Van Lanschot nv Financial Statements 2005

Transcription

1 Van Lanschot nv Financial Statements 2005

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3 Van Lanschot nv Financial Statements 2005

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5 3 Contents Financial statements 4 Consolidated Balance Sheet at 31 December Consolidated Income Statement for Shareholders Funds at 31 December Consolidated Cash Flow Statement for 2005 Notes 12 Summary of significant accounting principles 15 Summary of significant accounting policies 19 Financial Risk Management 25 Notes to the Consolidated Balance Sheet 48 Notes to the Consolidated Income Statement 54 Supplementary notes First-time adoption ifrs 66 Consolidated Balance Sheet at 1 January 2004 (ifrs) 67 Consolidated Balance Sheet at 1 January 2005 (ifrs) 73 Consolidated Balance Sheet at 1 January 2004 (Dutch gaap) 74 Consolidated Balance Sheet at 1 January 2005 (Dutch gaap) including changes on account of ias 32 and ias Statement of movements in Shareholders Funds Dutch gaap-ifrs 77 Comparison of Income Statement for 2004 ifrs- Dutch gaap Company financial statements 79 Accounting policies for the company financial statements 80 Balance Sheet at 31 December Income Statement 82 Notes to the Balance Sheet Other information 84 Auditors report 85 Profit appropriation

6 4 financial statements Consolidated Balance Sheet at 31 December 2005 In thousands of euros Assets * Cash and cash equivalents 1 52,165 92,166 92,166 Financial receivables from trading activities 2 221, , ,054 Banks 3 1,854,340 1,473,058 1,473,058 Investments 4 1,301,230 1,227,291 1,132,476 Loans and advances to the public and private sectors 5 13,540,856 12,686,489 12,661,543 Financial assets at fair value through profit or loss 6 342, ,522 81,957 Other financial assets 7 47,196 71,719 Investments in associates 8 18,393 20,695 19,587 Property, plant and equipment 9 187, , ,686 Goodwill and other intangible assets 10 59,387 56,090 56,090 Prepayments and accrued income , , ,641 Other assets , , ,116 Total assets 17,971,611 16,577,779 16,325,374 The number beside each item refers to the relevant note. * Excluding ias 32/39

7 5 consolidated balance sheet at 31 december 2005 Equity and liabilities * Financial liabilities from trading activities ,859 87,189 87,189 Banks , , ,122 Due to the public and private sectors 15 11,458,834 11,047,826 11,043,822 Financial liabilities at fair value through profit or loss , ,351 Other financial liabilities 17 29,668 22,128 Issued debt securities 18 3,197,815 2,515,178 2,510,212 Subordinated loans , , ,381 Provisions 20 89, , ,302 Accruals and deferred income , , ,428 Other liabilities 22 52, , ,790 16,692,301 15,567,409 15,468,246 Share capital 32,372 32,372 37,372 Share premium 135, , ,202 Reserves 645, , ,774 Perpetual loans 312, ,000 Undistributed profit 152, , ,780 Shareholders funds 23 1,279,310 1,010, ,128 Total equity and liabilities 17,971,611 16,577,779 16,325,374 Contingent liabilities , , ,000 Irrevocable commitments , , ,527 1,042,425 1,192,527 1,192,527 * Excluding ias 32/39

8 6 financial statements Consolidated Income Statement for 2005 In thousands of euros Income from operating activities * Interest income 871, ,501 Interest expense 585, ,632 Interest , ,869 Income from securities and associates 27 20,453 16,582 Commission income 177, ,849 Commission expense 10,922 7,196 Commission , ,653 Profit on financial transactions 29 12,642 20,774 Total income from operating activities 485, ,878 Expenses Staf costs , ,039 Other administrative expenses 31 83,904 87,008 Staf costs and other administrative expenses 258, ,047 Depreciation and amortisation 32 20,152 17,634 Operating expenses 278, ,681 Value adjustments to receivables 33 16,874 16,584 Total expenses 295, ,265 Operating profit before tax 190, ,613 Income tax 34 38,127 25,833 Net profit 152, ,780 Earnings per share in euros Diluted earnings per share in euros * Excluding ias 32/39

9 7 Shareholders Funds at 31 December 2005 In thousands of euros * Issued share capital Balance sheet at 1 January 2005 before ifrs conversion ias 32/39 37,372 ifrs fta (ias 32/39) 5,000 Balance sheet at 1 January 32,372 33,972 Issue of depositary receipts 3,400 Balance sheet at 31 December 32,372 37,372 Share premium account Balance sheet at 1 January 2005 before ifrs conversion ias 32/39 176,202 ifrs fta (ias 32/39) 40,400 Balance sheet at 1 January 135,802 40,202 Share issue 136,000 Balance sheet at 31 December 135, ,202 Revaluation reserve Balance sheet at 1 January 2005 before ifrs conversion ias 32/39 6,517 ifrs fta (ias 32/39) 27,188 Balance sheet at 1 January 33,705 2,231 Revaluation of investments 26,448 Revaluation of associates 220 4,286 Balance sheet at 31 December 60,373 6,517 Other shareholders funds components Balance sheet at 1 January 2005 before ifrs conversion ias 32/39 ifrs fta (ias 32/39) 109 Balance sheet at 1 January 109 Upward value adjustments of derivatives taken directly to equity 1,048 Downward value adjustments of derivatives taken directly to equity 3,268 Balance sheet at 31 December 2,111 * Excluding ias 32/39

