The annual financial statements are prepared on the basis of statutory regulations in Luxembourg and, in particular, in accordance with the provisions of the Law of 17 June 1992 on annual financial statements and consolidated financial statements of banks operating under Luxembourg law. Balance sheet policy and valuation methods are determined by the Group. The Bank applies the following accounting principles and methods:
A) CURRENCY CONVERSION
Assets and liabilities in foreign currencies are posted in the relevant currency and are converted into the balance sheet currency according to the average spot price on the balance sheet date. Expenditure and income in foreign currencies are entered in the balance sheet currency on a daily basis at the respective day’s middle rate.
As yet unsettled forward exchange transactions are valued at the forward rate for the remaining term applicable on the balance sheet date.
Insofar as balance sheet items are hedged with forward exchange deals, the valuation results are neutralised by allocating the items to accruals and deferrals. The difference between spot and forward rates (swap premiums) is recorded with a pro rata temporis effect on net income.
Currency losses from unhedged forward transactions are accounted for in the profit and loss account.
Currency gains, however, are not reported.
B) DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments (swaps, options, futures, etc.) are valued individually at the market price according to the realisation and impartiality principle. However, valuation gains occurring within a portfolio at the same time as valuation losses are offset in one and the same currency while unrealised gains are in principle not recognised. There are also derivative positions for hedging purposes.
C) TANGIBLE AND INTANGIBLE ASSETS
The valuation is carried out at acquisition or production cost, less scheduled depreciation, if the service life of these assets is limited. Minor value assets are posted directly as expenditure in the year of acquisition.
Irrespective of whether or not they have a limited service life, tangible and intangible assets are subject to value adjustments, with a view to quoting them at the lower value applicable on the balance sheet date, if the value depreciation can be assumed to be permanent. Value adjustments are dissolved if the reasons for their formation no longer apply.
The scheduled depreciation and impairments are as follows:
D) FINANCIAL ASSETS
Financial assets include equity interests, shareholdings in affiliated undertakings, bonds and other fixed-interest securities, the purpose of which is to serve the Bank’s business operations on a long-term basis, and which are expressly allocated to financial assets by the Board of Management.
The Bank’s financial assets are valued at the acquisition cost. The cost prices are calculated according to the average method. In the event of reductions in value, value adjustments are made regardless of their duration. For certain securities that are linked to an asset swap, value adjustments are only made if the reduction in value is considered to be permanent.
Premiums are amortised for a proportional period of time. Discounts are recognised as income when due or sold. Discounts on securities, which are linked to an asset swap, are amortised for a proportional period of time.
E) SHORT-TERM SECURITIES
Securities in the trading portfolio and liquidity investment holdings are classed as current assets. Unlike financial assets, these holdings are not intended to serve the Bank’s business activities on a long-term basis.
The trading portfolio includes securities held for resale. The Bank has set a maximum retention period of 12 months for individual portfolios.
The Bank regards as liquid assets all shares purchased either to further its medium and long-term investment strategy, or to secure liquidity or boost its earnings, as well as securities that cannot be shown either in the trading or the investment portfolios.
Securities shown as current assets are valued according to the strict principle of lowest value, whereby stock exchange prices generally apply to securities with an active market. If no active market was available, the corresponding fair values would have been calculated on the basis of discounted cash models.
Receivables are shown on the balance sheet at their acquisition cost. The Bank’s policy is to make itemised allowances wherever appropriate to hedge interest and default risks.
G) VALUE ADJUSTMENTS AND PROVISIONS
Provisions are formed to the amount required, based on a reasonable commercial assessment.
Collective general valuation adjustments of the permissible amount are created based on the Luxembourg tax authority instruction of 16 December 1997. The risk assets calculated from the balance sheet and off-balance sheet transactions are used as the basis for determining the equity capital cover. The value adjustments are deducted from the corresponding asset items.
In order to cover possible future and as yet not quantifiable risks from the depositary business, provisions are created in the permitted fiscal amount applying the principle of prudence.
Liabilities are reported at the amount repayable. Discounts and premiums are shown against pro rata income.