Illustrative financial statements. to ARB FINMA circ. 15/1 Accounting - banks

Transcription

1 Illustrative financial statements according to ARB FINMA circ. 15/1 Accounting - banks Status: September 2015

2 New accounting rules for banks (ARB) New accounting rules for banks (ARB) A practice-based example of reliable assessment statutory financial statements Through its revision of the Banking Ordinance of 30 April 2014, the Federal Council has revised the accounting standards for banks. The results are contained in articles and of the Banking Ordinance and in the new FINMA circular 15/1 dated 27 March What are the most important changes? Additional requirements 1. Strict individual valuation: To date, collective valuation has been permitted in statutory single-entity financial statements. As previously for accounts prepared according to the true and fair view principle, statutory single-entity financial statements will now require unrestricted individual valuation of participations, tangible fixed assets and intangible assets. This has to be implemented by 1 January 2020 at the latest. The shift from collective to individual valuation can have a significant impact on the bank s capital in certain circumstances. 2. Broader obligations to consolidate: The consolidation requirements have been extended. Banks have to recognise all significant subsidiaries, including special-purpose entities, in their consolidated financial statements and not only participations in banks and entities in the financial services and real-estate industries. 3. Impairment of assets: Any value adjustments have to be deducted from the corresponding assets. It is no longer permitted to disclose total valuation adjustments under Valuation adjustments and provisions in the liabilities. The complexity of these revisions should not be underestimated and it will even increase because the valuation adjustments not only have to be deducted from the corresponding asset item but also classified according to a diverse set of criteria in the considerably expanded notes to the financial statements. There may well be some questions regarding interpretation in practice. Due to the increased effort needed for implementation, a longer transition period has been granted. In 2015 and 2016, banks may disclose valuation adjustments as a whole as a negative item (total or subtotal) in the assets. 4. Disclosure of own shares: Own shares shall be deducted (as a negative item) from the equity capital irrespective of the type of account closing process. 5. Equity-based compensation schemes: For the first time, rules have been defined for equity-based compensation schemes. According to the new regulations, share-based real and phantom equity instruments have to be valued at the fair value of the shares at the date they are awarded and recognised in the income statement over the vesting period. In addition, the general contractual terms and conditions, the fair value calculation principles and the expenses recognised in the result for the period have to be disclosed. There may be an impact on the equity capital or the result, depending on how such equity-based compensation schemes have been treated to date. 6. Structure of the income statement: As a first step, the net result of interest operations now has to be disclosed. The next step is to consider the Change in value adjustments for default risk and losses from interest operations as a separate item. The net result from interest operations follows on from the calculation of this change. This is a significant change from the current presentation because, to date, all changes in valuation adjustments were included after the Net result subtotal. The disclosure of gross profit is no longer envisaged as part of the minimum structure, but is replaced by the new item named Operating result. This modifies a broadly recognised and often used key figure, which could mean that modifications to internal goals as well as changes in other areas are needed. 7. New notes: The notes to the financial statements have been considerably expanded. The notes now comprise a total of 40 disclosures, which represents almost double the number of notes. The additions include, for example, the disclosure of structured products issued by the bank, the classification of assets by country rating as well as the disclosure of current and deferred taxes, including a weighted-average tax rate The numerous new disclosures and information require a corresponding database as part of the IT system; the implementation costs of this should not be underestimated. 8. Obligatory interim financial statements: Even smaller banks will have to publish interim financial statements. If the bank s equity or debt securities are listed on a stock exchange, the interim financial statements must now comprise an additional statement of shareholders equity and abbreviated notes. PwC 2

3 New accounting rules for banks (ARB) 9. Prolonged amortisation period for goodwill shortened from 20 years to 10 years: Goodwill continues to be amortised over the estimated useful life - usually within five years of the acquisition date - and recognised in the income statement. The previous law allowed for a prolonged amortisation period of 20 years in justified cases, whereas the new regulations permit a maximum prolongation of 10 years. These rules apply to new acquisitions made after the entry into force of the FINMA circular. Existing goodwill may continue to be amortised over the original period of up to 20 years and recognised in the income statement. Relaxations 1. Cash flow statement: The flow of funds statement (now called the cash flow statement) is only required for financial statements according to the true and fair view principle. 2. Consolidation discount : The group able to benefit from the so-called consolidation discount has been widened. If a financial group prepares and publishes consolidated financial statements and a group management report, the consolidated banks provided their equity securities are not listed do not have to prepare a management report, a cash flow statement and various notes for single-entity financial statements. To date, this relaxation only applied to the single-entity financial statements of the consolidating bank (parent company). What do you need to do? The minimum structure of the balance sheet and the income statement will be selectively modified which makes a modification of the chart of accounts necessary. In addition, other internal and external reports (e.g. SNB reporting, budget controlling, capital resources calculation, ALM, etc.) have to be checked for consistency, as these are often based on the charts of accounts for the financial reporting. For example, the balance sheet must now disclose as separate items the receivables and payables relating to securities financing operations as well as the positive and negative replacement values of derivative financial instruments. The new accounting standards are valid for the financial year beginning on or after 1 January The amendments to the new accounting standards have been mitigated somewhat by the transitional provisions. Even if the first-time financial statements according to the new standards will be published only at the end of 2015, one must not underestimate either the changes or the actions that need to be taken due to the central importance of financial reporting for a bank. We recommend performing an analysis as early as possible to determine the required revisions and the need for action at your bank. Below is a selection of topics you will need to address: Strategic challenges What impact do the accounting changes have on other aspects of management, e.g. goals, annual result, employee compensation, etc.? What type of account closing is used to prepare the financial statements? Do the new standards affect the obligation to consolidate accounts? Does the group benefit from a consolidation discount? Does the increase in transparency require modifications to your communications? What impact do the new regulations have on your accounting and valuation rules? PwC 3

4 New accounting rules for banks (ARB) Operating challenges What changes are required to the chart of accounts and to IT systems? Which policies, ratio systems and reports will have to be modified? Revision of the accounting and valuation principles. What modifications to valuations need to be performed by 1 January 2015? Which items in the balance sheet, income statement, cash flow statement and the notes need to be reclassified? What disclosures are required in the notes? Do we have all of the relevant information (especially, first-time presentation incl. prior year data)? Do we have sufficient resources to make the switch? Recommendation: To finalise before year-end 31 December 2015 Approve the framework structure of the financial statements and notes, incl. prior year s figures. Involve external audit and get the key partial results reviewed before year end. PwC 4

5 Contents New accounting rules for banks (ARB) 2 A. Format of the illustrative financial statements 7 B. Management report 8 1. Requirements of the Code of Obligations concerning the management report 8 2. Disclosure according to FINMA circ. 08/24 Supervision and internal controls banks 9 C. Reliable assessment statutory single-entity financial statements Balance sheet Income statement Appropriation of profit Cash flow statement Statement of changes in equity Notes Business name or name of the bank, and its legal form and domicile Accounting and valuation principles General principles Determination of previous year s figures Changes of the accounting and valuation principles Recording of business transactions Treatment of past-due interest Treatment of translation differences of foreign currencies Treatment of the refinancing of trading positions Risk management Credit risk Interest rate risk Other market risks Liquidity Operational risks Methods used for identifying default risks and determining the need for value adjustments Mortgage-based loans Securities-based loans Unsecured loans Process for determining value adjustments and provisions Valuation of collateral Mortgage-based loans Securities-based loans Business policy regarding the use of derivative financial instruments and hedge accounting Business policy regarding the use of derivative financial instruments Use of hedge accounting Material events after the balance sheet date Premature resignation of the auditor 31 PwC 5

6 6.9. Function on the engagement Securities financing transactions (assets and liabilities); Collateral for loans and off-balance-sheet transactions, as well as impaired loans Trading portfolios and other financial instruments at fair value (assets and liabilities) Derivative financial instruments (assets and liabilities) Financial investments Participations Companies in which the bank holds a permanent direct or indirect significant participation Tangible fixed assets Intangible assets Other assets and other liabilities Assets pledged or assigned to secure own commitments and assets under reservation of ownership Liabilities relating to own pension schemes, and number and nature of equity instruments of the bank held by own pension schemes Economic situation of own pension schemes Issued structured products Bonds outstanding and mandatory convertible bonds Value adjustments, provisions, reserves for general banking risks Bank s capital Equity securities or options on equity securities held by executives and directors and by employees Related parties Holders of significant participations and groups of holders of participations with pooled voting rights Own shares and composition of equity capital Equity participations held by the governing body and compensation report Maturity structure of financial instruments Assets and liabilities by domestic and foreign origin Assets by country or group of countries Assets by credit rating of country groups Assets and liabilities by the most significant currencies Information on the off-balance-sheet business Contingent liabilities and contingent assets Credit commitments Fiduciary transactions Managed assets Information on the income statement Result from trading operations and the fair value option Refinancing income and income from negative interest Personnel expenses General and administrative expenses Material losses, extraordinary income and expenses, material releases of hidden reserves, reserves for general banking risks, and value adjustments and provisions no longer required Revaluation of participations and tangible fixed assets up to acquisition cost at maximum Operating result broken down according to domestic and foreign origin Current and deferred taxes Earnings per equity security 65 D. Report of the audit firm 66 Additional tools relating to FINMA circ. 15/1 Accounting - banks 68 Contacts 69 Offices 70 PwC 6

7 A - Format of the illustrative financial statements A. Format of the illustrative financial statements Abbreviations The reference in the left-hand margin is to the corresponding section of the accounting standards and other relevant provisions in which the disclosure requirements are described. For the source information, the following abbreviations are used: BankO 12.3 Article 12 para. 3 Banking Ordinance (BankO) Version: 1 January 2015 FAQ x Question no. x of FINMA FAQ: Frequently asked questions on the FINMA circular 2015/1 Accounting banks Latest revision dated 22 July 2015 CO 123c.1 Article 123c para. 1 Code of Obligations (CO) Version: 1 July 2015 ARB 123 Margin no. 123 of FINMA circ. Accounting banks (ARB) Version: 27 March /24.1 Margin number 1 of FINMA circ. 08/24 Supervision and internal control banks Latest revision dated 6 December 2012 Presentation of additional guidance Sections of the financial statements marked in the right-hand margin as here should be reviewed for compliance with the disclosure requirements due to the amendments in the relevant provisions. The guidance sections are presented in red text with a grey background. Alternative presentations or examples are presented in black text with a grey background inside a black border. Completeness and accuracy of the illustrative financial statements This publication presents examples of reliable assessment statutory financial statements. The financial statements include the disclosures required by the revised Banking Ordinance and FINMA circular 15/1 Accounting banks. The sample disclosures in these financial statements are not to be viewed as the only form of presentation. Other forms of presentation are possible and may be preferable, provided that they comply with the accounting standards. The form and contents of the financial statements are the responsibility of the bank s supervisory body. We have made every effort to ensure this publication covers all of the disclosure requirements correctly and completely. Nevertheless, we cannot exclude the possibility that it contains errors. FINMA circ. 15/1 and the other legal requirements alone are binding. We recommend therefore that you consult the legal and regulatory requirements and seek professional advice before making any critical decisions. Depending on the circumstances of each case, additional disclosures may be necessary in order to comply with the legal, exchange-related and regulatory requirements. PwC accepts no liability for any consequences arising from the use of this publication. We would be happy to hear from you about how we can improve the future versions of this checklist. PwC 7

8 B - Management report B. Management report ARB 327 ARB 341 Note: Under the terms of art. 36 para. 1 BankO, where a financial group prepares and publishes consolidated financial statements and a group management report, the banks consolidated within the group are exempted from the requirement to include a management report in their single-entity financial statements. Banks whose equity securities are listed (art. 36 para. 2 BankO) are not permitted to apply the exemptions above. 1. Code of Obligations requirements concerning the management report BankO 36.1 ARB 327 ARB 341 BankO 36.4 CO 961 BankO 29 BankO 38 ARB A1 Where a financial group prepares and publishes consolidated financial statements and a group management report, the banks consolidated within the group are exempted from the requirement to include a management report in their single-entity financial statements. Banks whose equity securities are listed are not permitted to apply the exemptions above. The persons according to 961d.2 CO can request the complete financial statements and a management report. Undertakings that are required by law to have an ordinary audit must draw up a management report. The management report of the bank is based on article 961c CO. The management report contains at least the following: CO 961c.1 Presentation of business performance and the economic position of the undertaking (and, if applicable, the group); CO 961c.2 Number of full-time positions on annual average; CO 961c.2 Conduct of a risk assessment; CO 961c.2 Orders and assignments; CO 961c.2 Research and development activities; CO 961c.2 Extraordinary events; CO 961c.2 Future prospects. CO 961c.3 ARB A1 The management report must not contradict the economic position presented in the annual financial statements. Notes: Comments on various other aspects may be added, e.g. Economic situation; Strategic focus points; Staff-related; Information on the organisation; IT; Restructuring; Comments on the annual and the consolidated financial statements; The bank s engagements in culture and sport. The management report is not part of the annual financial statements and is not subject to the audit. PwC 8

