UBS AG Annual Report 2005

FY2005 Annual Report · UBS AG
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Financial Report 2005

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UBS AG
P.O. Box, CH-8098 Zurich
P.O. Box, CH-4002 Basel

www.ubs.com

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On the cover
“Hand in hand we are worldclass.”
What “You & Us” means to Christian Mutzner, who works for us in Zurich.

Cautionary statement regarding forward-looking statements | This communication contains statements that constitute 
“forward-looking statements”, including, but not limited to, statements relating to the implementation of strategic initiatives, such 
as the European wealth management business, and other statements relating to our future business development and economic 
performance.While these forward-looking statements represent our judgments and future expectations concerning the development
of our business, a number of risks, uncertainties and other important factors could cause actual developments and results to differ 
materially from our expectations. These factors include, but are not limited to, (1) general market, macro-economic, governmental 
and regulatory trends, (2) movements in local and international securities markets, currency exchange rates and interest rates, (3) 
competitive pressures, (4) technological developments, (5) changes in the ﬁnancial position or creditworthiness of our customers,
obligors and counterparties and developments in the markets in which they operate, (6) legislative developments, (7) management 
changes and changes to our Business Group structure and (8) other key factors that we have indicated could adversely affect our 
business and ﬁnancial performance which are contained in other parts of this document and in our past and future ﬁlings and 
reports, including those ﬁled with the SEC. More detailed information about those factors is set forth elsewhere in this document 
and in documents furnished by UBS and ﬁlings made by UBS with the SEC, including UBS’s Annual Report on Form 20-F for the year 
ended 31 December 2005. UBS is not under any obligation to (and expressly disclaims any such obligations to) update or alter its 
forward-looking statements whether as a result of new information, future events, or otherwise.

Imprint | Publisher / Copyright: UBS AG, Switzerland | Languages: English, German | SAP-No. 80531E-0601

Introduction

Our Financial Report comprises the audited ﬁnancial state-
ments of UBS for 2005, 2004 and 2003, prepared according
to International Financial Reporting Standards (IFRS) and rec-
onciled to the United States Generally Accepted Accounting
Principles (US GAAP). It includes the audited ﬁnancial state-
ments of UBS AG (the “Parent Bank”) for 2005 and 2004,
prepared according to Swiss banking law. Our Financial Report
also discusses the ﬁnancial and business performance of UBS
and its Business Groups, and provides additional disclosure re-
quired by Swiss and US regulations.

The Financial Report should be read together with the other
publications described on page 4.

We sincerely hope that you will ﬁnd our publications useful
and informative. We believe that UBS is one of the leaders in
corporate  disclosure,  and  we  would  be  keen  to  hear  your
views on how we might improve the content, information or
presentation of our products.

Tom Hill
Chief Communication Ofﬁcer
UBS

Introduction
UBS ﬁnancial highlights
UBS at a glance
Sources of information
Contacts

Presentation of Financial Information
UBS reporting structure
Measurement and analysis of performance
Changes in accounting and 
presentation in 2006
UBS Results

UBS Performance Indicators

Financial Businesses
Results
Global Wealth Management 
& Business Banking
Global Asset Management
Investment Bank
Corporate Center

Industrial Holdings

Balance Sheet and Cash Flows
Balance sheet and off-balance sheet
Cash ﬂows

Accounting Standards and Policies
Accounting principles
Critical accounting policies

Financial Statements

UBS AG (Parent Bank)

Additional Disclosure Required 
under SEC Regulations

1
2
3
4
6

7
8
10

12
13

15

19
20

28
42
47
52

55

59
60
63

65
66
68

71

191

205

1

Introduction

UBS ﬁnancial highlights

UBS income statement

CHF million, except where indicated

Net proﬁt attributable to UBS shareholders

Basic earnings per share (CHF) 1

Diluted earnings per share (CHF) 1

Return on equity attributable to UBS shareholders (%) 2

Performance indicators from continuing operations 3

Basic earnings per share (CHF) 1

Return on equity attributable to UBS shareholders (%) 4

Financial businesses 5

Operating income

Operating expenses

Net proﬁt attributable to UBS shareholders

Cost / income ratio (%) 6

Net new money, wealth management businesses (CHF billion) 7

Personnel (full-time equivalents)

Pre-goodwill earnings from continuing operations 3

Operating income

Operating expenses

Net proﬁt attributable to UBS shareholders

Cost / income ratio (%) 6

UBS balance sheet & capital management

CHF million, except where indicated

Balance sheet key ﬁgures

Total assets

Equity attributable to UBS shareholders

Market capitalization

BIS capital ratios

Tier 1 (%) 8

Total BIS (%)

Risk-weighted assets

Invested assets (CHF billion)

Long-term ratings

Fitch, London

Moody’s, New York

Standard & Poor’s, New York

31.12.05

14,029

13.93

13.36

39.4

9.78

27.6

39,896

27,704

13,517

70.1

95.1

69,569

39,896

27,704

9,442

70.1

For the year ended

31.12.04

8,016

31.12.03

5,904

7.78

7.40

25.5

8.02

26.3

35,971

26,149

7,656

73.2

60.4

67,407

35,971

25,503

8,003

71.4

5.44

5.19

17.8

5.72

18.8

32,957

25,397

5,959

76.8

44.0

65,879

32,957

24,720

6,468

74.8

% change from

31.12.04

75

79

81

22

11

6

77

3

11

9

18

31.12.05

As at

31.12.04

% change from

31.12.03

31.12.04

2,060,250

1,737,118

1,553,979

44,324

131,949

12.9

14.1

310,409

2,652

AA+

Aa2

AA+

33,941

103,638

11.9

13.8

264,832

2,217

AA+

Aa2

AA+

33,659

95,401

12.0

13.5

252,398

2,098

AA+

Aa2

AA+

19

31

27

17

20

1 For the EPS calculation, see note 8 to the ﬁnancial statements.
the amortization of goodwill in 2004 and 2003. Due to changes in accounting standards, there is no amortization of goodwill from 2005 onwards.
continuing operations / average equity attributable to UBS shareholders less proposed distributions.
5 Excludes results from industrial holdings.
loss expense or recovery.
to the BIS capital and ratios table in the capital management section and note 28 to the ﬁnancial statements.

7 Includes Wealth Management International & Switzerland and Wealth Management US. Excludes interest and dividend income.

3 Excludes
4 Net proﬁt attributable to UBS shareholders from
6 Operating expenses / operating income less credit
8 Includes hybrid Tier1 capital, please refer

2 Net proﬁt attributable to UBS shareholders / average equity attributable to UBS shareholders less proposed distributions.

From 2005 on, all tables, charts, comments and analysis reﬂect the integration of Wealth Management US into the new Global
Wealth Management & Business Banking Business Group, the change in treatment of the Wealth Management US cash man-
agement business and the shift of the municipal securities business to the Investment Bank. Prior years have been restated to
reﬂect those changes. In 2005, the entire private equity portfolio started being reported as part of the Industrial Holdings segment.

Throughout this report, 2004 and 2003 results have been restated to reﬂect accounting changes (IAS1, IFRS 2, IFRS 4, IAS 27,
and IAS 28) effective 1 January 2005 as well as the presentation of discontinued operations.

2

UBS at a glance

UBS is one of the world’s leading ﬁnancial ﬁrms, serving a dis-
cerning global client base. As an organization, it combines
ﬁnancial strength with a culture that embraces change. As an
integrated ﬁrm, UBS creates added value for clients by draw-
ing on the combined resources and expertise of all its busi-
nesses.

UBS  is  present  in  all  major  ﬁnancial  centers  worldwide,
with ofﬁces in 50 countries. UBS employs more than 69,500
people, 39% in the Americas, 37% in Switzerland, 16% in
the rest of Europe and 8% in the Asia Paciﬁc time zone.

UBS is one of the best-capitalized ﬁnancial institutions in the
world, with a BIS Tier 1 ratio of 12.9%, invested assets of CHF
2.65 trillion, shareholders’ equity of CHF 44.3 billion and mar-
ket capitalization of CHF 131.9 billion on 31 December 2005.

Businesses

Wealth management
With more than 140 years of experience, an extensive global
network that includes one of the largest private client busi-
nesses in the US, and more than CHF 1,700 billion in invested
assets, UBS is the world’s leading wealth management busi-
ness, providing a comprehensive range of services customized
for wealthy individuals, ranging from asset management to
estate planning and from corporate ﬁnance to art banking.

Investment banking and securities
UBS is a global investment banking and securities ﬁrm with a
strong  institutional  and  corporate  client  franchise.  Consis-
tently  placed  in  the  top  tiers  of  major  industry  rankings,  it
is a leading player in the global primary and secondary mar-
kets for equity, equity-linked and equity derivative products.

In ﬁxed income, it is a ﬁrst-rate global player. In foreign ex-
change, it places ﬁrst in many key industry rankings. In invest-
ment  banking,  it  provides  premium  advice  and  execution
capabilities  to  its  corporate  client  base  worldwide.  All  its
businesses  are  sharply  client-focused,  providing  innovative
products, top-quality research and comprehensive access to
the world’s capital markets.

Asset management
UBS,  a  leading  asset  manager  with  invested  assets  of  over
CHF 750 billion, provides a broad base of innovative capa-
bilities stretching from traditional to alternative investment
solutions  for,  among  other  clients,  ﬁnancial  intermediaries
and institutional investors across the world.

Swiss corporate and individual clients
UBS  is  the  leading  bank  for  Swiss  corporate  and  individual
clients. It serves around 2.6 million individual clients through
more than 3 million accounts, mortgages and other ﬁnancial
relationships. It also offers comprehensive banking and securi-
ties services for 136,500 corporations, institutional investors,
public entities and foundations as well as 3,000 ﬁnancial insti-
tutions worldwide. With a total loan book of over CHF 140 bil-
lion, UBS leads the Swiss lending and retail mortgage markets.

Corporate Center
The Corporate Center partners with the businesses, ensur-
ing that the ﬁrm operates as a coherent and integrated whole
with a common vision and set of values. It helps UBS’s busi-
nesses  grow  sustainably  through  its  ﬁnancial  control,  risk,
treasury, communication, legal, human resources and tech-
nology functions.

3

Introduction

Sources of information

This Financial Report contains UBS’s audited ﬁnancial statements for the year 2005 and related detailed 
analysis. You can ﬁnd out more about UBS from the sources shown below.

Publications

This Financial Report is available in English and German. (SAP
no. 80531-0601).

Annual Review 2005
Our  Annual  Review  contains  a  description  of  UBS  and  our
Business Groups, as well as a summary review of our perfor-
mance  in  2005.  It  is  available  in  English,  German,  French,
Italian, Spanish and Japanese. (SAP no. 80530-0601).

Handbook 2005 / 2006
The Handbook 2005 / 2006 contains a detailed description of
UBS, our strategy, organization, employees and businesses, as
well  as  our  ﬁnancial  management  including  credit,  market
and operational risk, our capital management approach and
details of our corporate governance. It is available in English
and German. (SAP no. 80532-0601).

