Accounting principles

(unaudited)

1 Basis for financial accounting

1.1 Basis for financial accounting

The interim financial reporting was prepared in accordance with the international accounting standard for interim financial reporting (IAS 34 “Interim Financial Reporting”). The accounting and valuation principles employed in the unaudited consolidated interim management report correspond to those used in the 2019 annual report, which was prepared in accordance with international financial reporting standards (IFRS). In addition, the regulations valid since 1 January 2020 have been applied.

The unaudited interim financial reporting does not encompass all the data contained in the audited 2019 consolidated financial statement and should, therefore, be read together with the audited consolidated financial statement as at 31 December 2019. The interim financial reporting was compiled in fulfilment of obligations under stock exchange law and, in addition, is provided for information purposes.

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

For reasons of better readability, linguistic and structural adjustments have been made to individual positions in the income statement and the balance sheet. On account of their non-substantial share, which is not based on the effective interest method, interest income and interest expenses are presented in a simplified form. The position “Depreciation and amortisation” has been renamed “Depreciation”. Furthermore, in view of their materiality, the following positions have been integrated in other positions: in the income statement, the position “Share of net income of associates and joint venture” has been integrated in the position “Other income”. In the balance sheet, the position “Right of use assets from leases” has been incorporated in the position “Property and equipment” and the position “Lease liabilities” in the position “Other liabilities”. The positions “Debt issued” and “Bonds issued” were amalgamated and are now reported under the position “Debt issued”.

1.2 Use of estimates in the preparation of financial statements

In preparing the financial statements in conformity with IFRS, the management is required to make estimates and assumptions. These include statements regarding future developments, for the correctness of which no guarantee can be provided. They contain risks and uncertainties including, but not restricted to, future global economic conditions, exchange rates, regulatory provisions, market conditions, competitors’ activities as well as other factors, which are beyond the control of the company. These assumptions affect reported income, expenses, assets, liabilities and disclosure of contingent assets and liabilities. Use of information available on the balance sheet date and application of judgement are inherent in the formation of estimates. Actual results in the future could differ from such estimates, and the differences could be substantial to the financial statements.

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 liabilities for pension plans are all areas which leave large scope for estimate judgments. Assumptions and estimates made in these areas could be substantial to the financial statement. Explanations regarding this point are shown under Notes 13 und 14 in these consolidated interim financial statements 2020 and under Notes 13, 19, 28, 36 and in the chapter “Pension plans and other long-term benefits” in the consolidated financial statements 2019, respectively.

The LLB Group periodically reviews the actuarial assumptions and parameters used for the calculation of pension obligations. The actuarial assumptions and parameters used for the calculation of pension obligations in the 2019 annual financial statement, i. e. discount rate, future salary increase, interest credit rate and life expectancy, were adjusted accordingly in the 2020 interim financial reporting.

1.3 New IFRS, amendments and interpretations

New IFRS, as well as revisions and interpretations of existing IFRS, which must be applied for financial years beginning on 1 January 2020 or later, were published, or in some cases, came into effect.

For the 2020 financial year, the following amendments in connection with the IBOR reform, phase 1 are relevant for the LLB Group: amendments to IFRS 9 “Financial Instruments”, IAS 39 “Financial Instruments: Recognition and Measurement” and IFRS 7 “Financial Instruments: Disclosures”. This also applies to amendments to IFRS 3 “Business Combinations”, which contain changes in relation to the definition of a “business operation”, IAS 1 “Presentation of Financial Statements” and IAS 8 “Accounting Policies, Changes to Accounting Estimates and Errors” in relation to the definition of materiality and changes in connection with the introduction of the new conceptual framework. All the amendments and changes will be applied for the first time in the 2020 financial year. The effects of them have no material influence on the accounting policies of the LLB Group; they mainly represent clarifications and disclosure requirements. The contents of the amendments and a detailed presentation of them can be found in the 2019 annual report (Accounting principles). On account of their significance, only the amendments and changes to the IBOR reform, phase 1 is dealt with in more detail here.

Phase 1 of the IBOR reform deals with issues relating to financial reporting in the period prior to the replacement of an existing benchmark interest rate by an alternative interest rate. Only questions relating to hedge accounting have to be dealt with in this context. As far as the LLB Group is concerned, the requirements of phase 1 affect only interest rate swaps, which are employed for hedge accounting purposes. In relation to the transition of existing LIBOR-based interest rate swaps to a new benchmark interest rate, the LLB Group relies on the criteria defined by the International Swaps and Derivatives Association (ISDA), which has already carried out a range of consultations to consolidate the opinions of various market participants. The resulting findings, which at the present time are not conclusively available, will provide clarity on how existing LIBOR-based interest rate swaps can be transferred to a new benchmark rate. The LLB Group applies portfolio fair value hedge accounting (PFVH) to fixed-interest interest instruments in accordance with IAS 39. The separate identifiability, and therefore the related measurability, of a transaction is a prerequisite for it to be regarded as a hedging relationship. The IBOR reform has no influence on the identifiability or measurability at LLB Group because the LLB Group secures the refinancing risks, which arise from the fixed interest rate of the underlying transaction. This is identifiable not only at the start of a hedging transaction, but also over the whole of its duration. The simplifications are relevant in respect to the (prospective and retrospective) measurement of effectiveness. These include the assumptions that the benchmark interest rate does not change (prospective) and because of this the hedge accounting relationship can continue to be assessed as highly effective. From a retrospective perspective, if this is not highly effective, the simplification lies in the fact that the hedge accounting relationship does not have to be ended. At the LLB Group, in conformance with the hedge accounting documentation, hedge accounting transactions are reset every month in order to reflect changes in the underlying mortgage lending business. Due to the fact that the Group pursues this dynamic hedging strategy, from the perspective of the LLB Group, this simplification in relation to the retrospective assessment plays only a secondary role because, within the scope of the hedging relationship, in the case of a changed reference interest rate another underlying transaction could possibly be designated. The assumption is that, on account of this procedure, the effectiveness of the hedge accounting relationship continues to apply. Nevertheless, this simplification is important and will be employed if the effectiveness no longer applies only because of reasons related to the IBOR reform; in this connection the hedge accounting relationship will not be ended. All instruments are based on LIBOR as the benchmark interest rate, this will continue to exist until the end of 2021. The positive replacement value amounted to CHF 3.1 million, the negative replacement value totalled CHF 21.5 million. The underlying contract volume totalled CHF 1’220.0 million.