10 8 financial statements * Other reserves Balance sheet at 1 January 2005 before ifrs conversion ias 32/39 536,257 ifrs fta (ias 32/39) 6,345 Balance sheet at 1 January 542, ,792 ifrs adjustments ,439 Employee stock option costs 2,656 Net profit 2004/ , ,259 Dividend 2004/ ,066 73,020 Repurchase of own shares for options 30,147 5,561 Sale of shares 10,250 Exercise of stock options 14,883 8,210 Other movements 177 3,405 Revaluation of associates 3,829 Balance sheet at 31 December 587, ,257 Perpetual loans Balance sheet at 1 January 2005 before ifrs conversion ias 32/39 ifrs fta (ias 32/39) 165,000 Balance sheet at 1 January 165,000 Issue of perpetual loans 150,000 Movement in own position 2,055 Balance sheet at 31 December 312,945 Undistributed profit Balance sheet at 1 January 2005 before ifrs conversion ias 32/39 100,780 Balance sheet at 1 January 100, ,259 Added to other reserves 100, ,259 Profit for the financial year 152, ,780 Balance sheet at 31 December 152, ,780 * Excluding ias 32/39

11 9 Consolidated Cash Flow Statement for 2005 In thousands of euros * Operating profit before tax 190, ,613 Cash flow from operating activities Adjustments for Depreciation and amortisation 20,152 17,634 Value adjustments to receivables 16,874 16,584 Income from securities and associates 20,453 16,582 Cash flow from operating activities 207, ,249 Net increase/(decrease) in operating assets and liabilities Movement in financial receivables/liabilities from trading activities 36,717 52,632 Movement in financial receivables/liabilities at fair value 1,194 1,104 Movement in banks 28, ,243 Movement in public and private sectors 443, ,385 Movement in provisions 46,248 35,026 Movement in other assets and liabilities 159,256 13,194 Movement in accrued and deferred assets and liabilities 58,013 34,937 Movement in financial assets and liabilities 32,063 Total movement in assets and liabilities 740, ,207 Income taxes paid 58,669 1,038 Net cash flow from operating activities 592, ,920 Cash flow from investing activities Investments and acquisitions Investments 273, ,441 Investments in associates 10,625 13,446 Property, plant and equipment 24,239 38,335 Intangible assets 6,935 56,705 Divestments, repayments and disposals Investments 199, ,041 Investments in associates 12,927 4,625 Property, plant and equipment 9,399 7,403 Profit of associates/shareholdings and investment portfolio shares 7,261 9,836 Dividends received from associates and shareholdings 13,192 6,746 Net cash flow from investing activities 72, ,276 * Excluding ias 32/39

12 10 financial statements Cash flow from financing activities Increase in share capital 3,400 Other movements in group equity 11, ,512 Perpetual loan 147,945 Additions to subordinated loans 199, ,271 Repayments on subordinated loans 55,605 11,153 Additions to debt securities 764,282 1,165,046 Repayments on debt securities 81, Cash dividend paid 43,066 73,020 Net cash flow from financing activities 943,023 1,382,025 Net increase in cash and cash equivalents 277, ,829 Cash and cash equivalents at 1 January 1,150, ,689 Cash and cash equivalents at 31 December 1,428,162 1,150,518