Quarterly reports
We provide detailed quarterly ﬁnancial reporting and analy-
sis, including comment on the progress of our businesses and
key strategic initiatives. These quarterly reports are available
in English.

Compensation Report 2005
The Compensation Report 2005 provides detailed information
on the compensation paid to the members of UBS’s Board of
Directors (BoD) and the Group Executive Board (GEB). The re-
port is available in English and German. (SAP no.82307-0601).
The  same  information  can  also  be  read  in  the  Corporate
Governance chapter of the Handbook 2005 / 2006.

The making of UBS
Our  “The  making  of  UBS”  brochure  outlines  the  series  of
transformational  mergers  and  acquisitions  that  created
today’s  UBS.  It  also  includes  brief  proﬁles  of  the  ﬁrm’s  an-
tecedent companies and their historical roots. It is available in
English and German. (SAP no. 82252).

How to order reports
Each of these reports is available in a PDF format on the in-
ternet  at  www.ubs.com/investors  in  the  reporting  section.
Prtinted  copies  can  be  ordered  from  the  same  website  by
accessing the order / subscribe panel on the right-hand side of

the screen. Alternatively, they can be ordered by quoting the
SAP number and the language preference where applicable,
from UBS AG, Information Center, P.O. Box, CH-8098 Zurich,
Switzerland.

Information tools for investors

Website
Our Analysts and Investors website at www.ubs.com/investors
offers a wide range of information about UBS, ﬁnancial infor-
mation (including SEC ﬁlings), corporate information, share
price graphs and data, an event calendar, dividend informa-
tion and recent presentations given by senior management to
investors at external conferences. Our information on the in-
ternet is available in English and German, with some sections
in French and Italian.

Messaging service
On the Analysts and Investors website, you can register to re-
ceive  news  alerts  about  UBS  via  Short  Messaging  System
(SMS) or e-mail. Messages are sent in either English or Ger-
man and users are able to state their preferences for the top-
ics of the alerts received.

Results presentations
Senior  management  presents  UBS’s  results  every  quarter.
These presentations are broadcast live over the internet, and
can be downloaded on demand. The most recent result web-
casts can be found in the Financials section of our Investors
and Analysts website.

Form 20-F and other submissions to the US Securities
and Exchange Commission

We ﬁle periodic reports and submit other information about
UBS to the US Securities and Exchange Commission (SEC).
Principal among these ﬁlings is our Annual Report on Form 
20-F, ﬁled pursuant to the US Securities Exchange Act of1934.
Our Form 20-F ﬁling is structured as a “wrap-around” doc-
ument. Most sections of the ﬁling are satisﬁed by referring to
parts of the Handbook 2005 / 2006 or to parts of this Financial
Report 2005. However, there is a small amount of additional
information in Form 20-F which is not presented elsewhere,
and is particularly targeted at readers in the US. You are en-
couraged to refer to this additional disclosure.

4

You may read and copy any document that we ﬁle with the
SEC on the SEC’s website, www.sec.gov, or at the SEC’s public
reference room at 100 F Street, N.E., Room 1580, Washington,
DC 20549. Please call the SEC at 1-800-SEC-0330 (in the US)
or at +1 202 942 8088 (outside the US) for further information
on the operation of its public reference room. You may also in-

spect our SEC reports and other information at the New York
Stock Exchange, Inc., 20 Broad Street, New York, NY 10005.
Much of this additional information may also be found on the
UBS website at www.ubs.com/investors, and copies of docu-
ments ﬁled with the SEC may be obtained from UBS’s Investor
Relations team, at the addresses shown on the next page.

Corporate information

The legal and commercial name of the
company is UBS AG. The company was
formed on 29 June 1998, when Union
Bank of Switzerland (founded 1862)
and Swiss Bank Corporation (founded
1872) merged to form UBS.
UBS AG is incorporated and domiciled
in Switzerland and operates under
Swiss Company Law and Swiss Federal

Banking Law as an Aktiengesellschaft,
a corporation that has issued shares of
common stock to investors.
The addresses and telephone numbers
of our two registered ofﬁces are:
Bahnhofstrasse 45,
CH-8001 Zurich, Switzerland, 
telephone +41-44-234 11 11;
and 

Aeschenvorstadt 1,
CH-4051 Basel, Switzerland, 
telephone +41-61-288 20 20.
UBS AG shares are listed on the
SWX Swiss Exchange (traded through
its trading platform virt-x), on the 
New York Stock Exchange and on 
the Tokyo Stock Exchange.

5

Introduction

Contacts

Switchboards 

For all general queries.

Investor Relations

Our Investor Relations team supports
institutional, professional and retail 
investors from our ofﬁces in Zurich
and New York.

www.ubs.com/investors

Media Relations

Our Media Relations team supports
global media and journalists from
ofﬁces in Zurich, London, New York
and Hong Kong.

www.ubs.com/media

Shareholder Services

UBS Shareholder Services, a unit
of the Company Secretary, is
responsible for the registration of
the Global Registered Shares.

Zurich

London

New York

Hong Kong

Hotline

Matthew Miller

Caroline Ryton

Reginald Cash

Nina Hoppe

Fax

Zurich

London

New York

Hong Kong

Hotline

Fax

+41-44-234 1111

+44-20-7568 0000

+1-212-821 3000

+852-2971 8888

+41-44-234 4100

+41-44-234 4360

+41-44-234 2281

+1-212-882 5734

+41-44-234 4307

+41-44-234 3415

+41-44-234 8500

+44-20-7567 4714

+1-212-882 5857 

+852-2971 8200

+41-44-235 6202

+41-44-235 3154

US Transfer Agent

For all Global Registered Share-
related queries in the US.

www.melloninvestor.com

Calls from the US

Calls outside the US

Fax

866-541 9689

+1-201-680 6578

+1-201-680 4675

6

UBS AG

Investor Relations 

P.O. Box

CH-8098 Zurich, Switzerland

sh-investorrelations@ubs.com

mediarelations@ubs.com

ubs-media-relations@ubs.com

mediarelations-ny@ubs.com

sh-mediarelations-ap@ubs.com 

UBS AG

Shareholder Services

P.O. Box

CH-8098 Zurich, Switzerland

sh-shareholder-services@ubs.com

Mellon Investor Services

480 Washington Boulevard

Jersey City, NJ 07310, USA

sh-relations@melloninvestor.com

Presentation of Financial Information

Presentation of Financial Information
UBS reporting structure

UBS reporting structure

Changes in 2005

Changes to accounting

In 2005, we implemented several accounting and reporting
structure changes. To reﬂect these changes, we have restated
our consolidated ﬁnancial statements and the segment report-
ing of business units affected for all prior periods, except for
the amortization of goodwill, which ceased at the beginning
of 2005 for ﬁnancial years after 2004. The ﬁgures and results
presented in this report are based on restated numbers.

Changes to reporting structure and presentation

In 2005, we implemented several changes in our reporting
structure. At the year’s outset, we decided to start reporting
our  private  equity  investments,  until  then  a  part  of  the
Investment Bank, in the Industrial Holdings segment. 

Effective 1 July, we brought our US, Swiss and international
wealth  management  units  along  with  our  Swiss  corporate
and retail banking unit into one Business Group titled Global
Wealth  Management  &  Business  Banking.  We  continue  to
disclose  the  Wealth  Management  International  &  Switzer-
land,  Wealth  Management  US  and  Business  Banking  Swit-
zerland units separately. We also transferred our municipal
securities unit, until then a part of the Wealth Management
US unit, to the Investment Bank’s ﬁxed income area.

In December 2005, we sold our independently branded
Private  Banks  and  specialist  asset  manager  GAM  to  Julius
Baer. The performance of Private Banks & GAM is shown as
discontinued  operations  in  a  separate  line  in  Corporate
Center for all periods presented.

At the start of 2005, we implemented the following changes
in accounting:
– IFRS 2 Share-based Payment. IFRS 2 requires entities to rec-
ognize  the  fair  value  of  share-based  payments  made  to
employees  as  compensation  expense,  recognized  over
the service period, which is generally equal to the vesting
period.

– IAS 27 Consolidated and Separate Financial Statements and
IAS 28 Investments in Associates. In the past, we treated all
our private equity investments as “Financial investments
available-for-sale”. The revised IAS 27 and IAS 28 required
us to change the accounting treatment for some of our pri-
vate equity investments, consolidating those that we con-
trol, and using the equity method of accounting where we
exercise signiﬁcant inﬂuence.

– IFRS  3  Business  Combinations. With  the  introduction  of
IFRS 3, we stopped amortizing goodwill at the beginning
of 2005. Instead, from now on, we will test goodwill an-
nually for impairment.

– IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations. This new standard requires that major lines
of  business  and  subsidiaries  acquired  exclusively  with
the intent of future sale be presented as “discontinued
operations” from the time a sale is highly likely to occur.
Private Banks & GAM and certain of our previously held
private  equity  investments  (now  reported  in  Industrial
Holdings)  met  these  criteria  and  were  reclassified  ac-
cordingly.

8

UBS Reporting Structure 

Global Asset Management 

Investment Bank 

Corporate Center 

Industrial Holdings

Motor-Columbus  
& Private Equity 

Financial Businesses

Global Wealth Management  
& Business Banking 

Wealth Management 
International & Switzerland

Wealth Management US

Business Banking Switzerland

– IAS 1 Presentation of Financial Statements. The adoption
of revised IAS 1 requires the inclusion of minority interests
in both net proﬁt and equity. The newly deﬁned net proﬁt
is then allocated into “Net proﬁt attributable to UBS share-
holders”  and  “Net  proﬁt  attributable  to  minority  inter-
ests”. When analyzing our performance, our focus will, as
before, be on “Net proﬁt attributable to UBS sharehold-
ers” (attributable proﬁt) and “Equity attributable to UBS
shareholders” (shareholders’ equity).

– IFRS 4 Insurance Contracts. The majority of insurance prod-
ucts issued by UBS are considered investment contracts and
are accounted for as ﬁnancial liabilities and not as insurance
contracts  under  IFRS  4.  The  related  assets  in  the  balance
sheet were reclassiﬁed from other assets to trading assets in
2004.

– A  redeﬁnition  of  recurring  income  for  the  Wealth
Management US unit to include interest income, bringing
it in line with the deﬁnition of recurring income for the
other wealth management units.
The overall impact of all the changes above was a decrease
in net proﬁt attributable to UBS shareholders by CHF 73 mil-
lion  and  CHF  335  million  for  2004  and  2003,  respectively.

Other new disclosures

As part of our continuing effort to improve the transparency
of  our  ﬁnancial  reporting  and  provide  the  best  possible
understanding of our business, we have made a number of
enhancements to our disclosure during 2005.

We  have  split  personnel  expenses  into  cash  and  share-
based components. This helps to distinguish between cash
expenses paid or accrued during the quarter, and deferred
payments which are driven by option and share grants made
in previous periods.

