Principles underlying financial statement reporting and comments
The unaudited interim financial report was prepared in compliance with International Financial Reporting Standards (IAS 34). The semi-annual financial statements are drawn up on the basis of the same accounting and valuation principles as underlie the 2016 annual consolidated financial statements. This gives rise to reclassifications in the comparative prior-year period resulting in a reduction of interest income by CHF 2.2 million. Income from trading activities in the 2016 prior-year period increased by the same amount. The corresponding financial-statement reporting policies are to be found in the 2016 Annual Report, page 113 ff.
In addition, the presentation of the income statement (and thus also segment reporting) was amended at the end of 2016 to conform to current practice in the sector. The sub-total “gross operating income” was replaced by the term “operating income”. Furthermore, the captions “depreciation and amortisation” and “valuation adjustments, provisions and losses” are now recorded under “operating expense”. The prior sub-total “gross income” was dropped. Because of the revised presentation, the sub-total “operating expenses” for the first half-year of 2016 of CHF 89.4 million increased to CHF 101.5 million. The other positions remain unchanged or are dropped.
New and revised International Financial Reporting Standards
Since 1 January 2017, the following new or revised Standards or Interpretations have taken effect:
Improvements to IFRS 2014–2016 cycles
In December 2016, the IASB published numerous amendments to existing IFRS as part of its annual improvement project “Improvements to IFRS 2012–2016 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 7 – Statement of cash flows (amendments to IAS 7)
The amendments are designed to clarify IAS 7 and improve informational disclosures provided to addressees of financial statements regarding the financing activities of a company. They become effective for reporting periods beginning on or after 1 January 2017. The changes have no material impact on the consolidated financial statements.
IAS 12 – Income taxes (amendments relating to the recognition of deferred tax assets for unrealised losses)
The amendments clarify the following matters:
- Unrealised losses on debt instruments measured at fair value and which are valued for tax purposes at purchase cost give rise to a deductible temporary difference. This occurs regardless of whether the debt instrument’s holder expects to recover the carrying amount of the asset by holding the instrument until maturity and collecting all contractual payments or whether he intends to sell it.
- The carrying value of an asset does not represent the upper limit for estimating probable future taxable profits.
- In estimating future taxable profits, tax deductions resulting from the reversal of deductible temporary differences are to be excluded.
- An entity shall evaluate a deferred tax asset in combination with other deferred tax assets. Whenever tax law restricts the utilisation of tax losses, the entity is to assess a deferred tax asset in combination with other deferred tax assets of the same (permissible) type.
These changes have no material impact on the consolidated semi-annual financial statement.
Within the framework of the authorisation given to it by the Annual General Meeting of Shareholders of 24 April 2015, VP Bank Ltd resolved to increase the number of its own shares through a further share repurchase programme of up to 10 per cent of the share capital. VP Bank Ltd thus picks up from the two successful programmes of 2015.
As part of the public repurchase programme, VP Bank Ltd is prepared to repurchase up to a maximum of 120,000 registered shares A. At no time, however, may it hold more of its own registered shares A than it is allowed within the framework of the above-mentioned authorisation granted by the Annual General Meeting (up to a maximum of 601,500 shares, which equates to 10 per cent of all registered shares A).
As part of this repurchase programme, VP Bank acquired 88,835 registered shares A at a price of CHF 8.8 million between 7 June 2016 and 31 May 2017.
The registered shares A so repurchased are to be used for acquisitions or treasury management purposes. VP Bank Ltd had commissioned Zürcher Kantonalbank to undertake the repurchase of the listed registered shares A.
The half-yearly results contain a provision based upon a settlement with the authorities in North Rhine-Westphalia pertaining to untaxed assets owned by German clients. This is a comprehensive settlement and applies to all German federal states. It thus creates clarity and legal security. The settlement covers VP Bank Ltd and all of its subsidiary banks. The half-yearly results reflect a provision in an amount of EUR 9.9 million for the settlement.
Post balance-sheet-date events
The Board of Directors reviewed and approved the consolidated financial statements in its meeting of 17 August 2017 and released them for publication.
International Financial Reporting Standards which must be adopted in 2018 or later
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 relevant disclosures be made available than at present. The Standard offers, in this respect, 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. Based upon the current stage of implementation, the introduction of IFRS 15 in general will have only minor impact on the recognition, recording, presentation and disclosures of VP Bank Group. Insofar as material in future, the inclusion of further revenue positions will be made with a more detailed presentation of the revenue types shown under commission and service income.
Application of IFRS 9 Impairment
As from 1 January 2018, the methodology used to compute the expected credit loss under IFRS 9 will replace the current valuation adjustments for credit risks of VP Bank. The computation and reporting of valuation adjustments for default risks using the current methodology will be undertaken for the last time as of 31 December 2017. On 1 January 2018, the valuation adjustments for credit risks will be derecognised over shareholders’ equity and the expected credit losses computed in accordance with IFRS 9 will be recognised in shareholders’ equity. From then on, changes in anticipated credit losses will be recorded in the income statement. IFRS 9 Impairment relates to all asset positions which are exposed to a potential credit risk and which are not already recorded at fair value over the income statement. This includes particularly client loans, amounts due from banks and financial investments measured at amortised cost. Also affected by this methodology are off-balance-sheet positions such as credit commitments and guarantees. Preparations for the implementation of the Standard had begun in VP Bank at the end of 2015. Implementation is now in the final phase. After completing the phases “conception”, “analysis” and “data preparation”, there now follows, based upon the technical specification concept, the calibration and refinement of the software solution implemented. At the same time, the data will be re-fed into the banking system and its integration into current operational processes expedited with the result that VP Bank Group, wherever required, can record the data at the individual-entity and group levels as of 1 January 2018.
VP Bank follows international standards for the modelling of expected credit losses. Should an instrument possess an external rating from a recognised rating agency (e.g. S&P, Moody’s), this rating will be utilised for determining the probability of default. Should no external rating be available, VP Bank, in principle, bases itself on the internal rating. Wherever the procurement of additional information is possible only with disproportionately high costs and efforts, use was made of admissible simplifications. Thus, a so-called “loss rate approach” is applied in the case, for example, of lombard credits. The level of expected credit losses is determined by allocating the credit instrument to one of three stages: in the case of stage 1, should no significant deterioration in credit quality exist since initial recognition, reductions in value in the amount of the loss arising from possible credit events within the following 12 months are to be recorded by corresponding charges to the income statement. Should no objective indication of a reduction in value exist but a significant increase in default risk be present, the reduction in value is to be recognised up to the level of the expected loss over the entire remaining duration through a corresponding charge to income (stage 2). In stage 3, an objective indication of a reduction in value must exist and an individual valuation adjustment for the financial instrument is to be recorded. Numerous studies suggest that the volatility of future income statements will increase because of fluctuating valuation adjustments. Current analyses show that no negative impact on shareholders’ equity and thus on the regulatory equity ratio will ensue in total for VP Bank through the discontinuation of existing lump-sum valuation adjustments and the initial application of IFRS 9 Impairment.
Significant foreign exchange rates
The following exchange rates were used for the most important currencies: