Accounting principles

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 business.

The Liechtensteinische Landesbank Aktiengesellschaft, founded and with its registered office located in Vaduz, 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 28 February 2013 and approved it for publication.

In addition, the consolidated financial statement must be approved by the General Meeting on 3 May 2013.

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 International Financial Reporting Standards (IFRS).

The Group financial statements were compiled on the basis of historical deemed costs with the exception of revaluation of some financial assets and liabilities.

The IFRS contain guidelines, which required the LLB Group to make assumptions and estimates while preparing the financial statements. Goodwill, intangible assets, fair value determinations for financial instruments and retirement pension plans are areas that require greater leeway for assessment, and where assumptions and estimates are of crucial importance for the consolidated statements. Explanations regarding these positions are listed under note 21, note 39 and under the pension plans (page 127).

Standards, amendments and interpretations effective from 2012:

  • IAS 12, «Income taxes» ; the amendment applies to the investment properties, which are recognised at fair value, whereby the deferred tax is to be calculated on the basis of an expected sale of the property. The implementation of the amendment had no major influence on the LLB Group's financial reporting.
  • IFRS 7, «Financial Instruments: Disclosures»; the amendment specifies additional disclosures regarding the transfer transactions of financial assets and the related obligations. The additional disclosures had no major influence on the LLB Group’s financial reporting. The additional disclosures can be seen in note 34.

It was decided not to implement at an earlier date additional standards and interpretations which become effective from 1 January 2013 or later.

These are:

  • IAS 19 (amended), «Employee Benefits» (effective from 1 January 2013); the amendments announced by the IASB improve the accounting requirements for pensions and other forms of post-employment benefits. They provide a better picture of a company's current and future obligations arising from the provision of defined benefit plans, and how these obligations affect the financial position, performance and cash flow of a company. In addition, the revised IAS 19 standard stipulates that the discount rates that were applied to calculate the net obligation must also be applied to calculate the expected return on plan assets. If the LLB had applied IAS 19 (amended) in its 2012 financial statement, the expense for defined benefit plans would as a consequence have been CHF 2.9 million higher. The earlier application would lead to a reduction in other liabilities of CHF 11.3 million per 31 December 2012.
  • IAS 27 «Consolidated and Separate Financial Statements» and IAS 28 «Investments in Associates» in conjunction with the introduction of IFRS 10 «Consolidated Financial Statements», IFRS 11 «Joint Arrangements» and IFRS 12 «Disclosure of Interests in Other Entities» (effective from 1 January 2013); the new IFRS standards supersede or complement the accounting and disclosure requirements for consolidated and separate financial statements. Further individual definitions in the standards are reinterpreted, supplemented or replaced. At present, the LLB is assuming that IRFS 10 and IFRS 12 will lead to additional disclosures in LLB Group's financial accounting. However, the LLB is not assuming that IFRS 11 will have a major influence on the Group’s financial accounting because the LLB does not currently employ pro rata consolidation. The LLB will implement the standards from 1 January 2013.
  • IFRS 9, «Financial Instruments» (effective from 1 January 2015): the amended IFRS 9, which also includes the revised classification and measurement guidelines for financial assets, contains guidelines covering financial liabilities and the derecognition of financial instruments. The standard foresees two measurement categories for financial assets: amortised costs and fair value. IFRS 9 requires that all financial assets are classified on the basis of the entity's business model for managing the financial assets, and the contractual cash flow characteristics of the financial assets. Non-traded equity instruments can be accounted for at fair value through other comprehensive income. There is no subsequent recycling of realized gains or losses from other comprehensive income to profit or loss. All other financial assets are measured at fair value through profit and loss. This designation is made separately for each financial instrument upon first being specified and is irrevocable. The requirements in IAS 39 regarding the classification and measurement of financial liabilities were retained, including the related application and implementation guidance. The two existing measurement categories for financial liabilities remain unchanged vis-a-vis the current regulations in IAS 39 («Financial Instruments: Recognition and Measurement»). The criteria for designating a financial liability at fair value through profit and loss remain unchanged as well. For financial liabilities designated at fair value through profit or loss, changes in fair value due to changes in an entity's own credit risk are directly recognised in other comprehensive income instead of in profit and loss. The IASB published amendments to IFRS 9, in which the exception ruling is formulated that stipulates that the previous year’s figures do not have to be adjusted. The impact of these new standards on the LLB Group's financial accounting is currently being analysed by an LLB project team.

Within the scope of the improvements made annually, various adjustments were implemented to existing standards and interpretations, which largely become effective on 1 January 2013. The LLB has assessed these new standards, interpretations and adjustments, and reached the conclusion that they will not have a major influence on the LLB Group's financial reporting.

2.2 Consolidation policies

The consolidated financial statement follows a banking format. The consolidation period corresponds to the calendar year. The financial year is identical to the calendar year for all consolidated companies. 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.

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.

Investments in associates and joint ventures

Investments in associates in which the LLB Group has a significant influence but in which it does not have control (normally evidenced when the LLB owns between 20 percent and 50 percent of the voting rights) are accounted for using the equity method. Joint ventures are accounted for according to the equity method.

Changes to the scope of consolidation

Swisspartners Investment Network AG has sold swisspartners AG with its registered office in Zurich. Swisspartners AG was removed from the scope of consolidation with effect from 31 December 2012.

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 accrual

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

Switzerland is included under the designation «Inland».