9 B - Management report 2. Disclosure according to FINMA circ. 08/24 Supervision and internal controls banks 08/24.1 Circular 08/24 regulates corporate governance, the monitoring of business activities and the internal controls and their monitoring by the unit responsible of banks, securities dealers, financial groups and financial conglomerates mainly active in banking or securities trading. 08/24.4 Securities dealers without bank status: margin nos do not apply if there is no segregation of duties between the board of directors and management. 08/24.5 Private banks: margin nos do not apply. Deviations from and relaxations of the remaining provisions are allowed upon prior agreement with the audit firm and FINMA, provided the partners are personally liable and are involved in managing the business. 08/24.6 Directly or indirectly held subsidiary banks and securities dealers as well as subsidiary companies that are primarily involved in financial activities which belong to domestic and international financial groups and financial conglomerates mainly active in banking and securities trading: margin nos do not apply; however, it is recommended to set up an audit committee. 08/24.7 Branch offices of foreign institutions: margin nos do not apply. All other provisions apply where relevant. 08/24.19 At least one third of the Board of Directors should consist of members who fulfil the independence criteria according to margin nos These members are to be named in the annual report. If fewer than one third of the members fulfil the independence criteria, this must justified in the annual report. 08/24.30 Should an institution not have an audit committee, the Board of Directors must appoint one or two independent Board members (but not the chairman of the Board), who fulfil the requirements as per margin no. 39, with the duties defined in margin nos FINMA may permit exceptions. Nevertheless, if the chairman of the Board is appointed to perform the abovementioned duties, this must be justified in the annual report. 08/24.37 If an institution decides not to establish an audit committee, despite fulfilling one or more of the criteria listed in margin nos , this has to be justified in the annual report. Note: Institutions are to establish an audit committee if at least one of the criteria as listed in margin nos applies: - Balance sheet total: >CHF 5 million; - Custody account volume (securities and precious metals of clients, with the exception of banks, according to regulatory reporting AU 001/AU 101) >CHF 10 billion; - Required capital according to the Capital Adequacy Ordinance (CAO) >CHF 200 million - Listed on a stock exchange (equity securities). 08/24.38 The majority of members must fulfil the independence requirements according to margin nos If the majority does not fulfil these requirements, this must be justified in the annual report. 08/24.40 The chairman of the Board of Directors should not be a member of the audit committee. However, if the institution decides that the chairman should sit on the audit committee, this must be justified in the annual report. 08/24.66 The internal audit function must meet the quality standards promulgated by the Swiss Institute of Internal Auditing (SIIA). Exceptions must be justified in the annual report. The work of internal audit is governed by the Standards for the Professional Practice of the Institute of Internal Auditors (IIA). PwC 9

10 1 Balance sheet C. Reliable assessment statutory single-entity financial statements ARB 74 BankO 69.1 ARB 626 Notes: Items and tables in the annual financial statements without balances may be omitted. Immaterial items may be summarised, provided this is done logically. In the first two years after the entry into force of the Ordinance (until 31 December 2016), banks can disclose value adjustments, in accordance with BankO 27.1, as negative items in the assets, either as full totals or sub-totals. FINMA regulates the specific details. Banks and financial groups that require more time for the changeover with regard to the deduction of value adjustments from asset items may apply the transitional provisions of art. 69 para. 1 BankO. The value adjustments concerned are to be disclosed separately in the notes to the annual financial statements/consolidated financial statements in the Presentation of value adjustments and provisions, reserves for general banking risks, and changes therein during the current year. 1. Balance sheet (CHF million) Annex ARB 75 Assets ARB 76 Liquid assets ARB 77 Amounts due from banks 6,573 5,874 ARB 78 Amounts due from securities financing transactions ARB 79 Amounts due from customers 2 9,904 9,532 ARB 80 Mortgage loans 2 10,328 8,684 ARB 81 Trading portfolio assets 3 1,383 1,283 ARB 82 Positive replacement values of derivative financial instruments ARB 83 Other financial instruments at fair value 3 1, ARB 84 Financial investments 5 1,983 1,864 ARB 85 Accrued income and prepaid expenses ARB 86 Participations 6, 7, ARB 87 Tangible fixed assets 8 1,273 1,405 ARB 88 Intangible assets ARB 89 Other assets ARB 90 Capital not paid in - - ARB 91 Total assets 34,549 30,983 ARB 92 Total subordinated claims ARB 93 - of which subject to mandatory conversion and/or debt waiver 12 7 PwC 10

11 1 Balance sheet ARB 94 (CHF million) Annex Liabilities ARB 95 Amounts due to banks 2,526 2,318 ARB 96 Liabilities from securities financing transactions ARB 97 Amounts due in respect of customer deposits 15,094 13,094 ARB 98 Trading portfolio liabilities ARB 99 Negative replacement values of derivative financial instruments ARB 100 Liabilities from other financial instruments at fair value 3 1, ARB 101 Cash bonds 4,357 4,112 ARB 102 Bond issues and central mortgage institution loans 15 4,849 4,558 ARB 103 Accrued expenses and deferred income ARB 104 Other liabilities ARB 105 Provisions 16 1,022 1,101 ARB 106 Reserves for general banking risks ARB 107 Bank s capital ARB 108 Statutory capital reserve ARB of which tax-exempt capital contribution reserve ARB 110 Statutory retained earnings reserve ARB 111 Voluntary retained earnings reserves 2,635 2,539 ARB 112 Own shares ARB 113 Profit carried forward 8 5 ARB 114 Profit ARB 115 Total liabilities 34,549 30,983 ARB 116 Total subordinated liabilities ARB of which subject to mandatory conversion and/or debt waiver 3 4 ARB 118 Off-balance-sheet transactions ARB 119 Contingent liabilities 2, 28 1,812 1,975 ARB 120 Irrevocable commitments ARB 121 Obligations to pay up shares and make further contributions ARB 122 Credit commitments 2, PwC 11

12 2 Income statement 2. Income statement ARB 126 (CHF million) Annex Result from interest operations ARB 127 Interest and discount income ARB 128 Interest and dividend income from trading portfolios 2 1 ARB 129 Interest and dividend income from financial investments ARB 130 Interest expense ARB 131 Gross result from interest operations ARB 132 Changes in value adjustments for default risks and losses from interest operations ARB 133 Subtotal net result from interest operations ARB 134 Result from commission business and services ARB 135 Commission income from securities trading and investment activities ARB 136 Commission income from lending activities 5 8 ARB 137 Commission income from other services ARB 138 Commission expense ARB 139 ARB 140 Subtotal result from commission business and services Result from trading operations and the fair value option ARB 141 Other result from ordinary activities ARB 142 Result from the disposal of financial investments ARB 143 Income from participations 5 5 ARB 144 Result from real estate ARB 145 Other ordinary income 4 4 ARB 146 Other ordinary expenses ARB 147 Subtotal other result from ordinary activities ARB 148 Operating expenses ARB 149 Personnel expenses ARB 150 General and administrative expenses ARB 151 Subtotal operating expenses ARB 152 Value adjustments on participations and depreciation and amortisation of tangible fixed assets and intangible assets ARB 153 Changes to provisions and other value adjustments, and losses ARB 154 Operating result ARB 155 Extraordinary income ARB 156 Extraordinary expenses ARB 157 Changes in reserves for general banking risks ARB 158 Taxes ARB 159 Profit PwC 12

13 3 Appropriation of profit 3. Appropriation of profit (CHF million) ARB 163 Profit ARB Profit carried forward 8 5 ARB 165 Distributable profit ARB 169 Transfers from the statutory capital reserves (reserves of tax-exempt capital contributions) - 60 Total at the disposal of the General Meeting ARB 166 Appropriation of profit Allocation to statutory retained earnings reserve Allocation to voluntary retained earnings reserves Dividend payment of which, share of the dividend from retained earnings of which, share of the dividend from the statutory capital reserves (reserves of tax-exempt capital contributions) New amount carried forward 4 8 PwC 13

14 4 Cash flow statement 4. Cash flow statement ARB 170 ARB 327 ARB 341 Notes: Preparing a cash flow statement is voluntary in the case of reliable assessment statutory single-entity financial statements (art. 25 para. 3 BankO). If the cash flow statement is prepared voluntarily, the provisions of the ARB must be applied. Preparing a cash flow statement is mandatory for all other types of financial statements. The cash flow statement is based on annex 6 to the circular (ARB A6-1 to A6-9). Under the terms of art. 36 para. 1 BankO, where a financial group prepares and publishes consolidated financial statements and a group management report, the banks consolidated within the group are exempted from the requirement to include a cash flow statement in their single-entity financial statements. Banks whose equity securities are listed (art. 36 para. 2 BankO) are not permitted to apply the exemptions above. ARB A6-3 (CHF million) Cash flow from operating activities (internal financing) Cash inflow Cash outflow Cash inflow Cash outflow Profit Change in reserves for general banking risks Change in value adjustments for default risks and losses Value adjustments on participations, depreciation and amortisation of tangible fixed assets and intangible assets Provisions and other value adjustments Accrued income and prepaid expenses Accrued expenses and deferred income Previous year s dividend Subtotal ARB A6-4 Cash flow from shareholder s equity transactions ARB A6-5 Share capital Recognised in reserves Change in own equity securities Subtotal Cash flow from transactions in respect of participations, tangible fixed assets and intangible assets Participations Real estate Other tangible fixed assets Intangible assets Subtotal PwC 14

15 4 Cash flow statement ARB A6-6 Cash flow from banking operations ARB A6-7 Medium and long-term business (> 1 year) Amounts due to banks Amounts due in respect of customer deposits Liabilities from other financial instruments at fair value Cash bonds Bonds Central mortgage institution loans Other liabilities Amounts due from banks Amounts due from customers Mortgage loans - 1, Other financial instruments at fair value Financial investments Other accounts receivable Short-term business Amounts due to banks Liabilities from securities financing transactions Amounts due in respect of customer deposits 1, Trading portfolio liabilities Negative replacement values of derivative financial instruments Liabilities from other financial instruments at fair value Cash bonds Bonds Central mortgage institution loans Other liabilities Amounts due from banks Amounts due from securities financing transactions Amounts due from customers Mortgage loans Trading portfolio assets Positive replacement values of derivative financial instruments Other financial instruments at fair value Financial investments Other accounts receivable Liquidity Liquid assets Subtotal Total PwC 15

16 5 Statement of changes in equity 5. Statement of changes in equity ARB 171 ARB A4 (CHF million) Bank s capital Capital reserve Retained earnings reserve Reserves for general banking risks Voluntary retained earnings reserves and profit carried forward Own shares Result of the period Total Equity at 1 January , ,941 Appropriation of retained earnings Allocated to the statutory retained earnings reserve Allocated to the voluntary retained earnings reserve Dividends Net change in retained earnings brought forward rd Purchase of own shares (at acquisition cost) Sale of own shares (at acquisition cost) Profit from the sale of own shares Capital increase Allocated to reserves for general banking risks Profit Equity at 31 December , ,214 PwC 16

17 6.1 Business name or name of the bank, and its legal form and domicile 6. Notes ARB Business name or name of the bank, and its legal form and domicile Musterbank AG is a joint-stock company under Swiss law. Services are rendered by the bank s head office in Zurich and by its offices in Basel, Bern and Lucerne. Services are rendered abroad by the bank s branch offices in Frankfurt, Hamburg, Luxembourg, Singapore and Hong Kong. ARB Accounting and valuation principles ARB 184 ARB 186 ARB 13 CO ARB 64 CO ARB 65 BankO 27.2 BankO 69.2 ARB General principles The accounting and valuation principles are based on the Code of Obligations, the Banking Act and its related Ordinance as well as the Accounting rules for banks, securities dealers, financial groups and conglomerates according to FINMA circular 15/1. The accompanying reliable assessment statutory singleentity financial statements present the economic situation of the bank such that a third party can form a reliable opinion. The financial statements are allowed to include hidden reserves. In the notes, the individual figures are rounded for publication, but the calculations are based on the nonrounded figures, thus small rounding differences can arise. General valuation principles The financial statements are prepared on the assumption of an ongoing concern. The accounting is therefore based on going-concern values. Items are be entered on the balance sheet as assets if, based on past events, they may be disposed of, a cash inflow is probable and their value can be reliably estimated. If a reliable estimate is not possible, then it is a contingent asset, which is commented on in the notes. Items are entered on the balance sheet as liabilities if they have arisen due to past events, a cash outflow is probable and their value can be reliably estimated. If a reliable estimate is not possible, then it is a contingent liability, which is commented on in the notes. The disclosed balance sheet items are valued individually. The transitional provision, which requires the individual valuation of equity participations, tangible fixed assets and intangible assets as of 1 January 2020, is not applied. In principle, neither assets and liabilities nor expenses and income are offset. Accounts receivable and accounts payable are offset in the following cases: ARB 33 Accounts receivable and accounts payable are offset if they concern the same type of transaction with the same counterparty in the same currency and they have an identical or earlier due date and do not lead to any counterparty risk. ARB 35 The amounts of own shares and cash bonds are offset with the corresponding item in the liabilities. ARB 36 Deduction of value adjustments from the corresponding asset item. ARB 38 Offsetting of positive and negative changes in book value with no income effect in the cur-rent period in the compensation account. ARB 40 Positive and negative replacement values of derivative financial instruments with the same counterparty are offset, if there are recognised and legally enforceable netting agreements in place. ARB 354 ARB 355 Financial instruments Liquid assets Liquid assets are recognised at their nominal value. Securities financing transactions The term securities financing transactions includes repurchase and reverse repurchase transactions, securities lending and securities borrowing. PwC 17

