Accounting principles

1 Basic information

The LLB Group offers a broad spectrum of financial services. Of particular importance are asset management and investment counselling for private and institutional clients, as well as retail and corporate client businesses.

The Liechtensteinische Landesbank Aktiengesellschaft, founded in and with its registered office located in Vaduz, Principality of Liechtenstein, is the parent company of the LLB Group. It is listed on the SIX Swiss Exchange.

The Board of Directors reviewed this consolidated annual statement at its meeting on 23 February 2018 and approved it for publication.

2 Summary of significant accounting policies

The significant accounting and valuation methods employed in the preparation of this consolidated financial statement are described in the following. The described methods have been consistently employed for the reporting periods shown, provided no statement to the contrary is specified.

2.1 Basis for financial accounting

The consolidated financial statement has been prepared in accordance with the International Financial Reporting Standards (IFRS).

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

Further basis for the preparation of the financial statement

The Group financial statement was prepared on the basis of historical acquisition or production cost with the exception of the revaluation of certain financial assets and liabilities.

On the basis of experience gained over recent years and the digitalisation strategy initiated by the LLB Group, the depreciation period for IT hardware and software (tangible and intangible assets) was assessed in some cases as not corresponding to the effective, useful life of the IT infrastructure employed. With effect from the financial year starting on 1 January 2017, the depreciation period was adjusted in line with the future useful economic life. An adjustment of this nature represents an accounting estimate in accordance with IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”. From an overall economic perspective, the adjustment of the depreciation period results in neither additional nor reduced expenses from depreciation and amortisation, however, for the individual reporting periods this alteration does affect operating expenses. In the period under report, the expenses from depreciation and amortisation were CHF 2.2 million lower, and for the 2018 financial year CHF 0.9 million lower, than without the change. The reduction in operating expenses in the financial years 2017 and 2018 of CHF 3.1 million is reflected in higher expenses for the period 2019 to 2022 due to the extension of useful life.

Numerous new IFRS standards, amendments and interpretations of existing IFRS standards, which are to be applied for financial years starting on 1 January 2017 or later were published or came into effect. Amendments, which are to be applied for financial years starting on 1 January 2017 or later and which are regarded as being relevant for the LLB Group, are amendments to IAS 7 “Statement of Cash Flows” within the scope of the Disclosure Initiative as well as amendments to IAS 12 “Income Tax”. The implementation of the changes has no major influence on the financial statement.

The following new or revised IFRS standards or interpretations are of importance for the LLB Group from 1 January 2018 or later:

• IAS 40 “Investment Property” – The amendments stipulate that in future the transfer of real estate into or out of the inventory of real estate held as financial investments is to be assessed on a principle-based basis. In future, transfers will only be made if there is a change of use. In this case, it is to be assessed whether a property meets the definition of real estate held as a financial investment. In addition the change of use must be evidenced, i.e. there must be objective evidence of, and not just an intention for, a change of use. In comparison with the previous ruling, the list of examples was changed from an exhaustive to a non-exhaustive list. In relation to operating leases, in future the commencement of the leasing relationship will be relevant as the time point of the transfer, and no longer the start of the lease term. The amendments are effective for periods on or after 1 January 2018. Retrospective application is also possible if this is possible without the use of hindsight. An earlier application is possible, but the LLB Group will not do so. The implementation of the changes has no major influence on the LLB Group’s financial statement.
• IFRS 2 “Share-based Payment” – The amendments concern rulings in connection with cash-settled share-based payments. An exception will continue to apply to share-based payments involving a so-called net settlement feature. In this case, the tax to be paid by the employee will be paid directly to the competent tax authority by the company. Accordingly, the employee retains only the share-based payment amounting to the balance from the original entitlement and the tax liability. Only the net settlement feature could be of future relevance for LLB. At the moment this situation does not exist. The new rulings come into effect on 1 January 2018. Retrospective application is also possible if this is possible without the use of hindsight. An earlier application is possible, but the LLB Group will not do so. The implementation of the changes has no major influence on the LLB Group’s financial statement.
• IFRS 9 “Financial Instruments “– IFRS 9 is structured in three phases: “Classification and Measurement”, “Impairment”, and “Hedge Accounting”. To facilitate the implementation of the requirements of the new standard, the LLB Group set up sub-projects which have been successfully completed.

