1 Basic information
The LLB Group offers a broad spectrum of financial services. Of particular importance are asset management and investment counselling for private and institutional clients, as well as retail and corporate client businesses.
The Liechtensteinische Landesbank Aktiengesellschaft, founded in and with its registered office located in Vaduz, Principality of Liechtenstein, is the parent company of the LLB Group. It is listed on the SIX Swiss Exchange.
The Board of Directors reviewed this consolidated annual statement at its meeting on 27 February 2016 and approved it for publication.
2 Summary of significant accounting policies
The significant accounting and valuation methods employed in the preparation of this consolidated financial statement are described in the following. The described methods have been consistently employed for the reporting periods shown, provided no statement to the contrary is specified.
2.1 Basis for financial accounting
The consolidated financial statement has been prepared in accordance with the International Financial Reporting Standards (IFRS).
Further basis for the preparation of the financial statement
The Group financial statement was prepared on the basis of historical acquisition or production cost with the exception of the revaluation of certain financial assets and liabilities.
Numerous new IFRS standards, as well as amendments and interpretations of existing IFRS standards, were published and became effective for financial years starting on 1 January 2016 or later. The following new or revised IFRS standards or interpretations are of importance for the LLB Group:
- IAS 12 “Income Taxes” – The amendments clarify how deferred tax claims from unrealised losses on assets reported at fair value are to be recognised. The standard is to be applied retroactively and comes into effect on 1 January 2017. An earlier implementation is possible, but the LLB Group has not done so. The implementation of the changes has no major influence on the LLB Group’s financial statement.
- IAS 40 “Investment Property” – The amendments stipulate that in future the transfer of real estate into or out of the inventory of real estate held as financial investments is to be assessed on a principle-based basis. In future, transfers will only be made if there is a change of use. In this case, it is to be assessed whether a property meets the definition of real estate held as a financial investment. In addition the change of use must be evidenced, i.e. there must be objective evidence of, and not just an intention for, a change of use. In comparison with the previous ruling, the list of examples was changed from an exhaustive to a non-exhaustive list. In relation to operating leases, in future the commencement of the leasing relationship will be relevant as the time point of the transfer, and no longer the start of the lease term. The amendments are effective for periods on or after 1 January 2018. Retrospective application is also possible if this is possible without the use of hindsight. An earlier implementation is possible, but the LLB Group will not do so. The implementation of the changes has no major influence on the LLB Group’s financial statement.
- IFRS 2 “Share-based Payment” – The amendments concern rulings in connection with cash-settled share-based payments. An exception will continue to apply to share-based payments involving a so-called net settlement feature. In this case, the tax to be paid by the employee will be paid directly to the competent tax authority by the company. Accordingly, the employee retains only the share-based payment amounting to the balance from the original entitlement and the tax liability. Only the net settlement feature could be of future relevance for LLB. At the moment this situation does not exist. The new rulings come into effect on 1 January 2018. Retrospective application is also possible if this is possible without the use of hindsight. An earlier implementation is possible, but the LLB Group will not do so. The implementation of the changes has no major influence on the LLB Group’s financial statement.
- IFRS 9 “Financial Instruments” – IFRS 9 is divided into three phases: classification and measurement, impairment and hedge accounting. The classification and measurement of financial instruments are made on the basis of the business model of the bank for the management of financial instruments and the contractual cash flow characteristics of the financial assets. The financial instruments are classified in the “Hold” business model and measured at amortised cost, if the purpose of the financial instrument is to generate interest earnings and payment of the principal upon maturity. If the financial instruments are held for liquidity management reasons, i.e. for the purpose of holding and sale, then the instruments are to be recognised at fair value through other comprehensive income. Gains and losses from this business model are booked in the statement of other comprehensive income and equity. Financial instruments which do not fulfil the SPPI criteria or which are used for the fair value option are to be classified as fair value through profit or loss. The new regulations will have no major impact because the LLB Group already reports the financial assets under IAS 39 in such a way that these correspond to the requirements of IFRS 9. Currently, there is a discussion about whether financial instruments are to be recognised at amortised cost, which permits early repayment and where the debtor is entitled to utilise the option of early repayment. The models under discussion concern financial instruments, or mortgage loans, which enable a symmetrical early repayment or an early repayment at fair value. By utilising the option, there is a possibility that the debtor could be compensated by the creditor. The board has decided to formulate a closely defined exception which permits instruments with symmetrical early repayment penalties to be reported in the balance sheet at amortised cost or at fair value with recognition of the changes in other comprehensive income, even though they do not fulfil the criteria as “solely payments of principal and interest on the outstanding capital amount”. The proposed implementation date for this exception is 1 January 2018. This issue has no relevance for the LLB Group because basically agreements are concluded with clients which envisage unilateral compensation for the bank’s lost interest in the event of early repayment.
