1. Significant accounting policies
Aduno Holding AG (Aduno Holding or Company) is a company domiciled in Zurich (Switzerland). The consolidated financial statements of the Company for the year ended 31 December 2017 comprise Aduno Holding and its subsidiaries (together referred to as the Group).
Aduno Holding and its subsidiaries offer financial services in the business field of cashless payment solutions and consumer finance services.
The subsidiary Viseca Card Services SA (Viseca) operates services for cashless payments. Viseca issues credit cards (card issuing) under the brand of the card schemes (schemes) Mastercard and Visa to private and business consumers for Swiss retail banks, several co-branding partners and on its own account, and operates all relevant customer service activities. The subsidiary cashgate AG (cashgate) offers consumer finance facilities to private and corporate customers in the Swiss marketplace. The subsidiary Aduno Finance AG (Aduno Finance) acts as centralised treasury operator. The subsidiaries Vibbek AG as well as Vibbek GmbH are developing software solutions for card terminals. The subsidiary AdunoKaution AG (AdunoKaution) and the subsidiary SmartCaution SA (SmartCaution) offer rental guarantees to their customers and the subsidiary Contovista AG (Contovista) is developing software for Finance Management as well as Analystics and distributing it to banks.
The consolidated financial statements were approved by the Board of Directors on 19 April 2018 and will be submitted for final approval by the general meeting on 29 May 2018.
Basis of preparation
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and comply with Swiss law. The consolidated financial statements are presented in Swiss francs, which is the Company’s functional currency. All financial information presented in Swiss francs has been rounded to the nearest thousand, except when otherwise indicated. As a result, rounding differences may appear.
The consolidated financial statements are prepared on the historical cost basis, except for derivative financial instruments that are stated at their fair value. Methods to determine fair values are further discussed in Note 32 “Financial risk management”.
Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests, even if the results in the non-controlling interests have a deficit balance.
Fair value measurements
The basis for the measurement of assets and liabilities is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (exit price) between market participants at the measurement date.
Use of estimates and judgements
The preparation of the consolidated financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.
Judgements made by management in the application of IFRS that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in the following notes:
- –Note 12 – Income tax expenses
- –Note 15 – Receivables from Payment business and Consumer Finance (e.g. recoverability)
- –Note 20 – Goodwill and other intangible assets (e.g. measurement of recoverable amounts of CGUs)
- –Note 30 – Contingent liabilities (e.g. counterparty credit risk of internet transactions)
Change in accounting estimate
The group has reassessed the amortisation period for other intangible assets and estimates the general useful life of software prospectively to five years (until 2016 the general amortisation period was three years).
Consolidation of subsidiaries
Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of the subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases.
For each business combination, the Group elects to measure any non-controlling interests in the acquiree at acquisition date at their proportionate share of the acquiree’s identifiable net assets, which are generally at fair value.
Investments in associates
Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Investments in associates are accounted for using the equity method and are recognised initially at cost.
The Group’s share of the net income or loss of the associates is reflected in profit or loss.
Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-group transactions are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.
Foreign currency transactions
Transactions in foreign currencies are translated to the respective functional currencies of Group entities at the exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency using the exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency using the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation of monetary items are recognised in profit and loss. Foreign currency effects on non-monetary items are recognised according to the fair value changes.
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated into CHF using exchange rates at year end. The income and expenses of foreign operations are translated to CHF using average exchange rates.
The following significant exchange rates applied:
Revenue comprises commission income, annual fee income, interest income and other income. Commission income and other income are recognised transaction-based as they occur. Annual fees are recognised on a straight-line basis over the duration of the service commitment and deferred accordingly. The commission income consists of transaction-based charges billed to customers of all business segments. Interest income includes interest earned from short-term loans granted to credit cardholders, long-term consumer credit loans granted to private customers, and leasing facilities to private and corporate clients. Interest income is recognised using the effective interest method.
Processing and service expenses
Processing and service expenses comprise transaction-based interchange expenses to card issuers, processing expenses to services partners, card schemes expenses for the usage of the worldwide card scheme environment, and other operational service expenses. Processing and service expenses are recognised as occurred.
Distribution, advertising and promotion expenses
The Group offers a variety of reward programmes to its customers in its Payment business. These programmes are partly run by third parties, in which case the incurred loyalty costs are directly accounted as expenses.
The Group offers a loyalty programme where customers collect points based on card spending, which are accounted in designated loyalty point accounts. Customers can spend their points by converting them into gifts, annual fee rebates as well as to rebate vouchers within the programme. The estimated upcoming expenses increase the accrued expenses. In addition, the Group offers a yearly fee rebate based on the volume of transactions of the customer. According to IFRIC 13, the estimated upcoming expenses are accounted as a reduction of the underlying income, and increase the accrued expenses.
The amount allocated to the annual fee rebates is recognised when the rebates are redeemed in the following year and, thus, the Company has fulfilled its obligation.
Interest expenses consist of the refinancing expenses to finance the interest income-generating businesses, losses on derivative financial instruments that are recognised in profit or loss, bank charges and expenses for bank guarantees. Interest expenses are recognised using the effective interest method.
Impairment losses from Payment business and Consumer Finance
Impairment losses from the Payment business contain losses arising from bad debts, fraud and chargebacks. Impairment losses in the Consumer Finance business represent mainly the build-up of accruals for incurred but not reported losses.
Other expenses are recognised as they are incurred. The expenses are recognised on an accrual basis.
Depreciation and amortisation
Depreciation and amortisation comprises the depreciation of property and equipment and the amortisation of intangible assets. Depreciation and amortisation are recognised in profit or loss following the depreciation and amortisation policy outlined in the respective section for property and equipment or other intangible assets.
Income tax expenses
Income tax expenses comprise current and deferred income tax. Income tax expenses are recognised in profit or loss, except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognised using the balance sheet liability method, providing the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences, based on the laws that have been enacted or substantively enacted by the reporting date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
Earnings per share
The Group presents basic earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to the equity holders of the Company by the weighted average number of ordinary shares outstanding during the period, adjusted for treasury shares.
As there are neither convertible bonds nor options or other potential shares outstanding, there is no dilutive impact for the shares.
An operating segment is a component of the Group that engages in business activities from which it earns revenues and incurs expenses. The results of the business activities are regularly reviewed by the Group’s chief operating decision maker to decide on resources to be allocated to the segments and assess their performance, for which separate financial information is available.
Cash and cash equivalents
Cash and cash equivalents include cash on hand, postal and bank accounts, and fixed-term deposits with an original maturity of less than 90 days from the date of acquisition. They are stated at amortised cost, which equals the nominal value.
Receivables Payment business / receivables Consumer Finance
Receivables from cardholders, from merchant activities, from Consumer Finance customers and from others are stated at their amortised cost using the effective interest method less impairment losses.
The allowance accounts in respect of receivables are used to record impairment losses unless the Group is satisfied or unless no recovery of the amount owing is possible, at which point the amount considered irrecoverable is written off against the receivable directly.
When assets are leased out under a finance lease, the present value of the future lease payments is recognised as a receivable. Future interest receivables from the financial lease are not considered in the receivables.
Derivative financial instruments, including hedge accounting
The Group uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational and financing activities. In accordance with its treasury policy, the Group does hold or issue derivative financial instruments either for hedge accounting or for economic hedging without applying hedge accounting.
Derivative financial instruments are recognised initially at fair value. Attributable transaction costs are recognised in profit or loss when incurred. Subsequent to initial recognition, derivative financial instruments are measured at fair value. The gain or loss on remeasurement to fair value is recognised immediately in profit or loss.
Currency swaps used by the Group do not qualify for hedge accounting; therefore they are accounted for as trading instruments.
The Group designates interest rate swaps as hedging instruments in a hedge of the variability in the interest payments related to variable interest-bearing financial liabilities (cash flow hedge).
The effective portion of changes in the fair value of the derivative is recognised in other comprehensive income and presented in the hedging reserve in equity. The amount recognised in other comprehensive income is removed and included in profit or loss in the same period as the hedged cash flows affect profit or loss in the same line item as the underlying transaction.
If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, or the designation is revoked, hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in other comprehensive income remains there until the forecast transaction affects profit or loss.
Financial investments available for sale
Security positions which are not held for trading purposes are reported as debt and equity securities available for sale and are measured at fair value. Unrealised gains and losses are recognised in other comprehensive income and reported in other components of equity until the security is sold or an impairment loss is recognised, at which point the cumulative gain or loss previously recorded in other components of equity is recognised in the income statement in other income.
