19 Goodwill and other intangible assets

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in CHF thousands

 

Goodwill

 

Other intangible assets

 

Software

 

Total

As at 1 January 2015

 

 

 

 

 

 

 

 

Cost

 

132'517

 

76'130

 

120'000

 

328'647

Accumulated amortisation and impairment

 

–76'897

 

–35'376

 

–62'650

 

–174'923

Net book amount

 

55'620

 

40'754

 

57'350

 

153'724

 

 

 

 

 

 

 

 

 

Year ended December 2015

 

 

 

 

 

 

 

 

Opening net book amount

 

55'620

 

40'754

 

57'350

 

153'724

Additions

 

0

 

0

 

3'074

 

3'074

Disposals

 

0

 

0

 

0

 

0

Amortisation

 

0

 

–3'718

 

–13'999

 

–17'717

Disposals / (Additions) from accumulated depreciation

 

76'897

 

6'252

 

13'197

 

96'346

Change from disposals to the scope of consolidation

 

–76'897

 

–20'367

 

–13'671

 

–110'935

Closing net book amount

 

55'620

 

22'921

 

45'951

 

124'492

 

 

 

 

 

 

 

 

 

As at 31 December 2015

 

 

 

 

 

 

 

 

Cost

 

55'620

 

55'763

 

109'403

 

220'786

Accumulated amortisation

 

0

 

–32'842

 

–63'452

 

–96'294

Net book amount

 

55'620

 

22'921

 

45'951

 

124'492

 

 

 

 

 

 

 

 

 

Year ended December 2016

 

 

 

 

 

 

 

 

Opening net book amount

 

55'620

 

22'921

 

45'951

 

124'492

Additions

 

0

 

0

 

8'999

 

8'999

Disposals

 

0

 

0

 

–39'062

 

–39'062

Amortisation

 

0

 

–3'718

 

–11'342

 

–15'060

Disposals / (Additions) from accumulated amortisation

 

0

 

0

 

39'063

 

39'063

Closing net book amount

 

55'620

 

19'203

 

43'609

 

118'432

 

 

 

 

 

 

 

 

 

As at 31 December 2016

 

 

 

 

 

 

 

 

Cost

 

55'620

 

55'763

 

79'340

 

190'723

Accumulated amortisation

 

0

 

–36'560

 

–35'730

 

–72'290

Net book amount

 

55'620

 

19'203

 

43'609

 

118'432

Goodwill

The LLB Group carried goodwill for the following segment:

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in CHF thousands

 

31.12.2016

 

31.12.2015

Retail & Corporate Banking

 

55'620

 

55'620

Goodwill impairment testing

Goodwill is tested twice a year for impairment – in the first quarter as a basis for the interim financial reporting at 30 June and in the third quarter as a basis for the annual financial reporting at 31 December. In order to determine a possible impairment, the recoverable amount of each cash generating unit which carries goodwill is compared with its balance sheet value. According to the calculations made, the recoverable amount of a cash generating unit always corresponds to the value in use. The balance sheet value or carrying value comprises equity before goodwill and intangible assets, as well as goodwill and intangible assets from the underlying purchase price allocation of this cash generating unit.

On the basis of the impairment testing carried out, management reached the conclusion that for the year ended on 31 December 2016, the total goodwill of CHF 55.6 million allocated to the cash generating unit Retail & Corporate Banking remains recoverable. No impairment needs to be recognised because the recoverable amount exceeds the balance sheet value.

Recoverable amount

For determining the value in use, which corresponds to the recoverable amount of the respective cash generating units, the LLB Group employs a discounted cash flow (DCF) valuation model. The DCF model used by the LLB Group takes into consideration the special characteristics of banking business and the financial services sector, as well as the regulatory environment. With the aid of the model, and on the basis of the financial planning approved by management, the cash value of estimated free cash flow is calculated. If regulatory capital requirements exist for the cash generating unit, these capital requirements are deducted from the estimated free cash flows for the respective period and are available to the cash generating unit for distribution. This amount then corresponds to the theoretical sum that could be paid out to the shareholders. For the assessment of the forecasted earnings, management employs approved financial plans covering a period of five years. The results of all periods after the fifth year are extrapolated from the forecasted result or the free cash flow of the fifth year together with a long-term growth rate corresponding to the long-term inflation rate in Switzerland and Liechtenstein. Under certain circumstances, the growth rates may vary for the individual cash generating units because the probable developments and conditions in the respective markets are taken into account.

