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 significant accounting and valuation methods employed in the preparation of the unaudited interim financial reporting correspond to those used in the 2016 annual report. In addition, the regulations valid since 1 January 2017 have been applied.

The unaudited interim financial reporting does not encompass all the data, which are contained in the audited 2016 consolidated financial statement and should, therefore, be read together with the audited consolidated financial statement per 31 December 2016.

On account of detailed definitions in its presentation, the interim financial reporting 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.

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 13 in the 2017 consolidated interim financial reporting and under note 19, note 34 and note 40 of the 2016 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 2016 annual financial statement were adjusted accordingly in the 2017 interim financial reporting.

On the basis of experience gained over recent years and the digitalisation strategy initiated by the LLB Group, the depreciation period for IT hard and software (tangible and intangible assets) was assessed in some cases as not corresponding to the effective useful life of the IT hard and software employed. With effect from the business 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 1.1 million lower than without the change. For the 2017 business year this means a reduction in operating expenses of CHF 2.2 million, and for the 2018 business year a reduction of CHF 0.9 million. The reduction in operating expenses in the 2017 and 2018 business years of CHF 3.1 million is reflected in higher expenses in the period 2019 to 2022 due to the extension of service life.

Numerous new IFRS standards, amendments and interpretations of existing IFRS standards were published or came into effect, which were to become effective for financial years starting 1 January 2017 or later.

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.

In comparison with the 2016 annual report, the International Accounting Standards Board (IASB) issued a new standard and a new interpretation during the period under report. These are IFRS 17 “Insurance Contracts” and IFRIC 23 “Uncertainty over Income Tax Treatments”.

New and amended IFRS standards and interpretations are of importance to the LLB Group. However, only important new information in comparison to statements made in the annual report per 31 December 2016 is shown in the following:

• IFRS 9 “Financial Instruments” – In relation to the project status at the end of 2016, the sub-projects for the implementation of the new standard were progressing according to plan.
  Sub-project “Classification and Measurement”: the definition of the business models for the individual financial instruments is currently being carried out, whereby the area of financial investments (see note 16 in the 2016 annual report) will have the largest impact, depending on the business model, during the transition from IAS 39 to IFRS 9. The strategy under IFRS 9, and therefore the classification of the individual financial investments, has not yet been definitely decided. However it is probable that debt instruments will be reported under a “Hold and Sell” business model, so that they can be recognised under IFRS 9 at fair value through other comprehensive income (FVOCI), provided that the SPPI criterion is fulfilled. The determining factor for this is the possibility of active liquidity management with this business model in contrast to the “Hold” business model. Provided there are natural hedges between changes in value from interest rate swaps and debt instruments, recognition at fair value through profit and loss (FVTPL) is conceivable. The focus here is on the “Trading” business model. In the case of equities, it is likely that the FVOCI option will be used for certain positions, meaning that in addition to an FVTPL valuation, a certain number of equities would be measured using FVOCI, provided that all the relevant prerequisites were fulfilled. Currently, it is not possible to make quantitative statements about the possible effects because, on the one hand, the business strategy has not yet been definitively decided, and on the other, the implementation of the measurement procedure for the individual financial instruments has not yet been completed.
  Sub-project “Impairment”: IFRS 9 stipulates that losses from credit risks are to be reported independently of the occurrence of the loss event. In accordance with general practice, a risk provision for expected credit losses during the next 12 months is to be determined on the balance sheet reporting date. If after the first time recognition of the credit position a significant increase in the credit risk occurs, the expected loss is to be considered over the entire term. To determine the expected receivables losses at both the individual and the portfolio level, in future appropriate and reliable information is also to be taken into consideration, which includes forecasts about future economic conditions. The implementation of the expected credit loss according to IFRS 9 is based largely on internal LLB procedures and models. Missing information regarding credit default probability, loss given by default and credit commitments at the time of the default are determined using models at the portfolio level. The models are generally configured on a cycle-related basis (Through The Cycle, TTC) and adjustments are made to them to take into consideration current economic conditions (Point in Time, PiT). Forward-looking economic data are also considered. The LLB continued with the development of the most important models during the first half of 2017. The measurement and discounting of the expected credit loss in accordance with IFRS 9 are carried out with the use of external software. The LLB also employs the software within the scope of balance sheet structure management. This ensures a high level of data integrity. The necessity of including forward-looking information in the measurement of expected credit loss means that substantial discretionary decisions have to be made, which can influence the magnitude of the expected credit losses. In this respect, the LLB is concentrating on the development of a robust governance process to determine the expected credit loss. During the second half of 2017, the focus will be on carrying out impact analyses using the formulated forecasts, models and scenarios.
• IFRS 16 “Leasing” – In comparison with the end of 2016, further analyses were carried out to ascertain possible effects. Currently, the effects of a worsening of regulatory indicators when the new standard is introduced are assessed as having no major influence.
• IFRIC 23 “Uncertainty over Income Tax Treatments” – The interpretation provides guidelines regarding the treatment of taxable profit or taxable losses, tax bases, unused tax losses, 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 independently 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 declarations. 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 standard comes into effect on 1 January 2019. An earlier implementation is possible, but the LLB will not do so. It will be applied fully retrospectively or retrospectively in a modified form. The effects of these changes on the LLB Group’s financial reporting are currently being analysed.

Within the scope of its annual improvements, the IASB has published further improvements (Annual Improvements to IFRS 2014 – 2016 Cycle), which are valid from 1 January 2017 or become effective from 1 January 2018. 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 2017.

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 2016 annual report. There were no significant changes in comparison with 31 December 2016.

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 2017.