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 2018 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 (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. As at 1 October 2018 the Group increased its stake in Accarda AG (Accarda) to 100%. Accarda operates in the field of loyalty cards with payment function. 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 develope software solutions for card terminals. They were sold as per 5 December 2018. The subsidiary AdunoKaution AG (AdunoKaution) and the subsidiary SmartCaution SA (SmartCaution) offer rental guarantees to their customers. They were merged into cashgate as per 1 July 2018. The subsidiary Contovista AG (Contovista) developes software for Finance Management as well as Analystics and distributes it to banks.
Basis of preparation
The consolidated financial statements were approved by the Board of Directors on 11 April 2019 and will be submitted for final approval by the general meeting on 27 May 2019.
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 which are stated at their fair value. Methods to determine fair values are further discussed in note 33 “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.
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 (e.g. expected credit loss and recoverability)
- –Note 16 – Receivables from Consumer Finance (e.g. expected credit loss and recoverability)
- –Note 18 – Other receivables (e.g. expected credit loss and recoverability)
- –Note 21 – Goodwill and other intangible assets (e.g. measurement of recoverable amounts of CGUs)
- –Note 31 – Contingent liabilities (e.g. counterparty credit risk of internet transactions)
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 fair value.
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 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 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 non-monetary bonus, annual fee rebates as well as 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. 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 as well as losses on derivative financial instruments that are recognised in profit or loss. Interest expenses are recognised using the effective interest method.
Impairment losses from the Payment business and from the Consumer Finance
Impairment losses from the Payment business contain losses arising from bad debts, from an increase of expected credit losses, fraud and chargebacks. Impairment losses from the Consumer Finance business contain losses arising from bad debts and from an increase of the expected credit 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 according to 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 they relate to items recognised directly in equity, in which case they are 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.
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, 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.
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 7–15 years, in general using the digital digressive method according to their respective 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.
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.
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:
- –IFRS 9 Financial Instruments
- –IFRS 15 Revenue from Contracts with Customers
IFRS 9 Financial Instruments
IFRS 9 sets out requirements for recognising and measuring financial assets and financial liabilities. The standard replaces IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 was adopted without restating comparative information. The reclassifications and adjustments arising from the new impairment rules are recognised in the opening balance as at 1 January 2018.
(i) Classification and measurement
The Aduno Group holds receivables that are expected to generate contractual cash flows and where the item will be held to term. If those receivables pass the Solely Payments of Principal and Interest (SPPI) test, as outlined below, they are measured at amortised cost (AC). They comprise receivables from the business units Payment and Consumer Finance.
When determining whether contractual cash flows solely comprise repayments of the principal and interest payments (SPPI), the Group considers the contractual terms for each instrument. The test looks at whether the contract provisions governing the financial assets could affect the timing or amount of the agreed cash flows. If the answer is affirmative, the asset may not meet the test criteria. When assessing the cash flows, the Group considers:
- –Conditions that could affect the timing or amount of the cash flow
- –Components with a leverage effect
- –Clauses on early repayment and extensions
In addition, the group holds financial instruments that are measured at fair value, such as derivatives, and equity shares that are classified as FVOCI, of which all associated gains and losses are recognised in “Other comprehensive income”.
The following table shows the adjustments recognised for each individual line item. The adjustments are explained in more detail below. The difference between the adjustments on the asset side and the adjustment in the statement of changes in equity equals the income tax effect.
Receivables from the business units Payment and Consumer Finance, cash and cash equivalents, and 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 the instruments and concluded that they meet the criteria for amortised cost measurement under IFRS 9. Consequently the instruments do not need to be reclassified.
The Group continues to measure all financial assets held at fair value under IAS 39 at fair value under IFRS 9. Equity shares held as available for sale with gains and losses recorded in “Other comprehensive income” (OCI) now appear in the new category “FVOCI – equity instrument”. Derivatives held for trading and used for hedging are measured at fair value. Consequently the application of IFRS 9 has no impact on the measurement.
All financial liabilities measured at amortised cost under IAS 39 are also measured at amortised cost under IFRS 9. Consequently the implementation of IFRS 9 has no impact on the measurement.