- On the basis of IFRS 9, impairments are to be recognised at an early stage (expected loss model). The amount of the impairment is determined on the basis of the classification of the financial instrument in one of the following three stages. In stage 1 there is no significant deterioration in credit quality and impairments amounting to the cash value of a 12-month expected credit loss are to be recognised. If there is no objective indication of an impairment, but a significant increase in credit risk has occurred, the impairment is to be recognised in the expected life-time credit loss (stage 2). In stage 3, there must be an objective indication of an impairment and a single allowance (life-time expected loss) is to be made for this financial instrument. These three stages are to be reviewed on every balance sheet key date. The LLB Group is currently installing a software application to enable the correct replication of the requirement to measure the expected losses. Various models are used in the calculation, which take into consideration the possible future probability of default by the counterparty, the expected loss, and also the loss given default. In addition, macro-economic forecasts are included in the calculation. The evaluation of which values should be applied to input parameters in the models, for example, what a significant increase in risk means and which level a financial instrument should be assigned to, therefore necessitate a high degree of judgement. These estimates determine the credit quality of the financial assets, which are exposed to a credit risk, and which in turn have an impact on the magnitude of the expected losses. Generally, it is expected the expected loss model under IFRS 9 will lead to higher value adjustments.
- In addition, IFRS 9 regulates hedge accounting, whereby it seeks to standardise risk management and accounting. Hedges are to be better reflected in the financial accounts.
- At present the LLB Group employs macro hedge accounting at portfolio level, which is not yet regulated under IFRS 9. Until the completion of the IASB project in macro-hedge accounting, LLB can continue to follow unchanged its previous approach under IFRS 9. Consequently, there are no major effects on the LLB Group. The new standard comes into effect on 1 January 2018. An earlier implementation is possible, but the LLB Group will not do so. It will be applied retrospectively except for other provisions in individual paragraphs. In the case of paragraph 7.2.15, which deals with the disclosure of details concerning financial instruments in paragraphs 42L–42O under IFRS 7, the LLB Group will provisionally choose the simplified application form, i.e. it will not show the comparison periods for the provisions specified there.
- IFRS 15 “Revenue from Contracts with Customers” – In May 2014, the International Accounting Standards Board (IASB), together with the Financial Accounting Standards Board (FASB), issued new regulations for the recognition of revenue, which completely replace the existing USGAAP and IFRS rulings for the recognition of revenue. The recognition requires that revenue be shown as goods or services transferred to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. IFRS 15 contains a 5-step model to calculate the revenue, whereby the type of transaction or the industry, in which the company operates is irrelevant. Furthermore the standard includes guidelines concerning the costs for the attainment and performance of a contract, as well as when such costs are to be capitalised. The standard specifies additional disclosures. In general, for LLB, the introduction of IFRS 15 will have only a slight influence on the recognition, balancing, presentation and disclosure of such items. The primary reason for this is that IFRS 15 is aimed mainly at industrial sectors and less at the financial services industry. Revenues from financial instruments, which represent the main business of LLB, do not fall under the provisions of IFRS 15 but rather are shown according to IFRS 9. Currently, revenues from fees and commissions are reported in one position (one line). In future, if they are material, further positions (lines) will be shown in a table to enable a more detailed presentation. LLB is therefore following the amendments to IAS 1 within the scope of the Disclosure Initiative, which are to be applied from 1 January 2016. According to one’s discretion, lines showing aggregated revenues may be presented, provided they do not bring the reader additional benefits if listed individually. The new standard comes into effect from 1 January 2018. An earlier implementation is possible, but the LLB Group will not do so. It will be applied retrospectively and on the basis of simplified transition provisions.