18 6.2 Accounting and valuation principles ARB 356 ARB 359 ARB 360 ARB 411 ff. ARB 421 ARB 427 ARB A3-24 ARB 411 FAQ 1 ARB 36 ARB 428 ARB 361 ARB 362 Repurchase transactions (repos) are recorded as cash deposits with own securities as collateral. Reverserepurchase transactions (reverse repos) are treated as receivables against collateral in the form of securities. The exchanged cash amounts are recorded at nominal value on the balance sheet. Securities lending transactions are treated as repos if they are subject to daily margining and secured by cash. Securities received and delivered are not recognised or derecognised in the balance sheet until the economic control of the contractual rights comprised in the securities is transferred. Amounts due from banks, amounts due from customers and mortgage loans Amounts due from banks, amounts due from customers and mortgage loans are recognised at their nominal value less any necessary value adjustments. Amounts due in respect of precious metal account deposits are valued at fair value if the precious metal concerned is traded on a price-efficient, liquid market. Doubtful receivables, i.e. obligations entered into with clients for which the debtor is unlikely to meet its future obligations, are valued individually and depreciated by means of individual value adjustments. The depreciation of doubtful receivables is determined by the difference between the book value of the receivable and the anticipated recoverable amount. The anticipated recoverable amount is the liquidation value (estimated net realisable value minus the costs of retention and liquidation). In doing so, the entire liability of the client or the economic entity has to be checked for any counterparty risk. For the consumer credit portfolio, which comprises numerous smaller receivables, flat-rate individual value adjustments are made, calculated on the basis of empirical values. If a receivable is classed as entirely or partially irrecoverable or a receivable is waived, the receivable is derecognised by booking it against the corresponding value adjustment. If recovered amounts from receivables written off in earlier periods cannot be used immediately for other value adjustments of the same type, they are recognised in Change in value adjustments for default risk and losses from interest operations in the income statement. In addition to the individual valuation adjustments and the flat-rate individual valuation adjustments, the bank creates value adjustments for latent default risks in order to cover the latent default risks as of the valuation cut-off date. Latent default risks are those that arise later even though, based on experience, they appear to be part of a seemingly flawless credit portfolio as of the balance sheet date. The assessment of latent default risks is based on empirical values for each credit-rating class. The bank classifies all receivables in one of the ten rating classes. For receivables in the classes 1 8, the debt is serviced, the collateral is adequate and the repayment of the loan is not in doubt. For these receivables, no value adjustments for latent default risks are created. Loans in classes 9 and 10 are highly likely to default and are individually depreciated. Value adjustments for latent default risks amounting to 0.4% of the receivable amount are created only for loans in classes 7 and 8, which, based on experience, represent a certain risk of loss for the bank. The value adjustments for latent default risks are created according to the incurred loss approach and do not include any expected future losses. For credit facilities (with corresponding credit facility limits) whose use is typically subject to frequent and large fluctuations (e.g. current account credit facilities) and for which provisioning is required, the bank uses an alternative method to record the required value adjustments and provisions. The initial and subsequent creation of a provision is carried out in its entirety via the item Change in value adjustments for default risk and losses from interest operations. If facility utilisation changes, a reclassification without an effect on income is carried out between the value adjustment for the corresponding balance sheet item and the provision for the undrawn part of the credit facility. Reclassifications without an effect on income are reported in the Reclassifications column in appendix 16 Value adjustments, provisions, reserves for general banking risks. The individual valuation adjustments, the flat-rate individual valuation adjustments and the value adjustments for latent default risks are deducted from the corresponding asset item in the balance sheet. Doubtful receivables are reclassified as performing if the outstanding amount of capital and interest are paid again on time according to the contractual agreements and other creditworthiness criteria. Value adjustments are released with an effect on income via the item Change in value adjustments for default risk and losses from interest operations. Amounts due to banks and amounts due in respect of customer deposits These items are to be recognised at their nominal value. Amounts due in respect of precious metal account deposits must be valued at fair value if the precious metal concerned is traded on a price-efficient, liquid market. PwC 18

19 6.2 Accounting and valuation principles ARB 363 ARB 364 ARB 365 ARB 363 ARB 369 ARB 370 ARB 370 ARB 442 ARB 40 Trading portfolio assets and trading portfolio liabilities Trading operations comprises items that are actively managed in order to profit from fluctuations in market prices or to realise gains from arbitrage. The trading portfolio and liabilities relating to trading operations are valued and recognised at fair value in principle. Fair value is the price based on a price-efficient and liquid market or the price calculated using a valuation model. If a fair value cannot be determined, the valuation and recognition is based on the lower of cost or market principle. The price gain or loss resulting from the valuation is recorded via the item Result from trading operations and use of the fair value option. Interest and dividend income from trading operations are recorded in the income statement via the item Interest and dividend income from trading operations. The refinancing costs for trading operations are not recorded in the Interest and discount income. Positive and negative replacement values of derivative financial instruments Derivative financial instruments are used for trading and for hedging purposes. Trading purposes The valuation of derivative financial instruments for trading purposes is done according to the fair value and the positive or negative replacement value is recorded in the corresponding item. The fair value is based on market prices, dealers price quotations, discounted cash flow and option pricing models. The realised result from trading operations and the unrealised result from valuations relating to trading operations are recorded via the item Result from trading operations and use of the fair value option. Hedging purposes The bank also uses derivative financial instruments as part of its asset and liability management (ALM) to hedge against interest rate change, currency and default risks. Hedging operations are valued like the hedged underlying transaction. The result from hedging operations is recorded in the same item as the corresponding result from the hedged underlying transaction. The valuation result from hedging instruments is recorded in a compensation account, provided that no change in the value of the underlying transaction has been booked. The net balance of the compensation account is recorded via the item Other assets or Other liabilities. Hedging transactions performed by the Treasury department are concluded by the Trading department. The Treasury department itself is not active in the market. Assets and liabilities as well as expense and income from inter-company transactions are eliminated. Hedges and the goals and strategies of hedging operations are documented by the group at the conclusion of a derivative hedging transaction. The effectiveness of the hedge is regularly reviewed. If the hedge is no longer or only partially effective, the part of the hedging transaction that is no longer effective is treated like a trading operation. Netting The bank offsets positive and negative replacement values with the same counterparty within the terms of the recognised and legally enforceable netting agreements. PwC 19

20 6.2 Accounting and valuation principles ARB 400 ARB 372 ARB 396 ARB 401 ARB 402 ARB 385 ARB 380 ARB 381 ARB 382 ARB 384 Other financial instruments valued at fair value and liabilities from financial instruments valued at fair value (fair value option) Financial instruments that are not used for trading purposes are recorded via this item and valued at fair value, provided that all of the following conditions are fulfilled: The financial instruments are valued on the basis of the fair value and comply with the documented risk management and investment strategy, which ensure the identification, measurement and reduction of the various risks involved. The use of fair value valuation largely neutralises the effect on the income statement of the economic hedging relationship that exists between the financial instruments on the asset side and those on the liabilities side. Any effect of a change in own credit rating on the fair value after the first-time recognition is neutralised in the income statement and recorded via the compensation account. The derivative is separated from the underlying and valued separately as a derivative if there is no close link between the economic characteristics and the risks of the embedded derivative and the underlying. Self-issued structured products are disclosed in the item Liabilities from financial instruments valued at fair value. Debt instruments and equity securities as well as collective investment scheme instruments, which the bank holds in connection with structured products, are disclosed in the item Other financial instruments valued at fair value. For self-issued structured products that are separated and valued separately, the underlying is valued and recorded in accordance with the valuation principles of the underlying. The derivative is valued at fair value and disclosed on the Positive or Negative replacement values of derivative financial instruments. Financial investments Financial investments include debt instruments, equity securities, physical stocks of precious metals as well as properties and goods acquired in relation to loan transactions and destined for sale. If the fair value of financial investments valued using the lower of cost or market principle increases again after declining below the historical cost, the value may be appreciated up to a maximum of the historical cost. The balance of the value adjustments is recorded via the item Other ordinary expenses or Other ordinary income. Held-to-maturity debt instruments The valuation is based on the acquisition cost principle with the agio/disagio (premium/discount) accrued/deferred over the residual term to maturity (accrual method). The agio/disagio is accrued/deferred over the residual term to maturity via the item Prepayments and accrued income or Accrued liabilities and deferred income. Value adjustments for default risk are recorded immediately under Changes in value adjustments for default risk and losses from interest operations. If held-to-maturity financial investments are sold or reimbursed early, the realised gains and losses, which correspond to the interest component, are accrued/deferred over the residual term to maturity of the transaction via the item Other assets or Other liabilities. Not held-to-maturity debt instruments The valuation is based on the lower of cost or market principle. The value adjustments arising from a subsequent valuation are recorded for each balance via the item Other ordinary expenses or Other ordinary income. Value adjustments for default risk are made immediately via the items Changes in value adjustments for default risk and Losses from interest operations. Equity securities, physical stocks of precious metals as well as properties and goods acquired in relation to loan transactions and destined for sale. The valuation is based on the lower of cost or market principle. For properties and goods acquired in relation to loan transactions and destined for sale, the lower of cost or market is determined by the purchase value or the liquidation value, whichever is the lowest. Own physical stocks of precious metals that serve as collateral for liabilities from precious metals trading accounts are valued, as they are in such accounts, at fair value. The value adjustments arising from a subsequent valuation are recorded for each balance via the item Other ordinary expenses or Other ordinary income. PwC 20

21 6.2 Accounting and valuation principles ARB 386 ARB 387 ARB 477 ARB A3-136 ARB A3-146 ARB 446 ARB 448 ARB 465 ARB 466 Participations Participations owned by the bank include equity securities of companies that are held for long-term investment purposes, irrespective of any voting rights. Participations are valued at historical costs minus any value adjustments due to business reasons Each participation is tested for impairment as of the balance sheet date. This test is based on indicators reflecting a possible impairment of individual assets. If any such indicators exist, the recoverable amount is calculated. The recoverable amount is calculated for each individual asset. The recoverable amount is the higher amount of the net selling price and the value in use. An asset is impaired if its carrying amount exceeds its recoverable amount. If the asset is impaired, the book value is reduced to match the recoverable value and the impairment is charged via the item Value adjustments on participations and amortisation of tangible fixed assets and intangible assets. Realised gains from the sale of participations are recorded via the item Extraordinary income and realised losses are recorded via the item Extraordinary expense. Tangible fixed assets Investments in tangible fixed assets are capitalised as an asset if they are used for more than one accounting period and exceed the minimal value for recognition of CHF 50,000. Tangible fixed assets are recognised at acquisition cost minus the scheduled accumulated amortisation over the estimated operating life. Tangible fixed assets are amortised at a consistent rate (straight-line amortisation) over a prudent estimated operating life via the item Value adjustments on participations and amortisation of tangible fixed assets and intangible assets. The estimated operating lives of specific categories of tangible fixed assets are as follows: ARB 474 Asset class Operating life Bank premises, other properties (not including land) Installations and renovations in third-party properties Plant, property, equipment Self-developed or bought-in software Telecommunications, IT years Remaining duration of the rental agreement 5 years 5 years 3 years ARB 558 ARB 477 ARB 467 ARB 468 ARB A3-136 ARB A3-146 ARB 450 Objects used by the bank as the lessee as part of a finance lease are recorded via the item Tangible fixed assets at cash purchase value. The leasing liabilities are disclosed, depending on the counterparty, in the items Liabilities with banks or Other liabilities. Each tangible fixed asset is tested for impairment as of the balance sheet date. This test is based on indicators reflecting a possible impairment of individual assets impaired. If any such indicators exist, the recoverable amount is calculated. The recoverable amount is calculated for each individual asset. An asset is impaired if its carrying amount exceeds its recoverable amount. If the asset is impaired, the book value is reduced to match the recoverable value and the impairment is charged via the item Value adjustments on participations and amortisation of tangible fixed assets and intangible assets. If the impairment test shows that the operating life of an intangible asset has changed, the residual carrying amount should be depreciated systematically over the newly estimated useful life. Realised gains from the sale of tangible fixed assets are recorded via the item Extraordinary income and realised losses are recorded via the item Extraordinary expense. Intangible assets Acquired intangible assets are recognised in the balance sheet if they yield measurable benefits for the company over several years. As a general rule, intangible assets generated internally are not recognised in the balance sheet. Intangible assets are recognised and valued according to the historical cost principle. PwC 21

22 6.2 Accounting and valuation principles ARB 475 Intangible assets are amortised at a consistent rate (straight-line amortisation) over a prudent estimated operating life via the item Value adjustments on participations and amortisation of tangible fixed assets and intangible assets. The estimated operating lives of specific categories of intangible assets are as follows: Intangible asset category Licences and brands Other intangible assets. Operating life max. 5 years max. 3 years ARB 477 ARB 467 ARB 468 ARB A3-136 ARB A3-146 ARB 522 ARB 529 ff. Each intangible asset is tested for impairment as of the balance sheet date. This test is based on indicators reflecting a possible impairment of individual assets impaired. If any such indicators exist, the recoverable amount is calculated. The recoverable amount is calculated for each individual asset. An asset is impaired if its carrying amount exceeds its recoverable amount. If the asset is impaired, the book value is reduced to match the recoverable value and the impairment is charged via the item Value adjustments on participations and amortisation of tangible fixed assets and intangible assets. If, as a result of the impairment review, the operating life of an intangible asset changes, the residual carrying amount should be depreciated systematically over the newly estimated operating life. Realised gains from the sale of intangible assets are recorded via the item Extraordinary income and realised losses are recorded via the item Extraordinary expense. Provisions Legal and factual obligations are valued regularly. If an outflow of resources is likely and can be reliably estimated, a corresponding provision must be created. Existing provisions are reassessed at each balance sheet date. Based on this reassessment, the provisions are increased, left unchanged or released. Positions are recorded as follows via the individual items in the income statement: ARB A3-153 Provision for deferred taxes: Taxes ARB 506 Pension provision: Personnel expenses ARB A3-124 Other provisions: Changes in provisions and other value adjustments and losses, except provisions for restructuring ARB 528 ARB A7 ARB A3-148 ARB 577 ARB 538 ARB 537 Provisions are released via the income statement if they are no longer needed on business grounds and cannot be used for other similar purposes at the same time. Reserves for general banking risks Reserves for general banking risks are prudently created reserves to hedge against the risks in the course of business of the bank. The creation and release of reserves is recognised via the item Changes in reserves for general banking risks in the income statement. The reserves for general banking risks are subject to tax. Taxes Note: In the reliable assessment statutory single-entity financial statements, there is no obligation to calculate and recognise deferred income tax. In these illustrative financial statements, however, we include deferred income tax in order to provide a comprehensive example. Current taxes Current income taxes are recurring, usually annual, taxes on profits and capital. Transaction-related taxes are not included in current taxes. Liabilities from current income and capital tax are disclosed via the item Accrued liabilities and deferred income. PwC 22