For financial years starting from 1 January 2021 or later, the International Accounting Standards Board (IASB) has announced amendments. Those relevant to the LLB Group are briefly described below:

  • IAS 1 “Presentation of Financial Statements” – The amendments concern the reporting of debt in the presentation of the financial status. They portray the criteria, according to which the classification of debt as short or long term is undertaken. Basically, from now on debt is only regarded as being long term if rights exist, which could defer the repayment for more than twelve months. The classification as short or long term is made independent of the probability of the exercising of the right to defer repayment. Special regulations are to be observed in the case of repayment in the form of equity capital instruments. The effects of the amendments are currently being analysed. The amendments are to be implemented retroactively and for the first time for financial years beginning on or after 1 January 2023. An earlier adoption is possible.
  • IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” – A clarification has been implemented which defines the cost of fulfilling contracts. The implementation applies to onerous contracts, which still exist in the period of the first application without previous years being adjusted. Any possible effects are to be recognised in the adjustment of the opening balance value in equity. The effects of the amendments are currently being analysed. The amendments are to be implemented for the first time for financial years beginning on or after 1 January 2022. An earlier adoption is possible.

Within the scope of its annual adjustments, the IASB has published further improvements (annual improvements to IFRS 2018 –2020 cycle). They come into effect for financial years beginning on or after 1 January 2022. An earlier adoption is possible, but is not being considered at the moment. The adoption of the changes will have no material effect on the LLB Group’s financial statement.

2 Impact of the corona pandemic

The corona pandemic has had various effects on the 2020 consolidated interim financial reporting of the LLB Group.

The crisis represents a risk which, in accordance with the risk management process, is to be considered within the scope of risk monitoring and risk control in the individual risk models. In this context, the recommendations of various regulatory bodies, e. g. the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA), were analysed. The parameters of the individual risk models were critically assessed. Scenario analyses of the individual risk positions were made to assess the possible risks of future developments.

Within the scope of the models of expected credit losses, the analyses revealed that no new scenarios had to be included in the macro-economic model and the existing weightings did not need to be adjusted. In line with the recommendations of the regulatory bodies, the LLB Group currently places a greater weighting on stable scenario estimates based on past experience. In some cases, deferments were granted for stage 1 and stage 2 loans. No material effects were experienced as a result of this. In times of great uncertainty, in order to respond appropriately to the current and possible medium-term effects of the corona pandemic, in particular, loans to companies in sectors particularly affected by the corona virus were analysed and, in some cases, specific allowances were made for them.

Liechtenstein and Switzerland decided to grant loan loss guarantees to the banks for bridging loans to help prevent liquidity bottlenecks at companies. Both LLB and Bank Linth have participated in these programmes. At the LLB Group, the bridging loans granted totalled around CHF 70 million, whereby this volume is secured by the State. The LLB Group is exposed to no significant risk as a result of this activity. The loans were classified in conformity with the market.

On account of the corona pandemic and the accompanying downturn on the financial markets and a reduced business volume, the management of the LLB Group has tested the impairment of tangible and intangible assets, especially existing goodwill. No impairment was established and no value adjustments were made.

3 Changes to the scope of consolidation

In the first half of 2020 no changes occurred in the scope of consolidation.

4 Foreign currency translation

(XLSX:) Download

Reporting date rate

 

30.06.2020

 

31.12.2019

1 USD

 

0.9512

 

0.9662

1 EUR

 

1.0651

 

1.0854

 

 

 

 

 

Average rate

 

First half 2020

 

First half 2019

1 USD

 

0.9645

 

0.9958

1 EUR

 

1.0668

 

1.1270

5 Risk management

Within the scope of its operative activity, the LLB Group is exposed to financial risks such as market, credit, liquidity and refinancing risks, as well as operational risks. In relation to the statements made in chapter 2 “Impact of the corona pandemic” the scope of risk for the LLB Group has not changed substantially in comparison with the situation on 31 December 2019. Therefore the 2020 consolidated interim financial reporting contains only qualitative disclosures regarding credit risks. For more detailed risk information, we refer to the risk management information in the 2019 annual report.

With regard to the value of its absolute loans, the credit portfolio of the LLB Group has not changed materially during the first half of 2020. In the case of stage 1 and stage 2 loans, a decrease in the expected credit losses occurred of CHF 1.4 million. Stage 3 positions experienced a net increase of CHF 15.2 million. Across all stages, the expected credit losses led to a total charge of CHF 13.8 million. This is reported in the consolidated income statement.

6 Events after the balance sheet date

No material events occurred after the balance sheet date which would have a significant influence on the asset, financial and earnings position of the LLB Group.