Equity securities are deemed impaired if there has been a significant or prolonged decline of fair value below the initial cost. A debt instrument is deemed impaired if the creditworthiness of the issuer significantly deteriorates or if there are other indications that an event has a negative impact on the future estimated cash flows related to the debt instrument, i.e. if it is likely that the amount due according to the contractual terms cannot be entirely collected.
Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the first-in-first-out principle. Net realisable value represents the estimated selling price for inventories less all estimated costs of completion and selling expenses.
Property and equipment
Items of property and equipment are stated at cost less accumulated depreciation and impairment losses.
Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment. The estimated useful lives are as follows:
Useful lives and residual values are reviewed annually at the balance sheet date and any adjustments are recognised in profit or loss. Gains or losses arising from the disposal of items of property and equipment are recognised in profit or loss.
The Group measures goodwill at the acquisition date as the excess of the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed and the sum of the fair value of the consideration transferred plus the recognised amount of any non-controlling interests in the acquiree. When the excess is negative (negative goodwill), it is recognised immediately in profit or loss.
Goodwill is stated at cost less any accumulated impairment losses. Goodwill is tested for impairment annually at the level of the cash-generating unit.
Other intangible assets
Intangible assets are stated at cost less accumulated amortisation and impairment losses.
Intangible assets consist of capitalised software costs, capitalised licences and client relationships, all of which have finite lives. The following intangible assets are amortised on a straight-line basis over their estimated useful lives:
Client relationships are amortised according to an average customer lifetime depending on the underlying business. The current recognised client relationships are amortised for 10–15 years, using the digital digressive method according to their useful life.
Amortisation methods, useful lives and residual values are reassessed at the reporting date and adjusted if appropriate.
Capitalised software includes external costs incurred when externally developing or purchasing computer software for internal use. The expenditure capitalised includes mainly external development and consultancy costs that are directly attributable to the external development of implementing and customising software.
Expenditures on internally generated goodwill and brands are recognised in profit or loss as incurred.
The recoverable amounts of non-current assets are reviewed for impairment at least once a year. If there is any indication of impairment (triggering event), an impairment test is performed. Goodwill is tested for impairment on an annual basis. If the carrying amount of an asset or its cash-generating unit exceeds the recoverable amount, an impairment loss is recognised in profit or loss.
A cash-generating unit is the smallest identifiable asset group that generates cash flows that are largely independent from other assets and groups. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis.
Payables to counterparties, other trade payables and other payables are stated at amortised cost.
They are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, they are measured at amortised cost using the effective interest method.
A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.
Leasehold restoration provisions
In accordance with the lease agreement and applicable constructive requirements / legal obligation, a provision for leasehold restoration in respect of reinstatement of the original condition of the premises is made when the Group enters into a contractual agreement. A related payment is recognised when the obligation event to restore the premises to the specified condition occurs. The expenses are recorded over the lifetime of the lease agreement.
The post-employment plans qualify as defined benefit plans. The Group’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and the fair value of any plan asset is deducted.
The calculation is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a benefit to the Group, the recognised asset is limited to the total of any unrecognised past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan.
Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in comprehensive income. The Group determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognised in profit or loss.
When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past services or the gain or loss on curtailment is recognised immediately in profit or loss. The Group recognises gains and losses on the settlement of a defined benefit plan when the settlement occurs.
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects.
When share capital recognised as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity, and the resulting surplus or deficit on the transaction is transferred to / from retained earnings.
Dividends are recognised as a liability at the date they are declared.
New and revised standards and interpretations newly adopted by the Group
The Group applied the following new and revised accounting standards and interpretations for the first time:
- –Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12)
- –Disclosure Initiative (Amendments to IAS 7)
Except additional disclosure (Amendments to IAS 7) the above-mentioned standards had no or no significant impact on the financial statements.
New and revised standards and interpretations
The following new and revised standards and interpretations have been issued, but are not yet effective and have not been applied early in these consolidated financial statements. Their impact on the consolidated financial statements of the Group has not yet been systematically analysed. The table reflects a first assessment conducted by the Group's management and the expected effects
IFRS 9 Financial Instruments (effective 1 January 2018)
In July 2014 the IASB issued the final version of IFRS 9 Financial Instruments, which replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018. Except for hedge accounting, retrospective application is required but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions.
The Group adopts the new standard on the required effective date and will not restate comparative information. During 2017 the Group performed a detailed assessment of all three aspects of IFRS 9. This assessment is based on currently available information and may be subject to changes arising from further reasonable and supportable information being made available to the Group in 2018. Overall, there is no significant impact on the statement of financial position and equity of the Group, except for the effect of applying the impairment requirements of IFRS 9. The Group will recognise an increase in the loss allowance resulting in a negative impact on equity as discussed below. In addition, the Group will implement changes in classification of certain financial instruments.
(a) Classification and measurement
The Group is not affected by a significant impact on its statement of financial position or equity on applying the classification and measurement requirements of IFRS 9. It will continue measuring at fair value all financial assets currently held at fair value. Equity shares currently held as available for sale with gains and losses recorded in other comprehensive income (OCI) are intended to be held for the foreseeable future. No impairment losses were recognised in profit or loss during prior periods for these investments. The Group will apply the option to present fair value changes in OCI. Therefore the application of IFRS 9 will not have a significant impact.
Receivables from business unit Payment, receivables from business unit Consumer Finance, as well as other receivables are held to collect contractual cash flows and are expected to give rise to cash flows representing solely payments of principal and interest. The Group analysed the contractual cash flow characteristics of those instruments and concluded that they meet the criteria for amortised cost measurement under IFRS 9. Therefore, reclassification for these instruments is not required.
The new impairment model requires the recognition of impairment provisions based on expected credit losses (ECL), either on a 12-month or lifetime basis rather than only incurred credit losses as is the case under IAS 39. It applies to financial assets classified at amortised cost, debt instruments measured at fair value through OCI, contract assets under IFRS 15 Revenue from Contracts with Customers, lease receivables, loan commitments and certain financial guarantee contracts. The Group will apply the simplified approach and record lifetime expected losses on trade receivables.
The Group has defined new impairment models for the credit card, consumer loans and leasing portfolios. The models are based on a collective assessment and the relevant input factors are probability of default, exposure at default and loss given default. The respective input factors are determined on the basis both of empirical data and forward-looking information. In general, comparable models are used for the credit card, consumer loan and leasing portfolios, while taking into account the different features and characteristics of the individual portfolios.
The approach for determining a significant increase in credit risk considers both quantitative factors (e.g. past due information) as well as qualitative indicators (e.g. individual assessment of the customer’s ability to meet its obligations). The resulting expected credit loss will mainly be driven by receivables in Stage 3 and the respective assumptions on the expected future cash flows (recoveries).
Based on the assessments undertaken to date, the Group expects a total increases in loss allowances of CHF 1.0 million up to CHF 3.0 million, which reflects a decrease in the financial instruments as well as in retained earnings.
(c) Hedge accounting
The Group determined that all existing hedge relationships that are currently designated in effective hedging relationships will continue to qualify for hedge accounting under IFRS 9. As IFRS 9 does not change the general principles of how an entity accounts for effective hedges, applying the hedging requirements of IFRS 9 will not have a significant impact on the Group’s financial statements.
IFRS 15 Revenue from Contracts with Customers (effective 1 January 2018)
In May 2014 the IASB issued the new standard which specifies how and when revenue is recognised. IFRS 15 replaces several other IFRS standards and interpretations that currently govern revenue recognition under IFRS, and provides a single, principles-based five-step model to be applied to all contracts with customers. The five-step cover: identifying the contract(s) with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract, and recognising revenue when (or as) the Group satisfies a performance obligation. The standard also requires entities to provide users of financial statements with more informative and relevant disclosures. The application of the new standard has no material impact except for additional disclosures.
IFRS 16 Leases
IFRS 16 was issued in January 2016 and replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentivesand SIC-27 Evaluating the Substandce of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees – leases of ’low-value’ assets (e.g. personal computers) and short-term leases (i.e. leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e. the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e. the right-of-use asset). Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset.
Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g. a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset.
Lessor accounting of IFRS 16 is expected to be unchanged from today’s accounting under IAS 17. Lessors will continue to classify all leases using the same classification principle as in IAS 17 and distinguish between two types of leases: operating and finance leases.