In our Information Technology Infrastructure (ITI) unit, we
show the cost of IT infrastructure per average number of ﬁ-
nancial business employees, helping us to track the success
of the unit. We also provided a new capital ratio to measure
capital consumption by our business units. Called the return
on adjusted regulatory capital, it is shown as a key perform-
ance indicator for the Investment Bank and Business Banking
Switzerland.

9

 
Presentation of Financial Information
Measurement and analysis of performance

Measurement and analysis of performance

UBS’s  performance  is  reported  in  accordance  with  Interna-
tional Financial Reporting Standards (IFRS). Additionally, our
results discussion and analysis comments on the underlying
operational performance of our business, focusing on con-
tinuing operations insulated from the impact of discontinued
activities and individual gain or loss items that are not rele-
vant to our internal approach to managing the company. This
includes items that we would not consider as indicative of our
future potential performance and are therefore not included
in our business planning decisions, and which are event- and
UBS-speciﬁc, rather than industry-wide. It also helps to bet-
ter assess our performance against peers and to estimate fu-
ture growth potential.

In the last three years, two such items had a signiﬁcant im-

pact on our consolidated ﬁnancial statements:
– In fourth quarter 2005, we sold our Private Banks & GAM
unit to Julius Baer for a gain of CHF 3.7 billion after tax
(pre-tax CHF 4.1 billion). The unit comprised the Banco di
Lugano, Ehinger & Armand von Ernst and Ferrier Lullin pri-
vate banks as well as specialist asset manager GAM. After
the sale, we retained a stake of 20.7% in the new Julius
Baer.

– A net gain of CHF 2 million (pre-tax CHF 161 million) in
second quarter 2003 from the sale of the Wealth Manage-
ment  US  Business  Unit’s  Correspondent  Services  Corpo-
ration  (CSC)  clearing  business.  A  substantial  portion  of
CSC’s net assets comprised goodwill stemming from the
PaineWebber  acquisition.  After  deducting  taxes  of  CHF
159 million (based on the purchase price) and the write-
down of the goodwill associated with CSC, the net gain
from the transaction was CHF 2 million.
Up  to  and  including  2004,  we  had  provided  comments
and analysis on an adjusted basis that also excluded the amor-
tization of goodwill and other acquired intangible assets. With
the  introduction  of  IFRS  3,  Business  Combinations,  at  the
beginning  of  2005,  we  ceased  amortizing  goodwill,  which
was by far the largest impact on our results. In our 2005 re-
porting, our result and analysis commentary compares current
results to the prior year on a pre-goodwill basis. Accordingly,
2004  results  in  this  report  are  analyzed  on  a  pre-goodwill
basis.

Seasonal characteristics

Our  main  businesses  do  not  generally  show  signiﬁcant
seasonal  patterns,  except  for  the  Investment  Bank,  where
revenues  are  impacted  by  the  seasonal  characteristics  of
general ﬁnancial market activity and deal ﬂows in investment
banking. 

When  discussing  quarterly  performance,  we  therefore
compare  the  Investment  Bank’s  ﬁnancial  results  of  the  re-
ported quarter with those achieved in the same period of the
previous year. Similarly, when considering the impact of the
Investment Bank’s performance on UBS’s ﬁnancial statements,
we discuss our overall quarterly performance on a year-on-
year  basis  –  comparing  the  actual  quarter  with  the  same
quarter in the previous year. Because of the volatile nature of
market  movements  and  the  resulting  business  and  trading
opportunities, the market risk and balance sheet items in our
Investment Bank are compared on a present quarter to pre-
vious quarter basis. For all other Business Groups and Units,
recent quarterly results are compared to the previous quar-
ter’s, as they are only slightly impacted by seasonal compo-
nents such as asset withdrawals in fourth quarter and lower
client activity levels related to the end of year holiday season.

Performance measures

UBS performance indicators
For the last six years, we have focused on a consistent set of
four long-term performance indicators that are valid through
periods of varying market conditions and designed to ensure
that we deliver continuously improving returns to our share-
holders. We have reported our performance against these in-
dicators each quarter:
– We seek to increase the value of UBS by achieving a sus-

tainable, after-tax return on equity of 15–20%

– We aim to increase shareholder value through double-digit
average annual percentage growth in basic earnings per
share (EPS)

– By cost reduction and earnings enhancement initiatives,
we aim to manage UBS’s cost / income ratio at a level that
compares positively with best-in-class competitors

– We aim to achieve a clear growth trend in net new money

in our wealth management units.
As we have been steadily exceeding our performance in-
dicators for some time now, we have decided to modify them
for 2006 (for further details, see page 12).

Business Group Key Performance Indicators
At the Business Group or Business Unit level, our performance
is measured by carefully chosen Key Performance Indicators
(KPIs). They indicate the Business Group’s or Business Unit’s
success  in  creating  value  for  shareholders  but  do  not  dis-
close explicit targets. The KPIs show the key drivers of each
unit’s  core  business  activities  and  include  ﬁnancial  metrics,
such as cost / income ratios and invested assets, along with
non-ﬁnancial metrics, such as the number of client advisors.

10

Business Group Key Performance Indicators

Business

Key performance indicators

Deﬁnition

Business Groups and Business Units
within Financial Businesses

Cost / income ratio (%)

Total operating expenses / total operating income before adjusted expected credit loss.

Cost / income ratio before goodwill (%)

Total operating expenses excluding amortization of goodwill / total operating income 
before adjusted expected credit loss.

Wealth & Asset Management Businesses 
and Business Banking Switzerland

Invested assets (CHF billion)

Client assets managed by or deposited with UBS for investment purposes only
(for further details please refer to page 12).

Net new money (CHF billion)

Inﬂow of invested assets from new clients
– outﬂows due to client defection
+/– inﬂows / outﬂows from existing clients
(for further details please refer to page 17).

Wealth & Asset Management Businesses

Gross margin on invested assets (bps)

Operating income before adjusted expected credit loss / average invested assets.

Wealth Management 
International & Switzerland 

Wealth Management US

Business Banking Switzerland

Client advisors

Expressed in full-time equivalents.

Recurring income (CHF million)

Interest, asset-based fees for portfolio management and fund distribution and 
account-based and advisory fees (as opposed to transactional fees).

Revenues per advisor 
(CHF thousand)

Non-performing loans / gross loans 
ratio (%)

Private client revenues / average number of ﬁnancial advisors.

Non-performing loans / gross loans.

Impaired loans / gross loans ratio (%)

Impaired loans / gross loans.

Return on adjusted 
regulatory capital (%)

Business Unit performance before tax / average adjusted regulatory capital.

Return on adjusted regulatory
capital before goodwill (%)

Business Unit performance before tax and goodwill amortization / average adjusted 
regulatory capital.

Investment Bank

Compensation ratio (%)

Personnel expenses / operating income before adjusted expected credit loss.

Corporate Center

Industrial Holdings

Non-performing loans / gross loans 
ratio (%)

Non-performing loans / gross loans.

Impaired loans / gross loans ratio (%)

Impaired loans / gross loans.

Return on adjusted 
regulatory capital (%)

Return on adjusted regulatory
capital before goodwill (%)

Average VaR (10-day 99%)

Information technology infrastructure 
(ITI) cost per Financial Business 
full-time employee

Investment (private equity, only 
comprising ﬁnancial investments 
available-for-sale)

Portfolio fair value (private equity,
only comprising ﬁnancial investments 
available-for-sale)

Business Group performance before tax / average adjusted regulatory capital.

Business Group performance before tax and goodwill amortization / average adjusted 
regulatory capital.

VaR expresses the potential loss on a trading portfolio assuming a 10-day time 
horizon before positions can be adjusted, and measured to a 99% level of conﬁdence.

ITI costs / average Financial Business personnel.

Historical cost of investment made, less divestments and impairments.

The fair value of a portfolio is the estimated amount for which the assets could 
be exchanged between willing buyers and willing sellers in an arm’s length trans-
action after an orderly sale process where the parties each act knowledgeably,
prudently and without compulsion.

11

Presentation of Financial Information
Measurement and analysis of performance

These  Business  Group  KPIs  are  used  for  internal  perfor-
mance measurement and planning as well as external report-
ing.  This  ensures  management  accountability  for  perform-
ance by the business leaders and consistency in external and
internal performance measurement.

Client / invested assets reporting
Since 2001, we have reported two distinct metrics for client
funds:
– Client assets are all client assets managed by or deposited
with UBS including custody-only assets and assets held for
purely transactional purposes.

– Invested assets is a more restrictive term and includes all
client assets managed by or deposited with UBS for invest-
ment purposes.
Invested assets is our central measure and includes, for ex-
ample, discretionary and advisory wealth management port-
folios,  managed  institutional  assets,  managed  fund  assets
and wealth management securities or brokerage accounts. It
excludes all assets held for purely transactional and custody-
only purposes as UBS only administers the assets and does not
offer advice on how these assets should be invested. Since
1 January 2004, corporate client assets (other than pension
funds) deposited with the Business Banking Switzerland unit
have been excluded from invested assets, as we have a min-
imal advisory role for such clients and as asset ﬂows are driven
more by liquidity requirements than investment reasons. The
same holds true for the corporate cash management business
of the Wealth Management US unit, which we excluded from
invested assets towards the end of 2005. Non-bankable as-

sets (for example art collections) and deposits from third-party
banks for funding or trading purposes are excluded from both
measures.

Net new money is deﬁned as the sum of the acquisition of
invested assets from new clients, the loss of invested assets
due to client defection and inﬂows and outﬂows of invested
assets  from  existing  clients.  Net  new  money  is  calculated
using the direct method, which is based on transactional level
ﬂows. Interest and dividend income, the effects of market or
currency movements, fees and commissions as well as acqui-
sitions and divestments are excluded from net new money.
The use of invested assets to fund interest expense on clients’
loans results in net new money outﬂows. Reclassiﬁcations be-
tween invested assets and client assets as a result of a change
in the service level delivered are treated as net new money
ﬂows.

When products are managed in one Business Group and
sold  in  another,  they  are  counted  in  both  the  investment
management  unit  and  the  distribution  unit.  This  results  in
double counting in UBS’s total invested assets as both units
provide an independent service to their respective client, add
value and generate revenues. Most double counting arises
where mutual funds are managed by the Global Asset Man-
agement business and sold by Global Wealth Management &
Business Banking. Both businesses involved count these funds
as invested assets. This approach is in line with industry prac-
tice and our open architecture strategy and allows us to ac-
curately reﬂect the performance of each individual business.
Overall,  CHF  332  billion  of  invested  assets  were  double
counted in 2005 (CHF 294 billion in 2004).

Changes in accounting and presentation in 2006

Fair value option for ﬁnancial
instruments (IAS 39)
Effective 2006, we will adopt the
revised fair value option for ﬁnancial
instruments in IAS 39 and plan to apply
it as follows.
Until this year, we had mainly applied
the fair value option to hybrid debt in-
struments issued by UBS. Starting in
second quarter 2006, we will also apply
the fair value option to certain new
loans and loan commitments made by
the Investment Bank. These are hedged
with credit derivatives and designated,
when made, as ﬁnancial instruments
carried at fair value. Fluctuations in their
fair value are therefore taken to the in-
come statement. This will offset move-
ments in the value of the accompany-
ing credit derivatives, which are also

fair-value accounted. 
By adopting this option, we reduce
temporary proﬁts and losses caused by
the different accounting treatments of
the loan and the hedge.

