Accounting principles

1 Basic information

The LLB Group offers a broad spectrum of financial services. Of particular importance are asset management and investment advisory 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 9 March 2020 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

2.1.1 General points

The consolidated financial statement was prepared in accordance with the International Financial Reporting Standards (IFRS). With the exception of the revaluation of certain financial assets and liabilities, the consolidated financial statement was prepared on the basis of the historical acquisition or production cost.

On account of clarification 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.

The purchase price allocation for the acquisition of Semper Constantia Privatbank AG was finally completed in 2019. This led to adjustments in current deferred tax obligations and, accordingly, in the newly acquired net assets. The adjustment of the purchase price led to an increase in goodwill of CHF 0.7 million. LLB categorised the adjustment of the values from the provisional purchase price allocation as being immaterial. Consequently, the goodwill was only adjusted in the 2019 initial book value in the statement of fixed assets.

The purchase price allocation for the acquisition of LB(Swiss)Investment AG was already finally completed in 2018. There were therefore no changes in 2019.

In Switzerland, voters approved the Federal Law on Tax Reform and AHV Financing (TRAF) on 19 May 2019. Previous tax privileges applying predominantly to internationally operating companies (status companies) were abolished. From 1 January 2020, therefore the same taxation rules apply for all companies within a Swiss canton. As a consequence, the income tax rate of the individual cantons will change thus resulting in a new income tax rate for the Swiss companies. At Bank Linth, the income tax rate will decrease from 1 January 2020 from currently 20.0 per cent to 16.0 per cent. On account of the reduction in the tax rate, the deferred tax rates for Bank Linth for the 2019 business year already have to be adjusted because they affect future tax outflows and inflows. The adjustment of deferred tax rates resulted in tax income affecting the income statement of CHF 1.6 million, as well as a tax income affecting the the other comprehensive income CHF 0.9 million. In future Swiss companies are expected to benefit from lower income taxes as a result of the reduction of the income tax rate.

2.1.2 New IFRS, amendments and interpretations

New IFRS, as well as revisions and interpretations of existing IFRS, which must be applied for financial years beginning on 1 January 2019 or later, were published or came into effect.

The new standard IFRS 16 “Leases” and the interpretation IFRIC 23 “Uncertainty over Income Tax Treatments” have both been judged to be relevant for the LLB Group in the 2019 business year. However, neither of the two new rulings has a material impact on the Group financial statement.

IFRS 16 replaces IAS 17 “Leases” and the corresponding interpretation and regulates the recognition and disclosure of leasing contracts. The application of the new guidelines led to a balance sheet extension of CHF 33.0 million or 0.1 per cent. Within the LLB Group, leases exist for business premises, real estate and vehicles. The introduction of IFRS 16 has no material impact for the LLB Group as lessor; all existing leases continue to qualify as operating leases. The standard came into effect on 1 January 2019 and was then applied for the first time by the LLB Group. The simplified approach (modified retrospective method) served as a transition method; the amount of the right of use corresponded to the amount of the lease liability. The transition of the outstanding lease liabilities to the initial balance sheet value is shown in note 18. No comparison information was restated. As part of the initial application, practical expedients were employed for the transition. The new IFRS 16 regulations were applied to all lease contracts, which already existed under IAS 17 “Leases”. They were not applied to contracts that were not classified as leases under IAS 17. On account of their similarity, the underlying lease contracts can be combined so that in the case of the same duration, the same discount rate can be applied. Depending on the duration, the interest rates for the calculation of the lease liability ranged between 0.1 and 1.7 per cent. The incremental borrowing rate of interest served as the basis for the calculation, this is specified by IFRS 16 in the case of selection of the modified retrospective transitional application. Since the underlying lease contracts are not onerous contracts, an impairment test as part of the transition process was not considered necessary. Where possible, the contracts were classified as short-term lease relationships or low-value lease contracts. The revaluation of the duration was premised on the existence of extension and / or termination options. The effects of the introduction of the new standard on the impairment figures are regarded as not being material.

IFRIC 23 “Uncertainty over Income Tax Treatments” – The interpretation came into effect on 1 January 2019 and has been applied since then by the LLB Group. The interpretation is applied fully retrospectively. The application of the amendments has no major influence on the LLB Group’s financial statement. There are no transitional effects.

The amendments brought by IAS 19 “Employee Benefits” and IFRS 9 “Financial Instruments” are already being fully applied. Reference is made to the explanations provided in chapter 2.1.2 “New IFRS standards, amendments and interpretations” in the 2018 Annual Report.

The following new or amended IFRS standards or interpretations are of importance for the LLB Group from 1 January 2020 or later:

• IFRS 9, IAS 39 and IFRS 7 “IBOR Reform Phase 1” – The aim of the IBOR reform is to replace certain interbank rates (Interbank Offered Rates, IBORs) with newly created benchmark interest rates. The IASB standards setting programme has divided the project into two phases: 1. Questions relating to financial reporting in the period prior to the replacement of an existing reference interest rate by an alternative rate, and 2. Questions relating to financial reporting in the period of the replacement of an existing reference interest rate by an alternative interest rate. Phase 1 was completed on 26 September 2019 with the publication of the amendments to IFRS 9 “Financial Instruments”, IAS 39 “Financial Instruments: Recognition and Measurement” and IFRS 7 “Financial Instruments: Disclosures”. The amendments, applicable retrospectively from 1 January 2020, should mitigate the effects of the IBOR reform on financial reporting. They aim to ensure that, in spite of the expected replacement of various benchmark interest rates, hedge accounting relationships, for example LIBOR, continue to exist and can continue to be designated. The LLB Group employs only portfolio fair value hedge accounting. There is no uncertainty regarding fair value hedge accounting for this reporting date, therefore it was decided not to introduce the amendments at an early date. The implementation of these amendments will have no material effect on the financial statement of the LLB Group. They will lead merely to further disclosures in the 2020 business year.
• IFRS 3 “Business Combinations”: Amendments in respect of the definition of a business – The amendments clarify that to be considered a business, an acquired set of activities and assets must include an input and a substantive process that together significantly contribute to the ability to create an output. IFRS 3 now contains guidelines for a simplified test to ascertain whether a business or merely a group of assets has been acquired. Various examples are provided with the amendments, which come into effect from 1 January 2020. The LLB Group decided against an early adoption of the amendments. The adoption of the amendments will have no material effect on the consolidated financial statement of the LLB Group.
• IAS 1 “Presentation of Financial Statements”: Amendments regarding the definition of materiality – The amendments aim to simplify and standardise the definitions of “material” in the various IFRS. They are provided with examples and come into effect from 1 January 2020. The amendments will be applied prospectively. The LLB Group decided against an early adoption of the amendments. The implementation of the changes will have no material effect on the LLB Group’s financial statement.
• IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”: Changes regarding the definition of materiality – In future the definition as in IAS 1 will be valid. Reference is made to the explanations under IAS 1 regarding the date of adoption and possible effects.
• 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. The LLB Group decided against an early adoption of the amendments. The implementation of the changes will have no material effect on the LLB Group’s financial statement.

2.1.3 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. These include statements regarding future developments, for the correctness of which no guarantee can be provided. They contain risks and uncertainties including, but not restricted to, future global economic conditions, exchange rates, regulatory provisions, market conditions, competitors’ activities as well as other factors, which are beyond the control of the company. These assumptions 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. LLB is under no obligation to update the statements regarding future developments made in this annual report.

The IFRS contains guidelines which require the LLB Group to make estimates and assumptions when preparing the consolidated financial statement. Expected credit losses, goodwill, intangible assets, provisions for legal and litigation risks, fair value conditions for financial instruments and value liabilities 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 notes 13, 19, 28, 36 and in the chapter “Pension plans and other long-term benefits”.

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.

2.2.1 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.

The capital consolidation is carried out according to the purchase method.

2.2.2 Participation in associated companies

Associated companies are recognised according to the equity method.

2.2.3 Investment in joint venture

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

2.2.4 Changes to the scope of consolidation

In the 2019 business year a stake of 30 per cent was acquired in Gain Capital Management S.A.R.L. with registered office in Luxembourg. The company has the status of an associated company. For further details reference is made to note 16 and the “Scope of consolidation”.

2.3 General principles

2.3.1 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.

2.3.2 Income accrual

Interest and dividend income is subject to the provisions of IFRS 9. Interest income is recorded using the effective interest method and dividends are recorded at the time point when a legal claim comes into existence.

Income disclosed in note 2 is subject to the provisions of IFRS 15 “Revenue from contracts with customers”. For further information see point 2.7.

2.3.3 Inland versus abroad

“Inland” encompasses the Principality of Liechtenstein and Switzerland.

2.4 Foreign currency translation

2.4.1 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.

2.4.2 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.

2.4.3 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.

The following exchange rates were employed for foreign currency conversion:

2.5 Cash and cash equivalents

The cash reported in the consolidated statement of cash flows consist of Cash and balances with central banks, 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 Measurement of balance sheet positions

Depending on the basis on which they are measured, balance sheet positions can be assigned to two groups: IFRS 9 relevant and IFRS 9 non-relevant. The major portion of the LLB Group’s balance sheet total is composed of balance sheet items that are measured according to IFRS 9.

2.6.1 Balance sheet positions measured according to IFRS 9 and portfolio hedge accounting according to IAS 39

A financial asset or a financial liability is recognised when LLB or one of its subsidiaries becomes a contracting party. Financial assets and liabilities are always initially recognised at fair value. Provided no measurement at fair value through profit and loss is made, the transactions costs form an integral part of the fair value of the financial instrument. This corresponds to a valuation at effective cost.

2.6.1.1 Classification and measurement of financial assets

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

The following table provides an overview of the individual measurement methods and the assets associated with them at the LLB Group:

Employment within the LLB Group

With respect to the classification of financial assets at the LLB Group, there is scope for discretion only in the case of financial investments, and assumptions are made only in relation to the business model and SPPI conformity. In the case of financial investments, the management of the LLB Group determines the strategy and the respective business model for all Group companies. Two business models are employed: “Hold and Sell” and “Others”. The allocation to the individual business model depends on the category to which the financial investment belongs. The LLB Group divides financial investments into two categories: “Asset & Liability Management” and “Strategic Participations”.

Debt instruments in the “Asset & Liability Management” category are assigned to the “Hold and Sell” business model. Basically – provided they fulfil SPPI criteria – they are recognised at fair value in other comprehensive income. In the case of investments in new issues, the internal assessment is compared downstream with an external assessment from Bloomberg. Where assumptions diverge and there is no conformity with SPPI criteria according to Bloomberg, management is informed accordingly. It then decides about the further treatment of the debt instruments. An external assessment is utilised in the case of instruments which are traded on a market. Old holdings, i. e. debt instruments that under IAS 39 “Financial Instruments: Recognition and Measurement” were recognised at fair value through profit and loss, will continue to be measured according to this method. These serve primarily as economic hedging instruments and therefore do not fulfil the criteria of the business models “Hold” or “Hold and Sell”. They are assigned to the business model “Others”.

Financial investments of the strategic participations category encompass equity instruments and investment fund units. They do not fulfil the SPPI criteria and are therefore recognised at fair value through profit and loss. In the case of some equity instruments that comply with the definition of equity capital securities, they are designated irrevocably for measurement at fair value in other comprehensive income (OCI). Consequently, if the instruments are sold, the unrealised gains accrued in other comprehensive income cannot be recycled. Further information is provided in note 15.

