Accounting principles

1 Basis for financial accounting

1.1 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 significant accounting and valuation methods employed in the preparation of the unaudited interim financial reporting correspond to those used in the 2017 annual report. In addition, the regulations valid since 1 January 2018 have been applied.

The unaudited interim financial reporting does not encompass all the data contained in the audited 2017 consolidated financial statement and should, therefore, be read together with the audited consolidated financial statement as at 31 December 2017. The interim financial reporting was compiled in fulfilment of obligations under stock exchange law and, in addition, is provided for information purposes.

On account of detailed definitions in its presentation, the interim financial reporting can contain reclassifications. These have no effect on the business result. No further details of reclassifications are provided because the only adjustments concern the type of presentation.

1.2 Estimates made in the preparation of the interim financial reporting

In preparing the interim financial reporting in conformity with IFRS, management is required to make estimates and assumptions. These contain statements concerning the future, which provide no guarantee whatsoever about future developments. These statements include, but are not limited to, risks and uncertainties concerning future global business conditions, foreign exchange rates, regulatory provisions, market conditions, the activities of competitors, as well as other factors beyond the control of the company. This may have an impact on individual income and expense positions, on assets and liabilities, as well as on the 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 LLB is under no obligation to update the forward-looking statements made in this interim financial reporting. The IFRS contain guidelines, which require the LLB Group to make estimates and assumptions when preparing the interim financial reporting. Allowances for credit loss expense, goodwill, intangible assets, provisions for legal and litigation risks, fair value criteria for financial instruments and pension schemes are areas with a wide scope of discretion, with which estimates and assumptions could be of vital importance for the financial reporting. Explanations regarding this point are shown under note 12 and note 13 in the 2018 consolidated interim financial reporting and under note 13, note 19, note 26, note 34 and note 41 of the 2017 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 2017 annual financial statement were adjusted accordingly in the 2018 interim financial reporting.

1.3 Amended and new IFRS standards and their effects

New IFRS standards, as well as revisions and interpretations of existing IFRS standards, which must be applied for financial years beginning on 1 January 2018 or later, were published or in some cases came into effect.

The new standards IFRS 9 “Financial Instruments” and IFRS 15 “Revenue from Contracts with Customers”, which are dealt with in more detail in a separate section, as well as the amendments to IAS 1 “Presentation of Financial Statements” and IAS 40 “Investment Property” were designated as relevant for the LLB Group for the 2018 financial year. The application of the amendments to IFRS 15, IAS 1 and IAS 40 has no major effect on the financial reporting. In the case of both IFRS 9 and IFRS 15, the transition rulings enable a modified retroactive adjustment to be made. Effects arising from the transition to the new standard will be recognised in equity without affecting the income statement; no restatement of the comparison period will be made. The LLB Group has elected to adopt the simplified form for the initial application of these standards, i.e. the values for the prior comparison periods will be presented according to the old regulations. The transition from IAS 18 “Revenue” and the relevant interpretations of IFRS 15 do not result in a correction of equity because the balance sheet does not contain any positions that would be subject to the IFRS 15 regulations. Within the scope of the application of IFRS 9, the LLB Group decided in favour of the early implementation of the amendments to IFRS 9, which concern the right of early termination and which were published by the International Accounting Standards Board (IASB) in October 2017. The early application will have no material impact.

In comparison with the 2017 Annual Report, the International Accounting Standards Board (IASB) issued further regulations during the report period, which will be relevant for the LLB Group from 1 January 2019 or later. These encompass the Conceptual Framework and the amendments to IAS 19 “Employee Benefits”.

If new or amended IFRS standards or interpretations, which are relevant for the LLB Group, have already been described in the 2017 Annual Report, only significant, new information compared with 31 December 2017 is provided here.