(ii) Impairment of financial assets
Instead of the incurred loss model used in IAS 39, IFRS 9 uses an expected credit loss (ECL) model. The Group calculates loss allowances at an amount equal to lifetime ECL where the credit risk has increased significantly (stage 2) or the financial asset is in default (stage 3). However, the following are measured as 12-month ECL (stage 1): financial assets of counterparties with low credit risk – an investment rating BBB or above – as at the balance sheet date, and other financial assets where credit risk has not increased significantly since initial recognition. Loss allowances for trade receivables are always measured at an amount equal to lifetime ECL.
More detailed analysis for financial instruments materially impacted by the expected credit loss are further explained in the following notes:
- –Note 15 – Receivables from Payment business
- –Note 16 – Receivables from Consumer Finance
- –Note 18 – Other receivables
Although the impairment requirements of IFRS 9 also apply to cash and cash equivalents, no material impairment loss has been identified either for 1 January 2018 or for 31 December 2018. All cash and cash equivalents are held with banks with a credit rating of A or higher. Most cash and cash equivalents are deposited with a bank that has an AAA rating. All cash and cash equivalents can be withdrawn immediately – there is no notice period.
The Group has determined that applying the IFRS 9 impairment requirements as at 1 January 2018 generates an additional impairment allowance as shown below:
IFRS 15 Revenue from Contracts with Customers
In May 2014, the IASB issued a new standard which sets out how and when revenue is recognised. IFRS 15 replaces several other IFRS standards and interpretations that previously governed revenue recognition under IFRS. The new standard includes a single five-step model with principles that apply to all contracts with customers. The five steps comprise: 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 as and when the Group satisfies a performance obligation.
The new standard also provides more comprehensive guidance for certain transactions and clearer guidance on multiple-element arrangements. The standard also requires additional disclosures for revenue.
The new standard has no material impact on the Group’s financial statements. 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.
New and revised standards and interpretations
With effect from 1 January 2019, the Aduno Group consolidated financial statements will be produced in accordance with Swiss GAAP FER. New and revised standards and interpretations that have been issued but are not yet effective and have not been applied early in the consolidated financial statements have not been examined further.
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 the 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 also provides the associated transaction and customer services. The majority of the business is linked to the Mastercard and Visa brands.
The business unit Payment operates through Viseca, Accarda and Contovista, as well as Vibbek GmbH and Vibbek AG, which were sold off effective 5 December 2018. The business unit’s main revenue streams come from interchange fees and commission, annual fees for cards and services, income from card transactions in foreign currencies, and interest income. AdunoKaution and SmartCaution were merged into cashgate in 2018 and were subsequently transferred to the Consumer Finance segment. The 2017 segment figures have been restated for the purpose of better comparability. Aduno SA was also part of the business unit Payment until it was sold in 2017. The Acquiring and Terminal business is now classified as a discontinued operation.
The business unit Consumer Finance is operated by cashgate. The business unit Consumer Finance offers leasing contracts and loans for consumer goods to private and corporate customers. The business unit was expanded to include rental deposits following the merger of AdunoKaution and SmartCaution in 2018. The 2017 figures have been restated for the purpose of better comparability. The primary revenue 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.
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 (2017: none).
The following table presents certain information regarding the operating segments, based on management’s evaluation and internal reporting structure, as at 31 December 2018 and 2017 and for each of the years ended.
3. Change in scope of consolidation
Acquisition of Accarda AG
Effective 1 October 2018 Aduno Holding purchased an additional 70% of the shares of Accarda AG in Brütisellen, canton of Zurich. Together with the holding of 30%, Aduno Holding now has a stake of 100% in Accrda. The company operates in the field of loyalty cards with payment function. The purchase price for the 70% was CHF 195.5 million, which was paid in full in cash. The revaluation of the existing 30% resulted in a valuation gain of CHF 27.4 million. The revaluation gain is recorded in “Income from associates”.
The following purchase price allocation is final. Goodwill of CHF 58.7 million has been identified and is allocated to the cash-generating unit Issuing. The increased stake in Accarda enables future business models and synergies with the existing issuing business and increases revenue from exisiting Accarda customers.
Included in the Group’s revenues for 2018 are CHF 21.1 million arising from the additional business from Accarda. A loss of CHF 10.7 million is included in the profit for the year. If the acquisition of Accarda had occurred on 1 January 2018, the Group’s consolidated revenue would have been CHF 564.2 million and its consolidated profit from continuing operations CHF 117.0 million. The acquisition incurred acquisition costs for the Group of CHF 2.8 million, which are included in the profit and loss statement under “Other expenses”.