The decision regarding the allocation to a business model or the appropriate designation is made at the product level.

Financial assets measured at amortised cost

• Cash and balances with central banks
  These are measured at amortised cost using the effective interest method. Since neither premiums nor discounts play a role, the value corresponds to the nominal value.
• Due from banks and loans
  These claims are measured at amortised cost using the effective interest method and taking into consideration an expected credit loss (ECL), since financial instruments measured at amortised cost are subject to a credit risk which has to be considered. The value stated in the balance sheet therefore corresponds to a net carrying amount because the expected credit loss is recognised in the balance sheet as a reduction of the carrying amount of a receivable. For off-balance sheet items, such as a commitment, however, a provision for credit loss is reported. The off-balance sheet total is not reduced. The impairments are recognised in the income statement and reported under “Expected credit losses”. Detailed information about expected credit loss and its calculation is provided in point 2.6.1.4 “Impairments”. Further information can be found in “Risk management” chapter 3 “Credit risk”.
  Interest and negative interest is recognised on an accrual basis and reported in interest income. The calculation basis is the gross carrying value for the financial instruments of stages 1 and 2, i. e. the value attained using the effective interest method before expected credit loss. In the case of stage 3 positions, the basis is the net carrying value.
  Basically, the LLB Group extends loans only on a collateralised basis, or only to counterparties having very high credit worthiness.

Financial assets recognised at fair value through other comprehensive income

• Debt instruments
  The measurement of debt instruments (corporate bonds) is carried out at amortised cost using the effective interest method. Unlike a measurement at amortised cost, the value is subsequently adjusted to fair value. Note 36 contains more information about the calculation of fair value.
  Debt instruments are subject to a credit risk. An expected credit loss is calculated in order to take this risk into consideration. In contrast to assets measured at amortised cost, no value adjustment of the asset is made. The expected credit loss is recognised in the income statement in the position “Expected credit losses”, the counter entry is made in other comprehensive income. Detailed information on expected credit loss and its calculation is provided in point 2.6.1.4 “Impairments”. Further information can be found in “Risk management” chapter 3 “Credit risk”.
  Interest and negative interest is recognised on an accrual basis and reported in interest income. The carrying amount is the value obtained using the effective interest method before adjustment to the fair value.
  When the debt instrument reaches final maturity, or is sold prior to final maturity, the unrealised gains accrued in other comprehensive income are reclassified in income from financial assets.
• Equity instruments
  Equity instruments are measured at fair value. Value changes and the corresponding gains / losses are recognised in other comprehensive income. Note 36 contains information about the calculation of fair value.
  In the case of the disposal of the equity instruments, the unrealised gains reported in the consolidated statement of comprehensive income are not reclassified in the income statement. These are reclassified in retained earnings without affecting the income statement.
  Dividend earnings are recognised in the income statement under income from financial investments.

Financial assets at fair value through profit and loss

• Derivative financial instruments
  Derivative financial instruments are valued as positive or negative replacement values corresponding to fair value and are reported in the balance sheet. Note 36 contains information about the calculation of fair value. 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 held for trading purposes, in net trading income. According to the guidelines governing fair value hedge accounting, income effects with hedging transactions occur only if opposite earnings effects do not completely neutralise each other. They are reported in net interest income.
• Hedge accounting
  Within the scope of risk management at the LLB Group, derivative financial instruments are employed principally to manage interest rate risk and only with counterparties having very high credit worthiness within predetermined limits. The management of interest rate risks is based on the requirements of the limits system.
  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 portfolio fair value hedge accounting (PFVH) for fixed-interest rate interest instruments 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). The PFVH portfolios consist of a subportfolio of hedging transactions, which is compared with a subportfolio of underlying transactions. The interest rate risk profile of the subportfolios is determined using an optimisation algorithm in order to achieve an optimum hedge allocation. The portfolios are designated over a hedge period of one month and are measured both retrospectively and prospectively. The effect on the income statement of the change in fair value of the hedging instrument is recognised under the same position in the income statement as the respective effect of the change in fair value of the hedged basic transaction. 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.
  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.
• Financial investments
  Within the LLB Group, the portfolio of financial investments recognised at fair value through profit and loss encompasses debt instruments and equity instruments. The debt instruments include both corporate bonds and investment fund units. The fund units represent callable instruments, which do not meet the criteria for equity instruments.
  These financial assets are measured at fair value. Note 36 contains information about the calculation of fair value. Non-realised gains or losses are reported in income from financial investments.
  Interest and negative interest is recognised on an accrual basis and reported in interest income. The nominal value of the debt instrument forms the basis for the calculation.
  Dividend earnings are recognised in the income statement under income from financial investments.

2.6.1.2 Classification and measurement of financial liabilities

Basically, the LLB Group’s financial liabilities are classified at amortised cost. The only exception is derivative financial instruments, which are classified at fair value through profit and loss.

The following table provides an overview of the individual measurement methods and the financial liabilities with which they are employed at the LLB Group.

Financial liabilities measured at amortised cost

These liabilities are measured at amortised cost using the effective interest method.

Interest and negative interest is recognised on an accrual basis and reported in interest income. Effects which arise as a result of the early disposal of the financial liability are recognised in the income statement.

Financial liabilities at fair value through profit and loss

Only derivative financial instruments are measured at fair value through profit and loss within the LLB Group. Note 36 contains information about the calculation of fair value.

2.6.1.3 Derecognition of financial assets and liabilities

The derecognition of financial assets occurs if the contractual claim to payment streams expires or if the ownership of the financial assets with all pertaining rights and risks is transferred.

Financial liabilities are derecognised when they have been settled.

2.6.1.4 Impairments

In line with IFRS 9, the LLB Group has developed and implemented an impairment model in order to quantify expected credit losses.

Governance in relation to input factors, assumptions and estimation procedures

The impairment model for the determination of the expected credit 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 probability of default (PD), loss given default (LGD) and exposure at default (EAD):

• 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. There are therefore 19 segments, which differ 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, exposure at default and loss given default, 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.

• Probability of default: 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 client segment, where a global probability of default is applied for the entire private client segment. In determining the portfolio probability of default, the only differentiation made is based on the internal historical default rates. A common factor with all ratings is that the probability of default in all cases is determined on a through-the-cycle basis, which is adjusted within the scope of micro-scenarios to take into consideration the expected economic conditions (point in time). For this purpose, in the case of private and corporate clients, the LLB Group estimates the development of interest rates as well as gross domestic product, and models the impact of the expected economic development on the probability of default. In the case of bank and financial investments having ratings from Moodys, this agency’s outlook of their future development is considered in the calculation.
• Exposure at default: 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 amostised cost of the individual period is extrapolated from the development resulting from integration and division by the length of the periods. The duration of the credits is in accordance with the conditions specified in the credit agreement. In the case of credits having an unspecified duration, a model is used as basis for the calculation. 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 approved by the Group Credit Committee, and is then employed to define the expected credit utilisation.
• Loss given default: Basically, there are three approaches for determining the loss given default: 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 probability of default, exposure at default and loss given default.

The credit quality determines the structure of the calculation.

• Credit quality level 1: No significant increase in the credit risk since initial recognition; the expected credit loss is calculated over one year.
• Credit quality level 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 level 3: Default in accordance the Capital Requirements Regulation (CRR). Art. 178 CRR specifies that a default can be considered to have occurred when a) it is unlikely that the debtor can pay back his liabilities in the full amount unless measures such as, for example, the realisation of collateral have to be implemented, or b) a substantial liability is more than 90 days overdue. In the case of defaulted positions, a specific value allowance is determined. The expected credit loss is calculated over the remaining term of the loan.

The allocation to a credit quality level has a significant influence on the magnitude of the expected credit loss because in the case of level 2 and level 3 positions this can be substantially higher than with level 1 positions.

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

Loans are allocated to a credit quality level. 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 level 2; payments more than 90 days past due are assigned to credit quality level 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 credit worthiness of the customer is to be expected in the future. Furthermore, in the case of bank and financial deposits, for example, the expectations of the rating agencies with respect to the future development of the ratings are considered in the assignment of a credit quality level for a loan.

During initial recognition, all risk-bearing positions are allocated to level 1 because no financial assets having an adverse effect on credit quality are purchased or generated.

Loans in credit quality level 2 are only reassigned to credit quality level 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 level 1 for at least three months.

In the case of loans in credit quality level 3, the Group Recovery Department is responsible for estimating the extent of a sustained improvement in credit quality. This 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 level 2, the criteria governing the credit quality level must have been fulfilled for at least three months.

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 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 (Art. 178 CRR) 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 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 LLB or a subsidiary within the LLB Group irrevocably waives a part of the debt.

Reporting of impairments

The LLB Group reports all impairments in the position “Expected credit losses”. This is part of operating income.

2.6.2 Balance sheet positions outside IFRS 9

2.6.2.1 Non-current assets and liabilities held for sale

Within the scope of recovery measures, LLB classifies the auctioned properties of its debtors as held for sale as soon as the corresponding criteria are fulfilled.

Properties or companies owned by a Group company are classified as held for sale if these are to be disposed of in line with the location or business strategy.

2.6.2.2 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 administrative purposes.

At the LLB Group, investment property is held for the purpose of capital appreciation. A classification is made only on the basis of objective indications and not on the basis of an intention to change the use of a property. The value of investment property is periodically assessed by external experts. Changes in the fair value, based on the report made by the experts, are recognised in the income statement as an allowance on property in the current period. Details are provided in footnotes if the change in fair value is substantial and therefore could have a significant effect on income. The LLB Group possesses only a few properties, which it does not use itself entirely. The part of the property it does not use itself is rented out. This part property is always immaterial and cannot be separately sold. Accordingly, the properties are not classified as investment property.

Other equipment encompasses fixtures, furnishings, machinery and IT equipment. These items are recognised in the accounts and depreciated over their estimated useful life.

Depreciation is carried out on a straight-line basis over the estimated useful life:

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 are recognised in depreciation and amortisation.

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.

2.6.2.3 Leasing

2.6.2.3.1 Group companies as lessees

In accordance with IAS 17, up to 31 December 2018, all leasing contracts of LLB and its subsidiaries were recognised in the income statement on a straight line basis over the term of the lease as general and administrative expenses.

The regulations of IFRS 16 now apply since 1 January 2019. The measurement of a lease liability is based on the fixed lease payments over the basic term of the lease, as well as on the assessment of extension and / or termination options. Non-lease components, where identifiable, are measured in accordance with the prevailing standards. Currently, there are no contracts having special contents such as variable lease payments, purchase options or penalty payments. To calculate the present value, the LLB Group utilises, almost without exception, the lessee’s incremental borrowing rate of interest, which corresponds to the duration of the lease.

The subsequent measurement for the right of use is made according to the acquisition cost model, and for the lease liability at amortised cost. The carrying value may change as a result of the reassessment of extension and / or termination options, as well as on account of a change in the amount to be paid periodically. These possible changes are monitored.

The LLB Group does not recognise leases having terms of up to twelve months, or of low-value leases, in the balance sheet. The payments are recognised in the income statement on a straight line basis over the term of the lease as general and administrative expenses.