13 11 Notes

14 12 notes Summary of significant accounting principles General The consolidated financial statements at 31 December 2005 of Van Lanschot nv were finalised by the Board of Managing Directors on 22 March 2006 and will be submitted to the shareholders at the General Meeting of Shareholders of 10 May 2006 for adoption. Van Lanschot nv is a company incorporated and established in the Netherlands whose depositary receipts for shares are publicly traded. Basis of preparation The consolidated financial statements of Van Lanschot nv and its subsidiaries are prepared in accordance with International Financial Reporting Standards (ifrs) as adopted by the European Union (eu). ifrs 1 (First-time adoption of ifrs) applies to these consolidated financial statements in connection with the first-time adoption of ifrs. All amounts are in thousands of euros, unless stated otherwise. Financial assets and liabilities included in the consolidated financial statements are measured at amortised cost, unless stated otherwise. Amortisation is calculated using the efective interest rate method, a method of calculating amortised cost and allocating interest income and expense over the relevant periods. Non-financial assets and liabilities are measured at historical cost. First-time adoption of ifrs Van Lanschot applies ifrs with efect from 1 January The transition date is 1 January Comparative figures for 2004 have been restated accordingly. In doing so, the bank has opted for the exemption permitted with respect to ias 32 and ias 39; 2004 figures have not been restated for the efect of these standards. A summary of the major changes compared with Dutch gaap is provided below; the efect on shareholders funds and net profit is set out in the statements of movements on pages 66 and further of the notes to the financial statements. Perpetual capital securities, treated as subordinated loans under Dutch gaap, are classified as equity under ifrs in part because management has control over whether or not dividends are distributed. Preference A shares on the other hand were treated as equity under Dutch gaap, whereas ifrs classifies them as debt on account of the lack of control over the payment of dividends. Goodwill paid was charged to equity under Dutch gaap, but is capitalised under ifrs as from 1 January In principle goodwill paid has an indefinite life but it is tested for impairment annually. A number of general provisions and the deferred option premiums classified under other liabilities have been released as a result of the transition to ifrs. The individual provisions were also restated in accordance with ifrs. Van Lanschot has carried out a collective assessment of a number of loan portfolios for diminutions in value that cannot be identified individually. Furthermore, a collective assessment was performed for diminutions in value already incurred but not yet reported to the bank. A number of commission items taken directly through profit or loss under Dutch gaap form part of the amortised cost of financial assets or liabilities under ifrs and have been taken to the balance sheet. Under Dutch gaap hedging derivatives were recognised as ofbalance sheet instruments. Under ifrs derivatives are valued at fair value and recognised in the balance sheet. Financial instruments in the trading portfolio were determined by reference to mid-prices under Dutch gaap, but ifrs requires the use of bid/ofer valuation techniques. Under Dutch gaap penalty interest received was recognised in the balance sheet and amortised over the fixed-interest term of the redeemed loan. Under ifrs penalty interest is recognised directly in the income statement. The penalty interest included in the balance sheet at 31 December 2004 was taken to equity. In accordance with ifrs provisions for expected postemployment staf benefits have been recognised in the balance sheet. Examples of these benefits are pensions and health insurance contributions after the retirement date. These future contributions are calculated on an actuarial basis. Under Dutch gaap interest-bearing securities in the investment portfolio were stated at redemption value. Under ifrs the investment portfolio is classified as available for sale, based on fair value. The fair value of these investments on the transition date amounted to million as against a redemption value of under Dutch gaap. Under ifrs the shares and shareholdings in the investment portfolio are carried at fair value. Van Lanschot uses bid/ofer prices if available. Under Dutch gaap, the shares were valued at midprices. The total value under ifrs at 1 January 2005 amounted to million. Contrary to Dutch gaap, dividend is recognised when made payable under ifrs. Van Lanschot values property for own use at cost, net of impairments, unlike the fair value applied under Dutch gaap. Van Lanschot has opted for the possibility ofered in ifrs to designate the fair value of bank premises at 1 January 2004 as cost. Van Lanschot has designated fair value totalling 65.6 million as cost, resulting in an increase of cost of 14.2 million. Long positions in Van Lanschot securities were removed from the item interest-bearing securities and deducted from debt securities. In addition to the aforementioned changes, the transition to ifrs also led to a number of reclassifications in the balance sheet. Short positions of securities and shares in the trading portfolio were removed from other liabilities and recognised as financial liabilities from trading activities. Van Lanschot applies the 10% corridor for employee benefits. In accordance with ifrs, the corridor was set at nil at the ifrs implementation date (1 January 2004).

