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 22 February 2019 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 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.

2.1.2 New IFRS standards, amendments and interpretations

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

The new standards IFRS 9 “Financial Instruments” and IFRS 15 “Revenue from Contracts with Customers”, as well as amendments to IAS 1 “Presentation of Financial Statements”, IAS 40 “Investment Property” and IFRS 2 “Share-based Payment” were designated as relevant for the LLB Group for the 2018 financial year. The application of the amendments to IFRS 2, IFRS 15, IAS 1 and IAS 40 has no major effect on the financial reporting. The quantitative effects of IFRS 9 are discussed under point 3 “First application of IFRS 9” in the accounting principles. In the case of both IFRS 9 and IFRS 15, the transition rulings enable a modified retroactive adjustment to be made. Effects arising from the transition to the new standard are recognised in equity without affecting the income statement; no restatement of the comparison period is made. The LLB Group has elected to adopt the simplified form for the initial application of these standards, i.e. the values for the prior comparison periods are presented according to the old regulations. The transition from IAS 18 “Revenues” and the relevant interpretations of IFRS 15 do not result in a correction of equity because the balance sheet does not contain any positions that would be subject to IFRS 15 regulations. Within the scope of the application of IFRS 9, the LLB Group decided in favour of the early implementation of the amendments to IFRS 9, which concern the right of early termination and which were published by the International Accounting Standards Board (IASB) in October 2017. The early application will have no material impact.

The following new or revised IFRS standards or interpretations are of importance for the LLB Group from 1 January 2019 or later:

• 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 office premises or motor vehicles. 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. In the first quarter of 2018 a project was started with the aim of ensuring an application of the standard in conformance with IFRS. It was decided to install software for the proper presentation of these positions on the balance sheet. The successful completion of the project and the recognition of the leasing contracts per 1 January 2019 occurred in the fourth quarter of 2018. Leasing contracts exist in the form of leases for office premises and properties, as well as for motor vehicles. The standard came into effect on 1 January 2019 and was then applied for the first time by the LLB Group. The simplified approach serves as a transition method, meaning that no comparison information needs to be restated. Other practical aids will also be utilised in addition. For example, the new IFRS 16 regulations will also be applied to all leasing contracts, which already existed under IAS 17 “Leasing”, or which were not applied to contracts that were not classified as leases under IAS 17. On account of their similarity, the underlying leasing contracts can be combined so that in the case of the same duration, the same discount rate can be applied. Since the underlying leasing contracts are not onerous contracts, an impairment test as part of the transition process was not considered necessary. Where possible, the contracts are classified as short-term leasing relationships or low-value leasing contracts, and the revaluation of the duration is premised on the existence of extension and/or termination options. The effects of introducing the new standard on the impairment of key figures is regarded as not being material; the right of use assets to be reported, which lead to an increase in the balance sheet total, amount to CHF 31 million. 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 selection of the modified retrospective transitional application.
• IAS 19 “Employee Benefits” – The amendments to IAS 19 were introduced to eliminate differences in accounting practices. Previously, rulings existed for how changes to contribution and benefit payments were to be considered for the calculation of net debt and net interest, but not however what procedure was to be adopted if amendments, curtailments, or settlements to defined benefit plans occurred during the report period. From now on, it is stipulated that when an amendment, curtailment or settlement of a defined benefit plan occurs, the current service cost and the net interest of the period after the remeasurement are to be determined using the actuarial assumptions used for the remeasurement. In a first step, the effects of a plan amendment, curtailment or settlement are to be recognised without considering any possible effects in relation to the asset ceiling. The determination and possible adjustment of the asset ceiling will only follow in a second step. The amendments came into effect from 1 January 2019. The LLB Group has already utilised the option to apply the amendments in advance. Within the LLB Group, plan amendments occurred at two companies during the second half of 2018. These resulted in a profit of CHF 0.4 million and an increase in equity of CHF 7.3 million.
• 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 came into effect from 1 January 2019 and will be applied for the first time by the LLB Group from this date. 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. There are no transitional effects.
• 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. The assessment of whether an acquired process is substantial replaces the assessment of whether market participants are capable of replacing any missing inputs or processes and continuing to produce outputs. Outputs are regarded as being goods or services produced for customers which contribute to the earning of investment income or other earnings from ordinary business activity. Therefore, pure cost reductions are no longer regarded as sufficient to differentiate between the acquisition of a business and a group of assets. IFRS 3 now contains guidelines that permit a simplified assessment of whether a business or merely a group of assets has been acquired. The optional concentration test assesses whether the entire fair value of the acquired gross assets is concentrated in one asset or in a group of identical assets. If this is the case, a business as such does not exist, and no evaluation regarding the input factors and substantial processes for generating an output needs to be made. Various examples are provided with the amendments, which come into effect from 1 January 2020. An earlier adoption is possible and is currently being considered by the LLB Group. The implementation of the changes will have no major influence on the LLB Group’s financial statement.
• 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. Examples are also provided. The amendments come into effect from 1 January 2020 and will be applied prospectively. An earlier adoption is possible and is currently being considered by the LLB Group. The implementation of the changes will have no major influence 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. An earlier adoption is possible but the LLB Group will probably not choose to adopt this in advance. The possible effects are currently being analysed.