23 6.2 Accounting and valuation principles ARB 540 ARB 547 ARB 543 ARB 35 ARB 583 ARB 585 ARB 511 ARB 502 ARB 508 ff. ARB 507 ARB 504 ARB 612 Expense due to income and capital tax is disclosed in the income statement via the item Taxes. Deferred taxes The valuation differences between the value for tax purposes and the financial accounting value are calculated systematically. The effects of deferred taxes are considered in the calculations. Provisions for deferred tax are created via the item Taxes. Off-balance-sheet transactions Off-balance-sheet disclosures are at nominal value. Provisions are created in the liabilities in the balance sheet for foreseeable risks. Own debt instruments and equity securities The amount of own shares and cash bonds is offset with the corresponding item in the liabilities. Purchases of own shares are recorded at the acquisition date at the cost of acquisition and deducted from equity via the item Own shares. No subsequent valuation is performed The gain realised from the sale of own shares is recorded via the item Statutory retained earnings reserve. The item Own shares is reduced by the amount of the acquisition cost that corresponds to the shares sold. Pension benefit obligations The bank s employees are insured through the bank s pension fund. In addition, there is an executive staff insurance scheme. The pension fund liabilities and the assets serving as coverage are separated out into legally independent foundations. The organisation, management and financing of the pension funds comply with the legal requirements, the deeds of foundation and the current pension fund regulations. All of the bank s pension funds are defined contribution plans. The bank bears the costs of the occupational benefit plan for employees and survivors as per the legal requirements. The employer contribution arising from the pension funds are included in Personnel expense on an accrual basis. The bank assesses whether there is an economic benefit or economic obligation arising from a pension fund as of the balance sheet date. The assessment is based on the contracts and financial statements of the pension funds (established under Swiss GAAP FER 26 in Switzerland) and other calculations that present a true and fair view of the financial situation as well as the actual over- or underfunding for each pension fund. The bank refers to a pension fund expert to assess whether a benefit or an obligation exists for each pension fund. The identified economic benefit (including the employer contribution reserves without a waiver of use) are recorded in Other assets. If an economic obligation is identified for an individual pension fund, it is recorded in Provisions. The difference with the corresponding value of the prior period are recorded in the income statement in Personnel expense. Notes: It is mandatory to capitalise the future economic benefit (incl. employer contribution reserves) in the true and fair view single-entity financial statements and in the consolidated financial statements. In reliable assessment single-entity financial statements, the employer contribution reserves and another economic benefit may be recorded in the assets, provided the requirements of the ARB are complied with. However, their capitalisation is not mandatory. Equity-based compensation schemes Equity-based compensation schemes exist for members of the Board of Directors and the executive management as well as some employees. Employees are allocated bearer shares depending on their tenure, hierarchical level and individual performance. These shares are subject to a three-year blocking period during which they cannot be sold. As this is compensation using real equity instruments, there is no subsequent valuation. Any differences are recorded via the item Personnel expense. Members of the executive management are also granted employee stock options of bearer shares in Musterbank AG, dependent on them achieving objectives. Such options are subject to a vesting period of five years. When exercising an option, the option holder has the right to either a cash settlement or shares in Musterbank AG. Employee stock options are treated as compensation using phantom equity instruments. PwC 23

24 6.2 Accounting and valuation principles ARB 612 The liability is recorded in Prepayments and accrued income and revalued as of each balance sheet date. The resulting change of the fair value is adjusted in the income statement via the item Personnel expense. Comprehensive details of the design of the equity-based compensation scheme can be found in the compensation report. ARB Determination of previous year s figures ARB 185 ARB 271 Notes: In the case of true and fair view supplementary single-entity financial statements being prepared for the first time: disclosure as to how the previous year s figures were determined or reference to the statutory single-entity financial statements of the previous year. When true and fair view supplementary single-entity financial statements are prepared for the first time, reporting of the previous year s figures and the preparation of a cash flow statement are mandatory in principle. If calculating the previous year s figures and/or preparing the cash flow statement involves considerable effort, either the previous year s figures of the most recent statutory single-entity financial statements are to be reported or the statutory single-entity financial statements of the previous year are to be published in full together with the true and fair view supplementary single-entity financial statements for the current year. ARB Changes of the accounting and valuation principles ARB 186 ARB 30 ARB 32 There have been no changes in the accounting and valuation principles since the prior year. Notes: If the accounting and valuation principles have been changed, the changes are disclosed here and their impact has to be indicated and explained. The effects on hidden reserves also have to be explained. Statutory single-entity financial statements: In the case of changes to the accounting and valuation principles, a restatement of the previous year s figures is not permitted in principle. However, simple reclassifications not relating to the equity capital and result of the period items are permitted. True and fair view supplementary single-entity financial statements and consolidated financial statements: In the case of changes to the accounting and valuation principles, a restatement of the previous year s figures and an explanation in the notes are required in principle. The financial statements including the previous year s figures are to be presented as if the newly applied accounting and valuation principles had always been in effect. PwC 24

25 6.2 Accounting and valuation principles The explanation of a restatement might be as follows, for example: In 2015, the bank introduced a new method to calculate the impairment of intangible assets, particularly goodwill. The key characteristics of the new method are as follows: These modifications require the restatement of the 2014 financial statements. The financial impact of the restatement is shown in the table below: Item Balance as of 1 January 2014 Before restatement Change After restatement Intangible assets xxxx +/- xxxx xxxx Retained earnings reserve xxxx +/- xxxx xxxx Income statement for 2014 financial year Value adjustments on participations and amortisation of tangible fixed assets and intangible assets xxxx +/- xxxx xxxx Group net profit xxxx +/- xxxx xxxx Balance sheet as of 31 December 2014 Intangible assets xxxx +/- xxxx xxxx Group net profit xxxx +/- xxxx xxxx ARB Recording of business transactions ARB 17 All business transactions concluded up to the balance sheet date are recorded as of their trade date (trade date accounting) and valued according to the above-mentioned principles. Any foreign exchange spot transactions and foreign exchange forwards entered into but not yet fulfilled are recorded in accordance with the settlement date accounting method. Between the trade date and the settlement date, these transactions are disclosed at replacement value via the item Positive replacement values of derivative financial instruments or Negative replacement values of derivative financial instruments. ARB Treatment of past-due interest ARB 425 Past-due interest and the corresponding commissions are not included as interest income. Interest income only includes interest and commissions that are over 90 days past due and not yet paid. With regard to current account limits, interest and commissions are treated as past due if the credit limit has been exceeded for over 90 days. From this point in time, no accrued interest and commission is recorded in Interest and discount income until there is no more past-due interest longer than 90 days. Past-due interest is not cancelled retroactively. The liabilities from the accumulated interest up to the expiry of the 90-day term (due unpaid interest and accumulated accrued interest) are written down via the item Change in value adjustments for default risk and losses from interest operations. ARB Treatment of translation differences of foreign currencies ARB 72 Transactions in foreign currencies are recorded at the respective daily exchange rate. Assets and liabilities are translated as of the balance sheet date using the average rate on the balance sheet date. Participations, tangible fixed assets and intangible assets are valued using the historical exchange rates. The price gain or loss resulting from the currency translation is recorded via the item Result from trading operations and use of the fair value option. PwC 25

26 6.3 Risk management ARB 189 For the foreign currency translation, the following exchange rates were used: USD EUR GBP ARB Treatment of the refinancing of trading positions Refinancing costs for trading operations are not deducted from the trading result Risk management The bank, like any other financial institute, is subject to various banking-specific risks: credit, market and liquidity risks as well as operational and legal risks. The monitoring, identification, measurement and management of these risks is a priority for the bank. The bank s primary goal is to maintain its first-class credit rating and its good reputation. The risk capacity is set in such a way that the bank complies with the statutory capital adequacy requirements, even if under the influence of diverse negative events. The key elements of risk management are: a comprehensive risk policy; the use of recognised risk measurement and risk management principles; the definition of various risk limits and the corresponding monitoring and reporting measures; ensuring timely and comprehensive reporting on all risks; the allocation of adequate financial and human resources to the risk management; and highlighting risk awareness at all management levels. The Board of Directors is the supreme organ of the risk management organisation. It specifies the risk policy and, as part of this, defines the risk philosophy, risk measurement and risk management. The Board of Directors approves the strategic risk limits based on the risk capacity and it monitors compliance with the limits as well as the implementation of the risk policy. To fulfil its monitoring duties, a comprehensive risk report is submitted to the Board of Directors on a quarterly basis. The internal reports ensure adequate reporting at all levels. The executive management is responsible for the execution of the Board of Director s policies. It ensures a suitable risk management organisation is in place as well as the use of an adequate risk monitoring system. It allocates the limits approved by the Board of Directors to the organisational units and delegates the corresponding competences. Adequate reporting at all levels is ensured by the internal reports. The risk control unit is independent of business operations and monitors the market risks incurred. In addition, the risk control unit coordinates all risk reporting. PwC 26

27 6.3 Risk management ARB Credit risk Loans to clients The monitoring of credit risks is performed at three levels: Ensuring established processes and tools for an in-depth assessment of credit risk and, hence, for high-quality decision-making relating to loans; Risk positions are closely monitored by qualified experts and restricted by limits; Periodic assessments of developments in the industry and in the credit portfolio. Responsibility for sales and responsibility for decisions regarding loans are separated. Authority regarding credit matters is given to the Credit Office and the Credit Committee of the executive management. The Board of Directors is responsible for approving large credit exposures as well as loans and exposures to members of the governing bodies. Specific authority to grant loans involving manageable risks are delegated to the client advisers. Such loans may be granted only within the limits of the predefined parameters used in the IT-based decision-making process. Credit Administration, which is independent of the client advisers and the Credit Office, processes the approved loans and is responsible for the final checks. The credit policy of the bank forms the basis of credit risk monitoring and control. This is expressed, particularly, in the credit conditions and the monitoring of loans. Significant aspects include knowing the purpose of the loan and the client s integrity along with the transparency, plausibility, ability to pay and the proportionality of the transaction. The credit policy is reviewed annually and supplemented by detailed internal policies and process descriptions. A key aspect of credit reviews, which assess credit worthiness by means of standard criteria, is the credit rating. The rating is an estimate of the risk and it measures the probability of default for each client exposure. In principle, the rating is applied to all credit clients. The rating also serves to establish the risk-adjusted conditions. The bank s rating system largely corresponds to the classifications given by external rating agencies. The bank applies ten rating classes, with each class assigned a fixed probability of default. The rating system is based on a mathematical/statistical model, which supports the credit decision. The assessment of the financial factors is primarily based on considerations of earning power, suitability of the loan and liquidity. The assessment considers quantitative factors and qualitative aspects of the borrower. Credit exposures to counterparties are restricted by credit limits. The borrowing capacity of commercial clients is used to calculate the maximum loan amount. The basis is the long-term realisable operating free cash flow. The cash flow over capital principle also applies to credit exposures to private clients. The loan-to-value ratios of collateral are based on the usual banking standards. All collateral used for mortgage loans is backed by an up-to-date valuation. Valuations are always dependent on the use of each object. If the credit rating is low, the liquidation value of the collateral is used. The maximum possible financing amount is determined by the bank s internal loan-to-value ratios and the ability to pay. Amortisation is fixed depending on the risk. The credit lines and collateral are reassessed and, if necessary, depreciated according to the bank s own internal time schedule and the process described in section 6.4. Counterparty risk in interbank business In the interbank business and trading operations, a multi-level limit system is used to manage the counterparty and default risks. In principle, the bank works only with first-class counterparties. Before entering into a business relationship with a counterparty in interbank business, the bank performs a comprehensive assessment of the counterparty risk. The limit depends significantly on the rating and on the capital adequacy of the counterparty. Risk Control monitors compliance with the limits on a daily basis. A review of the appropriate classification of the counterparties and, thus, of the set limits is performed, usually on an annual basis. Additionally, Risk Control monitors weekly the developments in counterparties ratings. In cases of extreme market events, a daily situation report is prepared in order to react immediately to increased risk situations. PwC 27

28 6.3 Risk management ARB Interest rate risk As the bank is heavily involved in balance sheet transactions, interest rate risks could have a significant impact on the interest margin. The interest rate risk arises mainly from imbalances between the time limits of assets and liabilities. The measurement and management of the resulting risks is key. This is part of the asset and liability management (ALM) performed by the ALM Committee (ALCO) of the bank, which comprises the members of the executive management and the Head of Research. The Risk Management function operates the ALM system and reports weekly. This measures the potential impact of market risks on the earnings situation and the equity capital of the bank by means of Value-at- Risk, gap and duration calculations. The variable interest-bearing items are illustrated using a mathematical model that applies the so-called constant maturity bonds approach. The analysis of the economic situation and the derivation of interest rate forecasts from it includes a regular analysis of the income and value effects. Depending on the estimated interest rate developments, the ALCO takes hedging measures within defined risk limits and defined hedging strategies. To this end, derivative financial instruments are used. Further, stress scenarios are used to assess the impact of non-parallel changes in the interest rate curve. A limit also exists for the standard stress scenario in use and compliance with it is monitored. Money market operations ensure long-term refinancing and the management of interest rate risks, taking into account the following objectives: Record, measure and manage all interest rate risks arising from client transactions with the bank; Generate risk-adjusted income within the risk limits; Ensure cost-effective refinancing in line with the development of the balance sheet; Monitor liquidity and avoid potential liquidity shortfalls. ARB Other market risks Currency risks The bank s currency management serves to minimise any negative impact on the bank s earnings due to interest rate changes. Basically, the goal is to balance the assets denominated in foreign currencies with the liabilities in foreign currencies. The currency risks are included in the Value-at-Risk calculations. Trading operations The trading book limits approved by the Board of Directors are divided among various units and the overall position of the bank is calculated continuously during the day. The value of trading operations, which forms the basis of the Value-at-Risk calculation, is determined using the fair value method based on daily market prices. The Value-at-Risk is calculated individually for the total trading book and for various risk factors (shares, interest rates, currencies and raw materials). The bank calculates the Value-at-Risk over a ten-day period and with a 99% confidence level using the Monte Carlo simulation method. Value-at-Risk reports are sent daily to the Heads of Trading and Risk Control at the group management level. Back testing of Value-at-Risk and simulations of stress scenarios are performed weekly and the results reported to the unit responsible. Trades in derivative financial instruments are mainly on behalf of clients; trades on own account are small and limited to hedging operations for nostro positions and transactions relating to balance sheet structure management. The bank does not have any market-making activities Both standardised and OTC instruments are traded Liquidity The liquidity strategy of the bank has been developed by the Treasury department and approved by the Board of Directors. The Treasury department ensures that the limits and objectives are complied with. Liquidity positions, the financing situation and concentration risks are reported monthly to the ALM Committee of the bank. The liquidity and financing limits are approved annually by the executive management and the Board of Directors. In doing so, the current and planned business strategy and the risk appetite are considered. Liquidity management aims to create a solid liquidity position to allow the bank to pay its obligations in a timely manner at all times. Further, the financing risk is managed through the optimisation of the balance sheet structure. The emergency liquidity plan is a key aspect of the bank s crisis management concept. The emergency plan includes an assessment of financing sources in a stressed market situation, considers liquidity status PwC 28