Acquisition of Contovista AG (2017)
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”.
Sale of Vibbek AG
As per 5 December 2018 the Group sold its 67% stake in Vibbek AG for CHF 3.3 million, resulting in a gain of CHF 0.4 million, which is recorded in other income.
4. Commission income
5. Interest income and interest expenses
The increase in net interest income is on one hande due to the acquisition of Accarda (CHF 7.4 million) and on the other due to the still very low refinancing costs.
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 or on the other payment 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).
The increase of income from services is mainly due the acquistion of Accarda (CHF 10.6 million).
Other income increased compared to 2017 due to a transitional service agreement in connection with the sale of the acquiring business.
7. Processing and service expenses
Card processing expenses are volume based and have increased in accordance with the transaction volume and card portfolio. The increase in service expenses is due to the purchase of Accarda (CHF 2.4 million).
8. Distribution, advertising and promotion expenses
9. Personnel expenses
The increase in personnel expenses is mainly due the purchase of Accarda (CHF 18.3 million); of this figure, CHF 10.8 million is due to past service costs, refer to note 30 “Employee benefits obligation”.
10. Other expenses
11. Impairment losses from Payment and Consumer Finance
In 2017, the impairment losses for both the business unit Payment as well as the business unit Consumer Finance were calculated using the old incurred loss model, whereas in 2018 the impairment losses were calculated based on the expected credit loss model. The impairment losses on commission income in 2018 comprise impairment losses for fraudulent and chargeback transactions, which are not credit losses.
12. Income tax expenses
Expenses recognised in the consolidated income statement
Average applicable tax rate
The Group calculated an average applicable income tax rate of 17.0% in 2018 and 14.9% in 2017, 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 2018 was 14.3%; for 2017, it was 31.6%. 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. An intended agreement with the Zurich tax authorities proved to be unrealistic. Following this, in March 2018, the Aduno Group lodged an appeal with the Zurich tax appeals court.
Due to the reassessment, in 2017 the Aduno Group recognised additional tax provisions amounting to CHF 23.7 million for the financial years 2011 to 2016, and CHF 7.3 million for 2017. There was no change to the assessment concerning this case in 2018. These tax provisions are part of the current tax payable of CHF 90.0 million.
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 2018, amounted to CHF 0.0 million (2017: CHF 22.7 million).
Tax loss carry-forwards
The Group had total tax loss carry-forwards of CHF 0.0 million as at 31 December 2018 (2017: CHF 15.8 million). There are no unrecognised tax loss carry-forwards.
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 the business unit Payment
Receivables from the business unit Payment – credit cards
Receivables from credit cardholders comprise open balances on credit card accounts. Open cardholder balances that have been past due for more than 90–120 days are transferred to a dedicated collection portfolio, which is actively monitored. As at 31 December 2018, the collection portfolio stood at CHF 3.5 million (31 December 2017: CHF 3.7 million). The portfolio is reported under “Receivables from debt collection – credit cards”.
Other receivables from the Payment business, credit cards comprise receivables totalling CHF 0.4 million from the software sales business (31 December 2017: CHF 1.1 million) plus a CHF 4.5 million standalone receivable linked to the Visa International Inc. card business (2017: CHF 4.7 million, long-term receivable).
Receivables from the Payment business – other payment cards
Receivables from cardholders consists of open balances on other payment card accounts. The vast majority of these other payment cards (receivables in the amount of CHF 220.4 million) is a homogenous retail card portfolio with a long tracking history. A small part of the other payment card accounts (receivables in the amount of CHF 19.5 million) comprises a heterogenous corporate portfolio and a retailcard portfolio with a short tracking history. Open cardholder balances that fulfil the transfer criteria are transferred to a dedicated collection portfolio, which is actively monitored. As at 31 December 2018, the collection portfolio stood at CHF 7.6 million. As the business was acquired on 1 October 2018, there are no figures for 2017. The portfolio is reported under “Receivables from debt collection, other payment cards”.
Other receivables from the Payment business, other payment cards comprise receivables from the payment solution “purchase on account” in e-commerce.