Within the scope of its annual improvements, the IASB published further improvements (Annual Improvements to IFRS 2015 – 2017 Cycle). They come into effect for financial years beginning from 1 January 2019. The implementation of these changes has no influence 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 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 13, 18, 25, 33 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. The financial year is identical to the calendar year for all consolidated companies. Solely LLB Invest AGmvK has a different financial year; however, this company is 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.

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. 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.

2.2.2 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.

2.2.3 Changes to the scope of consolidation

There were changes to the scope of consolidation in the 2018 financial year. Further details can be found in the chapters “Company acquisitions” and “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 payments are 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.

Earnings reported under “Net fee and commission income” are subject to the provisions of IFRS 15 “Revenues from contracts with customers”.

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 in a footnote under Note 15.

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 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. The subsequent measurement, arising from the classification, determines whether any possible transaction costs, which are directly attributable to the acquisition or sale of a financial asset or financial liability, are to be considered during initial measurement or are to be recorded immediately as affecting net income. Provided no subsequent measurement at fair value through profit and loss is made, the transaction costs basically form a part of the fair value of the financial asset or liability upon initial recognition. 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.

Measurement methods

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

Since, basically, equity instruments do not fulfil the SPPI criterion, they are measured at fair value through profit and loss, provided they have not been given a designation for a measurement at fair value through other comprehensive income. The consequence of the latter is that in the event of the instruments being sold, no reclassifying of accrued unrealised income in other comprehensive income (OCI) is possible.

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. No value allowances are made.
• Due from banks and loans
  Balances due from banks and loans are measured at amortised cost using the effective interest method and by calculating the 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 under “Credit risk” in the chapter “Risk management”.
  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

Financial assets
Within the LLB Group, the portfolio of assets recognised at fair value through other comprehensive income encompasses debt instruments and equity instruments. Although both types of financial instruments are measured using the same method, there are differences in the valuation process due to their different characteristics.

• Debt instruments
  The measurement of debt instruments (corporate bonds) is carried out at amortised cost using the effective interest method. In contrast to the measurement at amortised cost, the value is subsequently compared with the fair value. The fair value is determined on the basis of listed instruments and corresponds to the current bid price. If no active market exists, or if the instruments are not listed, the fair value is calculated using suitable valuation methods. These encompass references to recent transactions between independent business partners; the application of current market prices of other instruments, which are essentially similar to the assets being valued; the discounted cash flow procedure; and external pricing models, which take into account the special circumstances of the issuer. See also Note 33. The difference between the amortised cost and fair value represents the unrealised gain or loss from the fair value measurement, which are recognised in other comprehensive income.
  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 under “Credit risk” in the chapter “Risk management” from point 3.8.
  Interest and negative interest is recognised on an accrual basis and reported in interest income. The carrying amount is employed as the calculation basis, i.e. 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 measured at fair value.
• Equity instruments
  Equity instruments are measured at fair value. Value changes and the corresponding gains/losses are recognised in other comprehensive income. The calculation of the fair value of these financial assets is carried out in exactly the same way as for debt instruments.
  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 at fair value.