2.6.2.3.2 Group companies as lessors

All leasing contracts qualify as operating leases. The leasing revenues earned are recognised on a monthly basis as an integral part of other income in the income statement. The underlying financial assets are subject to the provisions described in point 2.6.2.2

2.6.2.4 Goodwill and other intangible assets

Goodwill and other intangible assets are recognised in the balance sheet at acquisition cost on the date of acquisition and reviewed for impairment on an annual basis in the third quarter, or if indications of an impairment exist.

Intangible assets comprise client relationships and brand values, software and other intangible assets. Intangible assets from acquisitions are amortised in a straight line over an estimated useful life of five to fifteen years. In general, software is amortised over a period of three to six years. See note 19.

2.6.2.5 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. These are reported in the balance sheet as tax liabilities. If uncertainty exists about whether a tax issue will be recognised by the tax authorities, the LLB Group contacts the tax authority concerned at an early date. If a tax issue cannot be conclusively clarified before the reporting date, the LLB Group makes assumptions regarding the amount that the tax authorities will accept. In this case, the amount reported in the IFRS statement can differ from the amount shown in the income tax return.

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 high 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.

2.6.2.6 Employee benefits

Retirement benefit plans

The LLB Group has pension plans for its employees, 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.

If changes, curtailments or settlements occur during the reporting period, the net debt is recalculated. In this case, the current service cost and the net interest, which have to be recalculated on the basis of new net debt, are to be newly determined for the remaining business year using the latest actuarial assumptions.

Variable salary component and share-based compensation

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. After the blocking period, the shares are automatically transferred to them.

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.

2.6.2.7 Provisions and contingent liabilities

Within the scope of ordinary banking business, the LLB Group is involved in various legal, regulatory and administrative proceedings. The current business environment involves legal and regulatory risks, whose influence on the financial strength and profitability of the Group – depending on the stage of the proceedings – is difficult to assess.

A provision is allocated, if the LLB Group bears a current liability on the reporting date arising from a past event, which will probably lead to an outflow of resources, the amount of which can be reliably estimated. In assessing whether the allocation of a provision and its amount are reasonable, the best possible estimates and assumptions available on the balance sheet reporting date are utilised, which may be adjusted accordingly at a later date to take into consideration new facts and circumstances.

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 addition, provisions are allocated for expected credit losses with off-balance-sheet positions. This is due to the fact that there is no corresponding asset within the balance sheet which could be reduced in value by means of a value allowance. The expected credit loss is reported in the income statement under “expected credit losses”. Credit loss forms an integral part of other business risks.

If liabilities do not fulfil the criteria applying to a provision, this could result in the formation of a contingent 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. 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.

2.6.2.8 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.

2.6.2.9 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.

Securities 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.

2.7 Recognition of revenues

2.7.1 Recognition of revenues

The LLB Group earns revenues from the provision of various services. These revenues are recognised when the obligation to provide the service has been fulfilled by the LLB Group and when it has been ensured that, at a time of uncertainty, no significant cancellations of previously recognised revenues can occur.

2.7.1.1 Recognition of revenues over a specified period

Fees for securities administration are typical revenues earned from fees and services that are recognised over a period at the LLB Group.

On account of the nature 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 generally 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 the same services that are required every day.

2.7.1.2 Recognition of revenues on a specific date

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

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

Costs incurred in providing a service are generally recognised at the time the service is provided.

2.7.1.3 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.

Clients have the possibility of paying an all-in fee for a range of different services. This all-in fee is disclosed in note 2 in a separate table. No reclassification into the corresponding line items of the individual revenue types containing the all-in fee is made because, on account of its business model, the all-in fee is assigned to the line item asset management and investment business. This additional table provides greater transparency on how these revenues are broken down in their entirety. These revenues are recognised in the period concerned and are paid by the client at the end of a quarter.

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

3 Events after the balance sheet date

At its meeting on 9 March 2020 the Foundation Board of LLB Pension Foundation decided to continuously lower the conversion rate over the next few years. Accordingly, LLB expects this to have a positive effect on the income statement in 2020 of around CHF 5 million.