- IFRS 16 “Leasing” – The new standard regulates the recognition and disclosure of leasing contracts. Leasing contracts are understood to be contracts that convey the right to use an asset for a period of time in exchange for a consideration. This can be, for example, the leasing of premises or equipment. The IFRS 16 contains no material threshold values for when a leasing contract is to be recognised as an asset, rather all substantial leasing contracts are basically to be entered in the accounts. However options exist for short-term leasing terms (shorter than 12 months) and for low-value assets. The entering of leasing contracts in the financial accounts leads to a balance sheet extension, which basically has a negative impact on the regulatory required equity and also on the corresponding regulatory key figures, such as the Tier 1 ratio. The standard comes into effect on 1 January 2019. An earlier implementation is possible, but the LLB Group will not do so. It will be applied retrospectively, either completely or in a modified form. The effects of these changes on the LLB Group’s financial reporting are currently being analysed.
- Disclosure Initiative of the IASB – The IASB has started a project to explore how disclosures in IFRS financial reporting can be improved. This encompasses several smaller adjustments to the existing standard in addition to the comprehensive revision of the conceptual framework, as well as a fundamental revision of IAS 1 (“Presentation of Financial Statements”), IAS 7 (“Statement of Cash Flows”) and IAS 8 (“Accounting Policies, Changes in Accounting Estimates and Errors”) ». The following explanations refer to the small adjustments to be made to the existing standards. The aim of the changes to IAS 1 is to provide companies with more latitude in how data is presented, e.g. by the aggregation or disaggregation of information. Basically, the issue of materiality also plays a role. Materiality has to be viewed in relation to the entirety of the presented information. This can mean that specific details in standards are not presented if these are classed as being immaterial. The changes came into effect from 1 January 2016. The amendments to IAS 7 refer to changes in financial obligations arising from financing activity, including a separation into cash and non-cash changes. These come into effect from 1 January 2017. An earlier implementation is possible, but the LLB Group will not make use of this possibility. The standard will be applied prospectively.
Within the scope of its annual improvements, the IASB published further improvements (Annual Improvements to IFRS 2012–2014 Cycle), which came into effect on 1 January 2016. The implementation of the amendments has no major influence on the financial statement of the LLB Group.
Use of estimates in the preparation of financial statements
In preparing the financial statements in conformity with IFRS, the management is required to make estimates and assumptions that affect reported income, expenses, assets, liabilities and disclosure of contingent assets and liabilities. Use of information available to LLB on the balance sheet date and application of judgement are inherent in the formation of estimates. Actual results in the future could differ from such estimates, and the differences could be substantial to the financial statements.
The IFRS contains guidelines which require the LLB Group to make estimates and assumptions when preparing the consolidated financial statement. Allowances for credit loss risks, goodwill, intangible assets, provisions for legal and litigation risks, fair value conditions for financial instruments and value adjustments for pension plans are all areas which leave large scope for estimate judgments. Assumptions and estimates made in theses areas could be substantial to the financial statement. Explanations regarding this point are shown under notes 13, 19, 26, 34 and 40.
2.2 Consolidation policies
The consolidated financial statement adopts a business perspective and follows a financial format. The consolidation period corresponds to the calendar year. The financial year is identical to the calendar year for all consolidated companies. Solely LLB Invest AGmvK and LLB Qualified Investors AGmvK have a different financial year; however, these companies are negligible for the preparation of the consolidated financial statement. The Swiss franc (CHF), the currency of the country in which LLB AG has its registered office, serves as the reporting currency of the LLB Group.
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.
Participations in joint ventures
Joint ventures, i.e. companies in which LLB has a 50 percent participation, are recognised according to the equity method.
