Accounting principles
audited information

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 2 March 2010 and approved it for publication.

In addition, the consolidated financial statement must be approved by the General Meeting on 7 May 2010.

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. Areas that require more leeway for assessment or of greater complexity, as well as areas where assumptions and estimates are of crucial importance for the consolidated statements, are listed under note 21.

Standards, amendments and interpretations effective from 2009:

  • IAS 1 (amended), «Presentation of financial statements», primarily affects the presentation of owner changes in equity and of comprehensive income. It does not change the recognition, measurement or disclosures of specific transactions. The LLB Group has replaced the «Consolidated statement of recognised income and expense» with the «Consolidated statement of comprehensive income». In addition, the «Consolidated statement of changes in equity» is now reported in a separate table.
  • IFRS 7 (amended), «Financial instruments: Disclosures». This standard was amended in March 2009 and has been applied since 1 January 2009. The amended regulations require more details concerning financial instruments reported at fair value in accordance with a three-stage fair value hierarchy. Furthermore, the amendments stipulate more extensive qualitative and quantitative data regarding liquidity risks. Apart from the extension of the notes to the financial statement, this amendment has no influence on the annual financial statement.
  • IAS 23 (amended), «Borrowing costs». It requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset. The option of immediately expensing these borrowing costs has been removed. This amendment has no influence on the annual financial statement.
  • IAS 32 and IAS 1 (amended), «Puttable financial instruments and obligations to deliver». The amendment requires certain puttable financial instruments and some financial instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation to be classified as equity rather than as a liability. This amendment has no influence on the annual financial statement.
  • IFRS 2 (amended) deals with two matters. It clarifies that vesting conditions can be service conditions and performance conditions only. Other features of share-based payment are not vesting conditions. In the case of service conditions, the employee must render a specific period of service, whereas in the case of performance conditions specific performance targets must be attained, e. g. a specified increase in corporate profit. It also specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. This amendment has no influence on the annual financial statement.
  • IFRS 8, «Operating segments», redefines segment reporting and replaces IAS 14. According to the requirements of the new standard, external segment reporting is to be based on the internal reporting to the chief operating decision-maker, who is responsible for the allocation of resources and the monitoring of the results of the reporting segments. Furthermore, the LLB Group implemented a new organisational structure from 1 January 2009. The previous year's data has been restated accordingly. Further information can be seen from page 44, Segment reporting.
  • IFRS 1 (amended) and IAS 27r (amended). A dividend paid out from pre-acquisition reserves will not be automatically considered a return of investment. Rather, based on the amendments to IAS 27r, it may be an indicator of impairment unless there are clear indications that it is part of a return of investment. This amendment has no influence on the annual financial statement.
  • IFRIC 15, «Agreements for the construction of real estate». This addresses two questions of how and when revenue from the construction of real estate should be recognised. The interpretation gives guidance to determine if the accounting has to follow either IAS 11 «Construction contracts» or IAS 18 «Revenue». This amendment has no influence on the annual financial statement.

Standards, amendments and interpretations to existing standards that are not yet effective. These are:

  • IFRS 9 «Financial instruments» (effective from 1 January 2013).
  • IAS 24, «Related party transactions» (effective from 1 January 2011).
  • IFRIC 17, IFRIC 18 and IFRIC 19 (effective from 1 January 2011).

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 twelve existing standards and interpretations, which largely become effective on 1 January 2010. 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 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 and 50 % of the voting rights) are accounted for using the equity method.

Changes to the scope of consolidation
On 6 March 2009, Liechtensteinische Landesbank (Österreich) Holding GmbH, Vienna, was founded with a share capital of EUR thousands 35 and included in the scope of consolidation.

On 25 April 2009, Liechtensteinische Landesbank (Österreich) AG, Vienna, was founded with a share capital of EUR thousands 2'000 and included in the scope of consolidation.

On 9 June 2009, LLB Berufliche Vorsorge AG, Lachen, was founded with a share capital of CHF thousands 100 and included in the scope of consolidation.

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 upon receipt of payment.

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:

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Reporting date rate

31.12.2009

31.12.2008

 

Average rate

2009

2008

1 USD

1.0375

1.0575

 

1 USD

1.0813

1.0794

1 EUR

1.4890

1.4990

 

1 EUR

1.5081

1.5863

1 GBP

1.6475

1.5350

 

1 GBP

1.6815

1.9945

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 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

Swisspartners Investment Network AG, Zurich, provides insurance products within the scope of its asset management activities. These insurance products mainly comprise deferred pension insurance funds and fund-linked mixed insurance against one-time investments. Swisspartners Investment Network AG products do not contain any discretionary surplus sharing component.

Assets and liabilities from insurance contracts are evaluated at fair value. Claims are booked under assets in the corresponding position of the balance sheet. Under liabilities are those liabilities from insurance contracts and financial obligations. 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 the 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 2009, as was the case in the 2008 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:

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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 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 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.

2.15 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 amor tisation 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 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.

2.16 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 capitalised 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.

2.17 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.

2.18 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 repay ment 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.

2.19 Employee benefits

Retirement benefit plans
The LLB Group maintains retirement benefit plans in Liechtenstein and abroad on behalf of its employees, which according to IFRS are regarded as benefit-oriented 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.

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. For profit-sharing and bonus schemes, a total of CHF thousands 20'448 (2008: CHF thousands 14'741) in personnel costs were charged in 2009. Of which 31'700 shares were granted at an average price of CHF 66.90 in the 2009 business year (previous year: 27'730 shares at an average price of CHF 59.50).

2.20 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.

2.21 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.

2.22 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.

2.23 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 2009.