Financial assets at fair value through profit and loss

• 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 (see the paragraph “Debt instruments” under point 2.6.1.1 “Classification and measurement of financial assets” in the section “Financial assets at fair value through other comprehensive income”). 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. Income effects of hedging transactions according to fair value hedge account guidelines arise only when the opposing earnings effects do not completely neutralise each other.
• 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 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 be 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 per cent. The part outside the range of 80 to 125 per cent is classed as being ineffective. Within the scope of fair value hedge accounting at the portfolio level, the hedge relationship to the underlying transaction is determined by means of an optimisation, thus ensuring a high hedging ratio. A possible cause of the ineffectiveness of the hedge could be the mismatch in the risk profile of the portfolios.
  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. The fair value is measured in exactly the same way as for debt instruments recognised at fair value through other comprehensive income (see the paragraph “Debt instruments” under point 2.6.1.1 “Classification and measurement of financial assets” in the section “Financial assets at fair value through other comprehensive income”). Non-realised gains or losses are recognised in income from financial investments at fair value through profit and loss.
  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 at fair value.

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.

Financial liabilities classified at amortised cost

These liabilities are measured at amortised cost using the effective interest method. If the liabilities contain premiums or discounts, i.e. the value reported in the balance sheet does not correspond to the nominal amount, the difference is amortised over the term of the liability.

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.

Balance sheet positions measured at amortised cost comprise liabilities due to banks and customers, as well as debt issued and shares in bond issues of the Swiss regional or cantonal banks’ central bond institutions.

Financial liabilities classified at fair value through profit and loss

Only derivative financial instruments are measured at fair value through profit and loss within the LLB Group. For further information see the paragraph “Derivative financial instruments and hedging transactions” under point 2.6.1.1 “Classification and measurement of financial assets” in the section “Financial assets measured at fair value through profit and loss”.

2.6.1.3 Derecognition of financial assets and liabilities

Financial assets are derecognised when the contractual right to payment streams from a financial asset expires or the financial asset is transferred and the risks and rewards of ownership are transferred with it.

Financial liabilities are derecognised when they have been settled.

2.6.1.4 Impairments

In accordance with IFRS 9, an expected credit loss must be calculated and recognised for all positions which are subject to a credit risk and are not recognised at fair value through profit and loss. In line with IFRS 9, the LLB Group has developed and implemented an impairment model in order to quantify expected credit losses. The initial recognition of expected credit losses is made through equity (retained earnings) without affecting the income statement.

The statements, which in accordance with IFRS 7 “Financial Instruments: Disclosures” are to be made in connection with the initial application of IFRS 9, are shown in chapter 3 “First application of IFRS 9” immediately after the accounting principles. All other disclosures, especially the statements regarding impairments, are provided in “Risk management”, above all in chapter 3 “Credit risk”.

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. Consequently, 19 segments were formed, differing from each other in the modelling of the calculation parameters, to enable the LLB Group’s credit portfolio to be segregated into risk groups that are as homogenous as possible.

Modelling principles and calculation parameters of expected credit loss

The calculation of the expected credit loss is based on the components: probability of default, 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 deposits with ratings from Moody’s, the rating agency’s outlook for the expected future development of the ratings is taken into consideration.
• 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 amortised cost of the individual periods is extrapolated from the overall development through integration and then division by the duration of the periods. The term of the loans is defined in the individual credit agreements. In the case of loans with an unspecified term, a model is used to ascertain the term. The period of notice is used as a basis for the calculation. Cash inflows (loan repayments) are defined on the basis of the planned amortisation payments. Cash outflows (loan increases) are dependent on the type of loan and the agreed-but-not-yet-utilised credit limit. Internal experts estimate a credit conversion factor, which is 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 form of the calculation is determined by the credit quality.

• 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 and recognised by the Group Recovery Department. 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 per centage 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.

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.