IFRS 16 also requires lessees and lessors to make more extensive disclosures than under IAS 17.
IFRS 16 is effective for annual periods beginning on or after 1 January 2019. Early application is permitted, but not before an entity applies IFRS 15. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard’s transition provisions permit certain reliefs.
In 2018 the Group will continue to assess the potential effect of IFRS 16 on its consolidated financial statements.
2. Segment reporting
For reporting and managerial purposes, management has divided the Group’s business into four segments. The external segment reporting is based on the internal reporting to the chief operating decision maker, who is responsible for allocating resources, and assesses the financial performance of the business. The Executive Board has been identified as the chief operating decision maker, as it is responsible for the operational management of the entire Group and reviews the management reporting of each business segment on a monthly basis. The Executive Board consists of the Group’s Chief Executive Officer (CEO) as well as Chief Officers for Finance (CFO), Sales (CSO), Marketing (CMO) and Operations (COO).
The business unit Payment provides services for cashless payments via credit, debit and customer cards to private and corporate customers, and runs the relevant transaction and customer services relating to the business. The major part of the business is run through the brands of Mastercard and Visa.
The business unit Payment is operated through Viseca as well as through Accarda AG (Accarda), Vibbek AG, Vibbek GmbH, AdunoKaution, SmartCaution and the newly acquired Contovista. The major revenue streams in the business result from interchange fees and commissions, annual fees for cards and services, income from card transactions in foreign currency and interest income. Until its sale in 2017, Aduno SA was part of the business unit Payment. The Acquiring and Terminal business is therefore classified as discontinued operations and the prior-year figures have been restated accordingly.
The business unit Consumer Finance sells and operates leasing contracts and credit facilities for consumer goods to private and corporate clients. The business unit Consumer Finance is operated by cashgate. The major income streams are interest income, commission income and fees for chargeable services.
As the central treasury centre of the Group (Aduno Finance), Internal Financing provides financial services to the other members of the Group. The treasury services include the treatment of payments, the handling of foreign exchange transactions as well as the management of the Group’s brand assets. The major income streams result from foreign currency transactions and interest income.
The business unit Corporate Functions contains intercompany consolidation items as well as the financial result of Aduno Holding.
Segments’ assets and liabilities
The assets and liabilities, revenue and expenses are measured in accordance with the relevant IFRS Standards.
Information about major customers
There is no major customer in any of the business segments whose revenues amount to 10% or more of the segment’s revenues (2016: none).
The following table presents certain information regarding the operating segments, based on management’s evaluation and internal reporting structure, at 31 December 2017 and 2016 and for each of the years ended.
3. Change in scope of consolidation
Acquisition of Contovista AG
Effective 1 August 2017 Aduno Holding purchased an additional 55.7% of the shares of Contovista in Schlieren, canton of Zurich. Together with the holding of 14.3%, Aduno Holding now has a stake of 70% in Contovista. The company develops software for Finance Management as well as Analytics and distributes it to banks. The purchase price for the 55.7% was CHF 27.3 million, which was paid in full in cash. The revaluation of the existing 14.3% resulted in a valuation gain of CHF 4.0 million. The revaluation gain is recorded in “Income from associates”.
The following purchase price allocation is final. Goodwill of CHF 21.1 million has been identified and is allocated to the cash-generating unit Payment Issuing. The increased stake in Contovista strengthens the Group’s relationship to its shareholder banks, will pave the way for future business models within the Group and will increase revenue from exisiting customers.
Included in the Group’s revenues for 2017 are CHF 1.9 million arising from the additional business from Contovista. A profit of CHF 0.1 million is included in the profit for the year. If the acquisition of Contovista had occurred on 1 January 2017, the Group’s consolidated revenue would have been CHF 460.9 million and its consolidated profit from continuing operations CHF 75.2 million. The acquisition incurred acquisition costs for the Group of CHF 0.1 million, which are included in the profit and loss statement under “Other expenses”.
Acquisition of SmartCaution
As per 1 July 2016 Aduno Holding AG purchased 100% of the shares of SmartCaution in Geneva, canton of Geneva. The company’s field of activity is to provide rental guarantees to its customers and is integrated in the Group’s Payment segment. The purchase price was set to CHF 9.0 million of which 7.0 million have been paid in cash. The remaining CHF 2.0 million is a contingent purchase price consideration.
The following purchase price allocation is final. A goodwill of CHF 1.9 million has been identified and is allocated to the cash generating unit Payment Issuing. This transaction strengthens the rental guarantee portfolio of the Group in the western part of Switzerland and creates synergy effects.
Included in the Group’s revenues for the year 2016 are CHF 1.0 million arising from the additional business from SmartCaution. A loss of CHF 0.1 million is included in the profit for the year. If the acquisition of SmartCaution had occurred on 1 January 2016, the Group’s consolidated revenue would have been CHF 583.9 million and its consolidated profit after tax of CHF 118.1 million would have arisen (both based on continuing and discontinuing operations). The acquisition incurred acquisition costs for the Group of CHF 0.1 million, which are included in the profit and loss statement under “Other expenses”.
4. Commission income
5. Interest income and interest expenses
Interest income contains income from the Group’s Consumer Finance activities and also from credit lines granted to clients in the Payment business.
In the Payment business, credit cardholders are eligible to convert their debit on the credit card into a consumer credit for which the Group then charges interest for the period of the short-term loan.
Interest expenses are the refinancing expenses to finance the open credit lines of the Payment and Consumer Finance businesses.
6. Other income
Foreign exchange gains and losses arise on transactions which are not settled in Swiss francs. Customers in the Group’s Payment business are billed based on a typical exchange rate close to spot rates, whereas the Group is billed near the interbank rate (interbank rate plus Group’s credit spread).
As a former member of Visa Europe Ltd., the business unit Payment benefited in 2016 from selling Visa Europe Ltd. to Visa Inc. The Group received contributions at a total value of CHF 71.7 million, including preferential Visa Inc. shares at a value of CHF 17.3 million as at transaction date, as well as an entitlement to a deferred cash payment of CHF 4.3 million. The contribution of CHF 71.7 million has been recorded as “Other income”, of which CHF 20.5 million has been allocated to Aduno SA and is therefore disclosed as part of discontinued operations.
7. Processing and service expenses
8. Distribution, advertising and promotion expenses
9. Personnel expenses
10. Other expenses
11. Impairment losses from Payment and Consumer Finance
The impairment losses on commission income are attributable to losses arising from bad debts, fraud and chargebacks in the Payment business, whereas the impairment losses on interest income mainly represent incurred but not reported losses in the Consumer Finance business.
12. Income tax expenses
Expenses recognised in consolidated income statement
Average applicable tax rate
The Group calculated an average applicable income tax rate of 14.9% in 2017 and 16.2% in 2016, which represents the weighted average income tax rate calculated on the basis of the Group’s operating subsidiaries in Switzerland.
Reconciliation of effective tax rate
The average effective income tax rate for 2017 was 31.6% and 26.1% for 2016. It was derived as shown in the following table.
In 2011, the Aduno Group transferred the areas of cash management, payment transactions, financing, foreign currency management and brand management to the newly incorporated Aduno Finance AG, which is headquartered in Nidwalden, with offices in Freienbach (Schwyz).
During the ordinary tax inspections for 2011 and 2012, the cantonal tax authorities in Zurich questioned the transfer prices applied. At the end of the 2016 financial year, the Aduno Group was still working under the assumption that an agreement with the Zurich tax authorities would be reached, and it accrued a total of CHF 21.5 million under “Other expenses”.
This agreement proved to be unrealistic. Following this, in March 2018, the Aduno Group lodged an appeal with the Zurich tax appeals court. The time horizon for a definitive settlement has therefore lengthened materially.
Due to the reassessment, in 2017, the Aduno Group recognised additional tax provisions amounting to CHF 23.7 million for financial years 2011 to 2016, and CHF 7.3 million for the 2017 financial year. To provide better comparability and accurate presentation, the accrual booked in 2016 was also reclassified in the tax result.
Deferred tax assets and liabilities
The following table shows in which lines of the Group’s balance sheet tax assets and liabilities were recognised on temporary differences between the tax base and IFRS carrying amounts.
Temporary differences of associates, on which no deferred income taxes were recognised as at 31 December 2017, amounted to CHF 22.7 million (2016: CHF 20.9 million).