Management of credit risk in the Payment business
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.
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 10.7 million as at 31 December 2018 (2017: CHF 9.4 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 0.2 million as at 31 December 2018 (2017: CHF 0.06 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 1.5 million (2017: CHF 1.6 million).
Loss allowances for the business unit Payment – credit cards
The loss allowance for cardholders is composed of the ECL for receivables from the business unit Payment. The actual impairment is calculated for all significant receivables from individual cardholders. Any individual receivables that do not qualify as impaired are then assessed in terms of the expected credit loss. The loss allowance for all three categories is determined using historical data in conjunction with sophisticated analytical methods and valuation models.
Input factors for the calculation of the loss allowance
The input factors used to calculate expected credit loss (ECL = PD x EAD x LGD) for receivables that are assessed collectively are described below (PD: probability of default, EAD: exposure at default, LGD: loss given default):
- –The PD is derived from credit scoring models using survival analysis for private clients and logistic regression techniques for corporate clients. The scoring model is based on customer attributes such as card limits, income and age, plus behavioural attributes including payment history, card usage and risk-related transactions. Given the revolving credit facilities associated with the credit card business and the credit risk mitigation processes in place, the period of exposure is determined to be four months.
- –The EAD component consists of the current balance and an expected amount resulting from the unused card limit. The expected amount of the unused limit is calculated by analysing past defaults where the customer’s average default amount was 15–30% higher than their ordinary card usage. Being in stage 1 or stage 2 has no bearing on the extent of future usage in the event of a customer default.
- –The ECL model uses an LGD value that measures recoveries and losses up to 24 months from default. Stage 1 and stage 2 receivables are measured using the same LGD, as they are not yet in default. Receivables in stage 3 are assigned an individual LGD depending on their age and status within our debt collection process.
At each reporting date, credit risk is assessed to see whether it has increased significantly. The assessment considers both quantitative and qualitative factors. Where the impairment has not already been identified, a receivable from the Payment business is allocated to stage 2 when it is 60 days past due. Stage 2 receivables can be moved back to stage 1 as and when the credit risk no longer qualifies as significantly increased. The Group allocates a customer to stage 3 after debt management reminders have proved unsuccessful and the customer has had to be transferred to the pre-collection and legal collection processes. The transfer decision is made on a case-by-case basis for each customer and generally occurs when payments are 60–120 days past due. Contracts with customers in the collection process are terminated, which means contracts cannot be downgraded from stage 3. Stage 3 receivables are written off after two years. Based on past experience, the Group assumes that the receivables will not generate any further significant cash flow.
Under IFRS 9, ECL calculations are required to incorporate forward-looking information: the period of exposure has been defined as four months for the Payment business. Over a four-month period, the macroeconomic conditions in Switzerland do not vary sufficiently to create a significant risk of loss. Consequently we have chosen not to consider forward-looking information for the Payment business.
The loss allowance is adjusted based on management’s judgement as to whether actual losses are likely to fall above or below historical trends given current economic and loan conditions. Management deems the loss allowance for doubtful debts for the business unit Payment to be adequate.
Within the Payment business, an average of 99% (31 December 2017: 99%) of outstanding receivables are not past due. Based on past experience, the Group therefore calculates the impairment allowance on the basis of the default risk for the entire portfolio.
Expected credit loss in the Payement business, credit cards as per 31 December 2018
In 2018, the Group completely wrote off impaired receivables totalling CHF 1.4 million. Loss certificates with a value of CHF 1.0 million have been issued for the receivables.
Changes in ECL allowance
The table below shows the changes for each stage over the reporting period.
Loss allowances for the business unit Payment, other payment cards - homogeneous retail card portfolio
Any individual significant receivables are assessed in terms of loss allowance. The loss allowance is calculated using historical data in conjunction with sophisticated analytical methods and valuation models.
Input factors for the calculation of the loss allowance
The input factors used to calculate expected credit loss (ECL = PD x EAD x LGD) for receivables that are assessed collectively are described below:
- –PD is estimated based on historical default rates: the number of transfers to debt collection during the period of exposure divided by the number of receivables at the start of the period. In light of the revolving credit facilities associated with the credit card business and the capital adequacy requirements defined by the Basel Committee on Banking Supervision, the expected period of exposure is set at 12 months.