Revised performance indicators
for UBS
In the six years since we introduced our
performance measures, our ﬁrm has
evolved, and our business and client
base have grown. Our performance has
steadily exceeded our targets. That is
why, starting this year, we have decided
to modify our performance measures.
From 2006, on average and through
periods of varying market conditions,
we will:
–  seek to increase the value of UBS by
achieving a sustainable, after-tax

return on equity of a minimum of
20% (we previously targeted a
range of 15–20%)

–  aim to achieve a clear growth trend
in net new money for all our ﬁnan-
cial businesses, including Global
Asset Management and Business
Banking Switzerland. (This measure
was previously only applied to our
wealth management units.)

In future, we will use diluted earnings
per share (EPS) instead of basic EPS as
a reference for our EPS growth target
which remains, as before, annual
double-digit percentage growth. Our
cost / income objective will not change,
and we will continue to manage it at
levels that compare well with our best
competitors.

12

Presentation of Financial Information
UBS Results

UBS Results

2005

In 2005, attributable proﬁt was CHF 14,029 million, includ-
ing a net gain of CHF 3,705 million from the sale of Private
Banks & GAM.

Our ﬁnancial businesses contributed CHF 13,517 million
to attributable proﬁt, of which CHF 9,442 million was from
continuing  operations.  This  was  an  improvement  of  18%
(pre-goodwill) from CHF 8,003 million in 2004. Discontinued
operations contributed CHF 4,075 million. Industrial Holdings
added CHF 512 million, with CHF 402 million stemming from
continuing operations.

Dividend

The Board of Directors will recommend a total payout of CHF
3.80  per  share  for  the  2005  ﬁnancial  year  at  the  Annual
General Meeting (AGM) on 19 April 2006 in Basel. The pay-
out comprises a regular dividend of CHF 3.20 and a one-time

par value repayment of CHF 0.60 per share. The repayment
will allow our shareholders to beneﬁt from the gain realized
from the sale of Private Banks & GAM. Our dividend for the
2004 ﬁnancial year (paid in 2005) was CHF 3.00 a share, up
from the CHF 2.60 paid for the 2003 ﬁnancial year.

2004

In 2004, attributable proﬁt was CHF 8,016 million, up 36%
from CHF 5,904 million a year earlier. Continuing operations
contributed CHF 7,609 million to the result, while discontin-
ued operations made up CHF 407 million.

Financial businesses contributed CHF 7,656 million to at-
tributable proﬁt, up 28% from CHF 5,959 million a year ear-
lier. Continuing operations contributed CHF 7,357 million to
2004 attributable proﬁt. Industrial holdings added CHF 252
million  to  the  2004  result  from  continuing  operations  and
CHF 108 million from discontinued operations.

Risk factors

As a global ﬁnancial services ﬁrm, we are
affected by the factors driving the mar-
kets in which we operate. Different risk
factors can impact our ability to effec-
tively carry out our business strategies
and can directly affect our earnings. The
factors described below, as well as other
inﬂuences beyond our control, mean
that revenues and operating proﬁt have
and are likely to continue to vary from
period to period. Revenues and operat-
ing proﬁt for any particular period may
not, therefore, be indicative of sustain-
able results.

Interest rates, equity prices, foreign
exchange levels and other market
ﬂuctuations may affect earnings
A substantial part of our business
consists in taking trading positions in
the interest rate, debt, currency, equity,
precious metal and energy cash and
derivative markets.
The value of these assets and liabilities
can be adversely affected by market
price ﬂuctuations. Our market risks are

subject to a control framework and to
portfolio and concentration limits. We
avoid undue concentrations of risk and,
where appropriate, hedge exposure to
stress events. Nevertheless, in the event
of sudden, severe or unexpected market
movements, we might suffer signiﬁcant
losses. A description of our controls
and limits, including those applicable to
our exposure to market stress events, is
provided from page 53 onwards of our
Handbook 2005 / 2006.
Because we prepare our accounts in
Swiss francs while assets, liabilities, re-
venues and expenses from certain busi-
nesses are denominated in other curren-
cies, changes in foreign exchange rates,
particularly between the Swiss franc and
the US dollar (US dollar income repre-
senting the major part of our non-Swiss
franc income), may have an effect on
our reported earnings. Our approach to
currency management is explained on
page 78 of our Handbook 2005 / 2006.
Regulatory or political changes impact-
ing ﬁnancial market structures can affect

our earnings. An example was the intro-
duction of the euro in 1999, which af-
fected European foreign exchange mar-
kets by reducing the volume of foreign
exchange business, and prompted
greater harmonization between ﬁnancial
products. Movements in interest rates
can affect our net interest income and
the value of our ﬁxed income trading
portfolio, while movements in equity
markets can affect the value of our equity
trading portfolio. Changes in both can
affect the investment performance of
our asset management businesses. Our
ﬁxed income and equity trading portfo-
lios and our asset management busi-
nesses may also be impacted by credit
events, including defaults, related to the
issuers of bonds and equities. Our pri-
vate equity and commercial real estate
investments can be adversely affected
by economic, business and general mar-
ket conditions.
We consider our market risk control
framework, which is described on pages
70 to 79 of our Handbook 2005 / 2006,

13

Presentation of Financial Information
UBS Results

Risk factors (continued)

to be robust, but severe market disloca-
tions or an extended period of market
disruptions could have a material impact
on our earnings.
Furthermore, income in businesses such
as investment banking, and wealth
and asset management is often directly
related to client activity levels. As a re-
sult, our income is susceptible to adverse
effects from sustained market down-
turns as well as any signiﬁcant deteriora-
tion of investor sentiment. Asset-based
revenues generated in our wealth and
asset management businesses depend
on the levels of invested assets which
can, in themselves, be adversely affected
by deteriorating market valuations.

Market levels and trading volumes may
be affected by a broad range of geo-
political or regional issues or events
beyond our control, such as the possibil-
ity of war or terrorism, or by economic
developments such as low growth, inﬂa-
tion, recession or depression. Counter-
party failure may lead to credit loss
Credit is an integral part of many of our
business activities. The results of our
credit-related activities (including loans,
commitments to lend, contingent
liabilities such as letters of credit, and
derivative products such as swaps and
options) would be adversely affected by
any deterioration in the creditworthiness
of our counterparties and the ability of
clients to meet their obligations. The
credit quality of our counterparties may
be affected by various factors, such as
an economic downturn, lack of liquidity,
or an unexpected political event. Any
of these events could lead us to incur
losses. We believe that impairments in
the portfolio at the balance sheet date
are adequately covered by our allowances
and provisions. In general, we aim to
avoid risk concentrations in our credit
portfolio and we make active use of
credit protection. If our risk management
and control measures prove inadequate
or ineffective, then any credit losses sus-
tained might have a material adverse

14

effect on both our income and the value
of our assets.
A discussion of our approach to manag-
ing credit risk can be found on page 57
of our Handbook 2005 / 2006.

Operational risk may increase costs and
impact revenues
All our businesses are dependent on our
ability to process a large number of
complex transactions across many and
diverse markets in different currencies
and subject to many different legal and
regulatory regimes. Our systems and
processes are designed to ensure that
the risks associated with our activities,
including those arising from process
error, failed execution, fraud, systems
failure, and failure of security and physi-
cal protection, are appropriately con-
trolled. However, if our system of inter-
nal controls is ineffective in identifying
and remedying such risks, we will be
exposed to operational failures that
might result in losses. A discussion of our
approach to the management and con-
trol of operational risks is provided on
page 83 of our Handbook 2005 / 2006.

Legal claims may arise in the conduct of
our business
Due to the nature of our business, we
are involved in various claims, disputes
and legal proceedings in Switzerland
and in a number of jurisdictions outside
Switzerland, including the United States,
arising in the ordinary course of busi-
ness. Such legal proceedings may expose
us to substantial monetary damages and
legal defense costs, injunctive relief and
criminal and civil penalties.

Competitive forces may inﬂuence
business direction
We face intense competition in all
aspects of our business. In our various
lines of business we compete, both
domestically and internationally, with
asset managers, retail and commercial
banks, and private banking, investment
banking, brokerage and other invest-

ment services ﬁrms. We face intense
competition not only from ﬁrms compet-
ing locally in particular lines of business,
but also from global ﬁnancial institutions
that are comparable to UBS in size and
breadth.
The trend towards consolidation in the
global ﬁnancial services industry is creat-
ing competitors with broad ranges of
product and service offerings, increased
access to capital, and greater efﬁciency
and pricing power. We expect these
trends to continue and competition to
increase in the future. Our competitive
strength will depend on the ability of our
businesses to adapt quickly to signiﬁcant
market and industry trends.

Our global presence exposes us to other
risks
We operate in 50 countries, earn income
and hold assets and liabilities in many
different currencies and are subject to
many different legal and regulatory
regimes. Changes in local tax or legal
regulations may affect our clients’ ability
or willingness to do business with us.
Country, regional and political risks may
increase market and credit risk. Political,
economic and social deterioration in a
country or region, including local market
disruptions, currency crises, the break-
down of monetary controls or terrorism,
may adversely affect the ability of clients
or counterparties located in that country
or region to obtain foreign exchange or
credit and, therefore, to satisfy their
obligations towards us. As a truly global
ﬁnancial services company, we are also
exposed to economic instability in
emerging markets. We have a system of
controls and procedures to mitigate this
risk, and a discussion of our country risk
controls is provided on page 65 of our
Handbook 2005 / 2006. However, if our
controls failed to fully identify and
respond to country risk, we might suffer
a negative impact on our results and
ﬁnancial condition.

UBS Performance Indicators

15

UBS Performance Indicators

Performance against targets

RoE (%) 1

as reported

from continuing operations, before goodwill

Basic EPS (CHF) 2

as reported

from continuing operations, before goodwill

Cost / income ratio of the ﬁnancial businesses (%) 3, 4

as reported

before goodwill

Net new money, wealth management businesses (CHF billion) 5

Wealth Management International & Switzerland

Wealth Management US

Total

For the year ended

31.12.05

31.12.04

31.12.03

39.4

27.6

13.93

9.78

70.1

70.1

68.2

26.9

95.1

25.5

26.3

7.78

8.02

73.2

71.4

42.3

18.1

60.4

17.8

18.8

5.44

5.72

76.8

74.8

29.7

14.3

44.0

RoE 1  
in %

40

30

20

10

  0

2003 

2004 

2005

2003 

2004 

2005

Cost / income ratio of the financial businesses 3, 4
in %

39.4

27.6

26.3

25.5

18.8

17.8

80

70

60

50

40

76.8

74.8

73.2

71.4

70.1

As reported 

From continuing operations before goodwill

As reported 

Before goodwill

Basic EPS 2  
CHF

16.00

12.00

  8.00

  4.00

  0.00

Net new money, wealth management businesses 5
CHF billion

2003 

2004 

2005

2003 

2004 

13.93

9.78

8.02

7.78

5.72

5.44

100

  75

  50

  25

    0

60.4

44.0

2005

95.1

As reported 

From continuing operations before goodwill

1 Net proﬁt attributable to UBS shareholders / average equity attributable to UBS shareholders less proposed distributions.
statements.