15 13 summary of significant accounting principles Accounting treatment of financial instruments; comparative figures 2004 Van Lanschot applied ifrs to derive the comparative figures, except for financial instruments (ias 32 and ias 39) which were valued in accordance with Dutch gaap for the comparative figures The most important accounting policies for financial instruments under Dutch gaap are stated below. Interest-bearing securities Interest-bearing securities forming part of the investment portfolio are carried at redemption value net of any required impairments in value. The diference between the redemption value and cost of these securities is accounted for under accrued and deferred assets and liabilities and taken to interest income over the term to maturity. Interest-bearing securities in the trading portfolio are carried at fair value. The fair value is the mid-price at the balance sheet date. Short positions are included under Other liabilities. Shares Shares forming part of the investment portfolio are carried at fair value; movements in value are taken to a revaluation reserve kept for that purpose. Downward value adjustments below cost are taken directly to the income statement. Shares forming part of the trading portfolio are carried at fair value, the fair value being the mid-price at the balance sheet date. Value adjustments are recognised under Profit on financial transactions in the income statement. Short positions are recognised under Other liabilities at fair value. Derivatives Derivative contracts entered into to hedge risks are accounted for in line with the accounting treatment of the item concerned. Other financial instruments are carried at market value. Resulting exchange and price diferences are taken to the income statement. Upfront commission Upfront commission is recognised directly in profit. Any upfront commission paid is charged directly to the income statement. Basis of consolidation The consolidated financial statements of Van Lanschot nv comprise the financial statements of F. van Lanschot Bankiers nv and its subsidiaries. The financial statements of F. van Lanschot Bankiers nv and its subsidiaries are prepared at 31 December, using consistent accounting policies. The financial year of F. van Lanschot Bankiers nv and its subsidiaries is the same as the calendar year. Intra-group transactions are eliminated for consolidation purposes. Subsidiaries are consolidated from the date of incorporation or acquisition, being the date on which Van Lanschot obtains control, and continue to be consolidated until the date that such control ceases. Investments in associates in which at least 20% of the voting rights can be exercised are recognised in accordance with the equity method unless stated otherwise. Under the equity method, the investment is initially carried at cost, while future profits and changes in equity are accounted for proportionally. Segmented information The diferent business segments form the basis for Van Lanschot s primary segmentation. A business segment is a business unit that provides similar services subject to risks and returns that difer from those of other business segments. Van Lanschot s business units are Private banking, Business banking, Healthcare, Insurance and Other activities. The secondary segmentation basis is geographical, based on where the business unit is located. Van Lanschot s geographical segments are the Netherlands, Belgium and Other. Significant accounting judgments and estimates Impairment Van Lanschot assesses at each balance sheet date whether there is objective evidence that assets not valued at fair value through profit or loss are impaired. Impairments are determined on the basis of the diference between the carrying value and the discounted expected future cash flows. For financial assets, including loans, carried at amortised cost, Van Lanschot uses the original efective yield of the assets as the discount rate. Impairments are initially determined individually. Other financial assets are collectively assessed at portfolio level. In the case of a loss event the impairment resulting from the collective assessment is determined based on contractually agreed cash flows and historical experience with respect to credit losses on assets with equivalent credit characteristics. If current circumstances give rise to adjustment of historical experience, the efects of these circumstances are taken into account in the calculations. Non-financial assets are tested for impairment annually by assessing whether there are any indications that these assets are impaired. An impairment is the amount by which the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the higher of the fair value of an asset less costs to sell and its value in use. The value in use is based on the appraisal report prepared by a certified expert. To determine whether assets are impaired the individual assets are allocated to the lowest level in which cash flows can be identified (cash-generating units). Non-financial assets, other than goodwill, that were subject to impairment are reviewed at each balance sheet date to see whether the impairment can possibly be reversed. Impairments are recognised in the income statement. If a receivable is permanently uncollectable, it is written of and charged to the relevant balance sheet item. The impairment provision previously formed is then released to the relevant balance sheet item. If uncollectable receivables generate cash flows after having been written of these are taken directly to the income statement.

16 14 notes Estimation uncertainty In the process of applying Van Lanschot s accounting policies estimates and assumptions are made which have a significant impact on the amounts recognised in the financial statements. The estimates and assumptions are based on the most recent information available. Actual amounts in the future can difer from the estimates and assumptions. Fair value of derivatives and other financial instruments The fair value of financial instruments not traded in an active market (e.g. otc derivatives) is determined based on cash flow and option valuation models. On the basis of estimates made Van Lanschot selects a number of methods and defines assumptions that are primarily based on the market situation as at the balance sheet date. Van Lanschot has applied analyses based on discounted cash flow models for financial instruments with value adjustments through profit or loss and other financial assets and liabilities not traded in an active market. Foreign currencies The consolidated financial statements are presented in euros, which is Van Lanschot s functional and reporting currency. Each entity in the group determines its own functional and reporting currency and items included in the financial statements of each entity are measured using that currency. Transactions in foreign currencies are initially recorded at the exchange rate of the functional currency ruling at the date of the transaction. Assets and liabilities denominated in foreign currencies are translated at the functional currency rate of exchange ruling at the balance sheet date. All diferences are taken to the income statement. Recognition of financial assets The purchase or sale of financial assets classified as held to maturity, available for sale or held for trading that are settled in accordance with regular market practice are recognised on the date on which Van Lanschot commits itself to buy or sell the asset. Loans and deposits on the other hand are recognised on the settlement date. Derecognition of financial assets Financial assets are derecognised when: Van Lanschot s rights to the cash flows from the asset expire; Van Lanschot has transferred substantially all the risks and rewards; Van Lanschot no longer retains control over the assets nor has retained substantially all risks. If Van Lanschot has transferred control over the financial asset and has retained significant risks, it is recognised in the balance sheet to the extent that Van Lanschot is subject to changes in the value of the asset. Netting financial assets and liabilities Financial assets and liabilities are netted and the net amount reported in the consolidated balance sheet when Van Lanschot has a legally enforceable right to ofset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

