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.

Eliminations

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

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 expense

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

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.

Segment reporting

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

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.

Goodwill

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.

Impairment

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.

Provisions

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.

Employee benefits

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.

Share capital

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.

(a) Reclassification from “Loans and receivables” (LAR) to “Amortised cost” (AC)

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.

(b) Financial instruments held at fair value

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.

(c) Financial liabilities at amortised cost

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).

Payment

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.

Consumer Finance

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.

Internal Financing

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.

Corporate Functions

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.

Forward-looking statements

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.

Forward-looking statements

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:

17. Inventories

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.