Sub-project “Classification and Measurement”: 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 cash flow characteristics (SPPI criteria) of the financial instruments. The financial instruments are classified in the “Hold” business model and measured at amortised cost, if the purpose of the financial instruments is to generate interest income and payment of the principal upon maturity. In contrast, if the management pursues the goal of also employing them for liquidity management, i.e. for the purpose of holding and sale, then the instruments are to be recognised at fair value through other comprehensive income (FVOCI). Gains and losses from this business model are booked in the statement of other comprehensive income and equity. Upon final maturity or early sale, the cumulative gain or loss is recycled in the income statement. Financial instruments, which are classified in the “Trading” business model, which do not fulfil the SPPI criteria or for which the fair value option is utilised, are to be classified as fair value through profit or loss (FVTPL). The definition of the business models for the individual financial instruments has been made. Only in the area of financial investments (see Note 16) are there effects due to the transition from IAS 39 “Financial Instruments: Recognition and Measurement” to IFRS 9. The strategy according to IFRS 9, and therefore the classification of the individual financial investments, derived from the individual business models, is as follows: a portion of the debt instruments is primarily held for the purpose of the appropriation of fair value, and accordingly was classified in the “Trading” model. This includes debt instruments, which were recognised at fair value in the income statement at the end of the 2017 financial year. All other debt instruments fall under the business model “Hold to Collect and Sell” because this is employed to attain specific interest yields and thus to manage liquidity requirements. Under IFRS 9 all newly purchased debt instruments will primarily fall under the “Hold to Collect and Sell” business model because in addition to the collection of income from coupon payments, the aim is to achieve flexibility in liquidity management while at the same time minimising the volatility of price fluctuations. In the case of equities, which are all to be measured at fair value in the income statement by the end of the 2017 financial year, an irrevocable choice has been made for an insubstantial portion of them, which exclusively have an infrastructural character, to report them in future in other income. A reclassification of cumulative income contributions of around CHF 15.8 million will be made from retained earnings to other reserves for these positions. The following table summarises the statements made above and compares the measurements made under IAS 39 and IFRS 9:

Sub-project “Impairment”: In accordance with IFRS 9, impairments are to be recognised at an early stage (expected loss model). The amount of an 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 the credit quality and impairments amounting to the cash value of an expected 12-month credit loss are to be recognised. If there is no objective indication of an impairment, but a significant increase in the credit risk has occurred, the impairment is to be recognised up to the amount of the expected losses over the entire remaining period of the term (stage 2). For the LLB Group this results in a significant increase in the credit risk in addition to the 30-day overdraft, in particular from early warning indicators from account movements. In stage 3, there must be an objective indication of an impairment and a specific valuation allowance (lifetime expected loss) is to be made for this financial instrument. The requirements for impairments apply to financial assets, which are measured at amortised cost or at fair value through other comprehensive income (FVOCI), as well as to financial guarantees and credit commitments. In respect of the LLB Group, this means that an expected credit loss (ECL) for claims due from banks, loans to customers, debt instruments, contingent liabilities, irrevocable commitments and credit cards is to be calculated. The calculation and discounting of the expected credit loss according to IFRS 9 are carried out using the software, which LLB employs within the scope of balance structure management. This ensures a high level of data integrity. The implementation of the expected credit loss in accordance with IFRS 9 is based mainly on the following internal processes and models:

Probability of default (PD): The estimates for the probability of default are determined on a through-the-cycle (TTC) basis. Missing information in relation to the probability of default, loss given default and the exposure at default are determined by means of models at the portfolio level.

Loss given default (LGD): The loss given default is calculated on the basis of estimates made by experts.

Since the models are generally structured on a through-the-cycle basis, adjustments are made to take into consideration the current economic conditions (point in time, PiT). These encompass, in particular, forecasts regarding the development of gross domestic product, interest rate trends and the real estate index. Other processes that are employed in the calculation include the exposure at default (EAD) as well as discounting. Calculations show that the implementation of the ECL model in accordance with IFRS 9, in comparison with the current approach based on losses incurred, will lead to an increase in expected credit loss. On the one hand, this is attributable to the 12-month ECL, which has to be reported for all the financial instruments concerned, as well as the determination of the ECL on the basis of the entire term, which has to be applied for positions after a significant increase in the credit risk. The requirement to include forward-looking information in the calculation of expected credit loss means that substantial discretionary judgements have to be made, which can influence the expected credit loss and increase the volatility in the income statement. In relation to this issue, within the scope of the process to determine the expected credit loss, the LLB Group is focusing on the development of a system of robust governance. Within the context of the transition to IFRS 9, a one-time adjustment of equity (reduction), not affecting the income statement, is to be made on account of the changeover from an incurred loss model to an expected loss model. The effect before deferred taxes stood at between CHF 10 and 16 million, and after deferred taxes at between CHF 9 and 14 million.