• IFRS 16 “Leasing” – In the first quarter of 2018 a project was started with the aim of ensuring an application of the standard in conformance with IFRS. In spite of the fact that currently there are only a few leasing contracts, which would convey the right to use an asset and lead to a leasing obligation, it was decided to install software for the proper presentation of these positions on the balance sheet. Approval and release of the software is planned for the third quarter of 2018. Accordingly, in the fourth quarter all leasing contracts that fulfil the accounting criteria for a leasing contract and that currently represent operating leases will be recognised from 1 January 2019. Leasing contracts exist in the form of leases for office premises and properties. As a result of the takeover of the Semper Constantia Group from 4 July 2018, vehicle leasing contracts will be added to the existing portfolio. The simplified approach can serve as a transition method, meaning that no comparatives need to be restated. The effects of introducing the new standard on impairment of key figures is regarded as not being material.
• IAS 19 “Employee Benefits” – The amendments to IAS 19 were introduced to eliminate differences in accounting practices. Previously, rulings existed for how changes to contribution and benefit payments were to be considered for the calculation of net debt and net interest, but not however what procedure was to be adopted if amendments, curtailments, or settlements to defined benefit plans occurred during the report period. From now on it is stipulated that when an amendment, curtailment or settlement of a defined benefit plan occurs, the current service cost and the net interest for the period after the remeasurement are to be determined using the assumptions used for the remeasurement. In a first step, the effects of a plan amendment, curtailment or settlement are to be recognised without considering any possible effects in relation to the asset ceiling. The determination and possible adjustment of the asset ceiling will only follow in a second step. The amendments are valid for financial years beginning from 1 January 2019 and are to be applied prospectively. At the present time, the amendments are not regarded as being material for the LLB Group.
• Conceptual Framework – A new Conceptual Framework was published in March 2018. This aims to support the IASB both in developing new standards on the basis of uniform concepts and to help the persons preparing financial statements to formulate new accounting policies. In addition, it should assist all users to understand and interpret IFRS. The Framework is not a standard and does not override any specific regulation in the standards. The Framework is to be applied for financial years beginning on or after 1 January 2020. An earlier adoption is possible but the LLB Group will probably not choose to adopt this in advance. The possible effects are currently being analysed.

1.4 Initial application of IFRS 9

The LLB Group has applied IFRS since 1 January 2018 . IFRS 9 is structured in three phases by the IASB: “Classification and Measurement”, “Impairment” and “Hedge Accounting”. The following information relates only to classification and measurement as well as impairment. Under IFRS 9, macro-hedge accounting on the portfolio level, which the LLB Group currently applies, has not so far been regulated. Therefore, the requirements of IAS 39 “Financial Instruments: Recognition and Measurement” continue to apply.

1.4.1 Classification and measurement

Under IFRS 9, there are three methods of measuring financial assets. How a financial asset is measured depends on the business model employed by the company and the cash flow characteristics of the financial asset.

Classification and measurement under IFRS 9

• Amortised Cost (AC) – In order for financial assets to be measured at amortised cost, a company must adopt a business model aimed at the collection of contractual cash flows (“Hold” business model). The cash flows are collected at specified time points and consist solely of payments of principal and interest (SPPI). Under this business model only very restricted sales are possible, and only when certain conditions are fulfilled.
• Fair Value through Other Comprehensive Income (FVOCI) – Financial assets are classified and measured at FVOCI if they are held in a business model whose objective is attained by both the collecting of contractual cash flows and the sale of financial assets (“Hold to Collect and Sell” business model). The cash flows are collected at specified times and consist solely of payments of principal and interest (SPPI). By adopting a business model of this type, the LLB Group brings into line various objectives such as managing daily liquidity requirements, ensuring a specific interest yield profile or matching the duration of financial assets with the duration of the liabilities that those assets are funding.
• Fair Value through Profit and Loss (FVTPL) – Assets that do not meet the criteria for AC or FVOCI are measured at fair value through profit and loss (“Others” business model). Furthermore, measurement at FVTPL is basically carried out in combination with the “Trading” business model. The aim of this business model is generally active buying and selling. The collection of contractual cash flows is not integral to, but rather of secondary importance for the fulfilment of this business model’s objective.

It is always possible to designate a financial asset irreversibly at inception if there is an accounting mismatch and this can thereby be eliminated. In the case of debt instruments, the possibility exists of assigning them an FVTPL designation. Equity instruments are measured at FVTPL, provided they have not been given a FVOCI designation. The consequence of the latter is that in the event of the instruments being sold, no reclassifying of accrued unrealised income in other comprehensive income (OCI) is possible.