4 Operating expenses / operating income less credit loss expense or recovery.

3 Excludes results from industrial holdings.

2 Details of the EPS calculation can be found in note 8 to the ﬁnancial

5 Excludes interest and dividend income.

16

 
 
   
   
   
 
 
2005

For the last six years, we have consistently focused on four
performance indicators designed to ensure we deliver contin-
ually improving returns to our shareholders. These measures
are calculated before the effect of goodwill amortization in
2004  and  2003.  We  will  modify  some  of  them  starting  in
2006 to reﬂect the evolution of our business (see sidebar on
page 12). They will continue to focus solely on continuing op-
erations. Our cost / income ratio target will still be limited to
our ﬁnancial businesses.This avoids the distortion from indus-
trial holdings, which operated at a 92.3% cost / income ratio
in 2005.
Before the amortization of goodwill, our continuing opera-
tions showed:
–  Return  on  equity  in  full-year  2005  at  27.6%,  up  from
26.3% in 2004. The increase was driven by higher attrib-
utable proﬁt, but was partially offset by an increase in av-
erage equity levels, reﬂecting the growth in retained earn-

ings. From 2006 onwards, we aim to exceed 20% over pe-
riods of ﬂuctuating market conditions.

–  Basic earnings per share in 2005 at CHF 9.78, up 22% from
CHF 8.02 a year ago, reﬂecting increased earnings and a
slight reduction in the average number of shares outstand-
ing  (–2%)  following  share  repurchases.  Diluted  earnings
per share, our performance indicator from 2006 on, were
at  CHF  9.39  in  2005,  up  23%  from  CHF  7.64  in  2004.
–  A cost / income ratio for our ﬁnancial businesses of 70.1%
in 2005, down 1.3 percentage points from 71.4% a year
ago. This reﬂects the increase in net fee and commission
income and net income from trading activities, partly off-
set by higher costs related to personnel – all related to the
expansion of our business volumes.
Our wealth management businesses continue to gather
assets rapidly in all regions. In 2005, net new money totaled
CHF  95.1  billion,  up  57%  from  CHF  60.4  billion  in  2004,
corresponding  to  an  annual  growth  rate  of  6.9%  of  the
asset base at the end of 2004. Wealth Management Inter-

Net new money 1

CHF billion

Global Wealth Management & Business Banking

Wealth Management International & Switzerland

Wealth Management US

Business Banking Switzerland

Global Asset Management

Institutional

Wholesale Intermediary

Investment Bank

UBS excluding Private Banks & GAM

Corporate Center

Private Banks & GAM 2

UBS

1 Excludes interest and dividend income.

2 Private Banks & GAM was sold on 2 December 2005.

Invested assets

CHF billion

Global Wealth Management & Business Banking

Wealth Management International & Switzerland

Wealth Management US

Business Banking Switzerland

Global Asset Management

Institutional

Wholesale Intermediary

Investment Bank

UBS excluding Private Banks & GAM

Corporate Center

Private Banks & GAM 1

UBS

1 Private Banks & GAM was sold on 2 December 2005.

For the year ended

31.12.05

31.12.04

31.12.03

68.2

26.9

3.4

21.3

28.2

0.0

148.0

0.5

148.5

42.3

18.1

2.6

23.7

(4.5 )

0.0

82.2

7.7

89.9

29.7

14.3

2.5

12.7

(5.0 )

0.9

55.1

7.2

62.3

31.12.05

As at

31.12.04

% change from

31.12.03

31.12.04

982

752

153

441

324

0

2,652

0

2,652

778

606

140

344

257

0

2,125

92

2,217

701

599

136

313

261

4

2,014

84

2,098

26

24

9

28

26

25

(100 )

20

17

UBS Performance Indicators

national & Switzerland recorded inﬂows of CHF 68.2 billion,
driven by further growth in our ﬁve key European markets
and Asia. Our US business contributed CHF 26.9 billion in net
new money, CHF 8.8 billion above 2004 levels.

Starting in 2006, we will be reporting net new money for
all  ﬁnancial  businesses.  For  the  whole  of  2005,  net  new
money was CHF 148.0 billion, an all-time high, and up 80%
from CHF 82.2 billion a year earlier. This amounts to an an-
nual growth rate of 7% of the asset base at the end of 2004.
All the ﬁgures above exclude Private Banks & GAM.

2004

From our continuing operations and before goodwill amorti-
zation:
– Our return on equity was 26.3%, up from 18.8% in 2003,
well above our target range of 15% to 20%. The increase
reﬂects the combined effects of our strong earnings, con-

tinued buyback programs and the dividend outpacing in-
creased retained earnings.

– Basic earnings per share (EPS) were CHF 8.02, up 40% or
CHF 2.30 from CHF 5.72 in 2003. The high level reﬂected
the increase in net proﬁt as well as the 5% reduction in av-
erage number of shares outstanding due to our continu-
ing buyback programs.

– The  cost / income  ratio  of  our  ﬁnancial  businesses  was
71.4%  in  2004,  an  improvement  from  74.8%  in  2003.
Strong asset-based revenues drove fee and commission in-
come higher, demonstrating the inherent operating lever-
age  of  our  wealth  and  asset  management  businesses.
For full-year 2004, net new money inﬂows into our wealth
management businesses totalled CHF 60.4 billion, up 37%
from CHF 44.0 billion in 2003, corresponding to an annual
growth rate of 4.6% of the asset base at the end of 2003.
We saw gains in all geographical areas, especially from Asian
clients, and a particularly strong CHF 13.7 billion inﬂow into
our European wealth management business.

18

Financial Businesses

Financial Businesses
Results

Results

Income statement 1

CHF million, except where indicated

Continuing operations

Interest income

Interest expense

Net interest income

Credit loss (expense) / recovery

Net interest income after credit loss expense

Net fee and commission income

Net trading income

Other income

Total operating income

Cash components

Share-based components 2

Total personnel expenses

General and administrative expenses

Services to / from other business units

Depreciation of property and equipment

Amortization of goodwill

Amortization of other intangible assets

Total operating expenses

Operating proﬁt from continuing operations before tax

Tax expense

Net proﬁt from continuing operations

Discontinued operations

Proﬁt from discontinued operations before tax

Tax expense

Net proﬁt from discontinued operations

Net proﬁt

Net proﬁt attributable to minority interests

from continuing operations

from discontinued operations

Net proﬁt attributable to UBS shareholders

from continuing operations

from discontinued operations

Additional information

Personnel (full-time equivalents)

For the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

59,286

(49,758)

9,528

375

9,903

21,436

7,996

561

39,896

18,275

1,628

19,903

6,448

(14)

1,240

0

127

27,704

12,192

2,296

9,896

4,564

489

4,075

13,971

454

454

0

13,517

9,442

4,075

39,228

(27,484 )

11,744

241

11,985

18,506

4,902

578

35,971

16,310

1,396

17,706

6,387

(20 )

1,262

646

168

26,149

9,822

2,104

7,718

396 3

97

299

8,017

361

361

0

7,656

7,357

299

40,045

(27,784 )

12,261

(102 )

12,159

16,673

3,670

455

32,957

15,892

1,464

17,356

5,882

(23 )

1,320

677

185

25,397

7,560

1,409

6,151

220 3

52

168

6,319

360

360

0

5,959

5,791

168

51

81

(19 )

56

(17 )

16

63

(3 )

11

12

17

12

1

30

(2 )

(100 )

(24 )

6

24

9

28

404

74

26

26

77

28

31.12.05

69,569

As at

31.12.04

67,407

31.12.03

65,879

% change from

31.12.04

3

1 Excludes results from industrial holdings.
CHF 68 million and CHF 79 million for the years ended 31 December 2004 and 31 December 2003 respectively.

2 Additionally includes related social security contributions and expenses related to alternative investment awards.

3 Includes goodwill amortization of 

20

2005

Results

Our 2005 result was the best ever, with all our ﬁnancial busi-
nesses reporting a stronger performance than a year earlier.
Attributable proﬁt in 2005 was CHF 13,517 million, of which
discontinued operations contributed CHF 4,075 million, re-
ﬂecting the impact of the sale of Private Banks & GAM. Net
proﬁt from continuing operations was CHF 9,442 million, and
there was no goodwill charge. This was up 28% from CHF
7,357 million after goodwill in 2004, or 18% from CHF 8,003
million before goodwill. Higher revenues in practically all busi-
nesses drove the increase, clearly outpacing growth in costs.
Asset-based revenues showed particular strength, reﬂecting
rising market levels as well as strong inﬂows into our wealth
and asset management businesses. We also saw a strong in-
crease in brokerage, corporate ﬁnance and underwriting fees.
Overall,  net  fee  and  commission  income  now  contributes
54% to total operating income. Income from trading activi-
ties reached a record high as well, fueled by improved mar-
ket opportunities, particularly in second half 2005. Revenues
from interest margin products increased, reﬂecting the suc-
cess and growth of lending activities to wealthy private clients
worldwide. We also reported record credit loss recoveries. Per-
sonnel expenses were up 12% from a year earlier; perform-
ance-related payments rose with revenues and there was a
general increase in staff numbers (the number of employees
across the ﬁnancial businesses rose 3% in 2005, with the in-
crease spread across all businesses). For 2005, 50% of per-
sonnel expenses took the form of bonus or other variable com-
pensation,  up  from  49%  a  year  earlier.  Average  variable
compensation  per  head  in  2005  was  10%  higher  than  in
2004. Despite continued investments in expanding our busi-
ness while improving services to clients and streamlining in-
ternal processes, we kept costs under control. General and ad-
ministrative expenses were up just 1% in 2005 from a year

Net interest and trading income

CHF million

Net interest income

Net trading income

Total net interest and trading income

Breakdown by business activity

Equities

Fixed income

Foreign exchange

Other

Net income from trading activities

Net income from interest margin products

Net income from treasury and other activities

Total net interest and trading income

earlier.  Because  of  the  strength  of  revenue  growth,  our
cost / income ratio was 70.1% in 2005.

Operating income
Total operating income was CHF 39,896 million in 2005, up
11% from CHF 35,971 million in 2004. This was the highest
level ever.

Net interest income was CHF 9,528 million in 2005, down
from CHF 11,744 million in the same period a year earlier. Net
trading income was CHF 7,996 million, up from CHF 4,902
million in 2004.