29 6.4 Methods used for identifying default risks and determining the need for value adjustments indicators and key figures, and describes the emergency measures. Provisions for a crisis have been made by diversifying the sources of financing. All material expected cash flows and the availability of first-class collateral, which could be used to gain additional liquidity, are regularly reviewed Operational risks Operational risks are defined as the risks of losses due to the inadequacy or failure of internal policies, people and systems or due to external events. The assessment of operational risks and compliance risks evaluates the direct financial losses and the consequences of the loss of client trust and reputation. The primary objective of operational risk management is to ensure the trust of the clients, shareholders and regulators. The operational risks are measured by calculating the potential extent of damages in normal and extreme cases. The Risk Control department maintains a database of cases of damages and the losses incurred. For risk management purposes, the potential losses are assigned to the various risk categories and risk-adjusted measures to minimise the potential loss are defined. The Risk Committee of the Board of Directors reviews annually the operational risk policy, which, together with the detailed directives, serves as the basis for risk management. Risk-mitigation measures are implemented in the areas of process management, information security, control systems, quality and training. This also includes ensuring that operations continue in cases of internal or external events or disasters. The key controls have been documented in a standardised manner. All of the bank s departments perform (usually on an annual basis) an assessment of the internal control processes in terms of their operational effectiveness and take any improvement measures necessary. The effectiveness of the Business Continuity Management is tested annually. The results of these review measures are included in a report on the operational risks. This report is discussed by the executive management and the Risk Committee of the Board of Directors. The improvement measures are summarily approved by these bodies. Significant control deficiencies impact the performance appraisal and the remuneration of the units concerned. ARB Methods used for identifying default risks and determining the need for value adjustments Mortgage-based loans For residential properties used by the owner, the valuations generated by the hedonic models are updated annually. In doing so, the bank uses regionally specific property prices stemming from external providers and validated by the bank. Based on these valuations, the bank updates the loan-to-value ratio on an annual basis. Additionally, late payment of interest and amortisation payments are analysed. From this, the bank identifies mortgages that involve higher risks. These loans are then reviewed in detail by credit specialists. If necessary, additional coverage is requested or a corresponding value adjustment is created based on the coverage shortfall. For investment properties, the property value is calculated using a capitalisation model which includes the estimated long-term revenues. This model also includes market data, location data and vacancy rates. The rental income from investment properties is reviewed at least every three years. If there are indications of significant changes in the amount of rental income or the vacancy rate, a revaluation is performed before the end of the three-year period Securities-based loans The commitments and values of collateral for securities-based loans are monitored daily. If the collateral value of the securities falls below the amount of the credit line, the amount of the loan is reduced or additional securities are requested. If the coverage gap grows or in extraordinary market conditions, the securities are utilised and the credit position is closed out Unsecured loans Unsecured loans are usually commercial working-capital loans or unsecured account overdrafts of retail clients. PwC 29

30 6.5 Valuation of collateral For unsecured commercial working-capital loans, information is requested from clients every year (or more frequently, if necessary) that enable inferences to be made about the financial development of the company. This information might include, among others, revenue, sales and product development. The audited annual financial statements and, if applicable, the interim financial statements are requested regularly. The Credit Analysis department analyses these data and identifies any significant risks. If significant risks are identified, the Credit Analysis department makes a detailed assessment and defines jointly with the client adviser if action should be taken. If it is expected in this phase that the credit commitment is at risk, a corresponding value adjustment is created Process for determining value adjustments and provisions Any new value adjustments and provisions needed are identified by the process described in Sections to Further, the known risk exposures already identified as at risk are reassessed at each balance sheet date and the value adjustments are adjusted, if necessary. The Risk Committee assesses and approves all of the value adjustments created for the risk exposures. Then, approval is given by the executive management and the Board of Directors. ARB Valuation of collateral Mortgage-based loans Each mortgage-based loan granted is backed by an up-to-date valuation of the collateral. Valuations are always dependent on the use of each object. To assess residential properties, the bank s internal appraisers use hedonic valuation models. These compare property transactions based on the detailed characteristics of each property. For multi-storey dwellings, commercial properties and special properties, certified external property appraisers calculate the going-concern value, which takes into account the rental income, in particular. If the credit rating is low, the liquidation value is calculated. The bank uses as the basis for granting a loan whichever has the lowest value of the internal valuation, the purchase price and the external estimate Securities-based loans Primarily, transferable financial instruments (like loans and shares) that are liquid and actively traded are used for Lombard loans and other securities-based loans. Transferable structured products, for which there is regular market information and a market maker, are also accepted. The bank applies a discount to the market value in order to cover the market risk relating to marketable liquid securities and to calculate the value of the collateral. For structured products and products with long residual terms to maturity, the closing out period can be significantly longer; hence, higher discounts are applied to them than are applied to liquid instruments. For life insurance policies or guarantees, a product-specific or client-specific discount is fixed. ARB Business policy regarding the use of derivative financial instruments and hedge accounting ARB A Business policy regarding the use of derivative financial instruments Derivative financial instruments are used for trading and for hedging purposes. Derivative financial instruments are traded exclusively by specially trained traders. The bank does not have any market-making activities. Standardised and OTC instruments are traded on own account and on behalf of clients, especially interest-, currency- and equity/index-based instruments and, to a limited extent, those based on commodities. There is no trading in credit derivatives. Derivative financial instruments are used by the bank for risk management purposes, mainly to hedge against interest rate and foreign currency risks as well as, in some circumstances, to minimise credit risks, including risks of future transactions. Hedging transactions are concluded exclusively with external counterparties. PwC 30

31 6.7 Material events after the balance sheet date ARB A5-4 ARB A5-5 ARB A5-6 ARB A5-7 ARB A Use of hedge accounting Types of underlying and hedging transaction The bank uses hedge accounting mainly in relation to the following types of transaction: Underlying transaction Interest rate risks of interest-rate-sensitive receivables and payables in the banking book Exchange rate changes on net currency positions Default risks of counterparty positions Composition of the group of financial instruments Hedged using Interest rate swaps Foreign exchange forwards Credit derivatives (especially, credit default swaps and first-to-default swaps) Some interest-rate-sensitive positions in the banking book (especially receivables and payables with clients as well as mortgage receivables) are grouped in various fixed-interest-rate bands by currency and hedged by means of macro hedges. Economic relationship between the hedged items and the hedging transactions As soon as a financial instrument is designated as a hedging transaction, the bank documents the relationship between the hedging instrument and the secured underlying. Among others, it documents the risk management goals and strategy for the hedging transaction and the methods to assess the effectiveness of the hedging. The economic link between the underlying and the hedging transaction is continuously assessed as part of the effectiveness testing by observing the opposing changes in their values and their correlation. Measurement of effectiveness A hedge is seen as highly effective when the following criteria are fulfilled in all material aspects: The hedge is estimated as highly effective from its first application and for the rest of its lifetime. There is a close economic correlation between the underlying and the hedging transaction. Changes in the value of the underlying and the hedge are contrary to the hedged risk. The actual results of hedges are within a range of 80% 125%. Ineffectiveness If a hedging transaction no longer fulfils the effectiveness criteria, it is considered like a trading transaction and the effect of the ineffective portion is recorded via the item Results from trading operations and use of fair value option. In the 2015 income statement, the following effects due to ineffective hedges were disclosed: Due to an unexpected development in the maturity and fixed-interest structure of the mortgage portfolio, some interest-rate swaps concluded for hedging purposes were assessed as ineffective. The ineffective portion of these hedging transactions resulted in a loss of CHF 2 million, which was charged via the item Results from trading operations and use of fair value option Material events after the balance sheet date ARB 195 No material events occurred after the balance sheet date that could have a material impact on the financial position of the bank as of 31 December Premature resignation of the auditor ARB 196 PricewaterhouseCoopers AG, Zurich, was elected as the bank s auditor by the General Meeting. The audit mandate was granted in 2001 for the first time. The auditor has not resigned prematurely from its function. PwC 31

32 6.9 Information on the balance sheet ARB Information on the balance sheet ARB 174 ARB 627 Notes: Unless expressly provided for otherwise by the remarks or detailed information set out in annex 5 to the FINMA circ. 15/1, all quantitative entries are to be accompanied in the notes by figures from the previous year. When preparing annual financial statements in accordance with the provisions of FINMA circ. 15/1 for the first time, banks and financial groups may omit the presentation of the previous year s figures in the notes if this constitutes new information in the notes compared with FINMA circ. 08/2 Accounting banks, valid until 31 December ARB Securities financing transactions (assets and liabilities); (CHF million) ARB A5-9 Book value of receivables from cash collateral delivered in connection with securities borrowing and reverse repurchase transactions* Book value of obligations from cash collateral received in connection with securities lending and repurchase transactions* Book value of securities lent in connection with securities lending or delivered as collateral in connection with securities borrowing as well as securities in own portfolio transferred in connection with repurchase agreements of which, with unrestricted right to resell or pledge Fair value of securities received and serving as collateral in connection with securities lending or securities borrowed in connection with securities borrowing as well as securities received in connection with reverse repurchase agreements with an unrestricted right to resell or re-pledge of which, re-pledged securities of which, resold securities 4 - * Before netting agreements PwC 32

33 6.9 Information on the balance sheet ARB Collateral for loans and off-balance-sheet transactions, as well as impaired loans ARB A5-10 Collateral for loans and offbalance-sheet transactions (CHF million) Loans (before netting with value adjustments) Secured by mortgage Type of collateral Other collateral Unsecured Total Amounts due from customers 618 6,602 2,909 10,129 Mortgage loans - Residential property 8, ,816 - Office and business premises Commercial and industrial premises Other Total loans (before netting with value adjustments) ,066 6,602 3,246 20, ,314 5,941 2,605 18,860 Total loans (after netting with value adjustments) ,610 6,405 3,217 20, ,928 5,780 2,508 18,216 Off-balance-sheet Contingent liabilities ,812 Irrevocable commitments Obligations to pay up shares and make further contributions Credit commitments Total off-balancesheet ,025 2, ,050 2,513 ARB A5-15 Impaired loans Gross debt amount (CHF million) Estimated liquidation value of collateral Net debt amount Individual value adjustments , , ARB A5-15 The net debt of doubtful receivables increased by CHF 38 million or 6% compared with the prior year. The worsening of the situation is largely due to lower estimated recoveries. PwC 33

34 6.9 Information on the balance sheet ARB Trading portfolios and other financial instruments at fair value (assets and liabilities) ARB A5-17 (CHF million) Assets Trading portfolio assets Debt securities, money market securities/transactions of which, listed Equity securities Precious metals and commodities Other trading portfolio assets 1 - Total trading portfolio assets 1,383 1,283 Other financial instruments at fair value Debt securities Structured products Other Total other financial instruments at fair value 1, Total assets 2,775 2,139 - of which, determined using a valuation model of which, securities eligible for repo transactions in accordance with liquidity requirements Liabilities Trading portfolio liabilities Debt securities, money market securities/transactions of which, listed 6 7 Equity securities Precious metals and commodities Other trading portfolio liabilities 1 - Total trading portfolio liabilities Other financial instruments at fair value Debt securities Structured products 1, Other Total other financial instruments at fair value 1, Total liabilities 1, of which, determined using a valuation model PwC 34

35 6.9 Information on the balance sheet ARB Derivative financial instruments (assets and liabilities) ARB A5-18 Trading instruments Hedging instruments (CHF million) Positive replacement values Negative replacement values Contract volume Positive replacement values Negative replacement values Contract volume Interest rate instruments Forward contracts including FRAs Swaps , ,654 Futures Options (OTC) Options (exchange traded) Foreign exchange/precious metals Forward contracts , ,406 Combined interest rate/currency swaps Futures Options (OTC) Options (exchange traded) Equity securities/indices Forward contracts including FRAs Swaps Futures Options (OTC) Options (exchange traded) Credit derivatives Credit default swaps Total return swaps First-to-default swaps Other credit derivatives Other Forward contracts including FRAs Swaps Futures Options (OTC) Options (exchange traded) Total before netting agreements , ,621 of which, determined using a valuation model , ,356 of which, determined using a valuation model (CHF million) Total after netting agreements Positive replacement values (cumulative) Negative replacement values (cumulative) PwC 35

36 6.9 Information on the balance sheet ARB A5-18 Breakdown by counterparty (CHF million) Positive replacement values (after netting agreements) Central clearing houses Banks and securities dealers Other customers ARB Financial investments ARB A5-30 Breakdown of financial investments Book value Fair value (CHF million) Debt securities 1,699 1,697 1,742 1,731 - of which, intended to be held to maturity 1,417 1,319 1,460 1,345 - of which, not intended to be held to maturity (available for sale) Equity securities of which, qualified participations (at least 10% of capital or votes) Precious metals Real estate Total 1,983 1,864 2,029 1,914 - of which, securities eligible for repo transactions in accordance with liquidity requirements 1,445 1,432 1,452 1,443 ARB A5-30 Breakdown of counterparties by rating (CHF million) Book values of debt securities AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Unrated The bank relies on the rating classes of Standard & Poor s. PwC 36