In addition, IFRS 9 regulates hedge accounting, whereby it aims to standardise risk management and accounting. Risk Management must depict certain hedge accounting in the books. At present, the LLB Group employs macro hedges at portfolio level, which is not yet regulated under IFRS 9. Up to the completion of the International Accounting Standards Board (IASB) project in macro hedge accounting, LLB can continue to follow its previous approach unchanged under IFRS 9. Accordingly, there are no major effects on the LLB Group. IFRS 9 comes into effect on 1 January 2018. An earlier implementation is possible, but will not be carried out at the LLB Group. It will be applied retrospectively, either completely or in a modified form, i.e. in a simplified form, in that any possible differences between the previous carrying value and the carrying value at the beginning of the financial year in which the standard is applied for the first time will be adjusted via the opening balance sheet value of equity. The LLB Group has chosen the simplified form for the first application, i.e. the comparison periods show the closing values in accordance with IAS 39 and not IFRS 9.

• IFRS 9 “Financial Instruments”, Amendments – In October 2017, the IASB announced amendments in relation to contractual prepayment features. Thanks to the amendments, it is now possible that a prepayment right can be consistent with the SPPI payment conditions if the amount of the prepayment substantially constitutes a payment of principal and interest on the principal amount outstanding. Accordingly, the sign of the compensation payment is no longer relevant, the financial instrument therefore becomes eligible to be measured at amortised cost or at fair value through other comprehensive income (FVOCI). The amendment comes into effect on 1 January 2019 and is to be applied retrospectively. An early application is permitted and will be applied by the LLB Group parallel to the first application of IFRS 9. For these reasons, the amendments have no effect on the LLB Group.
• IFRS 15 “Revenue from Contracts with Customers” – In May 2014, the IASB, together with the Financial Accounting Standards Board (FASB), issued new regulations for the recognition of revenue, which completely replace the existing US-GAAP 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. Furthermore, the standard includes guidelines concerning the costs for the attainment and performance of a contract, as well as when such costs are to be capitalised. The standard specifies additional disclosures. In April 2016, the IASB provided clarifications on the subjects of “Identification of Benefit Obligations”, “Principal-Agent Relationships” and “Licenses” as well as the granting of transitional relief (optional application). In general, for LLB, the introduction of IFRS 15 will have only a slight influence on the recognition, balancing, presentation and disclosure of such items. The primary reason for this is that IFRS 15 is aimed mainly at industrial sectors and less at the financial services industry. Currently, revenues from fees and commissions are reported in one position (one line). In future, if they are material, further positions (lines) will be shown in a table to enable a more detailed presentation. The new standard comes into effect from 1 January 2018. An earlier application is possible, but the LLB Group did not do so. It will be applied on the basis of simplified transition provisions.
• 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. However options exist for short-term leasing terms (shorter than 12 months) and for low-value assets. 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. An earlier application is possible, but the LLB Group will not do so. It will be applied retrospectively, either completely or in a modified form. The effects of these changes on the LLB Group’s financial reporting are currently being analysed.
• IFRIC 23 “Uncertainty over Income Tax Treatments” – The interpretation provides guidelines regarding the treatment of taxable profit or taxable losses, tax bases, unused tax credits and tax rates when there is uncertainty as to what extent the tax authorities will recognise the individual tax positions. In a first step it is to be determined whether each tax treatment should be considered individually or whether some tax treatments should be considered together. In doing so, it is to be evaluated whether it is likely that the tax authority will accept the tax treatment or combination of tax treatments that an entity has employed, or intends to employ, in its tax declaration. If an entity concludes that it is probable that a particular tax treatment will be accepted, the entity has to determine taxable profit (taxable loss), tax bases, unused tax credits or tax rates consistently with the tax treatment included in its income tax declaration. If the entity concludes that it is not probable that a particular tax treatment will be accepted, the entity has to use the most likely amount or expected value of the tax treatment. The interpretation comes into effect on 1 January 2019. An earlier application is possible, but will not be utilised by the LLB Group. It will be applied fully retrospectively or retrospectively in a modified form. The implementation of these changes has no major influence on the LLB Group’s financial statement.