As well as income from interest margin-based activities
(loans  and  deposits),  net  interest  income  includes  income
earned as a result of trading activities (for example, coupon
and dividend income). This component is volatile from peri-
od to period, depending on the composition of the trading
portfolio.  In  order  to  provide  a  better  explanation  of  the
movements in net interest income and net trading income,
we analyze the total according to the business activities that
give rise to the income, rather than by the type of income
generated.

Net income from trading activities increased by 4% or CHF
387 million from CHF 11,032 million in 2004 to CHF 11,419
million in 2005. At CHF 3,928 million, equities trading income
in 2005 was up 27% or CHF 830 million from CHF 3,098 mil-
lion in 2004. Last year saw a large increase in derivatives and
prime brokerage revenues around the globe, with the deriv-
atives business seeing signiﬁcant growth in both Asia Pacif-
ic and Europe as we continued to develop in these regions.
Americas showed the strongest growth in prime brokerage,
reﬂecting the growth of our client base. These gains were par-
tially offset by lower revenues in our equity cash business.
Fixed income trading revenues, at CHF 5,741 million in 2005,
were down 8% or CHF 523 million from CHF 6,264 million
in 2004. The drop was driven by declines in credit ﬁxed in-
come and ﬁxed income, partially offset by increased revenues
in our rates, principal ﬁnance and commercial real estate busi-

For the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

9,528

7,996

17,524

3,928

5,741

1,458

292

11,419

5,355

750

17,524

11,744

4,902

16,646

3,098

6,264

1,467

203

11,032

5,070

544

16,646

12,261

3,670

15,931

2,445

6,474

1,436

258

10,613

5,000

318

15,931

(19 )

63

5

27

(8 )

(1 )

44

4

6

38

5

21

Financial Businesses
Results

ness.  Credit  ﬁxed  income  saw  large  revenue  decreases  in
structured credit, notably in the US and credit trading in the
emerging markets business and the high yield sector. Rev-
enues in our rates business were up, driven mainly by struc-
tured LIBOR derivatives, European interest rates and US en-
ergy  trading.  We  recorded  revenues  of  CHF  103  million
relating  to  Credit  Default  Swaps  (CDSs)  hedging  existing
credit exposure in the loan book, against losses of CHF 62
million a year earlier. At CHF 1,458 million, revenues from our
foreign exchange business were stable in 2005 compared to
CHF 1,467 million recorded a year earlier. While derivatives
trading was negatively impacted by historically low volatility
levels, foreign exchange trading revenues rose due to high-
er volumes.

Net  income  from  interest  margin  products increased
by 6% to CHF 5,355 million in 2005 from CHF 5,070 million
in 2004. The increase was driven by the growth in lending
to wealthy US clients through our US bank, UBS Bank USA.
Our domestic Swiss mortgage business and wealth manage-
ment  collateralized  lending  business  also  grew  during  the
year. In addition, revenues rose due to a rise of interest rates
for client liabilities (with variable rates denominated in US dol-
lars and Swiss francs). It also rose because of the appreciation
of the US dollar against the Swiss franc, which helped revenues
from US dollar cash accounts. This increase was partially off-
set by lower income from our shrinking Swiss recovery port-
folio, which dropped by CHF 1.1 billion compared to year-end
2004.

At CHF 750 million, net income from treasury and other
activities in 2005 was CHF 206 million or 38% higher than
CHF 544 million in 2004. The increase reﬂects the beneﬁts
of the diversiﬁcation of our capital base into currencies oth-
er than the Swiss franc in a way that matches the currency
mix of our risk weighted assets. The higher equity base had
a positive impact on treasury income as well, as did a posi-
tive timing effect related to cash ﬂow hedging.

In 2005, we experienced a net credit loss recovery of CHF
375 million, compared to a net credit loss recovery of CHF
241 million in 2004. Releases in country allowances and pro-
visions  of  CHF  118  million  reﬂected  the  generally  positive
macro-economic environment in key emerging markets. This
favorable result was achieved in a period which saw a benign
environment for credit markets globally. Economic expansion
in the US provided a strong stimulus for growth worldwide.
Almost without exception, credit spreads contracted in all the
major developed and emerging capital markets, as healthy

expansion of cash ﬂows allowed the corporate sector to de-
leverage and build liquidity.

The net credit loss recovery at Global Wealth Management
& Business Banking was CHF 223 million in 2005 compared
to a net credit loss recovery of CHF 94 million in 2004. The
benign credit environment in Switzerland, where the corpo-
rate bankruptcy rate has receded in 2005 coupled with the
measures taken in recent years to improve the quality of our
credit portfolio has resulted in a continued low level of new
defaults. The success we have had in managing our impaired
portfolio has also resulted in a higher than anticipated level
of recoveries.

The Investment Bank experienced a net credit loss recov-
ery of CHF 152 million in 2005, compared to a net credit loss
recovery of CHF 147 million in 2004. This continued strong
performance was the result of minimal exposure to new de-
faults  and  strong  recoveries  of  previously  established  al-
lowances and provisions as we actively sold impaired assets
at better than anticipated terms.

For further details on our risk management approach, how
we measure credit risk and the development of our credit risk
exposures, please see the “Financial Management” chapter
of our Handbook 2005/2006.

In 2005, net fee and commission income was CHF 21,436
million, up 16% from CHF 18,506 million a year earlier. The
increase was driven by a strong contribution from recurring
asset-based fees, higher investment fund fees and net bro-
kerage fees, rising corporate ﬁnance fees as well as an in-
crease in underwriting fees. Underwriting fees, at their high-
est level ever, were CHF 2,857 million in 2005, up 13% from
CHF 2,531 million in 2004. Fixed income underwriting fees
increased  due  to  signiﬁcantly  improved  market  conditions
and our enhanced competitive position, but were slightly off-
set by lower equity underwriting fees. Fixed income under-
writing was CHF 1,516 million in 2005, up 36% from CHF
1,114 million in 2004. Equity underwriting slightly decreased
by 5% to CHF 1,341 million in the same period. At CHF 1,460
million, corporate ﬁnance fees in 2005 were up 35% from
CHF 1,078 million a year earlier. Advisory gross revenues in-
creased  notably  during  2005,  signalling  the  continued
strength of merger and acquisition markets, and our grow-
ing franchise in this area. Net brokerage fees were CHF 5,087
million in 2005, up 15% or CHF 680 million from CHF 4,407
million in 2004, reﬂecting the improved markets and the re-
sulting  higher  confidence  of  institutional  and  individual
clients – especially in the second half of 2005. Investment

Credit loss (expense) / recovery

CHF million

Global Wealth Management & Business Banking

Investment Bank

UBS

22

For the year ended

31.12.05

31.12.04

31.12.03

223

152

375

94

147

241

(70 )

(32 )

(102 )

Net fee and commission income

CHF million

Equity underwriting fees

Bond underwriting fees

Total underwriting fees

Corporate ﬁnance fees

Brokerage fees

Investment fund fees

Fiduciary fees

Custodian fees

Portfolio and other management and advisory fees

Insurance-related and other fees

Total securities trading and investment activity fees

Credit-related fees and commissions

Commission income from other services

Total fee and commission income

Brokerage fees paid

Other

Total fee and commission expense

Net fee and commission income

For the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

1,341

1,516

2,857

1,460

6,718

4,750

212

1,176

5,310

372

22,855

306

1,027

24,188

1,631

1,121

2,752

21,436

1,417

1,114

2,531

1,078

5,794

3,948

197

1,143

4,488

343

19,522

264

977

20,763

1,387

870

2,257

18,506

1,267

1,084

2,351

761

5,477

3,500

216

1,097

3,718

356

17,476

244

1,082

18,802

1,473

656

2,129

16,673

(5 )

36

13

35

16

20

8

3

18

8

17

16

5

16

18

29

22

16

fund fees, at their highest level ever, were CHF 4,750 million
in 2005, up 20% from CHF 3,948 million in 2004, mainly re-
ﬂecting  higher  asset-based  fees  for  our  wealth  and  asset
management businesses, driven by strong client money in-
flows  and  strong  market  conditions.  Fiduciary  fees  were
slightly higher in 2005 increasing from CHF 197 million in
2004 to CHF 212 million, reﬂecting an increased number of
mandates. At CHF 1,176 million, custodian fees in 2005 were
up 3% from CHF 1,143 million in 2004. This increase was en-
tirely  due  to  an  enlarged  asset  base.  Portfolio  and  other
management  and  advisory  fees  increased  by  18%  to  CHF
5,310 million in 2005 from CHF 4,488 million in 2004. The
increase is again the result of rising invested asset levels driv-
en by market valuations and strong net new money inﬂows.
Insurance-related and other fees, at CHF 372 million in 2005,
increased by 8% from a year earlier, due to higher commis-
sions from insurance related products. Credit-related fees and
commissions increased by 16% to CHF 306 million in 2005
from CHF 264 million in 2004, reﬂecting improved market
conditions which brought higher volumes.

Commission income from other services increased by 5%
from CHF 977 million in 2004 to CHF 1,027 million in 2005,
mainly  driven  by  equity  derivative  products  distributed  in
Switzerland.

Other  income decreased  by  3%  to  CHF  561  million  in
2005 from CHF 578 million in 2004, mainly due to both low-
er net gains from disposal of associates and subsidiaries and
from investments in property. This was partially offset by high-
er net gains from disposal of investment in ﬁnancial assets
available-for-sale.

Operating expenses
We continue to tightly manage our cost base with a clear fo-
cus on improving the efﬁciency of our businesses. Total op-
erating expenses increased by 6% to CHF 27,704 million in
2005 from CHF 26,149 million in 2004.

Personnel  expenses increased  by  CHF  2,197  million  or
12% to CHF 19,903 million in 2005 from CHF 17,706 mil-
lion in 2004. The rise was driven by higher performance-re-
lated compensation reﬂecting the better performance in all
our businesses. Personnel expenses are managed on a full-
year basis with ﬁnal ﬁxing of annual performance-related pay-
ments in fourth quarter. Salary expenses rose due to the 6%
increase in personnel over the year (excluding the staff of Pri-
vate Banks & GAM), showing the continuous expansion of
our business as well as annual pay rises. Share-based com-
ponents increased by 17% or CHF 232 million to CHF 1,628
million from CHF 1,396 million. This was due to an increase
in the UBS share price and the higher proportion of stock in
bonuses granted in 2005, partially offset by lower option ex-
penses. Contractors’ expenses increased to CHF 823 million
in 2005, up 45% from CHF 567 million in 2004, mainly re-
lated to the integration of former Perot employees into our
central ITI function. It also reﬂects higher usage, mainly in our
Investment Bank in support of increased business ﬂows. In-
surance and social security contributions rose by 23% to CHF
1,256 million in 2005 compared with CHF 1,024 million in
2004, reﬂecting higher salary and bonus payments. Contri-
butions to retirement beneﬁt plans were up 9% or CHF 61
million from CHF 651 million in 2004 to CHF 712 million in
2005 because of the higher salaries paid. At CHF 1,390 mil-

23

Financial Businesses
Results

Indicative pre-goodwill tax rates for ﬁnancial businesses

in %

Global Wealth Management & Business Banking

Wealth Management International & Switzerland

Wealth Management US

Business Banking Switzerland

Global Asset Management

Investment Bank

For the year ended

31.12.05

31.12.04

31.12.03

19

18

40

17

24

29

18

18

37

19

21

30

18

16

38

20

20

32

lion in 2005, other personnel expenses increased CHF 25 mil-
lion from CHF 1,365 million in 2004, mainly driven by in-
creased headcount, partially offset by the end of retention
payments  in  the  Wealth  Management  US  business  and 
lower severance payments. 

ed earnings of statutory tax rates for the locations in which
the Business Groups operated. These tax rates, therefore, give
guidance on the tax cost to each Business Group of doing
business  during  2005  on  a  stand-alone  basis,  without  the
beneﬁt of tax losses brought forward from earlier years.