Tax loss carry-forwards
The Group had total tax loss carry-forwards of CHF 15.8 million as at 31 December 2017 (2016: CHF 14.1 million). There are no unrecognised tax losses carry-forwards.
Income taxes directly recognised in other comprehensive income
A decrease in employee benefit obligations of CHF 2.4 million was recognised in other comprehensive income in 2017 (2016: increase of CHF 2.9 million). The Group recognised CHF 0.5 million of deferred tax liabilities in other comprehensive income (2016: CHF 0.7 million of deferred tax assets).
A positive change in fair value of financial investments available for sale of CHF 7.4 million was recognised in other comprehensive income in 2017 (2016: CHF 1.5 million). The Group recognised CHF 1.6 million of deferred tax liabilities in other comprehensive income (2016: CHF 0.3 million). A gain of 1.4 million was recycled to profit or loss (2016: none). The Group recognised CHF 0.3 million of deferred tax income.
A positive change in fair value of cash flow hedges of CHF 0.3 million was recognised as a reduction in liability in 2017 (2016: positive change of CHF 1.8 million). The Group recognised deferred tax liabilities of less than CHF 0.1 million in other comprehensive income (2016: tax liabilities of CHF 0.2 million).
Movement in deferred tax assets and liabilities during the year
13. Earnings per share
Diluted earnings per share
There are neither convertible bonds nor options or other potential shares outstanding and therefore there is no dilutive impact on earnings.
14. Cash and cash equivalents
Cash and cash equivalents are mainly held in CHF, EUR and USD. The percentage of these currencies of the total cash and cash equivalents held is shown in the table below.
15. Receivables from Payment business and Consumer Finance
The sold Aduno SA had mainly receivables form card schemes and other receivables from the Payment business.
The aging of the receivables contained in the balance sheet that are not individually impaired as at the reporting date is as follows:
Receivables from Payment business
Receivables from cardholders consist of regular open balances on the credit card accounts of credit cardholders. Open balances from cardholders due for more than 90 days are transferred to a dedicated and monitored collection portfolio. The balance of the collection portfolio amounts to CHF 3.7 million (2016: CHF 3.6 million) and is shown under “Receivables from debt collection”.
If a cardholder transaction shows signs of being fraudulent, the respective balance is transferred to a dedicated fraud portfolio until the case is settled. This portfolio amounted to CHF 0.2 million as at 31 December 2017 (2016: CHF 0.2 million). An adequate allowance is set up for all receivables for which fraud is assumed. The respective balance of all fraudulent transactions under clarification is shown under “Receivables for which fraud is assumed”.
The open settlement balance to the card schemes in 2016 of CHF 85.4 million reflects the transmitted merchant transactions on the last days before closing. Due to the sale of Aduno SA there were no balances as at year end 2017. The open settlement balances to the card schemes are settled daily. In the history of the Company all daily balances to the schemes were settled as announced by the card schemes. Therefore no allowances for doubtful debts were built.
Due to the sale of Aduno SA there were no receivables from terminal sales in 2017. In 2016 receivables from terminal sales were open balances to customers totalling CHF 1.7 million and were contained in the other receivables from the Payment business. This amounted to 0.3% of the total receivables of the Payment business. Allowances for doubtful debts are built according to the aging of the overdue receivables, and receivables overdue for more than 12 months are provided for 100%.
In 2016 other receivables from the Payment business also contained receivables related to the currency conversion amounting to CHF 1.9 million. Such receivables were usually settled within less than one week. Due to the sale of Aduno SA there were no such receivables in 2017.
Receivables from Consumer Finance activities
These receivables consist of consumer loans and finance lease receivables from the car leasing business. Finance lease receivables are collateralised by the financed cars while consumer loans are not collateralised.
Open balances from the Consumer Finance segment due for more than 90 days are transferred to a dedicated and monitored collection portfolio. Allowances for doubtful debts are built using sophisticated analytical and statistical methods as described below. The total balance is shown as “Allowance for doubtful debts”.
Receivables from finance lease
Allowances for doubtful debts
Recognised allowances for doubtful debts for the business segments at the reporting date are shown in the following tables.
Allowances for doubtful debts on receivables from cardholders are composed of impairments on receivables due to late payment, fraudulent payments and non-recoverable chargeback at both specific and collective levels. All individually significant receivables from cardholders are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. The allowance for all three categories is determined according to historical data based on sophisticated analytical methods and evaluation models. The allowance is adjusted in line with management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than those suggested by historical trends. Management qualifies the allowance for doubtful debts in the Payment segment as adequate.
Allowances for doubtful debts on receivables from Consumer Finance is composed of impairments on receivables due to late payment and also comprise a portion of those found not to be specifically impaired but which are then collectively assessed for any impairment that has been incurred but not yet identified. The Group recognises allowances in its Consumer Finance business at the time the credit facility or the leasing contract is paid out to the customer.
The collective allowance is determined for clusters of customers by combining historical data based on sophisticated analytical methods and evaluation models considering the particular risks of each cluster. The allowance is adjusted in line with management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than those suggested by historical trends. Currently, no specific allowances that are individually significant are recognised on receivables in the Consumer Finance segment. Management qualifies the allowance for doubtful debts in the Consumer Finance segment as adequate.
Except for allowances for fraudulent transactions in the Payment business, all impairments of receivables are due to late payment by customers or those that have been incurred but not yet identified. Based on the Group’s experience, impairments are calculated as a percentage of the overdue balance by customers, including the estimated amount of receivables becoming overdue in the near future.
In the Payment and Consumer Finance businesses, on average about 99% (2016: 98%) of the receivables outstanding are not past due. Based on past experience, the Group includes the impairment allowance for these receivables in the allowance calculated on the basis of the default risk of the total debts.
In 2017 inventory costs of CHF 5.6 million were recognised as an expense (2016: CHF 6.2 million). No write-downs were recognised on inventories to net realisable value in 2017 (2016: CHF 1.5 million). As Aduno SA was sold, there are no longer terminals on stock.
17. Other receivables
Until 2016 the deposits on prepaid credit cards were deposited at a specific bank account and disclosed as deposits under “Other receivables”. During 2017 the group released the prepayments from this separate and distinct bank account and included those funds in the general cash management pool. At year-end 2017 the balance was TCHF 188. Accounts receivables are disclosed in the line item “Other”.
Foreign exchange contracts – trading
Interest rate swaps – cash flow hedges
Derivative financial instruments
The Group uses only foreign exchange contracts to hedge its foreign exchange risk exposure. As the Group does not comply with all documentation requirements under IAS 39, these derivatives do not qualify for hedge accounting and are therefore classified as “held for trading”.
Cash flow hedges
The Group also uses interest rate swaps to hedge its exposure to interest changes arising from the Payment and Consumer Finance businesses. These instruments qualify for hedge accounting.
The Group has a permanent requirement to refinance outstanding receivables due from cardholders and consumer finance customers. The refinancing need is fulfilled with bank loans with durations from one to 90 days and is aligned to Libor conditions. The Group enters into interest rate swaps to hedge its exposure to fluctuating interest rates on its refinancing. It swaps Libor interest payments into fixed interest payments. The total underlying amount of the contracted swaps as at 31 December 2017 amounted to CHF 6.0 million (2016: CHF 41.0 million).
All cash flow hedges of the IRS were assessed to be highly effective as at 31 December 2017 and as at 31 December 2016. A net unrealised gain of CHF 0.3 million (2016: net unrealised gain of CHF 1.8 million) with a related deferred tax liability of less than CHF 0.1 million (2016: related deferred tax liability of CHF 0.2 million) was included in other comprehensive income in respect of these contracts.
Cash flows from hedges occurring in the future are disclosed in Note 31, the profit and loss effect being the same as the related cash flow of the underlying hedged item.
18. Prepaid expenses
In the Payment segment, the Group pays commissions to its distribution partners (mainly the shareholder banks). The commission contains a reimbursement for annual charges for credit cards. The share paid to the partner but not yet consumed is recognised as a prepaid expense to partners.
Concerning the Consumer Finance activities, the Group recognises commissions paid to its sellers and distribution partners. The commission is periodically allocated to the expected duration of the contract.
19. Property and equipment
Non-cancellable operating lease rentals are payable as follows:
Operating leases include the Group’s offices in the cantons Zurich, St. Gallen, Ticino, Vaud, Neuchâtel and Geneva.
During the year ended 31 December 2017, CHF 4.9 million was recognised as an expense in the consolidated income statement in respect of operating leases (2016: CHF 4.8 million).