17 15 Summary of significant accounting policies Cash and cash equivalents Cash and cash equivalents in the balance sheet comprise all legal tender and balances withdrawable on demand with central banks in the countries where the bank is represented. For the purpose of the consolidated cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, as well as the balances withdrawable on demand with other banks. Financial receivables from trading activities Financial receivables from trading activities consist of the trading portfolio shares, bonds, long option position for clients and derivatives. The financial receivables from trading activities are recognised at fair value with efect from the trade date and value adjustments are taken to the income statement under the item Profit on financial transactions. Financial assets and liabilities at fair value through profit or loss Financial assets and liabilities at fair value through profit or loss comprise financial instruments which, in the opinion of management, should be recognised at fair value through profit or loss on the basis of one of the following reasons: 1 It eliminates or substantially reduces inconsistencies in valuation and recognition which would otherwise arise as a result of assets being valued or income and expense being recognised under diferent policies. 2 The performance of the relevant financial assets or liabilities is assessed based on their fair values, in accordance with a documented risk management or investment strategy. Reports to management are based on fair value. 3 The contract in which the financial instrument is included contains one or more embedded derivatives and the entire contract is recognised in the income statement at fair value. This is only permitted provided that: a the embedded derivative has significant influence on the contractually agreed cash flows, or b it is abundantly clear upon initial recognition of the financial instrument that it is not permissible to separate the embedded derivative (e.g. early redemption option at amortised cost). Other financial assets and liabilities Other financial assets and liabilities are carried at fair value and movements in value are taken to the income statement. The item mainly comprises derivatives included in a hedge accounting model. and foreign exchange movements in monetary items are taken directly to the income statement. Valuation methods are used to determine the market value of the shareholdings for which no stock exchange price is available. The shareholder value is derived in this way. The valuation methods used are: Peer group analysis The market value of shareholdings is determined with reference to a peer group. A peer group is a group of listed companies whose business characteristics and activities are comparable. Capitalisation method Under the capitalisation method the value of a shareholding is determined by multiplying the normalised operating profit (ebit) and the normalised operating profit before depreciation and amortisation (ebitda) by a factor commonly used in the market. Capitalised earnings method Under the capitalised earnings method the value of a shareholding is determined by discounting the normalised net profit to its present value using a required return on equity, taking the expected growth rate of the company into account. Net present value method Under the net present value method the value of a shareholding is determined by discounting the projected operating cash flows for the years and a final value based on the normalised operating profit. The capitalised earnings value is used to calculate the fair value of the cumulative preference shares. The capitalised earnings value is derived from the projected annual dividend distribution compared with the capital market interest rate as at the valuation date, taking a risk mark-up into account. Upon realisation of an available for sale share, the revaluation reserve accrued is released to the income statement under Income from securities and associates. Upon realisation of an available for sale bond, the revaluation reserve accrued is released to the income statement under Interest. Banks and Loans and advances to the public and private sectors Banks and Loans and advances to the public and private sectors are recognised at amortised cost using the efective interest method. The efective interest method is a method of calculating amortised cost and allocating interest income and interest expense over the relevant periods. Investments Investments in shares, bond and shareholdings are included under Investments. Investments are classified as available for sale and are initially recognised at cost including transaction costs plus any changes in the fair value of the investment after its acquisition. Movements in value are taken to a revaluation reserve that forms part of equity. Diminutions in value as a result of impairment Investments in associates Associates are entities over which Van Lanschot has significant influence but not control (generally a shareholding of between 20% and 50%). Associates are recognised in the financial statements in accordance with the equity method of accounting. Van Lanschot s share in the movement of shareholders equity of the associate is taken to the statement of movements in

18 16 notes shareholders funds. This also applies to the results of associates which are recognised in Van Lanschot s profit. Property, plant and equipment Property, plant and equipment comprises property held for own use, information technology, equipment and communication and safety equipment. Property, plant and equipment held for own use is initially carried at cost less accumulated depreciation and accumulated impairments in value. The carrying value includes the costs for replacement of part of the existing object as soon as these costs are incurred, but is exclusive of day-to-day servicing costs. Depreciation is calculated on a straight-line basis over the useful lives of the assets concerned. Estimated useful life of property, plant and equipment in years Expected useful life of intangible assets in years Client base Business Banking 10 Client base Private Banking & Healthcare 15 Third-party distribution channels 20 Agents contracts 20 Deposits and current account balances 10 Application software 3-5 Financial liabilities from trading activities Financial liabilities from trading activities are carried at fair value and movements in value are taken through profit or loss. This item comprises short positions for trading portfolio shares, bonds and derivatives, which are recognised with efect from the date on which the contract is concluded. Land Indefinite Buildings 40 Alterations 15 Operating software and it 3-5 Communication equipment 15 Safety equipment 15 Equipment 5 Operating software development costs are capitalised if they meet the criteria regarding identifiability, likelihood that future economic benefits will flow to Van Lanschot and costs can be measured reliably. Due to the public and private sectors This item is carried at amortised cost using the efective interest method. Issued debt securities and subordinated loans Issued debt securities and subordinated loans are carried at amortised cost. Purchases by Van Lanschot of own debt securities and subordinated loans are set of in the consolidated financial statements against the liability; the diference between cost and the carrying amount is taken to the income statement. If these are re-issued, the diference between the carrying amount and the issue price is recognised in the income statement. Goodwill and other intangible assets Goodwill is included in the financial statements at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying value may be impaired. Impairment is determined by assessing the recoverable amount of the cashgenerating unit to which the goodwill relates. A cash-generating unit s recoverable amount is the higher of its fair value less costs to sell and its value in use. Owing to the absence of a market for separate cash-generating units, Van Lanschot is unable to calculate a reliable fair value less costs to sell per cash-generating unit. Therefore, the recoverable amount is equal to the value in use. The value in use is determined by discounting the future cash flows generated by a cashgenerating unit to their net present value. If the recoverable amount of a cash-generating unit is lower than the carrying amount of the cash-generating unit concerned, goodwill is impaired. Other intangible assets, such as application software, client relations, contractual rights and the value of acquired funds entrusted and loans and advances, are capitalised at cost and amortised on a straight-line basis over their respective useful lives. Provisions Provision for pensions Van Lanschot operates defined benefit plans and defined contribution plans. Under defined contribution plans, contributions to pension funds are taken to the income statement as staf costs. Van Lanschot has no further payment obligations with respect to defined contribution plans once the contributions have been paid. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement. Factors such as age, years of service and salary are taken into account when determining amounts to be paid. The provision for defined benefit plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised gains or losses and past service costs. The pension obligation is calculated with reference to the expected return on plan assets. Neither diferences between the expected and actual return on plan assets nor actuarial gains and losses are recognised in the income statement, unless the total of these accumulated diferences and gains and losses falls outside the 10% corridor of the greater of the pension benefit obligations and the fair value of the corresponding plan assets. The portion that falls outside the corridor is taken through profit or loss over the remaining years of service of the participants.