37 6.9 Information on the balance sheet ARB Participations ARB 327 ARB 328 ARB 341 Under the terms of art. 36 para. 1 BankO, where a financial group prepares and publishes consolidated financial statements and a group management report, the banks consolidated within the group are exempted from the requirement to include this component of the notes in their single-entity financial statements. Banks whose equity securities are listed (art. 36 para. 2 BankO) are not permitted to apply the exemptions above. ARB A5-31 (CHF million) Participations With market value without market value Total participations Acquisition cost Book value (prior year end) Reporting year Reclassifications Additions Disposals Value adjustment s Appreciation in value Book value Accumulated value adjustments Market value ARB A5-32 ARB A5-31 Due to economic difficulties, the bank has accumulated depreciation of CHF 15 million since 2009 on its participation in Epsilon Bau AG. As the business situation worsened further during the year under review, depreciation was increased by CHF 4 million in 2015, resulting in a new net book value of CHF 9 million. Thanks to the sale of a part of the property portfolio, Zeta Immobilien AG, Basel, realised substantial proceeds from sales. This means that no reduction was made to the company s equity capital during The bank therefore increased the value of its participation by CHF 6 million to restore it to the historical cost of CHF 8 million. Note: In the consolidated financial statements and in the true and fair view single-entity financial statements, participations valued using the equity method also have to be disclosed. In the case of true and fair view statutory single-entity financial statements, the impact of a theoretical application of the equity method for participations over which the bank can exert a material influence is to be disclosed. ARB Companies in which the bank holds a permanent direct or indirect significant participation ARB 327 ARB 329 ARB 341 Under the terms of art. 36 para. 1 BankO, where a financial group prepares and publishes consolidated financial statements and a group management report, the banks consolidated within the group are exempted from the requirement to include this component of the notes in their single-entity financial statements. Banks whose equity securities are listed (art. 36 para. 2 BankO) are not permitted to apply the exemptions above. ARB A5-34 ARB A5-35 Company name and domicile Business activity Recorded as financial assets Alpha Handels AG, Bern Bank s capital (CHF m) Share of Held Capital Votes Direct Indirect Trading company 53 40% 35% 35% - PwC 37

38 6.9 Information on the balance sheet Recorded as participations Beta Finanz AG, Zurich Gamma Fonds AG, Lausanne Epsilon Bau AG, Lucerne Zeta Immobilien AG, Basel Finance company % 35% - 35% Fund management company 10 15% 40% 5% 35% Real estate company 25 45% 45% 45% - Real estate company 3 30% 30% 30% - Eta Travel AG, St. Gallen Travel agency 62 12% 12% - 12% ARB A5-36 As of 20 March 2015, the bank increased its share in Beta Finanz AG, Zurich, from 22% to 35%. ARB A5-36 ARB A5-37 As of 15 April 2015, the bank acquired a call option to purchase a maximum 9% of the shares of Beta Finanz AG, Zurich. The replacement value of this option was CHF 1.8 million as of 31 December 2015 and was recorded via Positive replacement values of derivative financial instruments. Further, an option was conceded with a third party to sell all of the shares in Zeta Immobilien AG, Basel, upon demand. This option is valid until 30 June 2016 at the latest. ARB Tangible fixed assets ARB A5-39 ARB 327 ARB 330 ARB 341 Notes: Where tangible fixed assets are immaterial or where their book value is less than 10 million Swiss francs, the breakdown may be limited to the gross additions and disposals and depreciation for the current year. In the event of the determination of acquisition cost being waived, reasons must be given for this. Under the terms of art. 36 para. 1 BankO, where a financial group prepares and publishes consolidated financial statements and a group management report, the banks consolidated within the group are exempted from the requirement to include this component of the notes in their single-entity financial statements. Banks whose equity securities are listed (art. 36 para. 2 BankO) are not permitted to apply the exemptions above. ARB A5-38 Tangible fixed assets Acquisition cost (CHF million) Book value Accumulated depreciation Reclassifications Additions 2015 Book value Disposals Depreciation Reversal s Bank buildings Other real estate Proprietary or separately acquired software Other tangible fixed assets Tangible assets acquired under finance leases of which, bank buildings of which, other real estate of which, other tangible fixed assets Total tangible fixed assets 1, , ,273 ARB A5-40 The depreciation method applied and the range used for the expected useful life are explained in the general principles for accounting and valuation. PwC 38

39 6.9 Information on the balance sheet ARB A5-43 ARB A5-42 Significant construction defects were identified in a newly built property, which was partly for own use. Therefore, additional depreciation of CHF 18 million was booked besides the scheduled depreciation. Operating leases (CHF million Off-balance-sheet leasing obligations Maturity up to 12 months 4 5 Maturity between 12 months to 5 years 3 3 Maturity over 5 years 5 1 Total off-balance-sheet leasing obligations of which, may be terminated within one year 4 2 ARB Intangible assets ARB A5-45 ARB 327 ARB 331 ARB 341 Notes: Where intangible assets are immaterial or where their book value is less than 10 million Swiss francs, the breakdown may be limited to the gross additions and disposals and depreciation for the current year. In the event of the determination of acquisition cost being waived, reasons must be given for this. Under the terms of art. 36 para. 1 BankO, where a financial group prepares and publishes consolidated financial statements and a group management report, the banks consolidated within the group are exempted from the requirement to include this component of the notes in their single-entity financial statements. Banks whose equity securities are listed (art. 36 para. 2 BankO) are not permitted to apply the exemptions above. ARB A5-44 (CHF million) Goodwill Cost value Book value Book value Disposals Accumulated amortisation Reclassifications Additions Amortisation Patents Licences Other intangible assets Total intangible assets ARB A5-46 The marketing rights for X-Brand and the usage rights for the corresponding address database are no longer used. For this reason, an immediate write down of CHF 4 million was made. PwC 39

40 6.9 Information on the balance sheet ARB Other assets and other liabilities ARB A5-48 (CHF million) Other assets Compensation account - 59 Amount recognised as assets in respect of employer contribution reserves Amount recognised as assets relating to other assets from pension schemes Indirect taxes Clearing expense Other assets Total other assets Other liabilities Compensation account 34 - Indirect taxes Clearing expense Unredeemed coupons, cash bonds and long-term bonds Liabilities from goods and services 6 6 Other liabilities Total other liabilities ARB A5-48 Note: Add any other material sub-items. ARB Assets pledged or assigned to secure own commitments and assets under reservation of ownership ARB A (CHF million) Pledged/assigned assets Book value Effective commitments Book value Effective commitments Due from banks Pledged or ceded mortgage receivables for mortgage-backed loans Total pledged/assigned assets Assets under reservation of ownership Securities serving as collateral, for which the resale or pledging rights as part of the securities financing operations have been ceded, are presented in appendix 1. PwC 40

41 6.9 Information on the balance sheet ARB Liabilities relating to own pension schemes, and number and nature of equity instruments of the bank held by own pension schemes ARB A5-50 Liabilities relating to own pension schemes (CHF m) (CHF m) Amounts due in respect of customer deposits 6 3 Negative replacement values of derivative financial instruments 1 1 Cash bonds 2 1 Bond issues and central mortgage institution loans 3 4 Accrued expenses and deferred income 1 1 Total liabilities relating to own pension schemes ARB A5-51 Equity instruments of the bank The bank s pension funds hold 1,480 bearer shares at a nominal value of CHF 1,000. This corresponds to a 0.2% share of the total company capital. The pension fund did not hold any shares in the bank in the prior year. ARB Economic situation of own pension schemes ARB A5-52 Employer contribution reserves (ECR) (CHF million) Nominal value Waiver of use Net amount Net amount Influence of ECR on personnel expenses Employer sponsored pension schemes Pension schemes Total ARB A5-53 ARB A5-57 The employer contribution reserves correspond to the nominal value according to the calculation of the pension fund. These are recognised in Other assets. The nominal amount of the employer contribution reserves is not discounted. Regular interest is paid on the employer contribution reserves. The interest payments are recognised in Personnel expense. There are no non-capitalised employer contribution reserves. PwC 41

42 6.9 Information on the balance sheet ARB A5-54 Economic benefit/obligation and pension expenses (CHF million) Over-/ underfunding Economic interest of the bank Change in economic interest vs. prior year Contributions paid 2015 Pension expenses in personnel expenses Employer sponsored funds/ employer sponsored pension schemes Pension plans without over-/ underfunding Pension plans with overfunding Pension plans with underfunding Total ARB A5-56 All of the bank s employees older than 20 years are insured through the bank s pension fund. Employees with temporary employment contracts of up to three months are excluded. The pension fund is a definedcontribution scheme. For members of the executive management and employees at management grade 2, the bank has a senior management pension fund. This is a defined-contribution scheme that ensures the portion of the basic salary that exceeds a certain minimum threshold. The senior management pension fund is financed jointly by the bank and the insured members. The accounting for the pension fund and for the senior management pension fund is in accordance with the requirements of the Accounting and Reporting Recommendations Swiss GAAP FER 26. There are no other liabilities on the employer s side. There are pension funds for the employees of the foreign subsidiaries; however, their sizes are not material for the bank as a whole. They do not disclose any underfunding or overfunding. The overfunding of the bank s pension fund of 108% is used exclusively for the benefit of the insured members, thus there is no economic benefit to the bank that needs to be recorded in the balance sheet and in the income statement. The underfunding of the senior management pension fund amounts to 99%. The pension fund has not decided on any measures that would lead to a future liability for the bank. PwC 42

43 6.9 Information on the balance sheet ARB Issued structured products ARB A5-59 Underlying risk of the Book value embedded derivative ARB A5-60 Valued as a whole Valued separately (CHF million) Booked in trading portfolio Booked in other financial instruments at fair value Value of the host instrument Value of the derivative Total Interest rate instruments with own debenture component without own debenture component Equity securities with own debenture component without own debenture component Foreign currencies with own debenture component without own debenture component Commodities/precious metals with own debenture component without own debenture component Total ,328 ARB Bonds outstanding and mandatory convertible bonds ARB 327 ARB 332 ARB 341 ARB A5-61 Under the terms of art. 36 para. 1 BankO, where a financial group prepares and publishes consolidated financial statements and a group management report, the banks consolidated within the group are exempted from the requirement to include this component of the notes in their single-entity financial statements. Banks whose equity securities are listed (art. 36 para. 2 BankO) are not permitted to apply the exemptions above. Interest rate Type of bond Issue year Due date Earliest possible termination Outstanding nominal value (CHF m) % Long-term bond % Subordinated loan without PONV* clause % Long-term bond % Long-term bond % Long-term bond % Subordinated loan with PONV* clause 2012 unlimited % Long-term bond % Long-term bond Mortgage-backed loans 1,519 Total ,849 * PONV=Point of no viability PwC 43

44 6.9 Information on the balance sheet ARB A5-62 Note: If there are more than 20 issues, the information on bonds outstanding may be summarised and disclosed as per the following table. Separate disclosures for each issuer needed in consolidated financial statements. ARB A5-62 Bonds outstanding and mandatory convertible bonds Issuer Type of bond Weighted average interest rate Maturities Amount (CHF m) ABC AG Non-subordinated 1.84 % ,834 Subordinated without PONV clause* 3.51 % Subordinated with PONV clause* 4.24 % unlimited 360 CDE Ltd. Non-subordinated 1.76 % ,940 Subordinated without PONV clause* 2.94 % ,452 Subordinated with PONV clause* 3.95 % unlimited 780 Total ,940 * PONV clause = Point of no viability ARB A5-62 Maturities of bonds outstanding Issuer Maturities > 1 year > 2 years > 3 years > 4 years (CHF million) 1 year > 5 years Total 2 years 3 years 4 years 5 years ABC AG ,768 CDE Ltd ,250 3,163 7,172 Total ,595 1,170 1,635 4,034 9,940 PwC 44

45 6.9 Information on the balance sheet ARB Value adjustments, provisions, reserves for general banking risks BankO 69.1 ARB 626 ARB A5-63 In the first two years after the entry into force of the Ordinance (until 31 December 2016), banks can disclose value adjustments, in accordance with BankO 27.1, as negative items in the assets, either as full totals or sub-totals. FINMA regulates the specific details. Banks and financial groups that require more time for the changeover with regard to the deduction of value adjustments from asset items may apply the transitional provisions of art. 69 para. 1 BankO. The value adjustments concerned are to be disclosed separately in the notes to the annual financial statements/consolidated financial statements in the Presentation of value adjustments and provisions, reserves for general banking risks, and changes therein during the current year. (CHF million) Status Use in Reclassification conformity with designated purpose Currency differences 2015 Status Past due interest, recoveries New creations charged to income Releases to income Provisions for deferred taxes Provisions for pension benefit obligations Provisions for default risks Provisions for other business risks Provisions for restructuring Other provisions Total provisions 1, ,022 Reserves for general banking risks Value adjustments for default risks in respect of impaired loans Value adjustments for latent risks Value adjustments for default and country risks ARB A5-67 The provisions for restructuring are mainly in relation to the obligations arising from the acquisition and integration of XYZ Asset Management Partners in They include integration measures and compensation payments in relation to personnel measures. Up to 2019, the expected liabilities will be estimated and, where necessary, justified on an annual basis. The compensation payments depend on imputed results and the retention of the clients of XYZ Asset Management Partners. The remaining provisions include those for legal costs as well as the hidden reserves. The legal risks are assessed continuously and the corresponding provision is adjusted during the course of the judicial proceedings, if necessary. Whether a loss is realised depends on the ruling of the competent court. ARB A5-68 The reserves for general banking risks are subject to tax. PwC 45

46 6.9 Information on the balance sheet ARB Bank s capital ARB A ARB A5-88 Total par value No. of shares Capital eligible for dividend Total par value No. of shares Capital eligible for dividend (CHF m) (000s) (CHF m) (CHF m) (000s) CHF m Share capital 630 1, , Registered shares of which, paid up Bearer shares of which, paid up Participation capital of which, paid up Total bank s capital 830 1, , Authorised capital of which, capital increases completed none - - Conditional capital of which, capital increases completed none - - none - - ARB A5-88 Rights and restrictions linked to the shares The company s share capital is fully paid in. No special rights are conferred by the share capital. The exercise of voting rights and the corresponding rights of the holders of registered shares requires recognition by the Board of Directors and entry in the share register as a voting shareholder. Such approval may be refused if the investor, despite the bank s requests, does not declare that the shares are held in his/her own name and acquired for his/her own benefit, or if the share of voting rights of a holder of registered shares exceeds 5% of the total number of registered shares entered in the commercial register. With the exception of this duty of registration, there are no other limitations placed on shareholders voting rights. ARB Equity securities or options on equity securities held by executives and directors and by employees Equity securities Options Number Value Number Value ARB A5-71 Members of the Board of Directors (CHF m) (CHF m) (CHF m) (CHF m) Members of executive bodies 1,594 1, ,841 6, Employees 2,922 3, Total 5,187 5, ,841 6, PwC 46