20. Goodwill and other intangible assets
The acquisitions of the BCV portfolio and Raiffeisen Finanzierungs AG in 2008 resulted in a further increase in the client relationships recognised in the Group’s balance sheet, which is depreciated using the digital degressive method over 7–10 years, ending in 2018.
In 2012 the Group acquired client relationships amounting to CHF 9.0 million for its Consumer Finance business to strengthen its presence in the French-speaking part of Switzerland. Also in 2012 the Group acquired Revi-Lease and recognised the client relationship. These relationships are depreciated using the digital degressive method through their estimated useful life over 10 years until 2022.
The acquisition of AdunoKaution in 2014 resulted in a further increase in client relationships by CHF 0.7 million. Also in 2014 the Group acquired the client relationship of Banque Cantonale Neuchâteloise amounting to CHF 2.3 million. These are depreciated using the digital degressive method over its estimated useful life until 2024.
The acquisition of SmartCaution in 2016 resulted in an increase in client relationships by CHF 7.7 million. This is depreciated using the digital degressive method over its estimated useful life until 2031.
The acquisition of Contovista in 2017 resulted in an increase in client relationships by CHF 1.0 million. This is depreciated using the digital degressive method over its estimated useful life until 2032.
In 2017 Aduno SA was sold and the related client relationships in the amount of CHF 5.4 million were derecognised.
Impairment tests for cash-generating units containing goodwill
The Group performed impairment tests on goodwill as at 30 September 2017. For the purpose of impairment testing, goodwill is allocated to a cash-generating unit that is expected to benefit from the synergies of the corresponding business combination.
For the impairment test, the recoverable amount of a cash-generating unit (the higher of the cash-generating unit’s fair value less costs to sell and its value in use) is compared to the carrying amount of the corresponding cash-generating unit.
Future cash flows are discounted using a pre-tax rate that reflects current market assessments based on the Weighted Average Cost of Capital (WACC) and the Capital Asset Pricing Model (CAPM). The WACC is calculated based on an average of available market betas of a group of companies operating in the same businesses as the respective cash-generating unit as well as the risk-free interest rate.
Fair value less costs to sell is normally assumed to be higher than the value in use; therefore, fair value less costs to sell is only investigated when value-in-use is lower than the carrying amount of the cash-generating unit.
The cash flow projections are based on three-year period budgets. Cash flows beyond this period are extrapolated using the long-term estimated growth rates stated below.
Key assumptions used for value-in-use calculations of goodwill amounts per cash-generating unit were as follows:
The estimated recoverable amount for the 3 (2016: 4) cash-generating units exceeds the carrying amount of the cash-generating units. No reasonably possible change in the key assumptions would cause the carrying amount of the cash-generating units to exceed the recoverable amount.
21. Investments in associates
Since 2007 the Group has owned a 30% stake in Accarda. Accarda has its principal place of business in Wangen‑Brüttisellen (ZH) and issues, processes and operates store cards and gift cards on behalf of corporate retail customers.
The following table shows a summary of the full-year financial information for the associate Accarda, not adjusted for the percentage ownership held by the Group:
The Group’s share of the profit of Accarda for the period from 1 January to 31 December 2017 amounted to CHF 3.4 million and is accounted in the consolidated profits of the Group (2016: CHF 3.3 million). In 2017 Aduno Holding received a dividend payment of CHF 1.5 million from Accarda (2016: CHF 1.5 million).
Since 2015 the Group has owned a 33.3% stake in SwissWallet AG, founded in 2015. SwissWallet AG has its principal place of business in Zurich. SwissWallet is a digital payment solution from the Swiss credit card industry.
In March 2016 Aduno Holding acquired a 14.3% stake in Contovista. Contovista develops software for Finance Management as well as Analytics and distributes it to banks. The Group is represented in the Board of Directors of Contovista. In 2017 the Aduno Holding acquired an additional 55.7% and increased its stake to 70%. Consequently Contovista is now fully consolidated. Refer to Note 3 “Change in scope of consolidation”. Due to the revaluation of the current 14.3%, the group recorded a fair value gain of CHF 4.0 million in income from associates.
The Group’s share of the loss of SwissWallet AG for the period from 1 January to 31 December 2017 amounted to less than CHF 0.1 million and is accounted in the consolidated profits of the Group (2016: gain of CHF 0.1 million).
22. Financial investments available for sale
The group holds
preferential Visa Inc. shares. These shares are classified as financial investments available for sale. In 2017 the fair value increased by CHF 7.4 million (2016: 1.5 million), which was recorded as an unrealised gain on financial investments available for sale in other comprehensive income. The disposed portion of preferential Visa Inc. shares relating to Aduno SA was reacquired by Viseca subsequent to the sale of Aduno SA.
23. Payables to counterparties
The Group receives advance payments from customers with issued prepaid credit cards as well as for downpayments for leasing contracts. In 2016 the payables to merchants as well as the others have been solely from the sold Aduno SA.
24. Other trade payables
“Other trade payables” contain unpaid invoices which were received before the end of the year, but for which the time limit for payment has not yet been reached. They amounted to CHF 7.1 milion as per the end of the reporting period (end of 2016: CHF 10.4 million).
25. Other payables
Details of derivative financial instruments are shown in Note 17 “Other receivables”.
26. Accrued expenses and deferred income
27. Interest-bearing liabilities
Changes arising from financing liabilities are mainly due to changes from financing cash flows and are disclosed in the statement of cash flows.
Terms and debt repayment schedule
As at 31 December 2017, the Group has a syndicated loan facility of CHF 600 million headed by Zürcher Kantonalbank (ZKB) (31.12.2016: CHF 1,050 million) at its disposal. The interest conditions of the facility are quoted by ZKB at market conditions as at the fixing date according to the maturity plus a margin depending on the Company’s credit rating.
As at 31 December 2017, the syndicated loan amounted to CHF 390 million nominal (31.12.2016: CHF 390 million).
Unsecured bond issues
Two bonds were issued in 2017. These included a fixed rate bond of CHF 100 million with its maturity in 2018 and a coupon of 0.0% with an effective interest rate of -0.3%; and another bond of CHF 100 million disposing of a floating rate based on the Libor interest rate with a floor at 0.0% and a cap at 0.05% expiring in 2019 with an effective interest rate of 0.0%.
A fixed rate bond of CHF 275 million issued in 2014 with its maturity in 2021 disposes of a nominal interest rate of 1.125%. Including fees, the effective interest rate amounts to 1.241%.
Other bank liabilities
As at 31 December 2017, the Group has access to a bilateral credit facility with ZKB of CHF 700 million (31.12.2016: CHF 700 million). The interest rate for this facility is set at the market interest rate based on the maturity plus a fixed credit margin.
As at 31 December 2017, the total of the other bank liabilities - “current accounts” amounted to CHF 0.36 million (31.12.2016: CHF 8.6 million). In addition, the Group drew a so-called overnight facility over year-end 2017 in the amount of CHF 101.8 million (2016: none).
No assets were pledged as at 31 December 2017 (2016: none).
The Group is involved in legal proceedings in the course of normal business operations. The Group establishes provisions for pending legal cases if management believes that the Group is more likely than not to face payments and if the amount of such payments can be reasonably estimated.
Other provisions have been set aside for dismantling obligations for leasehold improvements in premises rented by the Group: The Group currently has no plans of abandoning these premises and therefore these provisions are considered non-current (2017: 1.6 million and 2016: 1.6 million), as well as for onerous contracts: Within the context of the sale of Aduno SA, the Aduno Group undertook to provide transitional services to the buyers. An upper limit for the fees to be paid for this was agreed in connection with the sale. As the costs for the services to be provided, including costs for rent, exceed the anticipated income and it is a loss-making contract (onerous contract), a provision of CHF 5.4 million was recognised (2016: none).
29. Employee benefit obligations
The pension plan of the Group is a defined benefit plan. Disability and death benefits are defined as a percentage of the insured salary.
It provides benefits in excess of the LPP/BVG law, which stipulates the minimum requirement of the mandatory employer’s sponsored pension plan in Switzerland. In particular, annual salaries up to CHF 84,600 (2016: CHF 84,600) must be insured; financing is age-related with contribution rates calculated as a percentage of the pensionable salary increasing with age from 7% to 18%. The conversion rate to calculate the annuity based on the accrued savings capital is 6.8% at normal retirement age (65 for men and 64 for women). The calculations are based on the BVG Generation Table 2015.