Assumptions

As far as possible, the parameters on which the valuation model is based are coordinated with external market information. In this context, the value in use of a cash generating unit is most sensitive to changes in the forecasted earnings, changes to the discount rate and changes in the long-term growth rate. The discount rate is determined on the basis of the capital asset pricing model (CAPM), which contains a risk-free interest rate, a market risk premium, a small cap premium, as well as a factor for the systematic market risk, i.e. the beta factor.

The long-term growth rates outside the five-year planning period (terminal value), on which the impairment tests for the annual report per 31 December 2016 were based and which were used for extrapolation purposes, as well as the discount rates for the individual cash generating units, were unchanged from the parameters used at 31 December 2015. The parameters used are shown in the table below. The discount rate is directly influenced by the fluctuation of interest rates. On account of the unchanged, historically low interest rate levels on the market, the discount rate of the cash generating units has not changed in comparison with the previous year. In a longer-term comparison, the present interest rate environment is also reflected in substantially lower interest income as well as corresponding lower annual earnings and free cash flows distributable to shareholders. On account of the fact that the discount rate is linked to current interest rate levels, when the latter rise, basically the discount rate, and interest income, will also rise. The cash generating units are exposed to only a limited level of risk because they operate in a local market, and only in retail and private banking with a limited risk profile.

Sensitivities

During the periodic preparation and execution of impairment tests, all the parameters and assumptions, on which the testing of the individual cash generating units is based, are reviewed and – if necessary – adjusted. A change in the risk-free interest rate has an influence on the discount rate, whereby a change in the economic situation, especially in the financial services industry, also has an impact on the expected or estimated results. In order to check these effects on the value in use of the individual cash generating units, the parameters and assumptions employed with the valuation model are subjected to a sensitivity analysis. For this purpose, the forecasted free cash flow attributable to shareholders is changed by 10 percent, the discount rate by 10 percent and the long-term growth rates by 10 percent. According to the results of the impairment tests carried out, and based on the described assumptions, an amount of CHF 40.0 million in excess of the balance sheet value is obtained for the Retail & Corporate Banking segment. A reduction of the free cash flow of 10 percent would lead to an impairment of CHF 9.5 million in the goodwill of the Retail & Corporate Banking segment and an increase in the discount rate by 10 percent would lead to an impairment of CHF 18.5 million. A reduction in the long-term growth rate of 10 percent would not lead to any impairment. The discount rate could be increased by 6.5 percent and the free cash flow could be reduced by 8.0 percent before the recoverable amount would correspond to the book value.

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Growth rates

 

Discount rates

in percent

 

2016

 

2015

 

2016

 

2015

Retail & Corporate Banking

 

1.0

 

1.0

 

6.0

 

6.0

In view of the challenging situation in the financial services industry, which is expected to persist in the future, the management estimates that an impairment of the goodwill in the Retail & Corporate Banking segment in the coming business years is not improbable. However, thanks to the relative strength in comparison with competitors as well as the realised and planned cost-cutting and efficiency improvement measures, a positive development of the segment is expected over the medium to long-term.

If the estimated earnings and other assumptions in future business years deviate from the current outlook due to political or global risks in the banking industry – such as for example due to uncertainty in connection with the implementation of regulatory provisions and the introduction of certain legislation, or a decline in general economic performance – this could result in an impairment of the goodwill in the future. This would lead to a reduction in the income statement of the LLB Group and a decrease in the equity attributable to shareholders and net profit. Such an impairment would not, however, have an impact on cash flows or on the Tier 1 ratio because – in accordance with Liechtenstein equity capital ordinance – goodwill must be deducted from capital.

Other intangible assets

Customer relationships and brand values are reported as assets under other intangible assets. These are amortised over a period of 15 years on a straight-line basis. Estimated aggregated amortisation on intangible assets amounts to:

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in CHF thousands

 

 

2017

 

3'718

2018

 

3'718

2019

 

3'718

2020

 

3'718

2021

 

3'718

2022 and thereafter

 

613

Total

 

19'203