Changes to the scope of consolidation
There were no changes to the scope of consolidation in the 2016 business year.
2.3 General principles
Recording of business
Sales and purchases from trading assets, derivative financial instruments and financial investments are booked on the transaction date. Loans, including those to clients, are recorded in that period of time in which the funds flow to the borrower.
Income from services is recorded at the time the service was rendered. Asset management fees, safe custody fees and similar types of income are recorded on a pro rata basis over the period the specific service is provided. Interest income is recorded using the effective interest method. Dividends are recorded at the time point a legal claim comes into existence.
Inland versus abroad
“Inland” encompasses the Principality of Liechtenstein and Switzerland.
2.4 Foreign currency translation
Functional currency and reporting currency
The items contained in the financial accounts of each Group company are valued in the currency which is used in the primary business environment in which the company operates (functional currency).
The reporting currency of the LLB Group is the Swiss franc.
Group 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 or other comprehensive income.
Transactions and balances
Foreign currency transactions are translated on the day of the transaction at spot rates into the functional currency. Monetary assets and liabilities in foreign currency are translated on the balance sheet date at the exchange rate prevailing on the reporting date into the functional currency. The price gains or losses resulting from the valuation are booked to the income statement. Non-monetary foreign currency positions measured at fair value are translated at the exchange rate prevailing on the date of the calculation of the fair value. The following exchange rates were employed for foreign currency conversion:
Reporting date rate
2.5 Cash and balances with central banks
Cash and balances with central banks consist of cash in hand, postal cheque balances, giro and sight deposits at the Swiss National Bank and foreign central banks, as well as clearing credit balances at recognised central savings and clearing banks, claims from money market instruments with an original maturity period of less than three months as well as loans due from banks (due daily).
2.6 Balances due from banks and from customers
Balances due from banks and from customers are initially recorded at actual cost, corresponding to the fair value of the specific loan at the time it was granted. Subsequent valuation reflects the amortised cost under application of the effective interest rate method.
Interest on balances due from banks and from customers is recognised on an accrual basis and is reported according to the effective interest method, included under the item interest income.
Negative interest on assets and liabilities is accrued in a period-compliant manner and reported in the income statement as interest paid or interest received.
Basically, the LLB Group extends loans only on a collateralised basis, and only to counter parties having very high credit worthiness.
Loans are regarded as being impaired if it is likely that the entire amount owed according to the loan agreement is not recoverable. Loan impairments are caused by country- or counterparty-specific criteria. Indications for the impairment of financial assets are:
- the financial difficulty of the borrower;
- a breach of contract, such as a default or delinquency in interest or principal payments;
- the increased probability that the borrower will enter bankruptcy or financial reorganisation;
- national or local economic conditions that correlate with defaults on the assets of the Group.
The amount of the impairment is measured as the difference between the carrying value of the claim and the estimated future cash flow, discounted by the loan’s original effective interest rate. Allowances for credit risks is reported as a reduction of the carrying value of a claim on the balance sheet, whereas for an off-balance sheet item, such as a commitment, a provision for credit loss is reported under provisions. Impairments are recognised in the income statement.
2.7 Trading portfolio assets
Trading portfolio assets comprise equities, bonds and structured financial products. Financial assets held for trading purposes are recorded at fair value. Short positions in securities are reported as trading portfolio liabilities at fair value. Realised and unrealised gains and losses as well as interest and dividends are recorded in net trading income.
Fair value is based on current market prices in the case of an active market. In the absence of an active market, fair value is calculated on the basis of valuation models (see 2.9 “Financial investments”).
2.8 Derivative financial instruments and hedge accounting
Derivative financial instruments are valued as positive or negative replacement values corresponding to fair value and are reported in the balance sheet. Fair value is calculated on the basis of exchange quotations; in the absence of these, valuation models are employed. Derivative financial instruments are held within the LLB Group for hedging and trading purposes. If the derivative financial instruments held for hedging purposes do not fulfil the strict IFRS hedge accounting criteria, changes in fair value are recognised, as with derivative financial instruments for trading purposes, in net trading income. Within the LLB Group, income effects of hedging transactions according to hedge accounting guidelines arise only with the ineffective component, the effects of the effective component neutralise each other.