The plan must be fully funded under LPP/BVG law on a static basis at all times. In case of underfunding, recovery measures must be taken, such as additional financing from the employer or from the employer and employees, or a reduction in benefits or a combination of both.
The Group is affiliated to the collective foundations Swisscanto Sammelstiftung der Kantonalbanken, CIEPP - Caisse Inter-Entreprises de prévoyance professionnelle and PKG Pensionskasse (PKG). The collective foundations are separate legal entities. The foundations are responsible for governance of the plans; their boards are composed of an equal number of representatives from the employers and the employees chosen from all affiliated companies.
The foundation has set up investment guidelines, defining in particular the strategic allocation with margins.
Additionally, there is a pension committee composed of an equal number of representatives from the Group and the employees of the Group. The pension committee is responsible for the setint up the plan benefits.
In 2016 the collective foundation Swisscanto Sammelstiftung der Kantonalbanken decided to reduce the conversion rates on the extra-mandatory part of the savings capital over the coming years, which led to plan amendments recognised in 2016.
This defined benefit plan exposes the Group to actuarial risks, such as longevity risk, currency risk, interest rate risk and market (investment) risk.
Movements of present value of defined benefit obligations
Movements of fair value of plan assets
The plan assets include a qualifying insurance policy.
The plan assets are invested to ensure that the return on plan assets together with the contributions should cover the long-term benefit obligations. In the short-term, however, the pension fund could suffer a shortfall as defined by Swiss law, which would eventually trigger restructuring contributions.
Expenses recognised in the statement of comprehensive income
Significant actuarial assumptions at the reporting dates were as follows (expressed as weighted averages):
The sensitivity analysis below has been determined based on reasonably possible changes of the respective actuarial assumptions occurring at the end of the reporting period, while holding all other assumptions constant.
- –If the discount rate is 25 basis points higher (lower), the defined benefit obligations would decrease by CHF 5.3 million (increase by CHF 4.9 million). In 2016 decrease by CHF 5.4 million and an increase by CHF 5.9 million.
- –If the expected salary growth rate increases (decreases) by 0.5%, the defined benefit obligations would increase by CHF 0.9 million (decrease by CHF 1.0 million). In 2016 an increase by CHF 1.3 million and a decrease by CHF 1.4 million.
- –If the expected pension growth rate increases by 0.25%, the defined benefit obligations would increase by CHF 4.1 million (2016: CHF 4.5 million).
- –If the life expectancy increases by one year for both men and women, the defined benefit obligations would increase by CHF 2.1 million (2016: CHF 2.4 million).
The sensitivity analysis presented above may not be representative of the actual change in the defined benefit as it is unlikely that a change in assumptions would occur in isolation as some of the assumptions may be correlated.
The Group expects to pay CHF 5.8 million in contributions to defined benefit plans in 2018. As at 31 December 2016 the Group expected to pay CHF 6.5 million (including the disposed Aduno SA) in 2017.
The bonds held are predominantly rated A or better.
Cash as well as most of the investments in bonds and shares have a quoted market price in an active market. Investments in real estate and alternative investments do not typically have a quoted market price in an active market.
The pension fund does not directly invest in the Group’s own transferable financial instruments.
The investment strategy has been defined based on an asset-liabilities matching strategy. However, matching between assets and liabilities is only possible to a certain degree as the duration of the liabilities is relatively long compared to the available assets. Furthermore, available bonds with long durations do not generate a yield high enough to reach the necessary returns on the plan assets. Therefore, the pension fund also needs to invest in property and alternative investments.
As at 31 December 2017 the weighted-average duration of the defined benefit obligations was 18.3 years (2016: 18.4 years).
30. Contingent liabilities
In the normal course of business, the Group enters into agreements pursuant to which the Group may be obliged under specified circumstances to indemnify the counterparties with respect to certain matters. Up to 2016 these indemnification obligations typically arose in the context of business arrangements where the Group has remitted payments to the merchants for card members’ purchases of goods and services that have not yet been used or delivered. This creates a potential exposure for the Group in the event that the card member is not able to obtain the goods or services due to bankruptcy of the merchant and the Group is obliged to credit the card member for the goods not received or the services not consumed. Historically, this type of exposure has not generated any significant loss for the Group.
In some leasing contracts in the Consumer Finance business the Group confirms to the customer a minimum residual value of the leased item to the leasing partner, meaning that if the leasing customer returns the leased item to the leasing partner after the leasing period with a lower value than the minimum residual value, the Group is obliged to refund the leasing partner the difference in value.
31. Share capital and reserves
As at 31 December 2017 the share capital of the parent company Aduno Holding consisted of 25,000 shares with a nominal value of CHF 1,000 each (2016: 25,000 shares). The holders of the shares are entitled to receive dividends as declared and are entitled to one vote per share at the general meeting of the Company.
The following dividends were declared and paid by the Group:
After 31 December 2017 the Board of Directors proposed a dividend of CHF 6,000 per share totalling CHF 150 million for 2017. The dividend proposal will be forwarded for approval by the general meeting in May 2018.
As described in Note 17, the Group uses interest rate swaps to hedge its exposure to interest rate changes. The effective portion of these hedges, net of taxes, is accounted in the hedging reserve.
In 2011 the Group entered into a forward-starting swap to fix the interest rate of the bond issue planned and executed in October 2011. The realised negative fair value was accounted in the hedging reserve and is included in the interest expense within the duration of the bond.
The Board’s policy is to maintain an adequate equity base so as to maintain the confidence of investors, creditors and the market and to sustain the future development of the business. The Board of Directors monitors the return on capital, which the Group defines as the total shareholders’ equity and the development of dividends paid to shareholders.
According to the Swiss consumer finance regulations, certain consumer finance credit balances to private customers have to be underlined with 8% of equity. For the subsidiary cashgate, the Company’s target is therefore to always maintain an equity base fulfilling these legally required obligations. The level of equity is reviewed by the management of cashgate on a quarterly basis. Since the acquisition of the Consumer Finance business, this obligation was fulfilled at the end of each month, including on 31 December 2017.
32. Risk management
Through its business activities, the Aduno Group is subjected to constant changes and thus also confronted with opportunities and risks that can substantially affect the achievement of its strategic goals and objectives. These opportunities and risks can arise from events, conditions and actions to which the Group is exposed and which it therefore needs to understand and actively manage.
In recent years the Group has further enhanced its risk management programme (framework), expanding it to take into account the complexity of its business
divisions and major changes in the business environment.
The Group defines
risk as the uncertainties inherent in the achievement of strategic and operational objectives that
are associated with all business activities. These uncertainties could result
in a shortfall in meeting objectives or the risk of financial losses.
As a financial services company, the Aduno Group is exposed to various types of risk that are managed actively and systematically.
The Aduno Group’s risk management approach follows a standardised model that starts with the definition of the risk policy, continues with the identification, management and monitoring of the risks associated with its business activities, and culminates in risk reporting.
Internal control system
The internal control system (ICS) of the Group covers all control structures (including roles and responsibilities) and processes that form the basis for achieving the business objectives and ensuring appropriate business operations across all levels of the Company. The integrated ICS consists of ex-post oversight as well as planning and management activities.
Principles of risk management
The risk policy specifies the framework for the risk management and risk profile of the Group. This in particular includes the definition of risk capacity, risk appetite, limits, suitable stress tests as well as quantification and aggregation methodologies to monitor the risk profile.
The risk policy sets out the objectives of risk management. It involves taking risks in a controlled and deliberate manner to achieve an optimal risk-return ratio. The framework conditions are determined by the Company’s business strategy and risk capacity. To this end, the Group aligns the strategic planning process with capital planning and risk budgeting.
A risk culture geared towards responsible risk-taking to ensure a deliberate approach to risks is fostered throughout the Group. The management of the Group is expected to set an example and influence their employees to only take on risks that are compatible with the specified risk appetite. The promotion and compensation of employees also takes their compliance with the risk culture and risk policies into account.
As the Group’s business operations involve inherent risks that require active management, the Group aims for a high degree of risk awareness.
The Group consciously enters into risk transactions within its defined risk appetite. To this end, new business activities or changes to existing business activities are systematically evaluated with regard to their risk profile and the risk portfolio is constantly monitored. The Group avoids extreme risks that jeopardise its solvency or its very existence.
Segregation of duties
Risk management operates along the “Three Lines of Defence Model”. The first line of defence refers to the functions that own and manage risks consisting of the managers, experts and staff within the business divisions and ensures that the actual risk profile adheres to the approved risk appetite.