Basically, financial liabilities are classified at amortised cost, unless one of the exceptions mentioned in IFRS 9.4.2. applies, or the right to choose measurement at FVTPL is used.

The effects of the transition from IAS 39 to IFRS 9 on the classification of financial assets and financial liabilities

At the LLB Group, the application of IFRS 9 only has an impact on financial assets that are contained in the balance sheet position “Financial investments”. For the LLB Group this is the only position where, as a result of broad discretionary scope and estimates in relation to the business model and the SPPI ability, the measurement under IFRS 9 can differ from that under IAS 39. For all the other balance sheet positions, for which IFRS 9 is applicable, the classification under IFRS 9 is identical to that under IAS 39.

Application of the business models

The management of the LLB Group specifies the strategy, and therefore the related business model, for all the Group companies. Two business models come into question for the financial assets that were contained in the Group’s portfolio at the time of transition, i.e. the “Hold to Collect and Sell” and the “Others” business models. In addition, equities that fulfilled the definition criteria of equity instruments were irreversibly designated as FVOCI. The decision regarding the allocation to a business model or designation was made at the product level.

Debt instruments – Under IAS 39 these instruments were recognised both at fair value through profit and loss, as well as available for sale (AFS). Those debt instruments that were measured at fair value through profit and loss under IAS 39 were assigned to the “Others” business model. The debt instruments that were measured as available for sale under IAS 39 were allocated to the “Hold to Collect and Sell” business model. The primary aim of this allocation of debt instruments is the management of liquidity requirements. From 1 January 2018, all new debt instruments will be assigned to the “Hold to Collect and Sell” business model.

Equity instruments – Under IAS 39 equity instruments were measured at fair value through profit and loss. These included equity instruments with an infrastructure character and investment funds that were classified as equity. With the transition from IAS 39 to IFRS 9 equity instruments with an infrastructure character have been designated at FVOCI. Investment funds continue to be measured at FVTPL because they do not meet the criteria for SPPI cash flows but are now reported under debt instruments.

Assessment of the SPPI

The assessment of whether financial assets conform to SPPI criteria is a critical judgement. The SPPI test is particularly relevant in the case of complex products. Within the LLB Group, the assessment is decisive for the classification of debt instruments because the SPPI condition is a co-factor in deciding how a debt instrument is to be measured. The assessment of every debt instrument is made internally prior to the classification. The internal assessment is checked against a downstream external Bloomberg assessment.

Comparison of assessments under IAS 39 and IFRS 9

The adjacent table summarises the statements made and compares the measurements under IAS 39 and IFRS 9:

A transition of the carrying values is shown in Chapter 1.4.3 Quantitative disclosure.

Measurement of financial assets

Initial recognition is basically made at fair value and, in the case of financial assets that are not recognised at fair value, with the addition of transaction cost. This corresponds to a valuation at effective cost. Subsequent measurement may differ depending on which classification an asset has or whether a designation has been made.

In line with the simplified transition to IFRS 9, in the comparison year the measurement basis is shown according to IAS 39. This can be seen in the 2017 Annual Report.