Within the scope of its annual improvements, the IASB published further improvements (Annual Improvements to IFRS 2014 – 2016 Cycle and 2015 – 2017 Cycle), which are valid from 1 January 2017, 2018 or 2019. The implementation of these changes has, or will have, no major influence on the LLB Group’s financial statement.

Use of estimates in the preparation of financial statements

In preparing the financial statements in conformity with IFRS, the 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 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 substantial to the financial statements.

The IFRS contains guidelines which require the LLB Group to make estimates and assumptions when preparing the consolidated financial statement. Allowances for credit loss risks, goodwill, intangible assets, provisions for legal and litigation risks, fair value conditions for financial instruments and value adjustments for pension plans are all areas which leave large scope for estimate judgments. Assumptions and estimates made in these areas could be substantial to the financial statement. Explanations regarding this point are shown under Note 13, Note 19, Note 26, Note 34 and Note 41.

2.2 Consolidation policies

The consolidated financial statement adopts a business perspective and follows a financial format. The consolidation period corresponds to the calendar year. The financial year is identical to the calendar year for all consolidated companies. Solely LLB Invest AGmvK and LLB Qualified Investors AGmvK have a different financial year; however, these companies are negligible for the preparation of the consolidated financial statement. The Swiss franc (CHF), the currency of the country in which LLB AG has its registered office, serves as the reporting currency of the LLB Group.

Subsidiaries

The consolidated financial statement incorporates the financial accounts of Liechtensteinische Landesbank AG and its subsidiaries. LLB Group companies, in which Liechtensteinische Landesbank AG holds, directly or indirectly, the majority of the voting rights or otherwise exercises control, are fully consolidated. Subsidiaries acquired are consolidated from the date control is transferred to Liechtensteinische Landesbank AG, and are no longer consolidated from the date this control ends.

The consolidation is carried out according to the purchase method. The effects of intra-group transactions and balances are eliminated in preparing the financial statements. Transactions with minorities are booked to equity.

Equity attributable to minority interests is presented in the consolidated balance sheet in equity, separately from equity attributable to LLB shareholders. Net profit attributable to minority interests is shown separately in the income statement.

Investment in joint venture

Joint ventures, i.e. companies in which LLB has a 50 percent participation, are recognised according to the equity method.

Changes to the scope of consolidation

There were no changes to the scope of consolidation in the 2017 financial year.

2.3 General principles

Recording of business

Sales and purchases from trading assets, derivative financial instruments and financial investments are booked on the transaction date. Loans, including those to clients, are recorded in that period of time in which the funds flow to the borrower.

Income accrual

Income from services is recorded at the time the service was rendered. Asset management fees, safe custody fees and similar types of income are recorded on a pro rata basis over the period the specific service is provided. Interest income is recorded using the effective interest method. Dividends are recorded at the time point a legal claim comes into existence.

Inland versus abroad

“Inland” encompasses the Principality of Liechtenstein and Switzerland.

2.4 Foreign currency translation

Functional currency and reporting currency

The items contained in the financial accounts of each Group company are valued in the currency which is used in the primary business environment in which the company operates (functional currency).

The reporting currency of the LLB Group is the Swiss franc.

Group financial statement

Group companies which report their financial accounts in a functional currency other than the Group’s reporting currency are translated as follows: all assets and liabilities are converted at the relevant exchange rate valid on the balance sheet date. All individual items in the income statement and statement of cash flows are converted at the average exchange rate for the accounting period. All resulting exchange differences are booked individually to equity and other comprehensive income, respectively.

Separate financial statements

Foreign currency transactions are translated on the day of the transaction at spot rates into the functional currency. Foreign currency differences with financial assets and financial liabilities occur if the exchange rate prevailing on the reporting date differs from the spot rate on the transaction date. In the case of monetary items, the resulting foreign currency differences are recognised in the income statement in the position foreign exchange trading under net trading income. The same applies to non-monetary items, which are recognised at fair value. In the case of non-monetary items, whose fair value changes are recognised directly in equity and in other comprehensive income without affecting net income, respectively, the foreign currency difference is a part of the change in fair value. If material, the foreign currency difference is reported in a foot note under Note 16.

The following exchange rates were employed for foreign currency conversion:

2.5 Cash and balances with central banks

Cash and balances with central banks consist of cash in hand, postal cheque balances, giro and sight deposits at the Swiss National Bank and foreign central banks, as well as clearing credit balances at recognised central savings and clearing banks, claims from money market instruments with an original maturity period of less than three months as well as loans due from banks (due daily).