47 6.9 Information on the balance sheet ARB A5-72 Equity-based compensation schemes exist for members of the executive management as well as some employees. Employees are allocated bearer shares depending on their tenure, hierarchical level and individual performance. These shares are subject to a three-year blocking period during which they cannot be sold. Members of the executive management are also given employee stock options of bearer shares in the bank dependent on them achieving their objectives. Such options are subject to a vesting period of five years. When exercising an option, the option holder has the right to either a cash settlement or shares in the bank. Employee stock options are treated as compensation using phantom equity instruments. Comprehensive details of the design of the equity-based compensation scheme can be found in the compensation report. ARB Related parties ARB A5-73 Amounts due from Amounts due to (CHF million) Holders of qualified participations: Group companies Linked companies Transactions with members of governing bodies Other related parties ARB A5-75 ARB A5-77 ARB A5-78 Amounts due to and from holders of significant ( qualified ) participations in the bank that are members of governing bodies are disclosed in the row Holders of significant participations. There are no significant off-balance-sheet transactions with related parties. On- and off-balance-sheet transactions with related persons are granted in conformity with market conditions, except the following: The bank is engaged to perform asset management activities for the MB Familienstiftung (Family Foundation) and its subsidiaries. The economic beneficiary of the foundation is A.A., a holder of a significant participation. The bank has waived any charges for brokerage, asset management, custody and account management. These would have amounted in 2015 to CHF 0.5 million (prior year CHF 0.4 million) of the standard commissions and charges of the bank. For mortgages, the bank charges members of the governing bodies and employees a maximum of 1% up to a maximum credit amount of CHF 1 million per borrower. Loans to members of governing bodies and to holders of significant participations as well as to their related parties and undertakings are only granted according to the generally accepted banking principles. Members of the bank s governing bodies perform regular banking operations at the same conditions that apply to the personnel. PwC 47

48 6.9 Information on the balance sheet ARB Holders of significant participations and groups of holders of participations with pooled voting rights ARB A5-80 The following hold participations with more than 5% of voting rights: ARB A (CHF million) Nominal % of equity Nominal % of equity With voting rights MB Familienstiftung, Zurich % % Alfred Muster, Zurich % - - Bernhard Muster, Bern % Alpha Investment Inc., New York % % Without voting rights None ARB A5-81 Note: In accordance with the principle of substance over form, both holders of direct and indirect participations are to be disclosed. ARB Own shares and composition of equity capital ARB A5-82 Own shares Average transaction price (CHF) No. of shares ARB A5-83 Own bearer shares as per ,920 + Additions 2, Disposals 3,120 2,480 ARB A5-94 Own bearer shares as per ,040 ARB A5-84 ARB 585 ARB A5-85 ARB A5-86 ARB A5-87 ARB A5-88 ARB A5-88 CO Own shares were treated at fair value during the year under review. The sale of own bearer shares resulted in a profit of CHF 1.2 million, which was credited to the statutory retained earnings reserve. The shares disposed of were regular own shares not held for trading purposes. There are no repurchase or disposal obligations or other contingent liabilities in relation to the sold and acquired own shares. Subsidiaries, joint ventures, affiliated companies and the foundations related to the bank do not hold any equity instruments of the bank. 1,685 bearer shares were reserved as of 31 December 2015 for equity-based compensation schemes. As of 1 January 2015, 3,570 bearer shares were reserved. The composition of the equity as well as the rights and restrictions in relation to the shares are described in appendix Error! Reference source not found., Bank s capital. Non-distributable reserves To the extent it does not exceed one-half of the share capital, the statutory retained earnings reserve may be used only to cover losses or for measures designed to sustain the company through difficult times, to prevent unemployment or to mitigate its consequences. There are no statutory limitations that apply to the distribution of the voluntary retained earnings reserve. PwC 48

49 6.9 Information on the balance sheet CHF m Non-distributable statutory capital reserve Non-distributable statutory retained earnings reserve Total non-distributable reserves ARB A5-89 All transactions with holders of participations in their capacity as such have been settled in cash and have not been offset against other transactions. Note: The following information is to be disclosed in true and fair view supplementary single-entity financial statements and consolidated financial statements: ARB A5-91 Reasons for and disclosure of the valuation basis of transactions with holders of participations that could not be recognised at fair value. ARB A5-92 Description of transactions with holders of participations that were not conducted at terms in line with the market, including disclosure of the difference recognised in the item Capital reserve between the fair value and the contractually agreed price of the transaction. PwC 49

50 6.9 Information on the balance sheet ARB Equity participations held by the governing body and compensation report ARB A5-93 CO 663c.3 Notes: This appendix concerns banks whose equity securities are listed on a stock exchange or similar institution. The disclosure requirements according to the Ordinance against Excessive Remuneration and art. 663c para. 3 CO also apply to organisations whose participation certificates are listed. According to art. 663c para. 3 CO the shareholdings in the company and the conversion and option rights held by each current member of the Board of Directors, executive management and board of advisers as of the year end must be disclosed. Additionally, any shares and options held by related parties of the members of the governing bodies must be disclosed. (No. of instruments) Board of directors Bearer shares Options Bearer shares Options A. A B. B C. C D. D Executive management E. E , ,224 F. F , ,506 G. G , ,366 H. H The information that has to be published according to the Ordinance against Excessive Remuneration (ERCO) shall be presented in a separate compensation report. The bank s compensation report is published on pages of this report. PwC 50

51 6.9 Information on the balance sheet ARB Maturity structure of financial instruments ARB 327 ARB 333 ARB 341 Note: Under the terms of art. 36 para. 1 BankO, where a financial group prepares and publishes consolidated financial statements and a group management report, the banks consolidated within the group are exempted from the requirement to include this component of the notes in their single-entity financial statements. Banks whose equity securities are listed (art. 36 para. 2 BankO) are not permitted to apply the exemptions above. (CHF million) At sight Cancellable Due within 3 months Due Due within 3 within 12 to 12 months months to 5 years Due after 5 years No maturity Total ARB A5-104 Assets/financial instruments Liquid assets Amounts due from banks ,658 1, ,573 Amounts due from securities financing transactions Amounts due from customers 486 5, , ,904 Mortgage loans ,965 7,484-10,328 Trading portfolio assets 1, ,383 Positive replacement values of derivative financial instruments Other financial instruments at fair value 1, ,392 Financial investments ,983 Total ,136 6,184 3,446 3,276 5,036 9, , ,433 5,481 2,641 2,883 4,909 8, ,799 Debt capital/financial instruments Amounts due to banks 1, ,526 Liabilities from securities financing transactions Amounts due in respect of customer deposits 4,277 5,992 3,409 1, ,094 Trading portfolio liabilities Negative replacement values of derivative financial instruments Liabilities from other financial instruments at fair value 1, ,438 Cash bonds , ,357 Bond issues and central mortgage institution loans ,186 2,177-4,849 Total ,672 6,188 3,969 2,681 5,619 2,348-28, ,707 5,815 2,281 2,510 4,794 2,991-25,098 PwC 51

52 6.9 Information on the balance sheet ARB Assets and liabilities by domestic and foreign origin ARB 221 ARB 327 ARB 334 ARB 341 ARB A5-110 Notes: Presentation of assets and liabilities by domestic and foreign origin in accordance with the domicile principle, provided at least 5% of the assets of the bank or financial group are domiciled abroad. The calculation is based on the average of the last three business years prior to the current period. Under the terms of art. 36 para. 1 BankO, where a financial group prepares and publishes consolidated financial statements and a group management report, the banks consolidated within the group are exempted from the requirement to include this component of the notes in their single-entity financial statements. Banks whose equity securities are listed (art. 36 para. 2 BankO) are not permitted to apply the exemptions above. The breakdown by domestic and foreign origin is made on the basis of the customer s domicile, with the exception of mortgage loans where the domicile of the property is the relevant criterion. Liechtenstein is deemed to be a foreign country. ARB A (CHF million) Domestic Foreign Domestic Foreign Assets Liquid assets Amounts due from banks 5, ,871 1,003 Amounts due from securities financing transactions Amounts due from customers 8,541 1,363 8,436 1,096 Mortgage loans 9,170 1,158 7,458 1,226 Trading portfolio assets 1, , Positive replacement values of derivative financial instruments Other financial instruments at fair value Financial investments 1, , Accrued income and prepaid expenses Participations Tangible fixed assets 1,273-1,405 - Intangible assets Other assets Capital not paid in Total assets 29,809 4,740 26,661 4,322 PwC 52

53 6.9 Information on the balance sheet (CHF million) Domestic Foreign Domestic Foreign Liabilities Amounts due to banks 1,084 1,442 1,231 1,087 Liabilities from securities financing transactions Amounts due in respect of customer deposits 12,816 2,278 9,988 3,106 Trading portfolio liabilities Negative replacement values of derivative financial instruments Liabilities from other financial instruments at fair value Cash bonds 3, , Bond issues and central mortgage institution loans 4,849-4,558 - Accrued expenses and deferred income Other liabilities Provisions , Reserves for general banking risks Bank s capital Statutory capital reserve Statutory retained earnings reserve Voluntary retained earnings reserves 2,635-2,539 - Own shares Profit carried forward Profit Total liabilities 29,149 5,400 25,546 5,437 PwC 53

54 6.9 Information on the balance sheet ARB Assets by country or group of countries ARB 222 ARB A5-111 ARB A5-113 ARB 327 ARB 335 ARB 341 Notes: Breakdown of total assets by country or group of countries (domicile principle), provided at least 5% of the assets of the bank or financial group are domiciled abroad. The calculation is based on the average of the last three business years prior to the current period; The level of detail in the breakdown by country/group of countries may be established by the bank at its own discretion. Model table 6 Geographic credit risk in FINMA circ. 08/22 Capital adequacy disclosure banks may be used instead of the following table Assets by country or group of countries. Under the terms of art. 36 para. 1 BankO, where a financial group prepares and publishes consolidated financial statements and a group management report, the banks consolidated within the group are exempted from the requirement to include this component of the notes in their single-entity financial statements. Banks whose equity securities are listed (art. 36 para. 2 BankO) are not permitted to apply the exemptions above. ARB A (CHF million) Absolute Share as % Absolute Share as % Switzerland 29, % 26, % Other Europe 2, % 3, % Germany 1, % 1, % Austria % % France % % Italy % % Principality of Liechtenstein % % Other countries % % North America % % USA % % Canada % % South America % % Brazil % % Argentina % % Other countries % % Asia 1, % % Japan % % Singapore % % Other countries % % Other % % Total assets 34, % 30, % PwC 54

55 6.9 Information on the balance sheet ARB Assets by credit rating of country groups ARB 223 ARB A7 ARB 223 ARB A5-114 Note: Breakdown of total assets by credit rating of country groups (risk domicile view), provided at least 5% of the assets of the bank or financial group are domiciled abroad. The calculation is based on the average of the last three business years prior to the current period. The breakdown of assets by credit rating of country groups is based on the risk relating to the underlying item and not the domicile of the debtor. For secured commitments, the risk domicile is determined taking into consideration the collateral. The bank analyses the country ratings of Standard & Poor s, Moody s and Fitch. Based on these agencies country ratings and an assessment of the current situation, the bank assigns an internal rating based on a five-level scale. By way of explanation, the table below presents the internal ratings compared with those of Standard & Poor s: ARB A5-114 Net foreign exposure Bank s own country rating Standard & Poor s rating Amount Share as % Amount Share as % (CHF m) (CHF m) 1 First class AAA to AA- 3, % 2, % 2 Good A+ to A % % 3 Average BBB+ to BBB % % 4 Speculative BB+ to B % % 5 Risk CCC+ and lower 1 0.0% 3 0.1% Total assets 4, % 3, % PwC 55

56 6.9 Information on the balance sheet ARB Assets and liabilities by the most significant currencies ARB 224 ARB A5-116 ARB 327 ARB 336 ARB 341 Notes: Presentation of assets and liabilities broken down by the most significant currencies for the bank or financial group, provided the total net position in foreign currencies exceeds 5% of the assets of the bank or financial group. The calculation is based on the average of the last three business years prior to the current period. The level of detail in the breakdown by currency may be established by the bank at its own discretion. Under the terms of art. 36 para. 1 BankO, where a financial group prepares and publishes consolidated financial statements and a group management report, the banks consolidated within the group are exempted from the requirement to include this component of the notes in their single-entity financial statements. Banks whose equity securities are listed (art. 36 para. 2 BankO) are not permitted to apply the exemptions above. ARB A (CHF million) CHF EUR USD Others Assets Liquid assets Amounts due from banks 5,192 1, Amounts due from securities financing transactions Amounts due from customers 8,096 2,195 1,808 - Mortgage loans 10, Trading portfolio assets Positive replacement values of derivative financial instruments Other financial instruments at fair value Financial investments 1, Accrued income and prepaid expenses Participations Tangible fixed assets 1, Intangible assets Other assets Capital not paid in Total assets shown in balance sheet 27,824 1,730 3,870 1,125 Delivery entitlements from spot exchange, forward forex and forex options transactions 5,054 4,181 1, Total assets 32,878 5,911 5,439 1,942 PwC 56

57 6.9 Information on the balance sheet (CHF million) CHF EUR USD Others Liabilities Amounts due to banks 1, Liabilities from securities financing transactions Amounts due in respect of customer deposits 9,468 3,580 1, Trading portfolio liabilities Negative replacement values of derivative financial instruments Liabilities from other financial instruments at fair value Cash bonds 4, Bond issues and central mortgage institution loans 4, Accrued expenses and deferred income Other liabilities Provisions Reserves for general banking risks Bank s capital Statutory capital reserve Statutory retained earnings reserve Voluntary retained earnings reserves 2, Own shares Profit carried forward Profit Total liabilities shown in the balance sheet 26,400 5,318 1, Delivery obligations from spot exchange, forward forex and forex options transactions 6, ,377 1,129 Total liabilities 32,967 5,779 5,363 1,974 Net position per currency PwC 57