• Financial assets at fair value through profit and loss – Financial assets are measured at fair value. Non-realised gains or losses are recognised at fair value through profit and loss in income from financial investments. The fair value of listed shares is measured on the basis of the current offer price. If there is no active market for a financial asset, or the asset is not listed on an exchange, the fair value is determined using suitable valuation methods. These encompass reference to recent transactions between independent business partners; the application of the current market prices of other assets, which are essentially similar to the assets being valued; the discounted cash flow procedure; external pricing models, which take into account the special circumstances of the issuer. See also note 13. Interest earnings from financial investments are recognised at fair value in net interest income, and income from dividends is recognised at fair value in income from financial investments. Interest is recognised on an accrual basis.
• Financial assets recognised at fair value through other comprehensive income (FVOCI) – Measurement differs depending on whether the positions are debt or equity instruments. Debt instruments are measured at amortised cost, whereby the effective interest rate method is applied minus any expected credit losses. Thereafter the value at amortised cost is adjusted to correspond to fair value. The fair value of these financial assets is measured on the basis of listed shares. If there is no active market, or if the assets are not listed on an exchange, the fair value is determined using suitable valuation methods similar to those used for assets measured at fair value through profit and loss. See also note 13. Possible gains or losses arising from value fluctuations are recognised in other comprehensive income. Interest on debt instruments is recognised on an accrual basis and reported using the effective interest method under interest income. Upon disposal of the debt instrument, the unrealised gains or losses reported in the statement of comprehensive income are reclassified in the income statement. Equity instruments are recognised at fair value. Changes in value, gains or losses are reported in other comprehensive income. The fair value of these financial assets is measured in exactly the same manner as with debt instruments. Dividend earnings are recognised in the income statement. Upon disposal of the equity instrument, the unrealised gains or losses reported in the statement of comprehensive income are not reclassified in the income statement. These are reclassified in retained earnings without affecting the income statement.

1.4.2 Impairment

The impairment regulations contained in IFRS 9, which are to be applied from 1 January 2018, are based on the expected credit loss model (ECL model) and supersede the incurred loss model (ICR model) stipulated in IAS 39. For all positions that are exposed to a credit loss risk and not recognised at fair value through profit and loss, in accordance with IFRS 9, an expected credit loss is to be calculated and recognised. Against the backdrop of IFRS 9, the LLB Group developed and implemented an impairment model in order to quantify expected credit losses. An expected credit loss is recognised initially in equity (retained earnings) without affecting the income statement.

Governance with respect to input factors, assumptions and estimation procedures

The impairment model for the determination of the expected loss requires a range of input factors, assumptions and estimation procedures that are specific to the individual institute. This in turn necessitates the establishment of a governance process. The Group Credit Risk Committee is responsible for the regular review, stipulation and approval of input factors, assumptions and estimation procedures, which must be carried out at least once a year. In addition, internal control systems at the LLB Group ensure the correct quantification of the expected loss as well as the conformance with IFRS.

Segmentation of the credit portfolio

The LLB Group segments its credit portfolio according to two criteria: by type of credit and by customer segment. The following types of credit are considered for the modelling of PD (Probability of Default), LGD (Loss Given Default) and EAD (Exposure at Default) calculation parameters:

• Mortgage loans
• Lombard loans
• Unsecured loans
• Financial guarantees
• Credit cards
• Bank deposits, secured
• Bank deposits, unsecured
• Financial investments
• SIC (Swiss National Bank)

In the case of the first five listed types of credit, a further differentiation is made between the customer segments: private clients, corporate clients and public sector debtors. Consequently, 19 segments were formed differing from each other in the modelling of the calculation parameters, to enable the LLB Group’s credit portfolio to be segregated into risk groups that are as homogenous as possible.

Modelling principles and calculation parameters of expected credit loss

The calculation of the expected credit loss is based on the components: probability of default, (PD), exposure at default (EAD) and loss given default (LGD), whereby specific scenarios are used to determine these criteria. The most important differences in the modelling of the calculation parameters are shown in the following.

