spring 2021 (Appendix 46). 

The Board of Directors reviewed and approved the con­solidated financial statements in its meeting of 18 February 2021. These consolidated financial statements will be ­submitted for approval to the Annual General Meeting of 30 April 2021.

 

2. Assumptions and uncertainties in estimates

The Board of Directors is responsible for issuing accounting directives. IFRS contain provisions requiring the management of VP Bank Group to make assumptions and estimates in drawing up the consolidated financial statements. The significant accounting principles are described in this part to show how their application affects the reported income and expenses, assets and liabilities, and disclosure of contingent liabilities. The assumptions and estimates are regularly 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 estimates

No material changes in estimates were made or applied. Further explanations on estimates are described in the corresponding tables in the notes (expected credit losses, goodwill, intangible assets, legal cases, provisions, share-based payments, income taxes, pension plans).

 

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, with the shareholders’ equity of the consolidated company being 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.

 

Participation in joint venture companies

Companies in which VP Bank Group holds a 50 per cent stake (joint ventures) are accounted for using the equity method.

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 joint venture 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 joint venture company.

 

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 on the balance sheet as of the date when the trade is entered into and not on the date when trade is subsequently settled.

 

Revenue recognition

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-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 on 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 into Swiss francs at the year-end exchange rate. Average exchange rates for the reporting period are applied for the translation of income statement items 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.

 

Group companies

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. Individual items of the income statement are translated at average rates for the period. The translation differences arising from the translation of financial statements into foreign currencies are recognised in equity capital as translation differences with no effect on net 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 on 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 include the items “Cash and cash equivalents”, “Receivables from money market papers” with an original maturity of three months or less and “At-sight balances due from banks”.

 

3.3 Financial instruments

General

VP Bank Group subdivides the financial instruments, to which traditional financial assets and liabilities as well as shareholders’ 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 measured 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 the financial instruments is made at the time of their initial recognition in accordance with the ­criteria of IFRS 9.

 

Trading portfolios

Trading portfolios comprise equity shares, bonds, precious metals and structured products. Financial assets held for trading purposes are valued at fair value. Short items 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 measured 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 asset carried at amortised cost is subject to the process for value adjustments of credit risks described below. If an impairment has occurred, the carrying value is reduced to the recoverable amount to be recognised on the income statement using the item “Valuation adjustments for credit risks”.

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 be designated and recorded under this category upon initial recognition. Liquid shareholders’ equity instruments that are managed on a benchmark basis with a ­medium-term investment horizon are to be evaluated at fair value through profit or loss (FVTPL).

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

 

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 on 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.

For illiquid shareholders’ equity instruments (private equity) as well as investments in high-dividend individual shares, the OCI option is applied, which results in a valuation at fair value through other comprehensive income (FVOCI). The focus of these investments is on long-term value generation. 

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

 

Bank and client loans

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 cases when portfolio fair-value hedge accounting is applied, the changes in fair-value are recognised in the balance sheet item “Other assets”.

 

Credit loss valuation adjustments in accordance with IFRS 9
Fundamentals of expected credit loss modelling

According to the International Financial Reporting Standard IFRS 9 Financial Instruments, all items on the assets side that are subject to potential credit risk and are not already recognised at fair value on the income statement are allocated to one of the 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 item is considered to be “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 into consideration. Furthermore, all available information on past events and current conditions are to be appropriately taken into account.

 

Implementation of IFRS 9 Impairment at VP Bank Group

All asset items 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. Also affected are off-balance-sheet items, such as credit commitments and guarantees and irrevocable lines of credit granted.

In VP Bank Group, the modelling of expected credit losses is undertaken according to specific balance sheet segments. During the process of segmentation, a distinction is made based on whether an external or internal rating exists.

In the case of items with an external rating from 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, items 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 applies. Should external rating agencies issue a default rating, the instrument drops to stage 3.

In the case of items with an internal rating of VP Bank Group, 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 item 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 items 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 criteria for the stage allocation. In addition, any collateral shortfalls for these items are taken into account.

In the case of items 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.

At VP Bank Group, the modelling of expected credit losses (ECL) is generally performed on the level of individual transactions and on the basis of various risk parameters (especially probability of default, the loss given default, the amount receivable and the 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 focuses 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 Group uses a combined loss rate. 

In addition to the use of past and current information to estimate the ECL, VP Bank Group also takes into account prospective information, in particular forecasts of future economic developments. 