2.6 Balances due from banks and from customers

Balances due from banks and from customers are initially recorded at actual cost, corresponding to the fair value of the specific loan at the time it was granted. Subsequent valuation reflects the amortised cost under application of the effective interest rate method.

Interest on balances due from banks and from customers is recognised on an accrual basis and is reported according to the effective interest method, included under the item interest income.

Negative interest on assets and liabilities is accrued in a period-compliant manner and reported in the income statement as interest paid or interest received.

Basically, the LLB Group extends loans only on a collateralised basis, and only to counter parties having very high credit worthiness.

Loans are regarded as being impaired if it is likely that the entire amount owed according to the loan agreement is not recoverable. Loan impairments are caused by country- or counterparty-specific criteria. Indications for the impairment of financial assets are:

• the financial difficulty of the borrower;
• a breach of contract, such as a default or delinquency in interest or principal payments;
• the increased probability that the borrower will enter bankruptcy or financial reorganisation;
• national or local economic conditions that correlate with defaults on the assets of the Group.

The amount of the impairment is measured as the difference between the carrying value of the claim and the estimated future cash flow, discounted by the loan’s original effective interest rate. Allowances for credit risks is reported as a reduction of the carrying value of a claim on the balance sheet, whereas for an off-balance sheet item, such as a commitment, a provision for credit loss is reported under provisions. Impairments are recognised in the income statement.

2.7 Trading portfolio assets

Trading portfolio assets comprise equities, bonds and structured financial products. Financial assets held for trading purposes are recorded at fair value. Short positions in securities are reported as trading portfolio liabilities at fair value. Realised and unrealised gains and losses as well as interest and dividends are recorded in net trading income.

Fair value is based on current market prices in the case of an active market. In the absence of an active market, fair value is calculated on the basis of valuation models (see “2.9 Financial investments”).

2.8 Derivative financial instruments and hedge accounting

Derivative financial instruments are valued as positive or negative replacement values corresponding to fair value and are reported in the balance sheet. Fair value is calculated on the basis of exchange quotations; in the absence of these, valuation models are employed. Derivative financial instruments are held within the LLB Group for hedging and trading purposes. If the derivative financial instruments held for hedging purposes do not fulfil the strict IFRS hedge accounting criteria, changes in fair value are recognised, as with derivative financial instruments for trading purposes, in net trading income. Within the LLB Group, income effects of hedging transactions according to hedge accounting guidelines arise only with the ineffective component, the effects of the effective component neutralise each other.

Hedge accounting

Within the scope of risk management, derivative financial instruments are employed mainly to manage interest rate and foreign currency risks. If these transactions fulfil the IFRS-specific hedge accounting criteria, and if these were employed as hedging instruments from a risk management perspective, they can be shown according to hedge accounting guidelines. If these transactions do not fulfil the IFRS-specific hedge accounting criteria, they are not presented according to hedge accounting guidelines, even if from an economic point of view they represent hedging transactions and are consistent with the risk management principles of the LLB Group.

The LLB Group employs fair value hedge accounting for interest rate instruments. In this case, the interest rate risks of the underlying transaction (e.g. a fixed-rate mortgage) are hedged by means of hedging instruments (e.g. an interest rate swap). Fair value hedge accounting is applied at the portfolio level, whereby one hedging instrument is used to secure one or more underlying transactions. The effect on income of the fair value change in the hedging instrument is recognised in the income statement in the same position as the corresponding effect on income of the fair value changes in the hedged underlying transactions.

In the case of the hedging of interest rate risks at the portfolio level, the fair value change in the hedged item is recognised in the same balance sheet position as the underlying item. As soon as a financial instrument is classified as a hedging instrument, and the hedging instrument fulfils the IFRS-specific hedge accounting criteria, the relationship between the hedging instrument and the hedged underlying transaction or the portfolio of underlying transactions is formally documented. This documentation contains the risk management goals and strategies for the underlying hedged relationship, as well as methods to assess the effectiveness, i.e. the effectiveness of the hedging relationship. The effectiveness of a hedging transaction is understood to be the extent to which changes in the fair value of the underlying transaction, which are attributable to a hedged risk, can be compensated for by changes in the fair value of the hedging transaction. An assessment is made, both when the hedging relationship is first applied and during its term, of whether it can regarded as “highly effective”. A hedge is regarded as being highly effective if: a) it is assessed as being highly effective both when the hedge is initially recognised and during the entire term of the transaction, and b) the actual results of the hedging transaction lie within a range of 80 to 125 percent. The part outside the range of 80 to 125 percent is classed as being ineffective.