Within the scope of risk management, derivative financial instruments are employed mainly to manage interest rate and foreign currency risks. If these transactions fulfil the IFRS-specific hedge accounting criteria, and if these were employed as hedging instruments from a risk management perspective, they can be shown according to hedge accounting guidelines. If these transactions do not fulfil the IFRS-specific hedge accounting criteria, they are not presented according to hedge accounting guidelines, even if from an economic point of view they represent hedging transactions and are consistent with the risk management principles of the LLB Group.
The LLB Group employs fair value hedge accounting for interest rate instruments. In this case, the interest rate risks of the underlying transaction (e.g. a fixed-rate mortgage) are hedged by means of hedging instruments (e.g. an interest rate swap). Fair value hedge accounting is applied at the portfolio level, whereby one hedging instrument is used to secure one or more underlying transactions. The effect on income of the fair value change in the hedging instrument is recognised in the income statement in the same position as the corresponding effect on income of the fair value changes in the hedged underlying transactions.
In the case of the hedging of interest rate risks at the portfolio level, the fair value change in the hedged item is recognised in the same balance sheet position as the underlying item. As soon as a financial instrument is classified as a hedging instrument, and the hedging instrument fulfils the IFRS-specific hedge accounting criteria, the relationship between the hedging instrument and the hedged underlying transaction or the portfolio of underlying transactions is formally documented. This documentation contains the risk management goals and strategies for the underlying hedged relationship, as well as methods to assess the effectiveness, i.e. the effectiveness of the hedging relationship. The effectiveness of a hedging transaction is understood to be the extent to which changes in the fair value of the underlying transaction, which are attributable to a hedged risk, can be compensated for by changes in the fair value of the hedging transaction. An assessment is made, both when the hedging relationship is first applied and during its term, of whether it can regarded as “highly effective”. A hedge is regarded as being highly effective if: a) it is assessed as being highly effective both when the hedge is initially recognised and during the entire term of the transaction, and b) the actual results of the hedging transaction lie within a range of 80 to 125 percent. The part outside the range of 80 to 125 percent is classed as being ineffective.
If fair value hedge accounting is employed for reasons other than the derecognition of the hedged transaction, the amount, which is reported in the same balance sheet position as the underlying transaction, is amortised over the residual term of the underlying transaction in the income statement.
2.9 Financial investments
According to IFRS, financial investments can be divided into various categories. The classification depends on the purpose for which the individual financial investments were made. The management of the LLB Group determines the classification upon initial recognition. In the 2016 business year and in the 2015 business year, financial investments were classified in the category “Financial investments at fair value through profit and loss”, as well as the category “Available-for-sale financial assets”. All value adjustments with the category “Financial investments at fair value through profit and loss” are recognised in the income statement. All value adjustments with the category “Available-for-sale financial assets” are reported in other comprehensive income.
This designation of the financial investments is in line with LLB’s investment strategy. The securities are managed on a fair value basis and their performance is evaluated accordingly. The members of the Group Executive Management receive the corresponding information.
Financial assets at fair value through profit and loss
Financial assets are recorded on the balance sheet at fair value. Non-realised gains and losses are reflected in the income statement at fair value under income from financial instruments. The fair value of listed shares is based on current market prices. If an active market is not available for financial assets, or if the assets are not listed, the fair value is determined by way of suitable valuation models. These encompass references to recent transactions between independent business partners, the application of the current market prices of other assets which are essentially similar to the assets being valued, discounted cash flows and external pricing models, which take into account the special circumstances of the issuer. See also note 34.
Interest and dividend income from financial investments is recorded at fair value as income from financial instruments. Interest income is recognised on an accrual basis.
Available-for-sale financial assets
Financial assets which are available for sale are recognised at fair value. Value changes, such as unrealised gains or losses, are reported in other comprehensive income. The fair value of these financial assets is measured on the basis of listed shares. If no active market exists or the assets are not listed on an exchange, the fair value is determined, similar to financial assets at fair value through profit and loss, by means of suitable valuation models. See also note 34.
