Notes to the consolidated income statement and consolidated balance sheet

1. Change of accounting principles (note 3 and principles underlying financial statement).
2. Cash-flow hedge accounting as well as portfolio fair-value hedges were employed in neither the current nor the prior-year period.

1. Income from corporate actions, asset management commissions, investment advisory services, all-in fees, securities lending and borrowing.

1. The results from derivatives for the purposes of risk minimisation (other than interest-rate derivatives) are included in this item.
2. Change of accounting principles (note 1 and principles underlying financial statement).

1. Includes in 2015 restructuring provisions in connection with the Centrum Bank merger, of which CHF 7.9 million for cancellation of an outsourcing contract and CHF 4.1 million for employees, e.g. social plan. 

1. Conversion of bearer shares into registered shares A (note 13).

Debt securities issued are recorded at fair value plus transaction costs upon initial recognition. Fair value corresponds to the consideration received. Subsequently, they are remeasured at amortised cost. The difference between issue price and redemption price of the security is amortised over the duration of the debt security using the effective interest method (0.43 per cent debenture 2021; 0.82 per cent debenture 2024).

All shares are fully paid up.

All proposals made by the Board of Directors were approved at the 53rd annual general meeting of VP Bank in Vaduz on Friday, 29 April 2016. The annual general meeting also approved the proposal of the Board of Directors that the Articles of Incorporation be changed for the conversion of bearer shares into registered shares. Developments at an international level necessitate greater transparency regarding the ownership structures of legal entities. In this context, the Board of Directors proposed that the listed VP Bank bearer shares each with a nominal value of CHF 10.00 be converted into registered shares A with the same nominal value. The existing, non-exchange-listed registered shares with a nominal value of CHF 1.00 remain unchanged as registered shares B and will not be traded on the stock exchange in future either. The first trading day for the registered shares A was on 6 May 2016.

1. Conversion of bearer shares into registered shares A (note 13).
2. Within the framework of the public share buyback programme, VP Bank AG is prepared to acquire a maximum of 120,000 registered shares A. However, VP Bank’s holdings of registered shares A will not exceed the amount permitted under authorisation given by the annual general meeting of shareholders at any time (up to a maximum of 601,500 shares, which corresponds to 10% of all registered shares A). The buyback programme for the registered shares A on the ordinary trading line on the SIX Swiss Exchange will run from 7 June 2016 up to 31 May 2017. The maximum amount to be paid under this bid amounts to CHF 6.6 million (open permitted buyback of 73'410 registered shares A multiplied with closing price as per 30 June 2016) million and is deducted from its own shares. In the table above, these shares are not disclosed, as they are not yet in the possession of VP Bank Ltd.
3. On 18 June 2015, VP Bank Ltd announced a public fixed-price bid for the acquisition of a maximum of 300,750 bearer shares (registered shares A) at a price of CHF 84.00 and a maximum of 300,208 registered shares (registered shares B) at a price of CHF 8.40. The maximum amount to be paid under this bid amounts to CHF 27.8 million and is deducted from it s own shares. In the table above, these shares are not disclosed, as they are not yet in the possession of VP Bank Ltd.

1. Conversion of bearer shares into registered shares A (note 13).

The following valuation methods are used to determine the fair value of on-balance-sheet financial instruments:

Cash and cash equivalents, money market paper

For the balance-sheet-items “Cash and cash equivalents” and “Receivables arising from money market paper”, which do not have a published market value on a recognised stock exchange or on a representative market, the fair value corresponds to the amount payable at the balance-sheet date.

Due from/to banks and customers, medium-term notes, debenture issues

In determining the fair value of amounts due from/to banks, due from/to customers (including mortgage receivables and due to customers in the form of savings and deposits), as well as of medium-term notes and debenture issues with a fixed maturity or a refinancing profile, the net present value method is applied (discounting of monetary flows with swap rates corresponding to the respective term). For products whose interest or payment flows cannot be determined in advance, replicating portfolios are used.

Trading portfolios, trading portfolios pledged as security, financial instruments at fair value

Fair value corresponds to market value for the majority of these financial instruments. The fair value of non-exchange-listed financial instruments (in particular for structured credit loans) is determined only on the basis of external traders’ prices or pricing models which are based on prices and interest rates in an observable, active and liquid market.

Derivative financial instruments

For the majority of the positive and negative replacement values, the fair value equates to the market value. The fair value for derivative instruments without market value is determined using uniform models. These valuation models take account of the relevant parameters such as contract specifications, the market price of the underlying security, the yield curve and volatility.