If fair value hedge accounting is employed for reasons other than the derecognition of the hedged transaction, the amount, which is reported in the same balance sheet position as the underlying transaction, is amortised over the residual term of the underlying transaction in the income statement.

2.9 Financial investments

According to IFRS, financial investments can be divided into various categories. The classification depends on the purpose for which the individual financial investments were made. The management of the LLB Group determines the classification upon initial recognition. In the 2017 financial year and in the 2016 financial year, financial investments were classified in the category “Financial investments at fair value through profit and loss”, as well as the category “Available-for-sale financial assets”. All value adjustments with the category “Financial investments at fair value through profit and loss” are recognised in the income statement. All value adjustments with the category “Available for-sale financial assets” are reported in other comprehensive income.

This designation of the financial investments is in line with LLB’s investment strategy. The securities are managed on a fair value basis and their performance is evaluated accordingly. The members of the Group Executive Board receive the corresponding information.

Financial assets at fair value through profit and loss

Financial assets are recorded on the balance sheet at fair value. Non-realised gains and losses are reflected in the income statement at fair value under income from financial instruments. The fair value of listed shares is based on current market prices. If an active market is not available for financial assets, or if the assets are not listed, the fair value is determined by way of suitable valuation models. These encompass references 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, discounted cash flows and external pricing models, which take into account the special circumstances of the issuer. See also Note 34.

Interest and dividend income from financial investments is recorded at fair value as income from financial instruments. Interest income is recognised on an accrual basis.

Available-for-sale financial assets

Financial assets which are available for sale are recognised at fair value. Value changes, such as unrealised gains or losses, are reported in other comprehensive income. The fair value of these financial assets is measured on the basis of listed shares. If no active market exists or the assets are not listed on an exchange, the fair value is determined, similar to financial assets at fair value through profit and loss, by means of suitable valuation models. See also Note 34. Interest and dividend income are recognised in the income statement. Interest is reported on an accrual basis.

2.10 Property, investment property and other equipment

Property is reported in the balance sheet at acquisition cost less any depreciation necessary for operational reasons. Bank buildings are buildings held by the LLB Group for use in the delivery of services or for administration purposes, whereas investment property is held to earn rentals and / or for capital appreciation. If a property is partially used as investment property, the classification is based on whether or not the two portions can be sold separately. Investment property is periodically valued by external experts. Changes in fair value are recognised in the income statement as other income in the current period. If the portions of the property can be sold separately, each portion is booked separately. If the portions cannot be sold separately, the whole property is classified as a bank building unless the portion used by the bank is minor.

Equipment includes fixtures, furnishings, machinery and IT equipment. These items are entered in the financial accounts and depreciated over the estimated useful life of the asset.

Depreciation is conducted on a straight-line basis over the estimated useful life as follows:

Small value purchases are charged directly to general and administrative expense. In general, maintenance and renovation expenditures are booked to general and administrative expense. If the related cost is substantial and results in a significant increase in value, such expenditures are capitalised and depreciated over their useful life. Profits from the sale of fixed assets are reported as other income. Losses result in additional write-downs on fixed assets.

Property and equipment is regularly reviewed for impairment, but always when, on account of occurrences or changed circumstances, an overvaluation of the carrying value appears to be possible. If, as a result of the review, a reduction in value or modified useful life is determined, the residual carrying value is depreciated over the adjusted useful life, or an unplanned write-down is made.

2.11 Non-current assets held for sale

Long-term assets (or a disposal group) are classified as held for sale, if their carrying amount will be recovered primarily through a sale transaction rather than through continuing use. For this to be the case, the asset (or the disposal group) must be available for immediate sale in its present condition subject only to the terms that are usual and customary for sales of such assets (or disposal groups) and such a sale must be highly probable. Long-term assets held for sale and disposal groups are measured at the lower of carrying amount and fair value less costs to sell, unless the items shown in the disposal group are not classified in the valuation rules of IFRS 5 “Non-current assets held for sale and discontinued operations”.