19 17 summary of significant accounting policies Provision for healthcare costs Van Lanschot operates a health insurance scheme under which retired employees receive compensation. The compensation is calculated on an actuarial basis and recognised in the balance sheet as a provision. Provision for employee rebates Van Lanschot has facilities in place under which retired employees are granted rebates on, for example, their mortgage interest rates. The rebates are calculated on an actuarial basis and recognised in the balance sheet as a provision. Provision for jubilee benefits On the occasion of being in service for 10, 20, 30 and 40 years employees receive a bonus. Furthermore, receptions are organised for employees who have been in service for 25 and 40 years. These benefits are calculated on an actuarial basis and recognised in the balance sheet as a provision. Other provisions A provision is a liability of uncertain timing or amount. A provision is recognised when Van Lanschot has an obligation, it is likely that an outflow of resources will be required to settle the obligation and the amount of the obligation can be reliably estimated. Deferred taxes Deferred taxes are recognised in the balance sheet for temporary diferences between the carrying amount of an asset or liability and its tax base. Deferred tax assets are recognised under Other assets and deferred tax liabilities under Provisions. Deferred taxes are calculated using enacted tax rates that will apply at the time the deferred taxes are to be realised. Deferred tax assets and liabilities are set of when they relate to the same tax authority, the same type of tax, it is permitted under law to set of these deferred taxes and the taxes are expected to be settled simultaneously. Deferred taxes are recognised at their non-discounted value. Changes in the value of investments classified as available for sale and movements in the value of derivatives forming part of a cash flow hedge are recognised in equity net of deferred tax. Deferred tax is taken to the income statement at the same time as the movement in value. Classification as debt or equity Financial instruments, or the individual components of the instrument, are classified as debt or equity in accordance with economic substance. Preference A shares Van Lanschot are viewed as debt. These preference A shares Van Lanschot were cancelled as of 1 January The perpetual capital securities that Van Lanschot issued on 29 October 2004 and 15 December 2005 are considered to be equity. Derivatives Derivatives in the trading book are recognised in the category Financial receivables (positive fair value) or liabilities (negative fair value) from trading activities. Hedging derivatives are included in the category Other financial assets or liabilities at fair value if hedge accounting is applied. If hedge accounting is not applied the hedging derivatives are recognised under Financial assets or liabilities at fair value through profit or loss. The initial recognition is at fair value on the date the contract is entered into. After initial recognition the derivative is subsequently remeasured at fair value and movements in value are taken to the income statement under Profit on financial transactions. Fair values are based on stock exchange prices, cash flow models and (option) valuation models. Hedge accounting Van Lanschot uses derivatives to hedge its exposure to risks. The carrying amount of assets and liabilities that are hedged through fair value hedging and that would otherwise be recognised at cost is adjusted for movements in the fair value that can be allocated to the hedged risks. Any gains or losses arising from changes in the fair value of derivatives not relating to the hedged risks are taken directly to the income statement. At the inception of a hedge transaction, Van Lanschot formally designates and documents the hedge relationship and the risk management objective and policy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how Van Lanschot will assess the hedging instrument s efectiveness in ofsetting the exposure to risks. Such hedges are expected to be highly efective. The efectiveness is assessed on a monthly basis to determine that the hedge has been highly efective throughout the financial reporting periods for which it was designated. Hedges which meet the strict criteria for hedge accounting are accounted for as follows. Fair value hedging Fair value hedges are hedges of the exposure to changes in the fair value of an asset or liability arising as a result of interest rate changes. Movements in the value of the hedging instrument are taken to the income statement. Insofar as the hedging instrument is efective, the hedged position or transaction is adjusted for the same amount and the amount is also recognised in the income statement. Micro fair value hedging Micro fair value hedge accounting individually links a hedged item and a hedging instrument. Hedged items comprise debt securities, subordinated loans and deposits in particular. Swaps are used as hedging instruments. Portfolio fair value hedging Portfolio fair value hedge accounting links a portfolio of hedged items and a hedging instrument. The portfolio of hedged items comprises guarantee mortgages and the hedging instruments are caps entered into to hedge the interest rate risk. Cash flow hedging Cash flow hedges are a hedge of the exposure to variability in cash flows of an asset, liability or a future transaction