- –EAD is estimated based on historical default rates: total value of transfers to debt collection in CHF during the period of exposure divided by the number of transfers to debt collection during the period. In the collective assessment, the calculated EAD is weighted with the number of customers of a stage. In addition to the current drawn balance, EAD therefore also implicitly includes an estimated amount for the unused limit.
- –The ECL model applies an LGD value that measures recoveries and losses up to 24 months from default.
The stage transfer assessment, management’s judgement and derecognition criteria are applied essentially identically to the previous descriptions of the credit card business.
Within the Payment business, an average of 96% of outstanding receivables are not past due. There are no 2017 figures for comparison because the business was acquired on 1 October 2018. Based on past experience, the impairment allowance is calculated using the default risk for the entire portfolio.
Expected credit loss in the business unit Payment, other payment cards - homogeneous retail card portfolio
Change in ECL allowance
The ECL allowance has not changed significantly since the acquistion of Accarda.
In 2018, the Group completely wrote off receivables totalling CHF 4.0 million. Loss certificates with a value of CHF 2.7 million have been issued for the receivables.
Loss allowances for the business unit Payment, other payment cards – remaining portfolio
The expected credit loss and the corresponding loss allowance for a small portion of the Payment business portfolio (receivables from cardholders, other payment cards and other receivables from the business unit Payment, other payment cards) are based on a loss rate approach, whereby a combination of probability of default and loss given default is applied.
The loss allowance is adjusted based on management’s judgement as to whether actual losses are likely to fall above or below historical trends given current economic and loan conditions. Management deems the loss allowance for doubtful debts for the business unit Payment to be adequate.
The debt collection is net of receivables impaired at acquistion date in the amout of CHF 3.9 million.
Loss allowance on other receivables from the business unit Payment, credit cards
For other receivables from the business unit Payment, the Group uses a loss rate approach to measure lifetime expected credit loss.
The loss allowance on receivables from software sales in the amount of CHF 0.4 million and on a standalone receivable linked to Visa International Inc. in the amount of CHF 4.5 million is deemed not significant.
Loss allowances on other receivables from the business unit Payment, other payment cards
The Group uses a loss rate approach to measure lifetime expected credit losses for receivables from the payment solution “purchase on account” in e-commerce. They are disclosed in the following table.
The debt collection is net of receivables impaired at acquistion date in the amount of CHF 0.4 million.
Disclosure of the comparable figures for receivables from the Payment business as at 31 December 2017 in line with IAS 39
The following table shows the aging of the receivables contained in the balance sheet that are not individually impaired as at the reporting date:
Receivables from fraud and chargeback processes
If a cardholder is suspected of making a fraudulent transaction or claims a chargeback, the balance is transferred to a dedicated portfolio until the case is settled. As at 31 December 2018, the value of the dedicated portfolio was CHF 0.4 million (31 December 2017: CHF 0.4 million). Suitable valuation allowances are set aside for all receivables in the portfolio. The total of all fraudulent and chargeback transactions currently under investigation is reported under “Receivables from fraud and chargeback processes”.
16. Receivables from Consumer Finance
Receivables from Consumer Finance and management of credit risk
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.
The receivables from consumer loans are not collateralised. The finance lease receivables are collateralised by the financed cars.
Open balances from the Consumer Finance segment that have been past due for more than 90–150 days are transferred to a dedicated collection portfolio, which is actively monitored.
Receivables from finance leases
Loss allowances for receivables from Consumer Finance
The loss allowance for the business unit Consumer Finance is composed of impairments on receivables that are already past due plus a group of receivables that are not yet past due, but which have been collectively assessed and are expected to generate an impairment.
Input factors for the calculation of loss allowances
The collective loss allowance is calculated for clusters of customers using historical data in conjunction with sophisticated analytical methods and valuation models, whereby the specific risks for each cluster are taken into account. The input factors used to calculate expected credit loss (ECL = PD x EAD x LGD) for receivables that are assessed collectively are described below:
- –PD for consumer loans is measured by dividing the portfolio into sub-portfolios by interest rate type. PD for the leasing business is measured at portfolio level. The expected credit loss model uses a PD value based on a rolling 12-month average. For receivables where the credit risk has increased significantly, the total lifetime is defined as the effective contract duration. The average duration is 19 months for consumer loans and 32 months for leasing business.