For externally rated items, 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 items 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 macro-economic conditions that differ. The base scenario reflects the future economic development which is estimated to be the most probable, while 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.

 

Amounts due to 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 item “Other liabilities”.

 

Derivative financial instruments

Derivative financial instruments are measured and reported on 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 unrealised 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 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 can also be traded in the form of a security (warrant).

 

Hedge accounting

In accordance with the risk policy of the Group, VP Bank Group 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, an asymmetrical representation, in bookkeeping terms, of the changes in value of the underlying transaction and the hedge ensues. 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 juxtaposition 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.

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 risks and foreign-currency risks. Whenever derivative and non-derivative financial instruments fulfil the 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 papers. ­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 on the balance sheet. The opposing valuation changes from the hedging instruments as well as from the hedged underlying items are recognised on 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 previous year.

 

Debt securities issued

Medium-term notes are recorded at their issuance price and measured subsequently at amortised cost.

Bonds are recorded at fair value plus transaction costs upon initial recognition. Fair value corresponds to the ­consideration received. They are subsequently accounted for at amortised cost. 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.

 

Own shares

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 on 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 in respect of which VP Bank Group appears as principal are recorded on the balance sheet under amounts due to/from customers and banks. Securities lending and borrowing transactions in which VP Bank Group appears as the agent are recorded under off-balance-sheet items.

Fees received or paid are recorded under commission income.

 

3.4 Other principles

Provisions

Provisions are only recorded on the balance sheet if VP Bank Group has a liability to a third party which is ­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 overvalued because of occurrences or changed circumstances. If the carrying value exceeds the realisable value, a valuation adjustment is recorded. Any sub­- sequent ­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 are charged on a straight-line basis over the estimated useful lives:

Estimated 

useful life

25 years

10 to 15 years

no depreciation

5 to 9 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, plant and equipment are disclosed as other income.

 

Goodwill

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

 

Intangible assets

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, that is, 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 on the balance sheet under software. The amounts capitalised in this manner 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 5 to 10 years. Other intangible assets are recorded on the balance sheet at acquisition cost.

 

Leasing

VP Bank Group rents various office and warehouse buildings, as well as vehicles. Rental agreements are usually concluded for fixed periods of two to eight years, but options to extend may be included. 

Leasing relationships are recognised as rights of use and corresponding lease liabilities are recognised at net current value. The discounting is carried out at the marginal debt capital interest rate, which corresponds to the interest rate that VP Bank Group would have to pay if it were to borrow the funds in order to acquire an asset with a comparable value and comparable conditions in a comparable economic environment. Each lease payment is divided into repayment and financing expenses. Finance charges are recognised in interest income over the term of the leasing relationship so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right of use is depreciated on a straight-line basis over the lease term through the income statement item depreciation of property, plant and equipment. On the balance sheet, the rights of use are capitalised under property, plant and equipment and the lease liabilities are reported under other liabilities.

 

Current and deferred taxes

Current income taxes are computed based on the applicable taxation laws 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 on the balance sheet.

The taxation effects of temporary differences between the values attributed to the assets and liabilities as reported on 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 if 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.

 

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 service anniversaries which qualify as other long-term employee benefits.

The computation of accrued amounts and amounts due to these pension funds is based on the statistical and actuarial calculations of experts.

For 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. The insurance years completed up to the valuation date are taken into account. The computational assumptions taken into account by the Group include the expected future rate of salary increases, long-term interest earned on retirement assets, retirement patterns and life expectancy. The valuations are carried out annually by independent actuaries. Plan assets are remeasured annually at fair values.

Pension costs comprise three components:

Service costs which are recognised on the income ­statement;

Net interest expense, which is also recognised on 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 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 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 on the income statement as personnel expense.

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

 

4. Amendments in accounting ­principles and comparability

New and revised International Financial Reporting Standards

Since 1 January 2020, the following new and revised ­standards and interpretations have been published:

Interest Rate Benchmark Reform – Phase I (amendments to IFRS 9, IAS 39 and IFRS 7)

In September 2019, the IASB published amendments to IFRS 9, IAS 39 and IFRS 7.

The amendments provide temporary relief to allow hedge accounting to continue during the period of uncertainty before an existing interest rate benchmark is replaced by an alternative near-risk-free rate (RFR).