2.12 Goodwill and other intangible assets

Goodwill is defined as the difference between the purchase price paid for and the determined fair value at date of acquisition of identified net assets in a company purchased by the LLB Group. Other intangible assets contain separately, identifiable intangible values resulting from acquisitions and certain purchased brands / trademarks and similar items. Goodwill and other intangible assets are recognised on the balance sheet at cost determined on the date of acquisition, and are amortised using the straight-line method over the useful life of ten to fifteen years. On each balance sheet date, goodwill and other intangible assets are reviewed for indications of impairment or changes in future benefits. If such indications exist, an analysis is performed to assess whether the carrying value of goodwill or other intangible assets is fully recoverable. An amortisation is made if the carrying amount exceeds the recoverable amount. For impairment testing purposes, goodwill is distributed into cash generating units. A cash generating unit is the smallest group of assets that independently generates cash flow and whose cash flow is largely independent of the cash flows generated by other assets. Cash flows generated from independent groups of assets are largely determined on the basis of how management steers and manages business activity. The management of the LLB Group manages and steers business activity in divisions so that the divisions and segments are designated as the cash generating units of the Group.

Software development costs are capitalised when they meet certain criteria relating to identifiability, it is possible that economic benefits will flow to the company, and the cost can be measured reliably. Internally developed software meeting these criteria and purchased software are capitalised and subsequently amortised over three to six years. See also Note 19.

2.13 Current and deferred taxes

Current income tax is calculated on the basis of the tax law applicable in the individual country and recorded as expense for the accounting period in which the related income was earned. The relevant amounts are recorded on the balance sheet as provisions for taxes. The tax impact from time differentials due to different valuations arising from the values of assets and liabilities reported according to IFRS shown on the Group balance sheet and their taxable value are recorded on the balance sheet as accrued tax assets or, as the case may be, deferred tax liabilities. Deferred tax assets and deferred tax liabilities attributable to time differentials or accountable loss carry forwards are capitalised if there is a probability that sufficient taxable profits will be available to offset such differentials of loss carry forwards. Accrued / deferred tax assets / liabilities are calculated at the tax rates that are likely to be applicable for the accounting period in which the tax assets are realised or the tax liabilities paid.

Current and deferred taxes are credited or charged directly to equity or other comprehensive income if the related tax pertains to items that have been credited or charged directly to equity or other comprehensive income in the same or some other accounting period.

2.14 Debt issued

Medium-term notes are recognised at fair value, which usually corresponds to the issuance value, and at amortised cost. Debt instruments, which contain an embedded option for conversion of the debt into shares of LLB AG, are separated into a liability and an equity component. The difference between the proceeds of the issue price and the fair value of the instrument on the issue date is booked directly to equity. The fair value of the liability component on the issue date is determined on the basis of the market interest rate for comparable instruments without conversion rights. Thereafter, it is recognised at ongoing cost according to the effective interest method. Differences between the proceeds and the repayment amount are reported in profit and loss over the term of the debt instrument concerned. The LLB Group does not report changes in the value of the equity component in the following reporting periods.

2.15 Employee benefits

Retirement benefit plans

The LLB Group has pension plans for its employees in Liechtenstein and abroad, which are defined according to IFRS as defined benefit plans. In addition there are long-term service awards which qualify as other long-term employee benefits.

For benefit-oriented plans, the period costs are determined by opinions obtained from external experts. The benefits provided by these plans are generally based on the number of insured years, the employee’s age, covered salary and partly on the amount of capital saved. For benefit-oriented plans with segregated assets, the relevant funded status is recorded on the balance sheet as an asset or liability (in accordance with the Projected Unit Credit Method). An asset position is calculated according to the criteria of IFRIC 14. For plans without segregated assets, the relevant funded status recorded on the balance sheet corresponds to the cash value of the claims.

The cash value of the claims is calculated using the projected unit credit method, whereby the number of insured years accrued up to the valuation date are taken into consideration.

The effects of retroactive improvements to benefits resulting from plan changes as well as plan curtailments are recognised directly in the income statement.

Variable salary component and share-based remuneration

Regulations exist governing the payment of variable salary components. The valuation procedure with the variable salary component is based on the degree of individual target achievement. Executives receive a portion of their profit-related bonus in the form of entitlements to LLB shares. However, no exercising conditions are attached to this procedure.

The LLB Group enters a provision as a liability in those cases where a contractual obligation exists or a de facto obligation arises as a result of past business practice. The expense is recognised under personnel expenses. Obligations to be paid in cash are entered under other liabilities. The portion to be compensated with LLB shares is entered in equity. The number of shares for the share-based compensation corresponds to the average share price of the last quarter of the year under report.