20 18 notes arising as a result of interest rate movements. The portion of the gain or loss on the hedging instrument which was established to be an efective hedge is recognised directly in equity until the hedged item afects the income statement, while the inefective portion is recognised in profit or loss. Micro cash flow hedging Micro cash flow hedge accounting individually links a hedged item and a hedging instrument. Hedged items comprise debt securities and deposits in particular, whereas the hedging instruments are swaps. Embedded derivatives are treated as separate derivatives when their economic characteristics are not closely related to those of the financial host contract. The embedded derivative is treated separately if the host contract is not carried at fair value through profit or loss. An interest rate option in a mortgage that determines the ceiling or floor of the interest rate payable is an example of a closely related embedded derivative. An interest payment and redemption linked to a share index is an example of a derivate that is not closely related. If the hedging instrument expires or is sold, or if it can no longer be designated as a hedge, accumulated gains and losses remain in equity until the expected future transaction is taken to the income statement. If the expected future transaction is not expected to occur, the accumulated result is transferred directly from equity to profit or loss. Leases Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term. Share-based payment transactions Employees receive remuneration in the form of share-based payment transactions, whereby employees render certain services as consideration for equity instruments. The cost of equity-settled transactions with employees is measured by reference to the fair value at the date on which they are granted. The fair value is determined using a binomial model. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, in the period in which the performance is fulfilled, ending on the date on which the relevant employees become fully entitled to the award ( the vesting date ). Revenue recognition Revenue is recognised insofar as it is likely that the economic benefits will flow to Van Lanschot and revenue can be measured reliably. life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the efective interest rate, Van Lanschot takes into account all contractual terms of the financial instrument (for example, prepayment options) but not future losses due to uncollectable amounts. Commission Van Lanschot receives commission for the wide range of services it provides to clients. There are two types of commission: commission on a transaction basis and periodic commission charged to the client during the year. Commission on a transaction basis Commission income on a transaction basis is recognised in the periods in which Van Lanschot provides the services. Transaction commission for which Van Lanschot only provides a service on the transaction date (e.g. securities commission) is taken directly to the income statement. Transaction commission for which Van Lanschot has to provide a service in the future (e.g. commission for mortgages) forms part of amortised cost and is recognised in the income statement over the expected term of the asset. Periodic commission Periodic commission (e.g. management fees) is recognised in the income statement in the period in which the services are provided. Dividend Dividends receivable are recognised in the income statement when made payable. Taxes Tax on operating profit is recognised in the income statement in accordance with applicable tax law in the jurisdictions in which Van Lanschot operates. Tax efects of any losses incurred in a jurisdiction are recognised as assets when it is probable that sufficient future profits will be available in the relevant jurisdiction against which these losses can be set of. Earnings per share Earnings per share are calculated by dividing the profit for the year available to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share are calculated by dividing the profit available to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period, adjusted for possible dilution as a result of outstanding option rights for example. Interest Interest income and expense is recognised in the income statement using the efective interest method. The efective interest rate is the rate that exactly discounts estimated cash flows over the