• PD: The probability of default is determined differently depending on the segment. In the case of corporate clients, the ratings are based on an external scoring model where the financial statements of the corporate clients serve as a basis for the calculation of the respective ratings and probability of default. With bank and financial deposits, the ratings and probability of default are obtained from external sources (Moody’s). Basically, the probability of default is calculated at the position level. One exception is the private clients segment, where a global probability of default is applied for the entire client segment. In determining the portfolio probability of default, the only differentiation made is between the above-mentioned credit segments. Here the probability of default is based on internal historical default rates. A common factor with all the ratings is that the probability of default in all cases is determined on a through-the-cycle (TTC) basis, which is adjusted within the scope of micro-scenarios to take into consideration the expected economic conditions (point in time, PIT). For this purpose, in the case of private and corporate clients, the LLB Group estimates the development of interest rates as well as of gross domestic product, and models the impact of the expected economic development on the probability of default. In the case of bank and financial deposits with ratings from Moody’s, the rating agency’s outlook for the expected future development of the ratings is taken into consideration.
• EAD: Exposure at default is determined on the basis of the average amortised cost in the individual monthly period. The development of amortised cost is calculated on the basis of the initial credit exposure compounded with the effective interest, plus or minus additional inflows or outflows of resources such as amortisation payments. The average amortised cost of the individual periods is extrapolated from the overall development through integration and then division by the duration of the periods. The term of the loans is defined in the individual credit agreements. In the case of loans with an unspecified term, a model is used to ascertain the term. The period of notice is used as a basis for the calculation. Cash inflows (loan repayments) are defined on the basis of the planned amortisation payments. Cash outflows (loan increases) are dependent on the type of loan and the agreed-but-not-yet-utilised credit limit. Internal experts estimate a credit conversion factor, which is then employed to define the expected credit utilisation.
• LGD: Basically, there are three approaches for determining the loss given default (LGD): internal loss given default models (loans with real estate collateral), estimates made by internal experts (Lombard loans) and external studies from Moody’s (bank and financial deposits). In the case of loss given default models, the LGD of loans secured by mortgages is calculated on the basis of work-out procedures at the position level, taking into consideration the collateral provided. In this case, all the expected future cash flows are estimated and discounted. In addition, the value of the collateral provided is modelled on the basis of the expected development of real estate prices given various scenarios.

The expected credit loss is calculated as the sum of PD, EAD and LGD.

The form of the calculation is determined by the credit quality.

• Credit quality stage 1: No significant increase in the credit risk since initial recognition; the expected credit loss is calculated over one year.
• Credit quality stage 2: Significant increase in the credit risk since initial recognition; the expected credit loss is calculated over the remaining term of the loan.
• Credit quality stage 3: Default in accordance with the capital requirements regulation (CRR Art. 178); in the case of defaulted positions a specific value allowance is determined and recognised by the Group Recovery Department. The expected credit loss is calculated over the remaining term of the loan.

The assignment to a credit quality stage has a significant influence on the magnitude of the expected credit loss because in the case of stage 2 and stage 3 positions this can be substantially higher than with stage 1 positions, depending on the remaining term of the loan.

Credit quality stage, monitoring of significant increase in credit risk (SICR) and cure period

Loans are assigned to a credit quality stage. In addition to historical analysis, forward-looking factors are taken into consideration.

Historical analysis at the LLB Group considers, for example, whether the credit risk with a position has significantly increased since the beginning of the contractual term, or whether there are already payment arrears. Payments more than 30 days past due are assigned to credit quality stage 2; payments more than 90 days past due are assigned to credit quality stage 3. In the event of an increase of one percentage point in the default probability, the LLB Group assumes there will be a significant increase in the credit risk and accordingly calculates the expected credit loss for such positions over the remaining term of the loan.

In a forward-looking test, based on the development of a customer’s cash flows, it is examined whether a deterioration in the creditworthiness of the customer is to be expected in the future. Furthermore, in the case of bank and financial deposits, for example, the expectations of rating agencies with respect to the future development of the ratings are considered in the assignment of a credit quality stage for a loan.

Loans in credit quality stage 2 are only reassigned to credit quality stage 1 following a sustained improvement in their credit quality. The LLB Group defines a sustained improvement in credit quality as being the fulfilment of the criteria for credit quality stage 1 for at least three months.

In the case of loans in credit quality stage 3, the Group Recovery Department is responsible for estimating the extent of a sustained improvement in credit quality. The decision is largely guided by whether the default, as defined by the LLB Group, still exists or not. Here too, in order for a position to be returned to credit quality stage 2, the criteria governing the credit quality stage must have been fulfilled for at least 3 months.

Upon initial recognition, all risky positions are assigned to stage 1 because no financial assets having a negative effect on credit quality are purchased or generated.

Macro-scenarios

Three scenarios are utilised for the measurement of the expected credit loss: a basic scenario as well as a negative and a positive scenario. The probability of a credit loss occurring is the same with all three scenarios. The average value derived from these three scenarios represents the final expected credit loss.