Interest and dividend earnings are recognised in the income statement. Interest is reported on an accrual basis.
2.10 Property, investment property and other equipment
Property is reported in the balance sheet at acquisition cost less any depreciation necessary for operational reasons. Bank buildings are buildings held by the LLB Group for use in the delivery of services or for administration purposes, whereas investment property is held to earn rentals and / or for capital appreciation. If a property is partially used as investment property, the classification is based on whether or not the two portions can be sold separately. Investment property is periodically valued by external experts. Changes in fair value are recognised in the income statement as other income in the current period. If the portions of the property can be sold separately, each portion is booked separately. If the portions cannot be sold separately, the whole property is classified as a bank building unless the portion used by the bank is minor.
Equipment includes fixtures, furnishings, machinery and IT equipment. These items are entered in the financial accounts and depreciated over the estimated useful life of the asset.
Depreciation is conducted on a straight-line basis over the estimated useful life as follows:
Building supplementary costs
Fixtures, furnishings, machinery
Small value purchases are charged directly to general and administrative expense. In general, maintenance and renovation expenditures are booked to general and administrative expense. If the related cost is substantial and results in a significant increase in value, such expenditures are capitalised and depreciated over their useful life. Profits from the sale of fixed assets are reported as other income. Losses result in additional write-downs on fixed assets.
Property and equipment is regularly reviewed for impairment, but always when, on account of occurrences or changed circumstances, an overvaluation of the carrying value appears to be possible. If, as a result of the review, a reduction in value or modified useful life is determined, the residual carrying value is depreciated over the adjusted useful life, or an unplanned write-down is made.
2.11 Non-current assets held for sale
Long-term assets (or a disposal group) are classified as held for sale, if their carrying amount will be recovered primarily through a sale transaction rather than through continuing use. For this to be the case, the asset (or the disposal group) must be available for immediate sale in its present condition subject only to the terms that are usual and customary for sales of such assets (or disposal groups) and such a sale must be highly probable. Long-term assets held for sale and disposal groups are measured at the lower of carrying amount and fair value less costs to sell, unless the items shown in the disposal group are not classified in the valuation rules of IFRS 5 “Non-current assets held for sale and discontinued operations”.
2.12 Goodwill and other intangible assets
Goodwill is defined as the difference between the purchase price paid for and the determined fair value at date of acquisition of identified net assets in a company purchased by the LLB Group. Other intangible assets contain separately, identifiable intangible values resulting from acquisitions and certain purchased brands / trademarks and similar items. Goodwill and other intangible assets are recognised on the balance sheet at cost determined on the date of acquisition, and are amortised using the straight-line method over the useful life of ten to fifteen years. On each balance sheet date, goodwill and other intangible assets are reviewed for indications of impairment or changes in future benefits. If such indications exist, an analysis is performed to assess whether the carrying value of goodwill or other intangible assets is fully recoverable. An amortisation is made if the carrying amount exceeds the recoverable amount. For impairment testing purposes, goodwill is distributed into cash generating units. A cash generating unit is the smallest group of assets that independently generates cash flow and whose cash flow is largely independent of the cash flows generated by other assets. Cash flows generated from independent groups of assets are largely determined on the basis of how management steers and manages business activity. The management of the LLB Group manages and steers business activity in divisions so that the divisions and segments are designated as the cash generating units of the Group.
Software development costs are capitalised when they meet certain criteria relating to identifiability, it is possible that economic benefits will flow to the company, and the cost can be measured reliably. Internally developed software meeting these criteria and purchased software are capitalised and subsequently amortised over three to ten years. See also note 19.