21 19 Financial Risk Management Risk management has become an increasingly important factor of Van Lanschot s activities. The bank strives for a low risk profile to limit the efect of unexpected events on both equity and profit. The bank s risk management systems are in place to identify and analyse risks at an early stage and to set and monitor responsible limits. Adequate internal control procedures and reporting systems, including the application of appropriate limits and their constant supervision by means of reliable information systems, are key elements in the bank s risk management. Risk management is an ongoing process that hinges on the quality and commitment of employees and management. The bank therefore continually refines both its policy and its systems to meet changing market and other demands. New products are subject to a new product approval procedure before Van Lanschot introduces them. As part of that procedure an analysis is performed to clearly chart the risks run by the bank and its clients before the product is introduced. Organisation Under supervision of the Supervisory Board, the Board of Managing Directors determines the risk strategy, policy assumptions and limits. The Supervisory Board regularly assesses the risks related to the bank s activities and portfolio. The Credit Risk Management department is responsible for managing the credit risks at item and portfolio levels. The Operational & Market Risk Control department focuses on Asset & Liability Management, Market Risk, Information Risk, Operational Risk Control, Client Due Diligence and the Internal Control Structure. A number of committees operating within the bank continually monitor the identified risks and assess the efectiveness of measures to limit those risks. The members of the Board of Managing Directors have a seat on these committees or keep abreast of their proceedings by way of the reports provided to them. Additionally, Group Audit systematically assesses the efectiveness of controls and reports thereon to the Board of Managing Directors and the Audit & Compliance Committee (comprising members of the Supervisory Board). Van Lanschot s financial instruments are subject to a number of risks Market risk Credit risk Liquidity risks Market risk Market risk is the risk of loss as a result of changes in market variables, including objective variables such as interest rates, exchange rates and share prices. Furthermore there are variables that are not necessarily objective, such as volatility and correlations. The Asset & Liability Committee (alco), on which all members of the Board of Managing Directors have a seat in addition to specialists and the general managers involved, is responsible for managing interest rate, market and liquidity risks and supervising compliance with the relevant guidelines. The Committee meets on a monthly basis. Guidelines, procedures and limits have been established to limit the efect of the risks referred to above on the bank s results. In addition, this Committee is responsible for the bank s policy with regard to the balance sheet structure, capital ratios and funding, and for implementing the decisions that are made in that respect. The Commercial Meeting, which meets once every two weeks and on which members of the Board of Managing Directors likewise have a seat, discusses financial market developments and their potential impact on the bank s pricing policy. Van Lanschot uses the Value at Risk (VaR) method and stress testing, among other methods, to calculate and limit market risks. VaR is an estimate of the potential loss on the current portfolio as a result of unfavourable market movements, based on historical market movements and whereby the assumption is made that a certain period will be required to realise changes in positions. Stress tests are performed on the basis of future scenarios of major (stress) changes in market circumstances. Interest rate risk On the one hand interest rate risk is the risk that changes in interest rates will afect future cash flows from assets and liabilities. On the other hand there is a risk that the fair value of financial assets and liabilities changes as a result of movements in interest rates. Van Lanschot s results are influenced by the efects of movements in interest rates. Interest rate margins can increase following these changes, but they can also decrease or lead to losses if interest rates change unexpectedly. Van Lanschot uses a number of methods to manage interest rate risks, including gap analysis, duration analysis and scenario analysis. On this basis, Van Lanschot actively manages its balance sheet to limit the potential negative efect of interest rate risks. This can entail, for instance, adjustments in the fixed-interest portfolio or attracting funds providing the desired spread of interest rate maturities. Derivatives such as interest rate swaps and interest rate options are additionally used to manage interest rate risks. The bank s balance sheet management in practice depends on its expectations for interest rate movements and diferences between long and short-term interest rates. The form of balance sheet management naturally afects the sensitivity of equity and results to changes in the financial markets.

22 20 notes Van Lanschot applies diferent methods to qualify both the contractual and client behavioural aspects of savings and payments products, mortgages and loans. The table on page 21 shows Van Lanschot s exposure to interest rates based on the contractual terms to maturity of the separate balance sheet items. The interest risk is also qualified for the purpose of interest risks management, taking the contractual and client behavourial aspects of the products into account.

23 21 financial risk management Maturity schedule by interest term Variable < 3 months 3 months 1 year 5 years Total At 31 December 2005 (in thousands of euros) < 1 year < 5 years Assets Financial receivables from trading activities 148,517 9,577 52,989 94, ,249 Banks 1,487, , ,000 1,854,340 Investments 158,528 11, , , ,107 Loans and advances to the public and private sectors 1,324,717 6,665,827 1,217,654 3,217,774 1,114,884 13,540,856 Financial assets at fair value through profit or loss/ Other financial assets 1,707,874 1,176,556 1,167, ,544 4,532,361 Total assets 2,812,384 8,797,419 2,415,546 5,117,267 2,069,297 21,211,913 Liabilities Financial liabilities from trading activities 12,638 3,112 3, , ,885 Banks 116, ,569 14, ,635 45, ,344 Due to the public and private sectors 6,384,142 2,955, , , ,332 11,458,836 Financial liabilities at fair value through profit or loss/other financial liabilities 1,701, ,256 1,416, ,245 4,528,034 Issued debt securities 100 2,328, , ,805 3,197,815 Subordinated loans 203, ,708 55,128 62, ,580 Total liabilities 6,500,962 7,534,768 1,514,811 3,242,785 1,781,168 20,574,494 gap 3,688,578 1,262, ,735 1,874, , ,419 At 1 January 2005 (in thousands of euros) Assets Financial receivables from trading activities 36, ,888 32,513 54, ,281 Banks 1,164,855 37, ,940 18,594 1,473,058 Investments 1,245 18, , , ,456 Loans and advances to the public and private sectors 1,233,782 6,511, ,114 3,054, ,019 12,686,490 Financial assets at fair value through profit or loss/ Other financial assets 1,947, , , ,026 3,458,247 Total assets 2,398,637 8,534,978 1,329,492 4,544,677 2,034,748 18,842,532 Liabilities Financial liabilities from trading activities , ,586 Banks 106, ,027 41,597 60,168 54, ,832 Due to the public and private sectors 5,086,640 3,413, ,505 1,210, ,254 10,998,961 Financial liabilities at fair value through profit or loss/other financial liabilities 1,755, ,445 1,167, ,995 3,503,778 Issued debt securities 113 1,708,471 23, ,019 5,000 2,515,178 Subordinated loans 5,420 42,934 52, , ,735 Total liabilities 5,193,256 7,293, ,467 3,268,695 1,511,406 18,179,070 gap 2,794,619 1,241, ,025 1,275, , ,462