Accounting principles

1 Basis for financial accounting

The interim financial reporting was prepared in accordance with the International Financial Reporting Standards (IFRS) and complies with the requirements of IAS 34 (Interim Financial Reporting). The same accounting principles were applied as for the consolidated financial statement per 31 December 2015 with the exception of the changes mentioned below. The unaudited interim financial reporting should be read together with the audited 2015 consolidated financial statement. Management believes that all the necessary adjustments were made to provide a fair presentation of assets, liabilities, results of operations and cash flows.

In preparing the interim financial reporting in conformity with IFRS, management is required to make estimates and assumptions that affect reported income, expenses, assets, liabilities and disclosure of contingent assets and liabilities. Use of information available to the LLB on the balance sheet date and application of judgement are inherent in the formation of estimates. Actual results in the future could differ from such estimates, and the differences could be material to the financial statements. The IFRS contain guidelines, which require the LLB Group to make estimates and assumptions when preparing the interim financial reporting. Goodwill, intangible assets, pension plans and fair value measurements for financial instruments are all areas which leave large scope for estimate judgements. Assumptions and estimates made with them could be material to the financial statement. Explanations regarding this point are shown under note 11 and note 14 in the 2016 consolidated interim financial reporting and under note 19, note 36 and note 41 of the 2015 consolidated financial statement.

The LLB Group periodically reviews the actuarial assumptions and parameters used for the calculation of pension obligations. The actuarial assumptions and parameters used for the calculation of pension obligations in the 2015 annual financial statement were adjusted accordingly in the 2016 interim financial reporting. The Personnel Pension Fund Foundation of LLB AG reduced the conversion rate for the pension plan. In the first half of 2016, this led to a one-time reduction in personnel expenses of CHF 10.2 million.

Numerous new IFRS standards, amendments and interpretations of existing IFRS standards were published, which were to become effective for financial years starting 1 January 2016 or later. The following new or revised IFRS standards or interpretations are of importance to the LLB Group:

• IFRS 9 “Financial Instruments” – IFRS 9 is divided into three phases: Classification and Measurement, Impairment and Hedge Accounting. The classification and measurement of financial instruments are made on the basis of the business model of the bank for the management of financial instruments and the contractual cashflow characteristics of the financial assets. The financial instruments are classified in the “Hold” business model and measured at amortised cost, if the purpose of the financial instrument is to generate interest earnings and payment of the principal upon maturity. If the financial instruments are held for liquidity management reasons, i.e. for the purpose of holding and sale, then the instruments are to be recognised at fair value through other comprehensive income. Gains and losses from this business model are booked to the statement of other comprehensive income and equity. On the basis of IFRS 9, impairments are to be recognised at an early stage (expected loss model). The amount of the impairment is determined on the basis of the classification of the financial instrument in one of the following three stages. In stage 1 there is no significant deterioration in credit quality and impairments amounting to the cash value of a 12-month expected credit loss are to be recognised. If there is no objective indication of an impairment, but a significant increase in credit risk has occurred, the impairment is to be recognised in the expected life-time credit loss (stage 2). In stage 3, there must be an objective indication of an impairment and a single allowance (life-time expected loss) is to be made for this financial instrument. These three stages are to be reviewed on every balance sheet key date. In addition, IFRS 9 regulates hedge accounting, whereby it seeks to standardise risk management and accounting. Hedges are to be better reflected in the financial accounts. The new standard comes into effect on 1 January 2018. The previous year does not have to be adjusted. The first-time adjustments will be made via the opening equity capital per 1 January 2018. The LLB has split its analysis of the effects of these changes into three parts, equivalent to the three stages of the IFRS. Up to the completion of the IASB project dealing with macro hedge accounting, the LLB can continue with its macro hedge accounting under IFRS 9 unchanged. The new rules regarding the classification and valuation of financial instruments will have no material influence on the LLB Group because the current classification and valuation of financial instruments remains largely unchanged. With respect to the third phase of IFRS regarding impairments (expected loss model), the LLB Group has formulated a concept (validation of scope) for the systematic calculation of periodic impairments. In this connection, the LLB Group will introduce a standard IT tool throughout the Group during the first half of 2017.
• IFRS 15 “Revenue from Contracts with Customers” – In May 2014, the IASB, together with the FASB, issued new regulations for the recognition of revenue, which completely replace the existing USGAAP and IFRS rulings for the recognition of revenue. The recognition requires that revenue be shown as goods or services transferred to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. IFRS 15 contains a 5-step model to calculate the revenue, whereby the type of transaction or the industry, in which the company operates is irrelevant. The standard envisages additional disclosures. The new standard comes into effect on 1 January 2018. The effects of these changes on the LLB Group’s financial reporting are currently being analysed.
• IFRS 16 “Leasing” – The new standard regulates the recognition and disclosure of leasing contracts. Leasing contracts are understood to be contracts that convey the right to use an asset for a period of time in exchange for a consideration. This can be, for example, the leasing of premises or equipment. The IFRS 16 contains no material threshold values for when a leasing contract is to be recognised as an asset, rather all substantial leasing contracts are basically to be entered in the accounts. The entering of leasing contracts in the financial accounts leads to a balance sheet extension, which basically has a negative impact on the regulatory required equity and also on the corresponding regulatory key figures, such as the tier 1 ratio. The standard comes into effect on 1 January 2019. The effects of these changes on the LLB Group’s financial reporting are currently being analysed.
• Disclosure Initiative of the IASB – The IASB has started a project to explore how disclosures in IFRS financial reporting can be improved. This envisages a fundamental revision of IAS 1 (“Presentation of Financial Statements”), IAS 7 (“Statement of Cash Flows”) and IAS 8 (“Accounting Policies, Changes in Accounting Estimates and Errors”). In addition, a general revision is to be made of appendix instructions in existing standards. The objective is to improve the materiality of disclosures in financial statements such as relevance and use of the figures for the reader, as well as increased company-specific disclosures.

Within the scope of its annual improvements, the IASB has published further improvements (Annual Improvements to IFRS 2012 – 2014 Cycle), which came into effect on 1 January 2016. The implementation of the amendments has no major influence on the financial statement of the LLB Group.

2 Changes to the scope of consolidation

There were no changes to the scope of consolidation in the first half of 2016.

3 Foreign currency translation

4 Risk management

In the course of its operating activity, the LLB Group is exposed to financial risks such as market risk, liquidity and refinancing risk, credit risk and operational risk. The interim financial statement contains no risk information. We therefore refer to the risk management information provided in the 2015 annual report. There were no significant changes in comparison with 31 December 2015.

5 Events after the balance sheet date

There have been no material events after the balance sheet date which would require disclosure or adjustment of the consolidated interim financial statement for the first half of 2016.