Valuation methods for financial instruments

The fair value of listed securities held for trading purposes or as financial instruments, as well as that of listed derivatives and other financial instruments with a price established in an active market, is determined on the basis of current market value (Level 1). Valuation methods or pricing models are used to determine the fair value of financial instruments if no direct market prices are available. If possible, the underlying assumptions are based on observed market prices or other market indicators as at the balance-sheet date (Level 2). For most of the derivatives traded over the counter, as well as for other financial instruments that are not traded in an active market, fair value is determined by means of valuation methods or pricing models. Among the most frequently applied of those methods and models are cash-value-based forward pricing and swap models, as well as options pricing models such as the Black-Scholes model or derivations thereof. The fair values arrived at on the basis of these methods and models are influenced to a significant degree by the choice of the specific valuation model and the underlying assumptions applied, for example the amounts and time sequence of future cash flows, discount rates, volatilities and/or credit risks. If neither current market prices nor valuation methods/models based on observable market data can be drawn on for the purpose of determining fair value, then valuation methods or pricing models supported by realistic assumptions derived from actual market data are used (Level 3). Level 3 principally includes investment funds, for which an obligatory net asset value is not published at least on a quarterly basis. The fair value of these positions is, as a rule, computed on the basis of external estimates by experts in relation to the level of future distributions of fund units, or equates to the acquisition cost of the securities less any applicable valuation allowances.

In the financial year 2016, positions with a fair value of CHF 0.0 million (2015: CHF 4.5 million) were reclassified from Level 1 (quoted market prices) to Level 2 (valuation methods based on market data), CHF 0.0 million (2015: CHF 0.0 million) from Level 2 to Level 3 (valuation methods, based on realistic market-data-related assumptions) as well as CHF 0.0 million from Level 3 to Level 2 (2015: CHF 4.3 million). The reclassifications are made as of the end of the reporting period in the case of changes in the availability of market prices (market liquidity).

No deferred day 1 profit or loss (difference between the transaction price and the fair value calculated on the transaction day) was reported for Level 3 positions as of 30 June 2016 or 31 December 2015.

Sensitivity of fair values of Level 3 financial instruments

Changes in the net asset values of investment funds lead to corresponding changes in the fair values of these financial instruments. A realistic change in the basic assumptions or estimated values has no material impact on the statement of income, other comprehensive income or the equity of VP Bank Group’s shareholders.

Assets under management of CHF 6.7 billion and custody assets of CHF 0.4 billion were taken over as part of the acquisition. The transaction gave rise to a “bargain purchase” of TCHF 49,982 as well as intangible assets (client relationships) of TCHF 34,045. The client relationships will be amortised over 10 years.

The costs of the transaction incurred in the reporting period (advisory, legal, auditing, valuation costs, etc.) amount to CHF 2.1 million and are recognised in general and administrative expenses (note 7). The costs for the capital increase accompanying the transaction, in compliance with IFRS, were not taken to income but charged to capital reserves and amount to CHF 0.5 million for the current period. The resulting “bargain purchase” can be ascribed in particular to two specific reasons. On the one hand, it must be taken into consideration that the whole restructuring and integration costs in connection with this transaction are borne by VP Bank. On the other hand, the fact that the seller has become an anchor shareholder in VP Bank in an equivalent amount is also to be taken into account. The market values underlying the sales price of the bearer shares are significantly lower than the intrinsic value of the bearer share.

The bearer shares of VP Bank have been traded on the stock exchange at a price under their carrying value. Both effects combined led to the disclosed “bargain purchase”. The latter was taken to income under “Other income” (note 5). 

Centrum Bank was merged with VP Bank Ltd on 30 April 2015 and fully integrated into VP Bank, Vaduz. Because of the merger of the various organisational units, it is not always possible to show the impact of the acquired company on the profit and loss account.

These transactions were conducted under conditions which are customary for securities lending and borrowing activities as well as trades for which

VP Bank acts as intermediary.

1. Acquired client relationships (note 17) of CHF 6.7 billion are included in this position in 2015.
2. Acquired client relationships (note 17) of CHF 0.4 billion are included in this position in 2015.
3. During the closing operations we determined that the published custody assets as per 31 December 2015 were CHF 1.6 billion (30 June 2015: CHF 1.5 billion) overvalued. The figures were restated accordingly.