In determining the expected credit loss on the basis of the various scenarios, the LLB Group utilises the following three macro-factors, which have an influence on the creditworthiness of a debtor as well as on the value of the collateral provided for the loan:

• Gross domestic product
• Interest rate development
• Real estate price development

The impact of the macro-factors is based on estimates made by the Asset Management Division of LLB AG and the Risk Management Department of the LLB Group, whereby the macro-factors are also regularly submitted to the Group Credit Risk Committee for its approval.

Definition of default, determination of creditworthiness and write-off policy

Under IFRS 9, the LLB Group bases its definition of default on the capital requirements regulation (CRR) Art. 178 in order to ensure a uniform definition for regulatory and accounting policy purposes. On the one hand, claims which are more than 90 days past due are regarded as defaulted and, on the other, indications that a debtor is unlikely to pay its credit obligations can also lead to a loan being classified as in default.

The LLB Group regards a financial asset as being impaired when its recoverable value, which is determined on the basis of a calculation of the present value, is lower than the carrying value. The difference between the present value and the carrying value is recognised as a specific value allowance.

A cautious write-off policy is pursued with impaired assets because if a debt is waived it can no longer be recovered. A debt is written off only when there is no reasonable expectation of recovery in the future, a pledge default certificate has been submitted, which enables, in spite of the write-off, the remaining debt or a part of the remaining debt to be claimed, and where agreement has been reached with the debtor that the LLB or a subsidiary within the LLB Group irrevocably waives a part of the debt.

Modification of contracts

The control process for managing credit quality stages was described in “Credit quality stage, monitoring of significant increase in credit risk (SICR) and cure period”. A modification of the contractual terms implies a change in the existing risk estimate of a financial asset and therefore has an influence on the classification of the financial asset within the impairment model. This becomes problematic if, on account of the modification of the contractual terms, a financial asset in credit quality stage 3 is classified as fundamentally different. The derecognition and re-entry of the financial asset means that it is automatically classified in credit quality stage 1. However, this does not conform to the financial asset’s risk profile so that following the modification it is again transferred to credit quality stage 3. The control process is followed in the case of financial assets of credit quality stages 1 and 2.

1.4.3 Quantitative disclosure

The following tables bring together the qualitative statements on classification and measurement as well as impairment and show the transition of the year-end totals for balance sheet positions under IAS 39 to the year-opening totals under IFRS 9 for the individual measurement categories:

The difference in the balance sheet positions resulting from the revaluation corresponds to the difference in the value allowance between IAS 39 and IFRS 9.

In line with the changeover to IFRS 9, a reclassification of equity instruments with infrastructure character was made. These financial assets that were formerly recognised at fair value through profit and loss are now measured at fair value through other comprehensive income. Without the reclassification the operating income would have been CHF thousands 505 higher.

The following table shows the change in fair value:

The following table shows the value allowance development for loans to customers in the first half of 2018:

The following table shows the statement of the development of loans to customers related to the value allowance:

1.5 Initial application of IFRS 15

The LLB Group has applied IFRS 15 since 1 January 2018. The aim of the new standard is to enable the balance sheet reader to understand the type, scope, time point and uncertainty of the revenues and cash flows from contracts with customers. Here it has to be borne in mind that IFRS 15 only applies to revenues that are not related to financial instruments and other contractual rights or obligations that fall within the scope of IFRS 9 “Financial Instruments”. With regard to the positions of the consolidated financial statement, this means that revenues relevant to IFRS 15 are recognised in fee and commission income and in other income.

The LLB earns revenues by providing various services. In accordance with IFRS 15, these revenues are recognised over a period or on a specific date when the power of disposal is transferred to the purchaser and when it is sufficiently certain that the revenues can also be collected in the amount recognised. In the case of variable revenues, this means that recognition may only take place once it has been ensured that at a time when there is no uncertainty, no significant cancellations of previously recognised revenues occurs.

Recognition of revenues over a specified period

Typical revenues earned from fees and services that are recognised over a period include, for example, fees for the provision of IT infrastructure to enable a client to carry out his transactions at home by online banking or via his smart phone when he is on the move, credit and debit card fees and fees from asset management.