- –EAD is based on the amount that the Group expects to be owed at the time of default. The amount includes expected future amortisation payments up to the time of default. In the case of leasing contracts, the amount also includes proceeds from the sale of the leased item.
- –Stage 1 and stage 2 receivables are measured using the same LGD, as they are not yet in default. Receivables in stage 3 are assigned an individual LGD depending on their age and status within our debt collection process.
At each reporting date, credit risk is assessed to see whether it has increased significantly. The assessment considers both quantitative and qualitative factors. Where the impairment has not already been identified, a receivable from the Consumer Finance is allocated to stage 2 when it is 60 days past due. Stage 2 receivables can be moved back to stage 1 as and when the credit risk no longer qualifies as significantly increased. The Group allocates a customer to stage 3 after debt management reminders have proved unsuccessful and the customer has had to be transferred to the pre-collection and legal collection processes. The transfer decision is made on a case-by-case basis for each customer and generally occurs when payments are 90–150 days past due. Contracts with customers in the collection process are terminated, which means contracts cannot be downgraded from stage 3. Stage 3 receivables are written off after two years. Based on past experience, the Group assumes that the receivables will not generate any further significant cash flow.
Under IFRS 9, ECL calculations are required to incorporate forward-looking information: there is no significant statistical correlation between default risk and external macroeconomic factors in relation to consumer loans and the leasing business. Projections are used by experts when calculating the expected credit loss. Any anticipated effect from macroeconomic indicators is factored directly into the expected credit loss. The ECL calculation is reviewed on the reporting date to determine whether any current or forward-looking information needs to be adjusted.
The loss allowance is adjusted based on management’s judgement as to whether actual losses are likely to fall above or below historical trends given current economic and loan conditions. There are no specific significant loss allowances for receivables for the business unit Consumer Finance at present. Management deems the loss allowance for doubtful debts from Consumer Finance to be adequate.
Within Consumer Finance, an average of 98% (31 December 2017: 98%) of outstanding receivables are not past due. Based on past experience, the Group therefore calculates the impairment allowance on the basis of the default risk for the entire portfolio.
Expected credit losses in Consumer Finance as per 31 December 2018
In 2018, the Group completely wrote off receivables totalling CHF 11.5 million. Loss certificates with a value of CHF 8.9 million have been issued for the receivables.
Changes in ECL allowance
The table below shows the changes for each stage over the reporting period.
Disclosure of the comparable figures as at 31 December 2017 in line with IAS 39
The following table shows the aging of the receivables contained in the balance sheet that are not individually impaired as at the reporting date:
In 2018, inventory costs of CHF 4.7 million were recognised as an expense (2017: CHF 5.6 million). No write-downs were recognised on inventories to net realisable value in 2018 (2017: none).
18. Other receivables
Other receivables consists of credit risk-related positions, such as other accounts receivables, other receivables from partners (schemes), deposits and receivables from rental guarantee business as well as positions not within the scope of ECL measurement such as derivative financial instruments, prepayments and other receivables from VAT, withholding tax and salary benefits.
To measure the expected credit loss, the receivables within the scope of ECL calculation have been grouped together in a loss rate approach based on shared credit risk characteristics and the days past due.
Other receivables within the scope of ECL calculation consists mainly of very short-term receivables from a counterparty with a credit rating of AA-. The high rating, the short term and past experience (no default at all) result in a very low expected loss rate. The receivables due in 1-4 years consist of rental deposits at Zürcher Kantonalbank and Credit Suisse, both with a very high credit rating, and therefore a very low ECL is expected.
Receivables from the rental guarantee business
Derivatives – trading
Interest rate swaps – cash flow hedges
Derivative financial instruments
The Group uses derivatives to hedge foreign exchange risk and interest rate swaps to hedge against interest rate changes. As the Group does not meet all the documentation requirements under IFRS 9, the derivatives do not qualify for hedge accounting and are reported as “held for trading”.
Cash flow hedges (until 2017)
The Group also used interest rate swaps to hedge its exposure to interest changes arising from the Payment and Consumer Finance businesses. These instruments qualify for hedge accounting (until 2017).
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.