Use of estimates in the preparation of financial statements

In preparing the financial statements in conformity with IFRS, 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 the 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 material to the financial statements.

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 LLB Group's financial statement is reported in Swiss Francs, which represents the LLB Group's reporting currency.

Group companies

Group companies, which report their financial accounts in a functional currency other than the Group's accounting 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 converted into the functional currency at the exchange rates prevailing at the time of the transaction. Foreign currency assets and liabilities are translated at the exchange rates prevailing on the balance sheet date. Exchange gains and losses arising from the valuation are booked to the income statement. The following exchange rates were employed for foreign currency conversion:

(XLS:)

Reporting date rate

31.12.2012

31.12.2011

 

Average rate

2012

2011

1 USD

0.9131

0.9381

 

1 USD

0.9335

0.8861

1 EUR

1.2071

1.2158

 

1 EUR

1.2048

1.2320

1 GBP

1.4837

1.4550

 

1 GBP

1.4832

1.4198

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.

Allowances and provisions for credit risks

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 reorganization;
  • 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

All 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 listings; in the absence of these, valuation models are employed. Realised and unrealised gains and losses are recorded in net trading income.

Hedging transactions

The LLB Group may utilise hedge accounting if the conditions in accordance with IAS 39 for the permitted booking as criteria for treatment as a hedging transaction are fulfilled.

Certain derivative transactions do indeed represent hedging transactions, and they do correspond to the risk management principles of the LLB Group. However, due to the strict, specific nature of IFRS guidelines, they do not meet the criteria to be treated as hedging transactions in the financial accounts. Changes in value are recorded for the corresponding period in net trading income.

2.9 Financial investments

According to IFRS, financial investments may be subdivided into various categories depending upon the purpose for which the financial investments were made. The management of the LLB Group specifies the category of financial investments when they are first made. In 2012, as was the case in the 2011 financial year, all financial investments were valued at fair value through profit and loss.

This designation is in line with the LLB's investment strategy. The securities are managed on a fair value basis and their performance is evaluated accordingly. Members of the Group Executive Management receive the corresponding information.

Financial investments 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.

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.

2.10 Property, property held for sale and equipment

Real 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 other property is held to earn rentals and / or for capital appreciation. If a property is partially used as other property, the classification is based on whether or not the two portions can be sold separately. Real estate held as financial investments 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:

(XLS:)

Real property

33 years

Undeveloped land

no depreciation

Building supplementary costs

10 years

Fixtures, furnishings, machinery

5 years

IT equipment

3 years

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 capitalized 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 over-valuation 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. The details in the notes to the consolidated financial statement– provided that they relate to the consolidated balance sheet – basically refer to assets that are not held for sale. The long-term assets (or disposal groups) held for sale are shown separately in Note 35 «Non-current assets held for sale». 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 segments are designated as the cash generating units of the Group. Software development costs are capitalized 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 capitalized and subsequently amortised over three to ten years.

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. Accrued tax assets attributable to time differentials or accountable loss carry-forwards are capitalized if there is the probability that sufficient taxable profits will become available to offset such differentials or 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 in the same or some other accounting period.

2.14 Debt issued

Medium-term notes are recorded at issuance value and subsequently valued at ongoing cost of acquisition. Debt instruments, which contain an embedded option for conversion of the debt into shares of the 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

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.

In applying the selection possibility for the reporting of actuarial gains and losses (IAS 19p93a), these amounts are booked directly to equity or other comprehensive income.

For benefit-oriented plans with segregated assets, the relevant funded status (surplus or deficit of the cash value of the claims in comparison to the related assets valued at current market value) 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 plus or minus subsequent amounts to be offset from plan changes.

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.

Retroactive improvements in benefits due to changes in benefit plans are booked as expense using the straight-line method over the average period up to the date of non-forfeitability. If expectancies are non-forfeitable immediately, the corresponding expense is immediately recognised in the accounts.

Profit participation, bonus plans and share-based payment

Regulations exist governing bonus payments and profit participation schemes. The valuation method employed in the bonus regulations is based on the individual attainment of objectives. The valuation of profit participation regulations is based on the profit attained. Senior executives may opt to receive a portion of their profit participation in the form of LLB bearer shares. No exercising conditions are attached to this.

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 price per share for the share-based remuneration is calculated from the average price of the last quarter of the year under report.

2.16 Provisions and contingent liabilities

The current business environment in which the LLB Group operates exposes it to significant legal and regulatory risks. As a result, the 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 which 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.

However, the LLB Group is not in a position to estimate reliably the approximate financial implications 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. In many legal cases a combination of these facts makes it impossible to estimate the financial effect of contingent liabilities for the LLB Group. Indeed, making and disclosing such estimates or assumptions could seriously prejudice the position of the LLB Group in such legal cases.

In cases where only a possible liability is involved, but management does not believe 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 liability is based on the best possible estimate.

2.17 Allowances for credit risks

Allowances for credit risks is made at the LLB provided there are objective criteria indicating that the entire amount owed according to the loan agreement may not be recoverable. At the LLB, a credit amount is understood to be 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 of delinquency in interest or capital payments, or the probability that the borrower cannot repay the loan. Allowances for credit risks is 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, 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 Changes to the previous year

With the exception of both credit loss (expense)/recovery, which are now reported as expenses in interest business in order to provide a clearer presentation of interest income, and the adjusted values for 2011 in note 39, there were no changes.

4 Events after the balance sheet date

None.

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