At CHF 6,448 million in 2005, general and administrative
expenses increased CHF 61 million from CHF 6,387 million a
year ago. The increase was driven by travel and entertainment
expenses,  and  additional  administration  costs,  reflecting
higher employee levels and further increases in business ac-
tivity. Marketing costs increased due to continued investment
in  our  brand.  This  was  partially  offset  by  lower  provisions
(2004 included the civil penalty levied by the Federal Reserve
Board relating to our banknote trading business) and reduced
expenses for IT outsourcing and professional fees, as well as
lower rent and maintenance of machines and equipment.

Depreciation was CHF 1,240 million in 2005, down 2%
from CHF 1,262 million in 2004. This was the lowest level
ever, reﬂecting falling IT-related charges, partially offset by
higher depreciation on real estate.

There was no amortization of goodwill in 2005 as we were
required to stop doing so at the start of the year. In 2004,
amortization of goodwill was CHF 646 million. 

At CHF 127 million, amortization of other intangible as-
sets was down 24% from CHF 168 million a year earlier, due
to the reclassiﬁcation of the Wealth Management US work-
force to goodwill.

Tax

Tax expense for 2005 was CHF 2,296 million, resulting in an
effective tax rate of 18.8%, down from the full-year 2004 tax
rate of 21.4% (20.1% pre-goodwill). The tax rate for full-year
2005 was positively inﬂuenced by the absence of goodwill
amortization and the successful conclusion of tax audits in
the third and fourth quarters. We believe that a tax rate of
about 21% is a reasonable initial estimate for 2006.

Business Group tax rates
Indicative Business Group and Business Unit tax rates are cal-
culated on an annual basis based on the results and statuto-
ry tax rates of the ﬁnancial year. These rates are approximate
calculations, based upon the application to the year’s adjust-

The indicative tax rates for 2004 and 2003 are presented
pre-goodwill. They give an indication of what the tax rate
would have been if goodwill had not been charged for ac-
counting purposes. It is the sum of the tax expense payable
on net proﬁt before tax and goodwill in each location, cal-
culated on the above basis, divided by the total net proﬁt be-
fore tax and goodwill. Tax rates post-goodwill are higher than
the pre-goodwill rates, because in some jurisdictions there are
limitations on the tax deductibility of amortization costs.

Please note that these tax rates are not necessarily indica-
tive of future tax rates for the businesses or UBS as a whole.

Fair value disclosure of shares and options

The fair value of shares granted in 2005 rose to CHF 1,376
million, 24% higher than CHF 1,113 million a year earlier. The
increase compared to 2004 is primarily driven by an increased
proportion of bonuses being delivered in restricted shares.

The fair value of options granted as of 31 December 2005
was CHF 362 million, down 29% from CHF 508 million in
2004. The decrease reﬂects a lower fair value per option, pri-
marily due to a change in the valuation model, and a drop in
the number of options granted.

Most  share-based  compensation  is  granted  in  the  ﬁrst
quarter of the year, with any further grants mainly under the
Equity  Plus  program,  a  continuing  employee  participation
program under which voluntary investments in UBS shares
each quarter are matched with option awards.

These amounts, net of forfeited awards, will be recog-
nized  as  compensation  expense  over  the  service  period,
which  is  generally  equal  to  the  vesting  period.  Most  UBS
share and option awards vest incrementally over a three-year
period.

Outlook

At this time last year, we said that it would be challenging to
beat our then record 2004 result. Helped by continued favor-

24

able market conditions, especially in the second half of 2005,
we did exceed last year’s record performance; but this makes
the task for 2006 even greater. Early indications for 2006 show
that business has started on a positive note. Deal pipelines are
promising, investors are upbeat and macroeconomic indica-
tors are encouraging. The fundamentals driving the growth
of the ﬁnancial industry remain intact for the time being.

We are therefore optimistic about the outlook for UBS –
for 2006 and beyond. We now have a strong competitive po-
sition in the areas we have chosen to invest in – among them
European wealth management, alternative investments, in-
vestment banking, prime brokerage and in Asia Paciﬁc across
business lines. These areas are becoming major revenue con-
tributors, allowing us to invest in other opportunities that ﬁt
our strategy. This will help us sustain growth as well as our
attractiveness to clients, employees and shareholders well in-
to the future.

2004

Results

Net proﬁt attributable to UBS shareholders in 2004 was CHF
7,656 million, with CHF 7,357 million coming from continu-
ing operations and CHF 299 million from discontinued oper-
ations – the latter solely related to Private Banks & GAM. Over-
all,  performance  improved  28%  compared  to  2003,  when
attributable net proﬁt was CHF 5,959 million. Before good-
will and excluding the sale of our Correspondent Services Cor-
poration (CSC) clearing subsidiary, which was completed in
second quarter 2003, net proﬁt rose by 25%. The increase was
driven by higher revenues in all categories, clearly outpacing
cost  growth.  Our  asset-based  revenues  showed  particular
strength,  reﬂecting  improved  market  valuations  as  well  as
strong inﬂows of net new money into our wealth and asset
management businesses. We also saw a strong increase in bro-
kerage, corporate ﬁnance, underwriting fees and trading in-
come. We reported record credit loss recoveries as well. Per-
formance-related compensation rose in line with revenues,
with  higher  general  and  administrative  expenses  driven  by
higher legal provisions and operational risk costs.

Operating income
Total operating income was CHF 35,971 million in 2004, up
9% from CHF 32,957 million in 2003. The increase was driv-
en by our ability to capture opportunities in increasingly ac-
tive ﬁnancial markets. The increase in market levels positive-
ly  impacted  the  asset  base  of  our  wealth  and  asset
management businesses, prompting fee-based revenues to
rise. Trading and brokerage income also proﬁted from the im-
proved market environment that boosted institutional and
private client transaction activity. We also recorded credit loss
recoveries in 2004 compared to expenses in 2003. The over-

all rise in 2004’s revenues, however, was partially offset by
the weakening of the US dollar against the Swiss franc.

Net  interest  income was  CHF  11,744  million  in  2004,
down from CHF 12,261 million in the same period a year ear-
lier. Net trading income was CHF 4,902 million, up from CHF
3,670 million in 2003.

At CHF 5,070 million, net income from interest margin
products in 2004 was 1% higher than CHF 5,000 million a
year earlier. The increase was driven by the growth in lend-
ing to wealthy US clients through our US bank, UBS Bank
USA. Our domestic Swiss mortgage and wealth management
margin lending business also grew over the year. This increase
was nearly offset by lower income from our shrinking Swiss
recovery portfolio, which dropped by CHF 2.0 billion com-
pared to year-end 2003, reduced interest margins on client
cash and savings accounts, as well as declining revenues from
US dollar-denominated accounts.

Net income from trading activities was CHF 11,032 million
in 2004, up by 4% or CHF 419 million from CHF 10,613 mil-
lion a year earlier. At CHF 3,098 million, equities trading income
in 2004 was up 27% or CHF 653 million from CHF 2,445 mil-
lion in 2003. The increase reﬂects expansion in market volumes
and, hence, improved trading opportunities, especially during
the particularly strong ﬁrst quarter and after the US elections
in  November.  Our  proprietary  trading  strategies  performed
well. Equity ﬁnance revenues increased strongly, reﬂecting the
successful integration of ABN Amro’s prime brokerage busi-
ness. Fixed income trading revenues, at CHF 6,264 million in
2004, were down 3% from CHF 6,474 million in 2003. The
drop was driven by declines in our principal ﬁnance, commer-
cial real estate and ﬁxed income businesses, partially offset by
improved revenues in our rates business. Compared to 2003,
the market environment in 2004 saw rising interest rates and
lower  volatility,  which  drove  activity  from  the  market.  We
recorded losses of CHF 62 million relating to Credit Default
Swaps  (CDSs)  hedging  existing  credit  exposure  in  the  loan
book, against losses of CHF 678 million a year earlier. Foreign
exchange trading revenues increased by 2% to CHF 1,467 mil-
lion in 2004 from CHF 1,436 million a year earlier, reﬂecting
an outstanding performance in our derivative trading business
as well as strong sales volumes.

At CHF 544 million, net income from treasury and other
activities in 2004 was CHF 226 million or 71% higher than
CHF 318 million in 2003. The impact of falling interest rates
was partially offset by the diversiﬁcation of our invested eq-
uity into currencies other than the Swiss franc. Other activi-
ties improved due to lower goodwill funding costs.

In 2004, we experienced a net credit loss recovery of CHF
241 million, compared to net credit loss expense of CHF 102
million in 2003. This favorable result was achieved in a period
which  saw  a  very  sanguine  environment  for  credit  markets
globally. Economic expansion in the US provided a strong stim-
ulus for growth worldwide. Almost without exception, cred-
it spreads contracted in all the major developed and emerg-

25

Financial Businesses
Results

ing capital markets, as healthy expansion of cash ﬂows allowed
the corporate sector to de-leverage and build liquidity.

Net credit loss recovery at Global Wealth Management &
Business Banking amounted to CHF 94 million in 2004 com-
pared to net credit loss expenses of CHF 70 million in 2003.
Our domestic credit portfolio demonstrated strong resilience
in a Swiss economic environment which saw a 9.2% increase
in corporate bankruptcies compared to 2003. The measures
taken in past years to improve the quality of our credit port-
folio have resulted in lower levels of new defaults and our
success  in  managing  the  impaired  portfolio  resulted  in  a
higher than anticipated level of recoveries.

The Investment Bank experienced a net credit loss recov-
ery of CHF 147 million in 2004, compared to a net credit loss
expense of CHF 32 million in 2003. This strong performance
was  the  result  of  minimal  exposure  to  new  defaults  and
strong recoveries of previously established allowances and
provisions.  Releases  in  country  allowances  and  provisions
were due partly to exposure reductions in the affected coun-
tries and partly to a more favorable outlook for emerging
market economies. There was also a partial release of a size-
able allowance for a corporate counterparty which managed
a turnaround during 2004.

