Principles underlying financial statement reporting and comments
The unaudited interim consolidated financial statements were drawn in compliance with International Financial Reporting Standards (IAS 34). The semi-annual financial statements are prepared applying the same presentation and valuation policies as were applied for the 2018 financial statements.
New and revised International Financial Reporting Standards
The following new and revised Standards and Interpretations have taken effect since 1 January 2019:
Improvements to IFRS 2015–2017 Cycles
In December 2017, the IASB published several amendments to existing IFRS as part of its annual improvement project “Improvements to IFRS 2015–2017 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.
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 are to be applied for the first time for accounting periods beginning on or subsequent to 1 January 2019.
In implementing the new Standard, VP Bank applies the modified retrospective approach. As a result of adoption, right-of-use assets and leasing liabilities amounting to CHF 34.2 million were recognised as of 1 January 2019. In this process, leasing liabilities were measured at the net present value of their outstanding leasing instalments discounted using the lessee’s incremental borrowing rate as of 1 January 2019. In the case of VP Bank, the weighted average incremental borrowing rate in accordance with IFRS 16.C12(a) for the leasing liabilities upon initial adoption amounts to approx. 1.1 per cent.
Leasing arrangements exist for the rental of real estate, office premises as well as motor vehicles. Total assets increased by some CHF 0.03 billion. From 2019 onwards, depreciation and amortisation (approx. CHF 5.5 million) and interest expense (approx. CHF 0.5 million) replace rental expense (approx. CHF 6 million) in the income statement.
The Group rents various office and warehousing buildings as well as motor vehicles. As a rule, rental agreements are entered into for fixed periods of 2 to 8 years but may have renewal options.
Until 31 December 2018, leases were recognised by charges to income on a straight-line basis over the term of the lease. From 1 January 2019, leases are accounted for as rights of use and corresponding lease liabilities at present value. The discounting is effected at the incremental external borrowing rate corresponding to the interest rate that VP Bank would have to pay if it had to take up financing to acquire an asset in a comparable economic environment and on comparable conditions. Each lease instalment is divided into a capital amortisation amount and financing expense. The financing costs are recognised over the term of the lease as charges to interest income which produce a constant periodic interest rate on the residual amount of the liability for each period. The right-of-use asset is amortised on a straight-line basis over the lease term with charges to the income-statement caption depreciation and amortisation of property, plant and equipment. Right-of-use assets are capitalised as part of property, plant and equipment and leasing liabilities recognised under other liabilities.
In applying IFRS 16 for the first time, VP Bank availed itself of the following simplifications:
- As of 1 January 2019, VP Bank applies the modified retrospective approach whereby the leasing liability and right-of-use asset at the time of initial measurement is computed by reference to the net present value of the remaining leasing instalments using the Group’s incremental borrowing rate.
- Lease contracts with a remaining term of less than 12 months as of 1 January 2019 were classified as current liabilities in accordance with IFRS16.C10(c) and thus continued to be recognised as expense.
- Lease contracts with a right-of-use value of less than CHF 5,000 are not capitalised because of their small underlying value but taken to income.
- As of 1 January 2019, VP Bank, pursuant to IFRS 16.C10(d), has ignored the initial direct costs (e.g. planning permission costs) in measuring the right-of-use value at the time of initial adoption, and thus did not consider them as part of the right-of-use value.
IAS 19 – Employee benefits, adjustments resulting from amendment, curtailment or settlement of retirement benefit plans
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 to recompute the current service cost and net interest cost for the remaining business year using the current actuarial assumptions which were used for the mandatory revaluation of the net liability (asset). Furthermore, supplementary disclosures were now required 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 is to be assessed individually or several 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 adoption of the amendments has no material impact on the consolidated semi-annual financial statements of VP Bank Group.
Post-balance-sheet date events
In its meeting of 14 August 2019, the Board of Directors reviewed and approved the semi-annual report and released it for publication.
As part of its ordinary banking activities, VP Bank Group is involved in various legal, regulatory and administrative proceedings. The legal and administrative environment in which the Group operates conceals significant litigation, compliance, reputational and other risks in connection with legal disputes and regulatory proceedings. The impact of these proceedings on the financial strength and profitability of VP Bank Group is dependent on the status of the proceedings and their outcome. VP Bank Group establishes provisions for on-going and threatened proceedings if the probability that such proceedings will entail a financial commitment or loss is judged to be greater than the probability of this not being the case. In isolated cases in which the amount cannot be estimated, as, for instance, because they are at an early stage or of the complexity of the proceedings or other factors, no provision is established but a contingent liability is disclosed.
The risks described below are not, as the case may be, the only ones to which VP Bank Group is exposed. Additional risks which are presently unknown or risks and proceedings which are currently considered as being insignificant may equally impact the future course of business, operating results, financial investments and the outlook of VP Bank Group.
The Russian Agency for Deposit Insurance (DIA), as part of the bankruptcy proceedings of two Russian banks, asserts that third-party pledges created in connection with the granting of credits to foreign companies shortly prior to the revocation of the banking license and commencement of bankruptcy proceedings should not have been realised on the open market. Both proceedings are at differing stages of development.
In the first proceedings against VP Bank (Switzerland) Ltd involving an amount in dispute of USD 10 million, the Ninth Arbitration Court of Appeal on 24 May 2017 upheld the nullity of the realisation pursuant to Russian bankruptcy law. The court required VP Bank (Switzerland) Ltd to pay an amount of approx. USD 10 million. The sentence became res judicata on 19 September 2017. All extraordinary legal remedies without suspensive effect were dismissed.
The debt collection procedure opened on 7 June 2018 in Moscow has so far gone nowhere. In a letter dated 31 July 2019, DIA, in its capacity as insolvency administrator, issued the first call for payment to VP Bank (Switzerland) Ltd. VP Bank Group will not comply with this request as it denies the correctness of this decision. Further developments will be monitored by local lawyers in Moscow. VP Bank Group has also initiated measures to protect its own interests and those of its employees.
The second proceedings against VP Bank Ltd, and more recently VP Bank (Switzerland) Ltd, in an amount in dispute of USD 15 million are of a similar nature but are not yet closed. On 16 March 2018, the Supreme Court confirmed the jurisdiction of the Russian courts and dismissed the case to the Arbitration Court for substantive judgment. On 22 May 2019, the Arbitration Court ruled in favour of VP Bank Ltd and VP Bank (Schweiz) AG. This judgment was confirmed by the Court of Appeal on 12 August 2019. It is now open to the DIA to bring the decision before the Court of Cassation.
In both cases, VP Bank considers the risk of an outflow of assets to be low, for which reason no provision has been set aside.
Most important foreign-currency exchange rates
The exchange rates for the most important foreign currencies are as follows: