Accounting principles

1 Basis for financial accounting

1.1 Basis for financial accounting

The interim financial reporting was prepared in accordance with the international accounting standard for interim financial reporting (IAS 34 “Interim Financial Reporting”) and complies with international financial reporting standards (IFRS). The significant accounting and valuation methods employed in the preparation of the unaudited interim financial reporting correspond to those used in the 2018 annual report. In addition, the regulations valid since 1 January 2019 have been applied.

The unaudited interim financial reporting does not encompass all the data contained in the audited 2018 consolidated financial statement and should, therefore, be read together with the audited consolidated financial statement as at 31 December 2018. The interim financial reporting was compiled in fulfilment of obligations under stock exchange law and, in addition, is provided for information purposes.

On account of detailed definitions in its presentation, the consolidated financial statement of the comparison period can contain reclassifications. These have no, or no substantial, effect on the business result. If the reclassification is made in the form of a note to the income statement or balance sheet, this has no impact on the primary statements. Accordingly, no further details are provided because only the type of presentation was altered.

In the income statement a reclassification totalling CHF 2.8 million was made from the line “General and administrative expenses” to the line “Expected credit loss”. For background information on the change in presentation, reference is made to the Annual Report 2018, paragraph “Reporting of impairments”.

The valuation of assets and liabilities in connection with the acquisition of Semper Constantia Privatbank AG was finally completed on 14 June 2019. Consequently, the goodwill as a result of the transaction increased by CHF 0.7 million. Further information is provided in the chapter “Company acquisitions” .

1.2 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 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 Notes 14 und 15 in these consolidated interim financial statements 2019 and under Notes 13, 18, 25, 33 and in the chapter “Pension plans and other long-term benefits” in the consolidated financial statements 2018, respectively.

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 2018 annual financial statement, i.e. discount rate, future salary increase, interest credit rate and life expectancy, were adjusted accordingly in the 2019 interim financial reporting.

1.3 New IFRS, amendments und 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 in some cases came into effect.

It was determined that the new standard IFRS 16 “Leases”, as well as the interpretation IFRIC 23 “Uncertainty over Income Tax Treatments” were relevant for the LLB Group for the 2019 financial year. The amendments to IFRS 9 “Financial Instruments” regarding early termination and IAS 19 “Employee Benefits” concerning changes to defined benefit plans during the reporting period were adopted in advance in 2018. The adoption of the improvements within the scope of annual improvements to the IFRS 2015 – 2017 cycle has no material influence on the LLB Group’s financial statement.

• IFRS 16 “Leases” – The new standard regulates the recognition and disclosure of lease contracts. Lease contracts are understood to be contracts that convey the right to use an asset for a period of time in exchange for a consideration. All lease contracts are to be recognised in the accounts provided the option for short-term leases or low-value assets is not utilised. The entering of lease 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. If a lease is recognised, this leads to the recording of a lease liability and a right of use asset. The carrying amount corresponds to a present value. The LLB Group utilises recently introduced software to determine the amount of the present value. Lease contracts exist in the form of leases for office premises and properties, as well as for motor vehicles. These led to a balance sheet extension of around CHF 33.0 million, or around 0.1 per cent. 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. 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 0.14 and 1.67 percent. The lessee’s incremental borrowing rate of interest serves as the basis for the calculation of the right of use assets, which is specified by IFRS 16 in the case of the 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, and the revaluation of the duration is premised on the existence of extension and/or termination options. The effects of the introduction of the new standard on the impairment of key figures is regarded as not being material.
• 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 it is concluded that this is not probable, the two amounts differ, as, according to IFRS, the most likely amount or expected value of the tax treatment is to be utilised. The interpretation came into effect on 1 January 2019 and has been applied for the first time by the LLB Group since this date. 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. In such special cases, basically the LLB Group clarifies in advance with the tax authorities which amounts are to be used for tax purposes.

Financial years starting from 1 January 2020 or later are subject to the regulations listed in the 2018 Annual Report. The IASB issued no new standards or interpretations and the LLB Group made no reassessments as regards relevance.

1.4 IFRS 16 “Leases”

1.4.1 Measurement

The initial measurement is made on the commencement date, the right of use asset corresponds to the lease liability. The measurement of the lease liability is based on the fixed leasing payments over the term of the lease, as well as the assessment of extension and/or termination options. Currently, there are no contracts with special contents such as variable leasing payments, purchase options or penalty payments. The calculation of the present value is based on the interest rate applying to the lease, if this is known. If this is not known, the lessee’s incremental borrowing rate of interest is employed. For the calculation of the present value, the incremental borrowing rate is utilised that corresponds to the duration of the lease. In the case of short-term leases, or low-value leases, these are not recognised in the balance sheet, but rather booked directly through the income statement.

The follow-up measurement applies the acquisition cost model for the right of use asset and the amortised cost method for the lease liability. Changes in the carrying value, independent of the valuation measurement models employed, can occur when new measurements are made or the conditions of the lease change. These principally occur at the LLB Group as a result of the revaluation of an extension and/or termination option, or on account of a change in the amount to be paid periodically. If modifications lead to a new lease, which is to be measured separately from the existing lease, the discount interest rate is retained for the original lease and a new discount rate is determined for the separate lease. If changes do not lead to a new lease, for the effective time point of the change, a new discount interest rate for the remaining term of the lease is determined on the basis of a calculation of the duration of the lease.

1.4.2 Disclosure

The increase in the obligations from operating leases reported according to IAS 17 of CHF 15.5 million to CHF 33.0 million as an initial carrying value for leases under IFRS 16 is attributable largely to the revaluation of run-time options for lease contracts valid during the transitional period.

1.5 Bonds issued

A bond issue was made on 27 May 2019. These bonds are recognised at amortised cost.

Further information is provides in Note 13 “Bonds issued”.

2 Changes to the scope of consolidation

In the first half of 2019 no changes occurred in the scope of consolidation.

A 30 per cent stake in Gain Capital Management S.A.R.L., a company domiciled in Luxembourg, was purchased with a value of EUR thousands 3.6. The company has the status of an associated company with accounting according to the equity method.

3 Foreign currency translation

4 Risk management

Within the scope of its operative activity, the LLB Group is subject to financial risks such as market, credit, liquidity and refinancing risks, as well as operational risks. Only qualitative disclosures regarding credit risks are provided in the 2019 interim financial reporting. For more detailed risk information, we refer to the risk management information in the 2018 Annual Report.

With regard to the value of its absolute loans, the credit portfolio of the LLB Group has not changed materially during the first half of 2019. In the case of stage 1 and stage 2 loans, a slight decrease in expected credit losses occurred. Stage 3 positions made a significant contribution to the positive result thanks to various measures that were implemented by the Recovery Management Department. The contribution from expected credit losses over all positions subject to risks is reported in the consolidated income statement and totals CHF 3.7 million, of which CHF 2.7 million is attributable to stage 3 loans.

5 Events after the balance sheet date

LLB Verwaltung (Switzerland) AG has reached a settlement in connection with the US business of the former Liechtensteinische Landesbank (Switzerland) AG and signed a non-prosecution agreement. It has undertaken to make a payment of USD 10.7 million. The payment is covered by provisions. The release of provisions that are no longer required will have a positive effect before tax of around CHF 4 million on the business result in the second half of 2019.