In the case of services that are delivered over a period, the client also enjoys the benefit from the service over the period since the power of control is continually transferred with the provision of the service. Accordingly, the revenues obtained from the provision of the service are recognised over the period the service is provided. On account of the structure of the contracts at the LLB Group, a time period exists between the provision of the service and the payment by the client for it, which in general amounts to a maximum of one year. The payments made by clients are made on specific dates, usually at the end of a quarter.

The costs incurred in the provision of the service are recognised continually over the period because these are similar services that are required every day.

Recognition of revenues on a specific date

Typical revenues earned from fees and services that are recognised on a specific date include, for example, brokerage or processing fees for credit cards used abroad.

In the case of services that are delivered on a specific date, the power of control is transferred to the client. The resulting benefit for the client occurs once for the client on this date. Accordingly, the revenues obtained from the provision of the service are recognised once, i.e. in relation to this date.

In the case of services that are delivered over a period, but the payment for them is variable and a large degree of uncertainty exists concerning the amount of the revenues, the revenues are only recognised at that time when it is highly probable that no significant cancellation will occur with the recognised revenues. At the LLB Group, this situation can only arise in connection with performance fees.

The costs incurred in providing a service are generally recognised at the time point when the service is delivered. One exception is the costs in connection with performance fees because the service is continually provided over a period of time, but the attainment of specific objectives is uncertain due to external factors. Accordingly, in this case, the costs are not recognised at the same time as the revenue, but rather over the period the service is provided to achieve the objectives.

Recognition

The revenues recognised from fees and services are based on the service obligations specified in the contract and the payment to be made by the client for them. The payment may contain both fixed and variable components, whereby variable payments only occur in connection with asset management and are influenced by certain threshold values. The client may have to make an additional payment if, for example, a specified return is attained or he has decided to pay a previously stipulated percentage on his assets on a previously determined date as a fee. The recognition period basically amounts to a maximum of one year and the revenues are only to be recognised on the effective date. Only on this date will it be sufficiently clear that no significant cancellation of the revenues will occur.

Basically, the revenues are to be allocated to the individual service obligations. On account of the business model, this will not be possible for an immaterial part of the revenues because the client also has the option of paying an all-in fee for a range of different services. Apart from this case, the appropriate payments are separately disclosed for every type of service obligation.

If discounts have been granted within the scope of combinations of several products, these can be assigned to the individual service obligations.

2 Changes to the scope of consolidation

In the first half of 2018 changes occurred in the scope of consolidation. Retroactively from 1 January 2018, the companies LLB Beteiligungen AG, LLB Holding (Switzerland) AG and LLB Linth Holding AG merged, whereby as a result of the merger LLB Linth Holding AG emerged as the acquiring entity. After the merger, LLB Linth Holding AG changed its name to LLB Holding AG. LB(Swiss) Investment AG, which since May bears the new name LLB Swiss Investment AG, was included in the scope of consolidation for the first time. Further details about this acquisition are disclosed in the “Company acquisitions” section.

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. Usually, the interim financial reporting does not contain information on risk management. However, on account of the introduction of IFRS 9 for financial years beginning on or after 1 January 2018, relevant information is reported on “First application IFRS 9” in chapter 1.4 as an integral part of the accounting policies. We also refer the reader to the information on risk management provided in the 2017 Annual Report. With the exception of the changes in relation to credit risks, there were no significant changes in comparison with 31 December 2017.

5 Events after the balance sheet date

LLB took over complete control of Semper Constantia Privatbank AG (Semper Constantia) with registered office in Vienna on 4 July 2018. The expected purchase price amounted to EUR 195 million. Net assets of round EUR 107 million were acquired. A detailed disclosure will be made in the 2018 annual report. The purchase price allocation has not yet been completed. The definitive purchase price will be determined after the expiry of the earn-out period at the end of June 2019.

There were no further events after the balance sheet date which would require further information to be provided or necessitate an alteration of the 2018 consolidated interim financial reporting.