The second line of defence comprises centralised risk control that not only defines the directives that apply to all business divisions when dealing with specified risks but also monitors compliance with these requirements. The second line of defence also provides an aggregated portfolio view to support management in the implementation of effective risk management practices for the Group and ensures regular risk reporting.
The third line of defence provides independent assurance on the effectiveness of governance, risk management and internal controls, including the manner in which the first and second lines of defence meet risk management and control objectives. The internal and external auditors are responsible for the third line of defence.
Standardised risk management process
The risk management process of the Aduno Group contains the following elements: risk identification, risk assessment, risk steering and risk monitoring. All new business activities and changes to existing business activities follow the risk management process. The materiality of changes to the business model is a relevant benchmark in this process.
Central risk control ensures that the risk management process is carried out effectively.
Standardised valuation method
Standardised methods appropriate to the type and scope of business activity are defined for determining the risk profile and risk capacity. Risk assessments are made at risk category, business division and Group level.
Scenario-based risk assessments are performed to gauge the impact of environmental, business and operational risks on key objectives, whereby the realistic scenarios are based on the time horizon and objectives of the strategic business plan. The robustness of the business model is tested under various stress scenarios.
Risk Control regularly informs the Board of Directors and Executive Board of the Group about the overall risk situation, any developments in the risk profile and important findings gained through its risk oversight role. In addition, an annual activity report is prepared that provides information about the maturity level of and developments in the risk management system.
Various reports are prepared for each risk category, whereby format, frequency and recipients are tailored to the individual risk to ensure a comprehensive, objective and transparent foundation for decision-makers and oversight committees.
Board of Directors
Overall responsibility for risk management lies with the Board of Directors, which approves the principles for risk management. The Board of Directors receives regular reports about the risk situation of the Group and the status of measures implemented. The Board of Directors monitors the effective implementation of the risk policy and risk strategies as well as the adopted measures.
The Audit and Risk Committee and the internal auditors support the Board of Directors in the execution of its responsibilities.
The Executive Board (ExB) is responsible for the implementation of the risk management standards defined in the risk management regulations and the design, implementation and continuous review of the internal control system (ICS).
A risk board has been set up at the ExB level that meets quarterly to discuss the structure and effectiveness of the risk management system, the design and monitoring of the risk policy and the management of the Group’s risks.
Expert committees have been set up to prepare requests for approval for transactions, proposals and recommendations as a decision-making basis for the ExB.
A central risk control function is responsible for identifying and monitoring risks at an aggregated portfolio level, monitoring compliance with the risk policy and ensuring integrated risk reporting to the Board of Directors and the ExB. Risk control is responsible for risk measurement methodologies, risk-based approval processes for new business activities, model validation and quality assurance of the implemented risk measurement processes.
If required, risk control can propose directives for approval by the ExB. Central risk control is responsible for monitoring compliance with the policies and their supporting directives and providing reports or information as requested.
Control of material risks
The Group distinguishes the following six risk categories for its business activities:
- –External/environmental risk
- –Business risk
- –Operational risk
- –Credit risk
- –Liquidity risk
- –Market risk (currency risk, interest risk and equity price risk)
Reputational damage is not listed as a separate risk category as it generally only arises as a consequence of one of the aforementioned risks. Reputational damage is therefore considered to be consequential damage.
Environmental, business and operational risks are systematically assessed and either deemed acceptable and within the risk appetite or undesirable and to be reduced with appropriate measures. The measures that are implemented to mitigate risks are monitored through the ICS of the Group.
The Group defines external/environmental risk as risk arising from the external business environment of the Group that could challenge the business model of the Group or the individual companies.
The Group defines business risk as the possibility of lower than anticipated profits due to uncertainties arising from the following aspects: management and the quality of information used for taking decisions or deriving strategies.
Operational risk refers to the risk of monetary losses resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes information technology risks and all legal and regulatory risks.
The key credit risk for the Group is the risk of financial loss that arises if a customer or counterparty to a financial transaction fails to meet its contractual obligations and results primarily from the Group’s receivables from customers.
The Group’s exposure to credit risk primarily originates from the creditworthiness and credit capacity of each customer and is comprised of receivables which remain unpaid or which are paid later than at their due date.
Geographically, credit risk is concentrated in Switzerland where the Group mainly operates.
Receivables from cardholders
It is in the nature of the credit card business that customers get temporarily into debt with the credit card company. This explains the considerably high volumes of receivables.
The credit counterparty in the issuing business is a private or corporate consumer using a credit card for purchases or cash transactions. All credit card customers, when applying for a credit card, are assigned an individual credit rating before a credit card is issued. If a client does not meet the stringent customer credit rating criteria, no credit card is issued.
Risk and credit management is a core process in the credit card business and the Group therefore runs sophisticated risk assessment tools and delinquency reports to monitor and assess risk exposure. All incoming payments of customers are closely monitored. If a client defaults for more than 60 days, the receivable will be transferred to a dedicated risk management department to ensure collection of the debts.
For customers with high risk exposure, collaterals such as bank guarantees are held as security. Customers with low risk exposure are not required to deliver collaterals.
The Group issues credit cards on behalf of various distribution partners. The Group has entered into agreements with some of its partners, so that the partner bears the risk of default for any receivable outstanding from cardholders. If a cardholder becomes delinquent, the outstanding amount is paid in full by the partner.
If a cardholder has a direct relationship with the Group and not via a partner, the Group bears the default risk. In individual cases the outstanding receivable is collateralised by bank guarantees. The underlying receivables amounted to CHF 9.4 million as at 31 December 2017 (2016: CHF 10.1 million). These receivables are fully covered by the bank guarantees.
Residual amounts overdue for more than 90 days may occur outside the debt collection portfolio, when the assessment has not been completed. The total of these residual amounts stood at CHF 0.06 million as at 31 December 2017 (2016: CHF 0.1 million).
To avoid a total loss of the receivable, the Group renegotiates the terms of payment for customers who are not able to redeem the receivable in total. The renegotiated amounts are contained in “receivables from debt collection”. Conditions for renegotiated amounts are individually fixed depending on the individual situation of the debtor. The total portfolio with renegotiated payment terms comprises CHF 1.6 million (2016: CHF 1.7 million).
Receivables overdue for more than 24 months are written off from the balance sheet.
Receivables from merchant activities (up to 2016)
In the merchant business, the Group generally transfers money to its merchants at the same time as it receives the settlement by its counterparties. The major credit counterparties are the international operating card schemes MasterCard and Visa. The receivables are settled daily. Therefore, management assesses the credit risk in the merchant business as very low and receivables are not collateralised.
Resulting from terminal sales, the Group recognises receivables against commercial customers. To secure the receivables, the Group is able to block the customers’ terminals to ensure the payment of the customers’ debt towards the Group.
Receivables from Consumer Finance
In the Consumer Finance business, the Group grants cash credits or finances cars in a financial lease to its customers. The credit counterparty is a private consumer in the cash credit business and a private or corporate customer in the leasing business. The receivables are generally due on a monthly basis, which means that the credit risk steadily decreases over the life of the contract.
In compliance with the Swiss consumer credit regulations, a solvency check is carried out for all customers on an individual basis to assess the related credit risk when they apply for a cash credit or a leasing facility.
The solvency check is based on the customer’s historical track record with the Group and requires the customer to deliver personal data on their financial situation such as employment, family situation and personal debt situation. Additionally, a database for private consumer loans, maintained by Swiss banks, is consulted to confirm that no negative records have been recognised for the future customer.
If a client does not meet the stringent customer credit rating criteria, no credit facility will be approved.
Risk and credit management is a core process in the Consumer Finance business. Therefore, the Group runs sophisticated risk assessment tools and delinquency reports to monitor and assess the risk exposure. All incoming payments from customers are closely monitored. If a client defaults for more than 90 days, the overdue receivable will be actively managed to ensure the collection of the debt.
The receivables from consumer loans are not collateralised. The finance lease receivables are collateralised by the financed cars, the Group applying a margin between the lease amount and the estimated value of the financed car to ensure that the coverage of the receivable is higher than 100%.
Exposure to credit risk
The carrying amount of financial assets represents the maximum credit exposure. The maximum credit risk to which the Group is theoretically exposed at 31 December 2017 and 2016 respectively is represented by the carrying amounts stated for financial assets in the balance sheet.