Only hedging transactions of the currency CHF are affected (volume: CHF 102 million). The first-time application of the amendments had no impact on the consolidated annual report. Until 31 December 2020, there were no adjustments of items due to the reform of the IBOR interest rates. The adjustment of these transactions is expected to take place in the course of 2021, is value-neutral and does not affect the achievement of the hedging objective (fair value hedge).

 

The following amendments have no material impact on the consolidated financial statements of VP Bank Group

Amendment to IFRS 3, Business combinations – definition of a business (effective 1 January 2020)

Amendments to IAS 1 and IAS 8 – definition of material (effective 1 January 2020)

Amendments to IFRS 16, Leases, Related rent concessions (effective 1 June 2020) (subject to EU endorsement)

Small amendments to IFRS 3, IAS 16, IAS 37 and some annual improvements on IFRS 1, IFRS 9, IAS 41 and IFRS 16 (effective 1 January 2022) (subject to EU endorsement)

Amendments to IAS 1, Presentation of financial statements on classification of liabilities (effective 1 January 2023) (subject to EU endorsement)

 

International Financial Reporting Standards which are to be introduced in 2021 or later

Interest Rate Benchmark Reform – Phase II (amendments to IFRS 9, IAS 39 and IFRS 7)

In August 2020, the IASB published amendments to the Interest Rate Benchmark Reform – Phase 2 (amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16). In relation to changes to the financial instruments directly required by the reform, the amendments of phase 2 contain:

A practical expedient when considering changes in the basis for determining the contractual cash flows of financial assets and liabilities to allow for an adjustment to the effective interest rate

Facilitation of the discontinuation of hedging relationships

Temporary exemption from the need to meet the separately identifiable requirement when an RFR instrument is designated as a hedge of a risk component

Additional disclosures on IFRS 7 

In its phase 2 amendments, the IASB has identified four ways in which changes can be made to the basis for determining the contractual cash flows of a financial instrument in order to achieve IBOR reform:

By amending the terms of the contract (e.g. to replace a reference to an IBOR with a reference to an RFR).

By activating an existing fallback clause in the contract.

Without changing the terms of the contract, to change the way an interest rate benchmark is calculated.

A hedging instrument may alternatively be modified in accordance with the requirements of the reform by not changing the basis for calculating its contractual cash flows, but by closing out an existing IBOR-related deriva­tive and replacing it with a new derivative with the same counterparty, on similar terms, except by reference to an RFR.

A project team has been working on the implementation of the reform since 2019. The amendments are not expected to have a material impact on the consolidated financial statements of VP Bank Group. Effects of the IBOR transition are mainly to be expected in the case of cash flow hedges, especially if the IBOR interest rate of the underlying transaction is translated at a different time or according to a different logic than the float leg of the interest rate swaps. VP Bank Group currently has no cash flow hedges in place, but instead fair value hedges. The existing underlying transactions (loans with fixed interest rates) are dependent on IBOR interest rates neither currently nor in future, but their interest rate instead remains fixed over the term. In the case of the interest rate swaps (hedging transactions), the fixed leg relevant for the present value hedge is also dependent on IBOR interest rates neither currently nor in future.

VP Bank Group did not avail itself of the possibility of early adoption thereof.

 

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 Group 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 Group manages all risks within the risk budget approved by the Board of Directors. In managing the equity resources, VP Bank Group 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 VP Bank Group 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 Group is able to maintain its robust capitalisation as well as its credit rating and continues to create sustainable value for the shareholders.

 

Capital indicators

The determination of the required capital and tier capital pursuant to Basel III is undertaken based on the IFRS ­consolidated financial statements, with unrealised gains being deducted from core capital. Total capital (core ­capital and supplementary capital) must amount to a ­minimum of 12.5 per cent of the risk-weighted assets. 

Risk-weighted assets as of 31 December 2020 aggregated CHF 4.7 billion as compared to CHF 4.8 billion in the ­previous year. Core capital as of 31 December 2020 was CHF 972.8 million as compared to CHF 973.2 million in the previous year. The overall equity ratio increased by 0.7 percentage points, from 20.1 per cent on 31 December 2019 to 20.8 per cent on 31 December 2020. As of both 31 December 2019 and 31 December 2020, VP Bank Group was adequately capitalised in accordance with the respective guidelines of the FMA and the BIS currently in force. In 2020, VP Bank Group used no hybrid capital under ­eligible equity and, in accordance with International Financial Reporting Standards (IFRS), netted no assets against liabilities (balance sheet reduction).