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 1 March 2012 and approved it for publication.

In addition, the consolidated financial statement must be approved by the General Meeting on 4 May 2012.

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.

Standards, amendments and interpretations effective from 2011:

  • IAS 24 (amended) «Disclosure of Related Party Transactions»; the revised standard changes the definition of «related party» and eliminates certain disclosure requirements for transactions between government-related entities.
  • IAS 32 (amended) «Financial Instruments: Presentation»; the amendment stipulates that rights issues are to be classified as equity capital if they are exercised at a fixed cash amount, whereby the currency of the exercise price is irrelevant provided the subscription rights are issued pro rata at the same amount to all the rights holders.
  • IFRIC 14 (amended) «Prepayment of a Minimum Funding Requirement»; the amendment of IFRC 14 made by the IASB, which is itself an interpretation of IAS 19 «Employee Benefits», specifies that voluntary contributions in a pension plan with excess cover are to be recognised as an asset.
  • IFRIC 19 (amended) «Extinguishing Financial Liabilities with Equity Instruments»; when a debtor issues equity instruments to a creditor to completely or partially extinguish a financial liability, these equity instruments are to be regarded as payments and the debtor must fully or partly recognise the extinguished financial liability in profit and loss.

These amendments have no influence on the annual financial statement.

It was decided not to implement at an earlier date additional standards and interpretations which become effective from 1 January 2012 or later.

  • IAS 12, «Income taxes» (effective from 1 January 2012); 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.
  • IAS 19, «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.
  • IAS 27 «Consolidated and Separate Financial Statements according to IFRS» and IAS 28 «Investments in Associates and Joint Ventures» 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.
  • IFRS 7, «Financial Instruments: Disclosures» (effective from 1 July 2011); the amendment specifies additional disclosures regarding the transfer transactions of financial assets and the related obligations.
  • 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-à-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 recognized in other comprehensive income instead of in profit an loss.

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 seven existing standards and interpretations, which largely become effective on 1 January 2012. The project team 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.

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 the LLB Group, 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.

Investments in associates

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.

Changes to the scope of consolidation

Data Info Services AG, Vaduz, was founded in 2011. Liechtensteinische Landesbank AG, Vaduz, holds a share of 50 percent in this company, which was included in the scope of consolidation according to the equity method.

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».

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 Landesbank's functional and 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 exchange differences are booked individually to equity.

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

31.12.2011

31.12.2010

 

Average rate

2011

2010

1 USD

0.9381

0.9375

 

1 USD

0.8861

1.0381

1 EUR

1.2158

1.2435

 

1 EUR

1.2320

1.3782

1 GBP

1.4550

1.4475

 

1 GBP

1.4198

1.6037

2.5 Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker is the person or group that allocates resources to and assesses the performance of the operating segments of an entity. The Group has determined the Group Executive Board as its chief operating decision maker.

Income and expenses are assigned to the business divisions according to the principle of responsibility, based on the organisational structure. Indirect costs resulting from services provided internally between the segments are accounted for according to the principle of causation and are recorded as a cost reduction for the service provider and a cost charge for the service recipient. Income and expenditures of a superordinate nature that cannot be attributed to the segments are booked to the Corporate Center. Consolidated items are also booked to the Corporate Center. In accordance with IFRS 8, the Group has the following business segments: Domestic Market, International Market and Institutional Market. This structure constitutes the basis for the LLB Group's primary segment reporting. The geographical segment reporting is carried out according to the principle of business location, i.e. in the segments Liechtenstein, Switzerland and other countries.

2.6 Cash and cash equivalents

Cash and cash equivalents are composed of liquid funds, loans from money market securities with an original maturity period of less than three months as well as loans due from banks (due daily).

2.7 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.

2.8 Money market instruments

Claims arising from money market instruments 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 claims from money market instruments is reported according to the effective interest method and is included under the item interest income as an annual percentage rate.

2.9 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 reported according to the effective interest method and is included under the item interest income as an annual percentage rate.

Value adjustments 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 counter-party 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.

A value adjustment 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. 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. A value adjustment 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.

2.10 Insurance contracts

The claims and liabilities from insurance contracts are recognised at fair value. The claims on the assets side for 2011 are reported in the balance sheet position «Non-current assets held for sale». On the liabilities side for 2011, the liabilities are shown under «Liabilities classified as held for sale».

Changes to fair values and premium revenues as well as actuarial provisions are reported under «Net fee and commission income» in the item «Insurance-related fees and commissions».

Financial liabilities are evaluated at fair value because the corresponding assets are also evaluated at fair value, and thus an accounting mismatch is avoided.

2.11 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 2.13 «Financial investments»).

2.12 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. At the time the financial instrument is designated as a hedge, it is determined whether the instrument represents a fair value hedge of a balance sheet item or a cash flow hedge of a balance sheet item or future transaction.

In the case of fair value hedges, the change in fair value of the hedging derivative is recognised in the income statement. Those changes in fair value of the hedged item which are attributable to the risks hedged with the derivative instrument are reflected in an adjustment to the carrying value of the hedged item, which is also recognised in the income statement.

In the case of cash flow hedges, a change in the fair value of the effective portion of a derivative designated as a cash flow hedge is recognised in a separate position in equity. The gain or loss resulting from the hedging transaction reported in equity is recognised in the same accounting period in which the hedged payment flows of the underlying transaction are recognised.

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.

2.13 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 2011, as was the case in the 2010 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.

2.14 Property and equipment

Real property is reported in the balance sheet at acquisition cost less any depreciation necessary for operational reasons. Property includes bank buildings and other real property. 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. 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 writedown is made.

2.15 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 40 «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».

2.16 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. The primary reporting segment has been designated as the cash generating unit. 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.

2.17 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 between the values of assets and liabilities 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.

Accrued/deferred taxes are credited or charged directly to equity if the related tax pertains to items that have been credited or charged directly to equity in the same or some other accounting period.

2.18 Balances due to banks and customers

Balances due are recorded with the nominal or repayment amount. Interest and discounts are recognised on an accrual basis and charged to interest expense.

2.19 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.

2.20 Employee benefits

Retirement benefit plans

The LLB Group has both defined benefit and defined contribution pension plans for its employees in Liechtenstein and abroad.

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.

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.

In addition there are long-term service awards which qualify as other long-term employee benefits.

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. For profit-sharing and bonus schemes, a total of CHF thousands 10'031 (2010: CHF thousands 12'474) in personnel costs were charged in 2011. Of which 5'300 shares were granted at an average price of CHF 44.75 in the 2011 business year (previous year: 25'500 shares at an average price of CHF 69.30).

2.21 Provisions

Provisions are taken onto the balance sheet only if the Group has a liability versus a third party that is attributable to a past event, if the amount of such liability can be reliably estimated, and if it is likely that resources will have to be allocated to cover this liability.

2.22 Treasury shares

Bank shares 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.

2.23 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.

2.24 Off-balance sheet transactions

Off-balance sheet transactions are shown at par value. Identifiable risks from contingent liabilities and other off-balance-sheet transactions are allowed for in the formation of provisions.

3 Changes to the previous year

None.

4 Important changes since the balance sheet date

There have been no material effects after the balance sheet date which would require disclosure or adjustment of the consolidated financial statement for 2011.

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