2.13 Current and deferred taxes
Current income tax is calculated on the basis of the tax law applicable in the individual country and recorded as expense for the accounting period in which the related income was earned. The relevant amounts are recorded on the balance sheet as provisions for taxes. The tax impact from time differentials due to different valuations arising from the values of assets and liabilities reported according to IFRS shown on the Group balance sheet and their taxable value are recorded on the balance sheet as accrued tax assets or, as the case may be, deferred tax liabilities. Deferred tax assets and deferred tax liabilities attributable to time differentials or accountable loss carry forwards are capitalised if there is a probability that sufficient taxable profits will be available to offset such differentials of loss carry forwards. Accrued / deferred tax assets / liabilities are calculated at the tax rates that are likely to be applicable for the accounting period in which the tax assets are realised or the tax liabilities paid.
Current and deferred taxes are credited or charged directly to equity or other comprehensive income if the related tax pertains to items that have been credited or charged directly to equity or other comprehensive income in the same or some other accounting period.
2.14 Debt issued
Medium-term notes are recognised at fair value, which usually corresponds to the issuance value, and at amortised cost. Debt instruments, which contain an embedded option for conversion of the debt into shares of LLB AG, are separated into a liability and an equity component. The difference between the proceeds of the issue price and the fair value of the instrument on the issue date is booked directly to equity. The fair value of the liability component on the issue date is determined on the basis of the market interest rate for comparable instruments without conversion rights. Thereafter, it is recognised at ongoing cost according to the effective interest method. Differences between the proceeds and the repayment amount are reported in profit and loss over the term of the debt instrument concerned. The LLB Group does not report changes in the value of the equity component in the following reporting periods.
2.15 Employee benefits
Retirement benefit plans
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 and plan curtailments are recognised directly in the income statement.
Variable salary component and share-based remuneration
Regulations exist governing the payment of variable salary components. The valuation procedure with the variable salary component is based on the degree of individual target achievement. Executives receive a portion of their profit-related bonus in the form of LLB bearer shares. However, no exercising conditions are attached to this procedure.
The LLB Group enters a provision as a liability in those cases where a contractual obligation exists or a de facto obligation arises as a result of past business practice. The expense is recognised under personnel expenses. Obligations to be paid in cash are entered under other liabilities. The portion to be compensated with LLB bearer shares is entered in equity. The number of shares for the share-based compensation corresponds to the average share price of the last quarter of the year under report.
2.16 Provisions and contingent liabilities
The business environment in which the LLB Group currently operates exposes it to significant 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 certain 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.
In cases where only a possible liability is involved, but the management does not believe that there is a probability of an outflow of resources, this leads to a contingent liability for the LLB Group, but not to the formation of a provision. The amount of the contingent liabilities results based on best estimate.
2.17 Allowances for credit risks
Allowances for credit risks are made at LLB, provided there are objective criteria indicating that the entire amount owed according to the loan agreement may not be recoverable. At LLB, a credit amount is understood to be a loan, a claim or a fixed commitment such as a documentary credit, a guarantee, or a similar credit product. Objective criteria are serious financial difficulties experienced by the borrower, default or delinquency in interest or capital payments, or the probability that the borrower cannot repay the loan. Allowances for credit risks are reported as a reduction of the carrying value of a claim on the balance sheet. Allowances are reported in the income statement under credit loss (expense) / recovery. For further information, see “Risk management”, chapter “3. Credit risk”.
2.18 Treasury shares
Shares of Liechtensteinische Landesbank AG held by the LLB Group are valued at cost of acquisition and reported as a reduction in equity. The difference between the sale proceeds and the corresponding cost of acquisition of treasury shares is recorded under capital reserves.
2.19 Securities lending and borrowing transactions
Securities lending and borrowing transactions are generally entered into on a collateralised basis, with securities mainly being advanced or received as collateral.
Treasury shares lent out remain in the trading portfolio or in the financial investments portfolio as long as the risks and rewards of ownership of the shares are not transferred. Securities that are borrowed are not recognised in the balance sheet as long as the risks and rewards of ownership of the securities remain with the lender.
Fees and interest received or paid are recognised on an accrual basis and recorded under net fee and commission income.
3 Events after the balance sheet date
There have been no material events after the balance sheet date, which would require disclosure or an adjustment of the consolidated financial statement for 2016.