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

Macro-scenarios

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

IAS 1 “Presentation of Financial Statements” regulates which positions must at least be contained in financial statements. Up to 31 December 2017, there were no regulations governing the disclosure of impairments. Up to 31 December 2017, the LLB Group reported impairments in value of balance sheet items caused by changes in creditworthiness in the position “Expected credit losses”. A provision was formed for impairments in value of off-balance-sheet items caused by changes in creditworthiness. The allocation or release of provisions was reported by the LLB Group under “General and administrative expenses”, i.e. depending on their origin, impairments either reduced operating income or were charged to general and administrative expenses.

The introduction of IFRS 9 brought an adjustment to IAS 1. From 1 January 2018, IAS 1 stipulates that all impairment charges are to be reported in one line. Accordingly, the LLB Group has changed its presentation and now recognises all impairments in the position “Expected credit losses”. All impairments are contained in operating income.

Modification of contracts

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

2.6.2 Measurement of financial instruments up to 31 December 2017 according to IAS 39 “Financial Instruments: Recognition and Measurement”

The transition from IAS 39 to IFRS 9 was made utilising the simplified application option, i.e. the current period shows the values according to the disclosure under IFRS 9, the comparison period shows the values according to the old regulations under IAS 39. The two substantial changes, which became relevant for the LLB Group as a result of the transition from IAS 39 to IFRS 9, are:

• the impairment model according to the expected loss model under IFRS 9 in comparison with the impairment model according to the incurred loss model under IAS 39,
• changes in the measurement of financial investments due to the elimination of the measurement guidelines for the available-for-sale financial assets, as well as the possibility of an option to designate equity instruments for measurement at fair value through comprehensive income.

The accounting policies for major financial instruments in accordance with IAS 39 are explained in the following.

2.6.2.1 Cash and balances with central banks

Cash and balances with central banks are initially recognised at effective cost, which corresponds to the fair value at the time they were allocated. Subsequently they are measured at amortised cost using the effective interest method. No value allowances are made.

2.6.2.2 Due from banks and loans

Balances due from banks and from customers are initially recognised at effective cost, corresponding to the fair value of the specific loan at the time it was granted. Subsequently they are measured at amortised cost using the effective interest 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 under 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 collaterised basis and only to counterparties having very high creditworthiness.

A loan is 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 counterparty- or country-specific criteria. Indications for the impairment of a financial asset are:

• financial difficulties 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 other financial reorganisation;
• national or regional 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 present value of the estimated future cash flow of the claim, discounted by the loan’s effective interest rate. Allowances for credit risks are reported as a reduction of the carrying value of a claim in the balance sheet. In the case of off-balance-sheet items, such as a commitment, a provision for credit loss is reported under provisions. Impairments are recognised in the income statement.

2.6.2.3 Derivative financial instruments

The derivative financial instruments, which the LLB Group discloses in its balance sheet, were measured in exactly the same way under IAS 39 as they are now under IFRS 9. Reference is made to the text passage under point 2.6.1.1.

2.6.2.4 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, financial investments were classified in the category “Financial investments at fair value through profit and loss”, as well as in 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 no active market exists for the financial assets, their value is determined on the basis of the statements made under the paragraph “Debt instruments” under point 2.6.1.1 “Classification and measurement of financial assets” in the section “Financial assets at fair value through other comprehensive income”.

Dividend income from financial investments is recorded as income from financial instruments at fair value. Interest income is recognised as interest income 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 for the financial assets, their value is determined on the basis of the statements made under the paragraph “Debt instruments” under point 2.6.1.1 “Classification and measurement of financial assets” in the section “Financial assets at fair value through other comprehensive income”.

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

2.6.2.5 Balances due to banks and customers

Balances due to banks and customers are measured at amortised cost using the effective interest method. If the liabilities contain premiums or discounts, i.e. the value reported in the balance sheet does not correspond to the nominal amount, the difference is amortised over the term of the liability.

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.

2.6.2.6 Debt issued

Medium-term notes and mortgage-backed securities are recognised at fair value, which usually corresponds to the issuance value, and at amortised cost.

Interest on medium-term notes and mortgage-backed securities is recognised on an accrual basis and is reported according to the effective interest method under interest paid. Negative interest is reported as interest income.