58 6.10 Information on the off-balance-sheet business ARB Information on the off-balance-sheet business ARB Contingent liabilities and contingent assets ARB A5-117 ARB 327 ARB 337 ARB 341 Notes: Contingent liabilities and contingent assets where no reliable estimate is possible are not to be included in the table. Under the terms of art. 36 para. 1 BankO, where a financial group prepares and publishes consolidated financial statements and a group management report, the banks consolidated within the group are exempted from the requirement to include this component of the notes in their single-entity financial statements. Banks whose equity securities are listed (art. 36 para. 2 BankO) are not permitted to apply the exemptions above. ARB A5-117 (CHF million) Guarantees to secure credits and similar 1,274 1,339 Performance guarantees and similar Irrevocable commitments arising from documentary letters of credit Other contingent liabilities Total contingent liabilities 1,812 1,975 Contingent assets arising from tax losses carried forward 1 1 Other contingent assets - 2 Total contingent assets 1 3 ARB Credit commitments ARB 327 ARB 338 ARB 341 Note: Under the terms of art. 36 para. 1 BankO, where a financial group prepares and publishes consolidated financial statements and a group management report, the banks consolidated within the group are exempted from the requirement to include this component of the notes in their single-entity financial statements. Banks whose equity securities are listed (art. 36 para. 2 BankO) are not permitted to apply the exemptions above. ARB A5-119 (CHF million) Commitments arising from deferred payments 3 2 Commitments arising from acceptances (for liabilities arising from acceptances in circulation) 1 1 Other credit commitments 1 1 Total credit commitments 5 4 PwC 58

59 6.10 Information on the off-balance-sheet business ARB Fiduciary transactions ARB A5-120 (CHF million) Fiduciary investments with third-party companies Fiduciary investments with group companies and linked companies 3 - Fiduciary loans Fiduciary transactions arising from securities lending and borrowing, which the bank conducts in its own name for the account of customers Other fiduciary transactions Total fiduciary transactions ARB Managed assets ARB 229 Note: Breakdown of managed assets and presentation of their development. This information is to be disclosed if the balance of the items Commission income from securities trading and investment activities, and Commission expense is greater than one third of the items Gross result from interest operations, Result from commission business and services, and Result from trading operations and the fair value option. The calculation is based on the average of the last three business years prior to the current period. Type of managed assets ARB A5-121 (CHF million) Assets in collective investment schemes managed by the bank 55,350 52,071 Assets under discretionary asset management agreements 15,037 15,682 Other managed assets 9,307 9,697 Total managed assets (including double counting) 79,694 77,450 - of which, double counting -4,305-3,981 ARB A5-127 The managed assets disclosed include all client assets deposited at the bank with an investment character as well as client assets managed by the bank and held for safekeeping by a third-party bank. It does not include assets kept by the bank but managed by a third party (custody-only). Custody-only relates to banks and large fund companies (incl. their collective, investment and pension fund foundations) for which the bank acts exclusively as a custodian bank. Assets under discretionary asset management agreements comprise clients deposits for which the bank makes the investment decisions. Other managed assets include those for which the client makes the investment decisions. If products are developed in one business line but sold by another, they are double counted as both lines provide services to and generate income from their respective clients. PwC 59

60 6.11 Information on the income statement ARB A5-130 Development of managed assets Note: Disclosure of net new money inflows/outflows: when reporting this information for the first time, disclosure of the previous year figures is not mandatory. ARB A5-121 (CHF million) Total managed assets (including double counting) at beginning 77,450 76,352 +/- Net new money inflow or net new money outflow ,351 +/- Price gains/losses, interest, dividends and currency gains/losses +1,786-1,253 +/- Other effects Total managed assets (including double counting) at end 79,694 77,450 ARB A5-121 ARB A5-132 ARB 230 During the financial year, the bank assumed the managed assets from one Swiss bank and some smaller independent asset managers in the amount of CHF 810 million. These assets are disclosed in Other securities. The amount of net new money is calculated by determining the inflows and outflows of the managed assets based on transactions at client level. Interest and dividend income relating to the managed assets are not classed as new money inflows. Market and currency fluctuations, charges, commissions and charged interest payments are not included in the net new money Information on the income statement ARB Result from trading operations and the fair value option ARB 231 Note: Breakdown of the result from trading operations and the fair value option, provided the bank or financial group is not subject to the de minimis rule set out in FINMA circ. 08/20 Market risks banks (margin no. 49 ff.). ARB A5-133 Breakdown by business area (CHF million) Trading operations with corporate clients Trading operations with private clients Proprietary trading Other trading operations 1st 2 Total result from trading operations PwC 60

61 6.11 Information on the income statement ARB A5-133 Breakdown by underlying risk and based on the use of the fair value option (CHF million) Result from trading operations from: Interest rate instruments (including funds) 16 3 Equity securities (including funds) Foreign currencies Commodities/precious metals 3-4 Total result from trading operations of which, from fair value option o of which, from fair value option on assets 14 o of which, from fair value option on liabilities ARB Refinancing income and income from negative interest ARB A5-137 Refinancing income in the item Interest and discount income The refinancing costs for trading operations are not recorded as interest and discount income. ARB A3-10 ARB A3-19 Negative interest Negative interest on credit operations are disclosed as a reduction in interest and discount income. Negative interest on deposits are disclosed as a reduction in interest expense. ARB A5-137 (CHF million) Negative interest on credit operations (reduction in interest and discount income) 14 1 Negative interest on deposits (reduction in interest expense) 6 - ARB Personnel expenses ARB A5-138 (CHF million) Salaries (meeting attendance fees and fixed compensation to members of the bank s governing bodies, salaries and benefits) of which, expenses relating to share-based compensation and alternative forms of variable compensation 5 3 Social insurance benefits Changes in book value for economic benefits and obligations arising from pension schemes - - Other personnel expenses Total personnel expenses PwC 61

62 6.11 Information on the income statement ARB General and administrative expenses ARB A5-139 (CHF million) Office space expenses Expenses for information and communications technology Expenses for vehicles, equipment, furniture and other fixtures, as well as operating lease expenses 9 8 Fees of audit firm of which, for financial and regulatory audits of which, for other services - 1 Other operating expenses of which, compensation for guarantee by canton XY - - Total general and administrative expenses ARB Material losses, extraordinary income and expenses, material releases of hidden reserves, reserves for general banking risks, and value adjustments and provisions no longer required ARB 255 ARB A5-140 ARB 533 Note: Where the release of hidden reserves in any one accounting period is material, it is to be disclosed in the notes. The materiality of the aggregate release of hidden reserves is to be assessed in particular in relation to the disclosed equity and disclosed result of the period, as well as in relation to the effects on these amounts. A release amounting to at least 2% of the reported equity or 20% of the reported result of the period is as a rule deemed to be material. Material losses Besides the matters described under the item Extraordinary expenses, no material losses were incurred in the course of the financial year. Extraordinary income The extraordinary amount of CHF 57 million is mainly due to the sale of properties. Properties no longer required for business reasons with a net book value of CHF 115 million were sold in the course of the year under review, realising a gain of CHF 42 million. The sale of several equity participations resulted in proceeds from sales of around CHF 8 million. The equity of Zeta Immobilien AG, Basel, was impaired significantly in FY , therefore the bank reduced the book value to the estimated recoverable amount. Thanks to the realisation of significant proceeds from the sale of part of the property portfolio, the impairment of Zeta Immobilien AG s equity was reversed in the course of the financial year. The bank therefore increased the book value of its participation by CHF 6 million to restore it to the historical cost of CHF 8 million. This appreciation in value was booked in Extraordinary income. Extraordinary expenses A loss had to be assumed on a portion of the properties sold that amounted to CHF 42 million and was charged to the Extraordinary expenses. Material releases of hidden reserves No significant hidden reserves were released in the course of the financial year. Reserves for general banking risks The item Changes in reserves for general banking risks are used to record the creation of reserves for general banking risks in the amount of CHF 7 million. Value adjustments and provisions no longer required In 2013, provisions for other business risks were created in the amount of CHF 21 million to cover potential claims for damages relating to advisory services about alpha products. As the provision was no longer PwC 62

63 6.11 Information on the income statement needed after an agreement was reached with the claimant, this amount was released in the income statement via the item Changes in provisions and other value adjustments and losses. ARB Revaluation of participations and tangible fixed assets up to acquisition cost at maximum ARB A5-141 The equity participation in Zeta Immobilien AG, Basel, has been valued at the historical cost and an appreciation in value was recognised in the income statement. The details can be found in appendices Error! Reference source not found. and 36. ARB Operating result broken down according to domestic and foreign origin ARB 237 ARB A7 ARB 327 ARB 339 ARB 341 Notes: Presentation of the operating result broken down according to domestic and foreign origin, according to the principle of permanent establishment, provided the bank s business outside Switzerland is material; Definition Foreign business : Banks domiciled in Switzerland are deemed to have a foreign business if they have at least one branch or one company outside Switzerland required to be consolidated in accordance with art. 34 BankO. Under the terms of art. 36 para. 1 BankO, where a financial group prepares and publishes consolidated financial statements and a group management report, the banks consolidated within the group are exempted from the requirement to include this component of the notes in their single-entity financial statements. Banks whose equity securities are listed (art. 36 para. 2 BankO) are not permitted to apply the exemptions above. PwC 63

64 6.11 Information on the income statement ARB A (CHF million) Domestic Foreign Domestic Foreign Interest and discount income Interest and discount income from trading activities Interest and discount income from financial investments Interest expense Gross result from interest operations Changes in value adjustments for default risks and losses from interest operations Subtotal net result from interest operations Commission income from securities trading and investment activities Commission income from lending activities Commission income from other services Commission expense Subtotal result from commission business and services Result from trading operations and the fair value option Result from the disposal of financial investments Income from participations Result from real estate Other ordinary income Other ordinary expenses Subtotal other result from ordinary activities Personnel expenses General and administrative expenses Subtotal operating expenses Value adjustments on participations and depreciation and amortisation of tangible fixed assets and intangible assets Changes to provisions and other value adjustments, and losses Operating result PwC 64

65 6.11 Information on the income statement ARB Current and deferred taxes ARB A5-143 (CHF million) Expenses for current capital and income taxes Creation of provisions for latent taxes 11 7 Total taxes ARB A5-144 Average tax rate weighted on the basis of the operating result 22.7 % 23.5 % ARB A5-144 There are no tax losses brought forward that affect the income tax. ARB Earnings per equity security ARB 239 ARB A7 ARB 327 ARB 340 ARB 341 Notes: Disclosures and explanations of the earnings per equity security in the case of banks whose equity securities are listed. Definition Listed banks : Banking institutions whose equity and/or debt securities are listed or which have applied for listing and have prepared a listing prospectus for that purpose. Under the terms of art. 36 para. 1 BankO, where a financial group prepares and publishes consolidated financial statements and a group management report, the banks consolidated within the group are exempted from the requirement to include this component of the notes in their single-entity financial statements. Banks whose equity securities are listed (art. 36 para. 2 BankO) are not permitted to apply the exemptions above. ARB A Registered shares Bearer shares Participation certificates Registered shares Bearer shares Participation certificates Profit for the financial year (CHF) 209,121, ,928,357 Outstanding participation rights Time-weighted average number 800, , , , , ,000 Potential bearer shares from equity-based compensation schemes 7,841 6,476 Weighted average participation rights for diluted earnings per equity security 800, , , , , ,000 Result per equity security Undiluted Diluted The undiluted group profit per share and participation certificate is calculated from the profit for the financial year divided by the weighted average number of outstanding shares and participation certificates. The various nominal values of the bearer shares are taken into consideration. The dilution takes into account the potential impact of the bank s equity-based compensation schemes. PwC 65

66 D Report of the audit firm D. Report of the audit firm BankO 30 Report of the statutory auditor to the General Meeting of Musterbank AG Zurich Report of the statutory auditor on the financial statements As statutory auditor, we have audited the financial statements of Musterbank AG, which comprise the balance sheet, income statement, cash flow statement, statement of changes in equity and notes (pages 10 to 64), for the year ended 31 December Board of Directors responsibility The Board of Directors is responsible for the preparation of the financial statements in accordance with the requirements of Swiss law and the company s articles of incorporation. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements for the year ended 31 December 2015 comply with Swiss law and the company s articles of incorporation. PwC 66

67 D Report of the audit firm Report on other legal requirements We confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (art. 728 CO and art. 11 AOA) and that there are no circumstances incompatible with our independence. In accordance with art. 728a para. 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists which has been designed for the preparation of financial statements according to the instructions of the Board of Directors. We further confirm that the proposed appropriation of available earnings complies with Swiss law and the company s articles of incorporation. We recommend that the financial statements submitted to you be approved. PricewaterhouseCoopers Ltd A. Sample J. Doe Audit expert Auditor in charge Audit expert Zurich, 19 February 2016 PwC 67

68 Additional tools relating to FINMA circ. 15/1 Accounting - banks Additional tools relating to FINMA circ. 15/1 Accounting - banks In addition to these illustrative financial statements, PwC has developed various materials that can help you in implementing the revised financial reporting requirements: Disclosure checklists This checklist enables users to review whether the financial statements prepared in accordance with FINMA circ. 15/1 make full disclosure. The checklist is a complete and systematic list of the requirements of the Banking Ordinance, the FINMA circular and other regulatory documents relating to the disclosure requirements. PDF FINMA circ. 15/1 Accounting banks Disclosure checklist Recognition, recording and valuation checklist The financial reporting requirements applicable to banks and to securities dealers must be set out appropriately in the internal requirements, such as in the accounting manuals, accounting policies or group guidelines, so that the business transactions can be presented according to the financial reporting rules and disclosed in the financial statements. This checklist allows users to review the correct and complete regulation of the accounting, recognition, booking and valuation requirements in the financial statements prepared in accordance with FINMA circ. 15/1. PDF FINMA circ. 15/1 Accounting banks Recognition, recording and valuation checklist If you would like any of these materials, please ask your PwC contact or visit our website. PwC 68