The maximum exposure to credit risk for receivables from cardholders, Consumer Finance and merchant activities at the reporting date by type of customer is shown in the following tables. Additionally, credit risk can occur from debt collection and from fraud in the Payment business as shown in Note 15 and from other receivables.
The collateralisation by partners and bank guarantees is borne by those counterparties in the amount of the receivable. The estimated fair value of the collateral is estimated to be the same as the nominal value.
Receivables from Financial leases are collateralised by the financed cars. In accordance with the Group’s risk policy, the Group estimates that the fair value of the collaterals is approximately the same as the nominal value of the receivable.
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. Liquidity risk arises if the Group is unable to obtain under economic conditions the funds needed to carry out its operations. Group closely monitors its liquidity needs and also maintains liquidity forecasts.
Management ensures that cash funds and credit lines currently available (total credit line limit of CHF 1,300 million, 2016: CHF 1,750 million) and funds that will be generated from operating activities (in the last 12 months a monthly average of CHF 820 million, 2016: CHF 1,450 million) enable the Group to satisfy its requirements resulting from its operating activities and to fulfil its obligations to repay its debts at their natural due date.
Maturity of financial liabilities
Market risk is the risk of losses arising from movements in market prices in on-balance and off-balance sheet items. Three of the standard market risk factors cover the risk of price movements in foreign currency, interest rates and equity price risk.
Foreign currency risk
The Group’s exposure to foreign currency risk is as follows based on notional amounts. There is no currency risk on Swiss francs (CHF) as it is the functional currency of the Company.
The Group has estimated the effects of a strengthening of the Swiss franc against the following currencies. As a measure the Group assumed a volatility for CHF/EUR of 5.5% and for CHF/USD of 7.9%. These assumptions are based on market data from 2017.
With these assumptions, a strengthening of the Swiss franc against the following currencies at 31 December would have increased profit or loss after tax by the amounts shown below. No changes will occur within the equity of the Group when exchange rates change.
This analysis assumes that all other variables, in particular interest rates, remain constant.
In the case where the Swiss franc declines in value, the same effect vice versa would occur.
Interest rate risk
At the reporting date the interest rate profile of the Group’s interest bearing financial instruments after the effects of interest swaps was:
Cash flow sensitivity analysis
Due to the hedging activities, the exposure from variable rate instruments is highly reduced. If interest rates had been 10 basis points lower as at 31 December 2017, the post-tax profit of the Group would have been CHF 0.6 million higher with all other variables held constant (2016: CHF 0.7 million higher).
If interest rates had been 10 basis points higher, with all other variables held constant, post-tax profit would have been lower for the same amounts as above, arising mainly as a result of higher interest expenses on variable borrowings.
Fair value sensitivity analysis
The Group does not account for any fixed rate financial liabilities at fair value through profit or loss. Therefore, a change in interest rates at the reporting date would not affect profit or loss.
Equity price risk
The Group is exposed to equity price risk, which arises from available for sale equity securities. Currently, the Group holds preferential Visa Inc. shares of Visa. The shares of Visa are listed on the New York Stock Exchange. A 3% increase in the Dow Jones Industrial at the reporting date would have increased equity by CHF 0.6 million after tax (2016: increase by CHF 0.4 million); an equal change in the opposite direction would have decreased equity by CHF 0.6 million after tax (2016: decrease by CHF 0.4 million).
The fair values of financial assets and liabilities together with the carrying amounts shown in the balance sheet are as follows:
Basis for the determination of fair value
The following summarises the significant methods and assumptions used in estimating the fair value of financial instruments reflected in the table above.
Receivables and payables
Trade accounts receivable and payable are stated in the balance sheet at their carrying value less impairment allowance. Due to their short-term nature, receivables from card activities are assumed to approximate their fair value.
In the case of long-term financial instruments with a maturity or a refinancing profile of more than one year and for which observable market transactions are not available, the fair value is estimated using valuation models such as discounted cash flow techniques. Input parameters into the valuation include expected lifetime credit losses, interest rates, prepayment rates and primary origination or secondary market spreads.
Non-derivative financial liabilities
The fair value of financial instruments for disclosure purposes is calculated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments.
The difference between the carrying amount and the fair value of the interest-bearing liabilities (short-term as well as long-term) is caused by the unsecured bond issues and amounted to a total of CHF 13.1 million in 2017 (2016: CHF 21.8 million). These unsecured bonds are categorised in Level 1 of the fair value hierarchy.
Interest rates used for determining fair value
The interest rates used to discount estimated cash flows, where applicable, are based on the market interest rates for the maturity of the debt at the reporting date, and were in the range of –0.77% and –0.62% for the current year and –0.80% and –0.65% for 2016.
Financial instruments carried at fair value, fair value hierarchy
The table below analyses recurring fair value measurements for financial assets and financial liabilities. These fair value measurements are categorised into different levels in the fair value hierarchy based on the inputs to valuation techniques used. The different levels are defined as follows.
- –Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities that the Group can access at the measurement date
- –Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly
- –Level 3: unobservable inputs for the asset or liability
Input for Level 2 valuation
Level 2 fair values for simple over-the-counter derivative financial instruments are based on broker quotes. Those quotes are tested for reasonableness by discounting expected future cash flows using market rates for a similar instrument at the measurement date. Fair values reflect the credit risk of the instrument and include adjustments to take account of the non-performance risk, where appropriate. Level 2 fair values for available for sale financial instruments are based on market prices multiples without any unobservable input.
The fair value of financial instruments disclosed at fair value is determined as follows
An offsetting agreement was in place between Mastercard and different group companies (“offsetting agreement”). In its normal course of business as an acquirer (until the sale of the acquiring business in August 2017), the Group transfers the purchase price for card transactions to its affiliated partners. Mastercard simultaneously credits the respective amounts to the Group. At the same time, the Group as an issuer of credit cards has an obligation to Mastercard from the card transactions of its cardholders. The offsetting agreement allowed the Group to offset the respective credit and debit balances through the payments to or from Mastercard.
As at 31 December 2017 the offseting agreement was no longer in place as the acquiring business was sold. As at 31 December 2016 the outstanding amount in favour of the Group amounted to CHF 66.1 million included in “Receivables from business unit Payment, net”, while the Group had an outstanding obligation of CHF 39.7 million included in “Payables to counterparties”, resulting in a net amount of CHF 26.4 million in favour of the Group against Mastercard.
33. Related parties
Related parties are the shareholders which have a direct influence on the Group’s activities by delegating a member to the Group’s Board of Directors, the other members of the Group’s Board of Directors, the Executive Committee, entities controlled by a member of the Group’s Board of Directors and the associates Accarda and SwissWallet AG.
The shareholders that are considered as being related parties are as follows:
Transactions with related parties
The Group does extensive business with its shareholders and other related parties, especially within financing activities and card distribution in the Payment business.
Income and expenses with related parties as stated in the following table is included in the Group’s consolidated statement of comprehensive income.
All transactions between the Group and its related parties as well as its associates are entered into at market rates.
At the closing date, the Group had the following balance sheet exposure with its related parties:
The Group’s balance sheet does not contain provisions for doubtful debts from related parties, nor does the consolidated statement of comprehensive income recognise any expenses in respect of bad or doubtful debts due from related parties.
Transactions with associates
In 2017 and 2016 respectively, transactions with associates concerned mainly scanning services provided by Accarda to the Group as well as fees for consulting services provided to Accarda, and since 2015 processing services provided by SwissWallet AG to the Group.
Income and expenses with associates as stated in the following table are included in the Group’s consolidated statement of comprehensive income.
At the closing date, the Group had the following balance sheet exposure with its associates:
Transactions with key management personnel
The members of the Board of Directors and the Executive Board of the Group and their immediate relatives do not have any ownership interest in the Group’s companies.
The Group provides short-term remuneration to the members of the Board of Directors and Executive Board. Beside their salaries and pension fund benefits, the members of the Executive Board and directors receive long-term benefits based on the results of the Company.
The key management personnel compensation is as follows:
There are no loan agreements in place with key management. However, Viseca issues credit cards for key management. It is in the nature of the credit card business that the customer gets temporarily into debt with Viseca. Furthermore, cashgate offers Consumer Finance loans and leasing, and AdunoKaution and SmartCaution offer rental guarantees. In the case of ongoing business, employees and also key management can apply for those credits and facilities.
The conditions and requirements for eventually granted facilities and loans are under normal commercial terms and conditions that would also be provided to unrelated third parties.