2.6.3 Balance sheet positions outside IFRS 9

2.6.3.1 Non-current assets and liabilities held for sale

Long-term (non-current) 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. In this 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.

The measurement of non-current liabilities held for sale is carried out in exactly the same way as for the assets.

2.6.3.2 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.

Investment property is held to earn rental income and/or for 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. 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 a property is partially used as an investment property, the classification is based on whether or not the two portions can be sold separately. If the portions of the property can be sold separately, each part is recognised accordingly. 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.

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 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.

2.6.3.3 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 assets, which, among other factors, can result from acquisitions. These can include, for example, acquired client relationships, purchased brands values, software and similar items. Amortisation is carried out using the straight-line method over the useful life of five to fifteen years. Goodwill and other intangible assets are recognised in the balance sheet at acquisition cost on the date of acquisition. 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. The individual company is regarded as the smallest cash generating unit by the LLB 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 18.

2.6.3.4 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.

2.6.3.5 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 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, which, after expiry of the blocking period, automatically leads to payment in shares.

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.

2.6.3.6 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.

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”; in the balance sheet the credit loss forms an integral part of other business risks.

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.

2.6.3.7 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.

2.6.3.8 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.

2.7 Recognition of revenues

2.7.1 Recognition of revenues according to IFRS 15

The LLB Group earns revenues by providing various services. These revenues are recognised when the obligation to provide the service has been fulfilled by the LLB Group, i.e. when by providing the service, the power of disposal is transferred to the customer. Furthermore, it must be sufficiently certain that the revenues can be collected in the amount recognised. This means in the case of variable revenues that recognition may only take place once it has been ensured that at a time when there is no uncertainty, no significant cancellations of previously recognised revenues can occur. Recognition can be carried out over a period or on a specific date.

2.7.1.1 Recognition of revenues over a specified period

Account fees are typical revenues earned from fees and services that are recognised over a period at the LLB Group.

In the case of services that are delivered over a period, the client also enjoys the benefit from the service over the period since the power of control is continually transferred with the provision of the service. Accordingly, the revenues obtained from the provision of the service are recognised over the period the service is provided. On account of the 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 which are delivered on a specific date, the power of control is transferred to the client. The resulting benefit for the client occurs once for the client on this date. Accordingly, the revenues obtained from the provision of the service are recognised once, i.e. in relation to this date.

In the case of services that are 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 fees.

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

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 per centage on his assets on a previously determined date as a fee. The recognition period basically amounts to a maximum of one year and the revenues are only to be recognised on the effective date. Only on this date will it be sufficiently clear that no significant cancellation of the revenues will occur.

Basically, the revenues are to be allocated to the individual service obligations. On account of the business model, this will not be possible for an immaterial part of the revenues because the client also has the option of paying an all-in-fee for a range of different services. The revenues from all-in-fees are periodically analysed and, if they are significant, they are disclosed (see Note 2).

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

2.7.2 Recognition of revenues according to IAS 18 “Revenue”

Revenues from services are recognised when the services have been rendered. Asset management fees, security account fees and similar revenues are recognised pro rata over the period the service is rendered. Interest is recognised according to the effective interest method. Dividends are recognised from the date the legal right to receive payment is established.

2.8 Adjustments on account of new accounting policies

The introduction of IFRS 9 and amendments to IAS 1 in relation to the presentation of the origin of interest necessitated that various alterations had to be made to existing tables and that some tables became obsolete. The most important adjustments were as follows:

3 Initial application of IFRS 9

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

The accounting guidelines associated with the changes are reported in the accounting principles. Further information is provided in this chapter, however the focus lies on the quantitative disclosure.

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

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

Application of the business models

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

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

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

Assessment of the SPPI

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

Comparison of assessments under IAS 39 and IFRS 9

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

Quantitative disclosure

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

Transition of the carrying value of financial assets and financial liabilities from IAS 39 to IFRS 9

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

Transition of the value allowance for expected credit loss from IAS 39 / IAS 37 to IFRS 9

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

4 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 2018.