2.16 Provisions and contingent liabilities

Provisions are liabilities, whose maturities and amounts are uncertain. These are recognised in the balance sheet if the LLB Group a) has a liability towards a third party which is attributable to an event in the past, b) the liability can be reliably estimated, and c) an outflow of resources to cover this liability is probable. They are reported separately in the balance sheet.

Provisions are allocated within the scope of the best possible estimate of the expected payment. Such estimates are based on all the information available and are adjusted accordingly as soon as new information becomes available. New information or actually occurring events may substantially differ from the estimates made, which in turn can lead to significant changes in the consolidated financial statement. As soon as no further uncertainties exist in relation to the time point or amount of the payment, these items are reclassified in other liabilities.

The LLB Group’s business environment exposes it to both legal and regulatory risks. As a result, LLB is involved in various legal proceedings, whose financial influence on the LLB Group – depending on the stage of the proceeding – is difficult to assess and are subject to many uncertainties. The LLB Group makes provisions for ongoing and threatened proceedings when, in the opinion of management after taking legal advice, it is probable that a liability exists, and the amount of the liability or payment can be reasonably estimated.

For legal proceedings in cases where the facts are not specifically known, the claimant has not quantified the alleged damages, the proceedings are at an early stage, or where sound and substantial information is lacking, the LLB Group is not in a position to estimate reliably the approximate financial implication. In many legal cases, a combination of these facts makes it impossible to estimate the financial effect of contingent liabilities for the LLB Group. If, indeed, such assumptions or estimates were made or disclosed, it could seriously prejudice the position of the LLB Group in such legal cases.

Restructuring provisions are allocated only if the general criteria for the recognition of liabilities are fulfilled. Moreover, a detailed restructuring plan must be available, which at least names the business area concerned and its location, the approximate number of employees affected and their functions, the necessary expenditure and the time point of the restructuring measures. The persons affected must also have a well-founded expectation that the company will indeed carry out the restructuring measures. A decision taken by management can only justify the requirement to allocate a provision once the implementation of the restructuring measures has already commenced, or if the restructuring plan has been publicly announced.

If liabilities do not fulfil the criteria applying to a provision, this could lead to the formation of a contingent liability. Contingent liabilities indicate that uncertainty exists about whether future events, which cannot be influenced, will lead to liabilities, or if management assumes that for current liabilities an outflow of economic resources is not probable, or if it is not possible to adequately estimate the amount of the liability. Guarantees issued lead to contingent liabilities if indeed LLB can be made jointly and severally liable for liabilities towards third parties, but it can be assumed that these liabilities will not be paid by the LLB Group. The amount of existing contingent liabilities is the result of the best possible estimate made by management and is based on the requirements for provisions. If, on the basis of the current evaluation of contingent liabilities, an outflow of economic resources in the future is probable, a provision is allocated for this position which was previously treated as a contingent liability.

2.17 Allowances for credit risks

Allowances for credit risks are made at LLB, provided there are objective criteria indicating that the entire amount owed according to the loan agreement may not be recoverable. At LLB, a credit amount is understood to be a loan, a claim or a fixed commitment such as a documentary credit, a guarantee, or a similar credit product. Objective criteria are serious financial difficulties experienced by the borrower, default or delinquency in interest or capital payments, or the probability that the borrower cannot repay the loan. Allowances for credit risks are reported as a reduction of the carrying value of a claim on the balance sheet. Allowances are reported in the income statement under credit loss (expense) / recovery. For further information, see “Risk management”, chapter 3 “Credit risk”.

2.18 Treasury shares

Shares of Liechtensteinische Landesbank AG held by the LLB Group are valued at cost of acquisition and reported as a reduction in equity. The difference between the sale proceeds and the corresponding cost of acquisition of treasury shares is recorded under capital reserves.

2.19 Securities lending and borrowing transactions

Securities lending and borrowing transactions are generally entered into on a collateralised basis, with securities mainly being advanced or received as collateral.

Treasury shares lent out remain in the trading portfolio or in the financial investments portfolio as long as the risks and rewards of ownership of the shares are not transferred. Securities that are borrowed are not recognised in the balance sheet as long as the risks and rewards of ownership of the securities remain with the lender.

Fees and interest received or paid are recognised on an accrual basis and recorded under net fee and commission income.

3 Events after the balance sheet date

There have been no material events after the balance sheet date, which would require disclosure or an adjustment of the consolidated financial statement for 2017.