All cash flow hedges of the IRS were assessed to be highly effective as at 31 December 2017. A net unrealised gain of CHF 0.3 million with a related deferred tax liability of less than CHF 0.1 million was included in other comprehensive income in respect of these contracts.
19. 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.
20. Property and equipment
Non-cancellable operating lease rentals are payable as follows:
Operating leases include the Group’s offices in the cantons of Zurich, St. Gallen, Ticino, Bern, Vaud, Neuchâtel and Geneva.
During the year ended 31 December 2018, CHF 5.2 million was recognised as an expense in the consolidated income statement in respect of operating leases (2017: CHF 4.9 million).
21. 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 ten 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 their 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.
The acquisition of Accarda in 2018 added CHF 125.3 million to customer relationships. Customer relationships are divided into two sub-portfolios: one portfolio has a value of CHF 42.1 million, which is depreciated arithmetically over a seven-year period; the second portfolio has a value of CHF 83.2 million and is subject to straight line depreciation over a seven-year period. The portfolios are different in the composition of the customer base. Based on analyses we expect the value in use of one of the portfolio will decrease faster than the other. This expectation is reflected in a different amortization method.
Impairment tests for cash-generating units containing goodwill
The Group performed impairment tests on goodwill as at 30 November 2018. 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 plan. 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 three 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.
The composition of goodwill altered in 2018. Goodwill from the issuing business was increased by CHF 58.7 million following the acquisition of Accarda (see note 3). In addition, SmartCaution and AdunoKaution – the two legal entities that manage the rental guarantee business – merged into cashgate in 2018. The associated goodwill of CHF 1.9 million and CHF 3.9 million was therefore transferred from Payment business - Issuing to Consumer Finance.
22. 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. Effective 1 October 2018 Aduno Holding holds 100% in Accarda, and Accarda is now consequently fully consolidated, see also note 3 “Change in scope of consolidation”. The revaluation of the existing 30% resulted in a valuation gain of CHF 27.4 million. The revaluation gain is recorded in “Income from associates”.
The following table shows a summary of the full-year financial information for 2017 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 30 September 2018 amounted to CHF 2.9 million and is accounted in the consolidated profits of the Group. In 2018 Aduno Holding received a dividend payment of CHF 1.5 million from Accarda (2017: CHF 1.5 million). The revenue not adjusted for the percentage ownership held by the Group for the first 9 months of Accarda amounted to CHF 54.4 million, and the gain to CHF 9.7 million.
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.
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.
The Group’s share of the loss of SwissWallet AG for the period from 1 January to 31 December 2018 amounted to CHF 0.2 million and is accounted for in the consolidated profits of the Group (2017: loss of less than CHF 0.1 million).
23. Financial investments available for sale
The group holds
preferential Visa Inc. shares. These shares are classified as financial investments FVOCI, due to strategic reasons. In 2018, the fair value increased by CHF 4.3 million (2017: 7.4 million), which was recorded as an unrealised gain on financial investments FVOCI (2017: financial investment – 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.
From the preferential Visa Inc. shares the Group received dividends in the amount of CHF 0.1 million (2017: CHF 0.1 million), which are recorded in other income.
24. Payables to counterparties
The Group receives advance payments from customers with issued prepaid credit cards as well as for downpayments for leasing contracts.
The significant increase compared to 2017 is due to the acquisition of Accarda. Accarda operates also in the acquiring business and pays its merchants once a month. Balances not yet paid are disclosed as payable to the merchants.
25. 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 13.3 milion as per the end of the reporting period (end of 2017: CHF 7.1 million).
26. Other payables
Details of derivative financial instruments are shown in note 18 “Other receivables”.
27. Accrued expenses and deferred income
28. 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 2018, the Group has a syndicated loan facility of CHF 600 million headed by Zürcher Kantonalbank (ZKB) (31 December 2017: CHF 600 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 2018, the syndicated loan amounted to CHF 390 million nominal (31 December 2017: CHF 390 million).
Unsecured bond issues
Two bonds were issued in the first half of 2018. A CHF 100 million floating rate bond based on the Libor interest rate with a floor of 0.0%, a cap of 0.05% and an effective interest rate of -0.38%. Also a CHF 150 million fixed rate bond that matures in 2019 with a nominal interest rate of 0.00% and an effective interest rate of -0.26%.
Another bond was issued in the second half of 2018: a CHF 175 million fixed rate bond that matures in 2019 with a coupon of 0.0% and an effective interest rate after fees of -0.05%.
Two bonds were issued in 2017. These included a bond of CHF 100 million featuring a floating rate based on the Libor interest rate with a floor at 0.0% and a cap at 0.05% expiring in 2019, and a fixed rate bond of CHF 100 million maturing in 2018 with a coupon of 0.00% and an effective interest rate of –0.3% which expired in April 2018.
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 2018, the Group has access to a bilateral credit facility with ZKB of CHF 800 million (31 December 2017: 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. Of this, CHF 7.6 million had been used as at 31 December 2018 (31 December 2017: CHF 102.2 million).
In addition to a credit facility with ZKB, the Group has two short-term credit facilities with Commerzbank. One facility has a limit of CHF 195 million and was fully drawn as at 31 December 2018; no drawings had been made on the second CHF 160 million facility as at 31 December 2018. The interest rate for the credit facilities is set at the market interest rate plus a fixed credit margin.
No assets were pledged as at 31 December 2018 (31 December 2017: none).
The Group may be involved in legal proceedings in the course of normal business operations. The Group establishes provisions for pending legal cases where management believes that the Group is likely to be required to make payments and where the payment amounts can be reasonably estimated.
Other provisions include long-term dismantling obligations linked to tenant improvements to the business premises rented by the Group (2018: CHF 1.7 million; 2017: CHF 1.6 million). The Group does not have any plans to move out of the business premises at present. Provisions have also been set aside for onerous contracts (2018: CHF 2.4 million; 2017: CHF 5.4 million). As part of the sale of Aduno SA, the Aduno Group undertook to provide transitional services to the buyers with an agreed upper limit for the associated fees. The cost of providing the services, which includes rental costs, has exceeded the expected income.
Acquisitions through business combinations represents provisions for distributions from the Accarda debt collection business to payment card customers. The provision has been created because the exact amount and timing of the payments are unknown.
In 2018, the Group set up a provision in the amount of CHF 2.5 million for expected additional payments for social security on service agreements.
30. 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 (2017: 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 setting up the plan benefits.
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 fair value of defined benefit obligations
Movements of fair value of plan assets
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
Plan amendments derived subsequently to the purchase of Accarda resulted in past service costs in the amount of CHF 10.8 million, which have been recorded in personnel expenses.
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 6.4 million (increase by CHF 7.0 million). 2017, a decrease by CHF 5.3 million and an increase by CHF 4.9 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 1.1 million). In 2017, an increase by CHF 0.9 million and a decrease by CHF 1.0 million.
- –If the expected pension growth rate increases by 0.25%, the defined benefit obligations would increase by CHF 5.6 million (2017: CHF 4.1 million).
- –If the life expectancy increases by one year for both men and women, the defined benefit obligations would increase by CHF 2.9 million (2017: CHF 2.1 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 7.9 million in contributions to defined benefit plans in 2019. As at 31 December 2017, the Group expected to pay CHF 5.8 million in 2018.
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 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 2018, the weighted-average duration of the defined benefit obligations was 17.5 years (2017: 18.3 years).
31. 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.
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. This means 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.
32. Share capital and reserves
As at 31 December 2018 the share capital of the parent company Aduno Holding consisted of 25,000 shares with a nominal value of CHF 1,000 each (2017: 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 2018 the Board of Directors proposed a dividend of CHF 1,600 per share totalling CHF 40 million for 2018. The dividend proposal will be forwarded for approval by the Annual General Meeting in May 2019.
As described in note 18, 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. As per 31 December 2018 the Group did not apply any hedge accounting.
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 2018.
33. 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 its employees only to 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. The Payment business as well as Consumer Finance are primarily focused on retail customers. As such, the receivables are highly diversivied and there is no concentration risk in relation to client segments, branches or similar.
Explanation to credit risk is reflected in the corresponding notes 15, 16 and 18 together with an explanation of the expected credit loss.
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 2018 and 2017 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 and from Consumer Finance 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.
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.
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 1,755 million, 2017: CHF 1,300 million) and funds that will be generated from operating activities (in the last 12 months a monthly average of CHF 900 million, 2017: CHF 820 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.