In 2004, net fee and commission income was CHF 18,506
million, up 11% from CHF 16,673 million a year earlier. The
increase was driven by a strong contribution from recurring
asset-based fees, higher net brokerage fees, rising corporate
ﬁnance fees as well as an increase in underwriting fees. Un-
derwriting fees were CHF 2,531 million in 2004, up 8% from
CHF 2,351 million in 2003. Both equity and ﬁxed income un-
derwriting  fees  increased.  Fixed  income  underwriting  was
CHF 1,114 million in 2004, up 3% from CHF 1,084 million
in 2003. Equity underwriting increased 12% to CHF 1,417
million in the same period. At CHF 1,078 million, corporate
ﬁnance fees in 2004 were up 42% from CHF 761 million a
year  earlier.  We  were  able  to  beneﬁt  from  the  pick-up  in
merger and acquisition activity, and our strengthened advi-
sory business, particularly in the US. Net brokerage fees were
CHF 4,407 million in 2004, up 10% or CHF 403 million from
CHF 4,004 million in 2003, reﬂecting the improved markets
and the resulting higher institutional and individual client ac-
tivity – especially in the ﬁrst and fourth quarters of 2004. In-
vestment  fund  fees  were  CHF  3,948  million  in  2004,  up
13% from CHF 3,500 million in 2003, mainly reﬂecting high-
er asset-based fees for our wealth and asset management
businesses.  At  CHF  1,143  million,  custodian  fees  in  2004
were up 4% from CHF 1,097 million in 2003. This increase
was entirely due to an enlarged asset base. Insurance-relat-
ed and other fees, at CHF 343 million in 2004, decreased by
4% from a year earlier. Excluding the effect of the weaken-
ing US dollar, insurance-related and other fees were actual-
ly slightly higher compared to 2003. Credit-related fees and
commissions increased by 8% to CHF 264 million in 2004
from CHF 244 million in 2003, reﬂecting improved market

conditions which brought higher volumes. Portfolio and oth-
er management and advisory fees increased by 21% to CHF
4,488 million in 2004 from CHF 3,718 million in 2003. The
increase was again the result of rising invested asset levels
driven by market valuations and strong net new money in-
ﬂows, as well as an increase in performance fees.

Other  income increased  by  27%  to  CHF  578  million  in
2004 from CHF 455 million in 2003. The increase was driven
by higher disposal gains from ﬁnancial investments available-
for-sale (up CHF 42 million) and lower impairment charges
(down  CHF  150  million).  This  was  partially  offset  by  lower
gains  from  the  divestment  of  associates  and  subsidiaries,
which dropped by 51% to CHF 84 million in 2004 (the major
disposal being the Noga Hilton hotel in Geneva) from CHF 170
million in 2003 (the major disposal being Correspondent Ser-
vices Corporation (CSC)).

Operating expenses
We continued to tightly manage our cost base with a clear
focus on improving the efﬁciency of our businesses. Total op-
erating expenses increased by 3% to CHF 26,149 million in
2004 from CHF 25,397 million in 2003.

Personnel expenses increased by CHF 350 million or 2%
to CHF 17,706 million in 2004 from CHF 17,356 million in
2003.  The  rise  was  driven  by  higher  performance-related
compensation reﬂecting the better performance in most of
our businesses. Cash components rose by CHF 418 million due
to  the  2%  increase  in  headcount  over  the  year,  whereas
share-based components decreased by 5%. Contractors’ ex-
penses increased to CHF 567 million in 2004, up 6% from CHF
536 million in 2003, reﬂecting higher usage, mainly in our In-
vestment Bank in support of increased business ﬂows. At CHF
1,365 million, other personnel expenses dropped CHF 263
million from CHF 1,628 million in 2003 due to the end of re-
tention payments in the Wealth Management US business and
lower severance payments. For 2004, 49% of personnel ex-
penses took the form of bonus or variable compensation, up
from 46% in 2003. Average variable compensation per head
in 2004 was 9% higher than in 2003.

At CHF 6,387 million in 2004, general and administrative
expenses increased CHF 505 million from CHF 5,882 million
in the same period a year ago. The increase was driven by
higher provisions (up CHF 257 million) which rose due to spe-
ciﬁc operational and legal provisions (including the civil penal-
ty levied by the Federal Reserve Board relating to our ban-
knote  trading  business),  higher  IT  and  other  outsourcing
expenses as well as professional fees, the latter due to high-
er legal and project costs. This was partially offset by savings
in telecommunication, rent and maintenance expenses.

Depreciation was CHF 1,262 million in 2004, down 4%
from CHF 1,320 million in 2003, reﬂecting falling IT-related
charges as well as lower writedowns of equipment.

At CHF 646 million, amortization of goodwill was down
5% from CHF 677 million. Amortization of other intangible

26

assets was down 9% from CHF 185 million in 2003, reﬂect-
ing lower amortization charges and the weakening of the US
dollar against the Swiss franc.

Tax

In 2004, we incurred a tax expense of CHF 2,104 million, re-
ﬂecting an effective tax rate of 21.4% for full-year 2004, com-
pared to the full-year rate of 16.9% in 2003 (excluding the
gain on sale of CSC). The 2003 tax rate was positively inﬂu-
enced by a favorable regional proﬁt mix. The higher rate for
2004 has been driven by an increase in proﬁtability in higher
tax jurisdictions, mainly the US.

Fair value disclosure of options

The fair value of options granted in 2004 was CHF 508 mil-
lion (pre-tax: CHF 543 million) compared to CHF 439 million
(pre-tax: CHF 576 million) in the same period a year ago. The
after-tax increase was driven by a higher UBS share price, a
lower pro-forma tax beneﬁt, and adjusted assumptions for the
valuation of options. In fact, signiﬁcantly fewer option grants
were made in 2004 (down nearly 40% from 2003), in line with
our strategy of granting options more selectively.

27

Financial Businesses
Global Wealth Management & Business Banking

Global Wealth Management&Business Banking

Pre-tax proﬁt for our international and Swiss wealth management businesses was CHF 4,161 million, up 20%
from the pre-goodwill result achieved in 2004. In the US, pre-tax proﬁt rose to CHF 312 million from CHF 29 mil-
lion a year earlier. Business Banking Switzerland's pre-tax proﬁt was CHF 2,189 million, up 9% from 2004.

Business Group reporting

CHF million, except where indicated

Income

Adjusted expected credit loss 1

Total operating income

Cash components

Share-based components 2

Total personnel expenses

General and administrative expenses

Services to / from other business units

Depreciation of property and equipment

Amortization of goodwill

Amortization of other intangible assets

Total operating expenses

Business Group performance before tax

Business Group performance before tax and amortization of goodwill

KPIs

Cost / income ratio (%) 3

Cost / income ratio before goodwill (%) 3

Capital return and BIS data

Return on adjusted regulatory capital (%) 4

Return on adjusted regulatory capital before goodwill (%) 4

BIS risk-weighted assets

Goodwill

Adjusted regulatory capital 5

Additional Information

Client assets (CHF billion)

Personnel (full-time equivalents)

31.12.05

19,131

107

19,238

8,252

237

8,489

2,845

960

226

0

56

12,576

6,662

6,662

65.7

65.7

34.7

34.7

147,348

5,407

20,142

31.12.05

2,895

44,612

For the year ended

31.12.04

17,506

(38 )

17,468

7,630

235

7,865

2,473

1,137

202

238

115

12,030

5,438

5,676

68.7

67.4

31.3

32.7

134,004

3,648

17,048

As at

31.12.04

2,306

42,570

31.12.03

16,792

(139 )

16,653

7,711

288

7,999

2,383

1,285

236

246

137

12,286

4,367

4,613

73.2

71.7

25.8

27.3

132,106

3,713

16,924

31.12.03

2,196

42,386

% change from

31.12.04

9

10

8

1

8

15

(16 )

12

(100 )

(51 )

5

23

17

10

48

18

% change from

31.12.04

26

5

1 In management accounts, adjusted expected credit loss rather than credit loss expense is reported for the Business Groups (see note 2 to the ﬁnancial statements).
social security contributions and expenses related to alternative investment awards.
5 10% of BIS risk-weighted assets plus goodwill.

2 Additionally includes related
4 Business Group performance before tax / average adjusted regulatory capital.

3 Operating expenses / income.

Marcel Rohner | Chairman & CEO 
Global Wealth Management & 
Business Banking

28

Wealth Management International & Switzerland

Business Unit reporting

CHF million, except where indicated

31.12.05

Income

Adjusted expected credit loss 1

Total operating income

Cash components

Share-based components 2

Total personnel expenses

General and administrative expenses

Services to / from other business units

Depreciation of property and equipment

Amortization of goodwill

Amortization of other intangible assets

Total operating expenses

Business Unit performance before tax

Business Unit performance before tax and amortization of goodwill

KPIs

Invested assets (CHF billion)

Net new money (CHF billion) 3

Gross margin on invested assets (bps) 4

Cost / income ratio (%) 5

Cost / income ratio before goodwill (%) 5

Cost / income ratio before goodwill and excluding the European wealth management business (%) 5

Client advisors (full-time equivalents)

International clients

Income

Invested assets (CHF billion)

Net new money (CHF billion) 3

Gross margin on invested assets (bps) 4

European wealth management (part of international clients)

Income

Invested assets (CHF billion)

Net new money (CHF billion) 3

Client advisors (full-time equivalents)

9,024

(13)

9,011

2,491

88

2,579

804

1,371

89

0

7

4,850

4,161

4,161

982

68.2

102

53.7

53.7

47.7

4,154

6,476

729

64.2

100

722

114

21.8

803

For the year ended

31.12.04

7,701

(8 )

31.12.03

6,797

(4 )

7,693

2,047

72

2,119

642

1,395

66

67

8

4,297

3,396

3,463

778

42.3

103

55.8

54.9

47.2

3,744

5,429

562

40.4

102

437

82

13.7

838

6,793

1,921

75

1,996

604

1,479

82

54

21

4,236

2,557

2,611

701

29.7

101

62.3

61.5

53.2

3,300

4,734

491

29.7

101

267

46

10.8

672

% change from

31.12.04

17

(63 )

17

22

22

22

25

(2 )

35

(100 )

(13 )

13

23

20

26

(1 )

11

19

30

(2 )

65

39

(4 )

1 In management accounts, adjusted expected credit loss rather than credit loss expense is reported for the Business Groups (see note 2 to the ﬁnancial statements). 2 Additionally includes related social security
contributions and expenses related to alternative investment awards.

3 Excludes interest and dividend income.

4 Income/average invested assets.

5 Operating expenses/income.

29

Financial Businesses
Global Wealth Management & Business Banking

Business Unit reporting (continued)

CHF million, except where indicated

For the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

Swiss clients

Income

Invested assets (CHF billion)

Net new money (CHF billion) 1

Gross margin on invested assets (bps) 2

Capital return and BIS data

Return on adjusted regulatory capital (%) 3

Return on adjusted regulatory capital before goodwill (%) 3

BIS risk-weighted assets

Goodwill

Adjusted regulatory capital 4

Additional information

Recurring income 5

Client assets (CHF billion)

Personnel (full-time equivalents)

2,548

253

4.0

109

78.9

78.9

43,369

1,566

5,903

2,272

216

1.9

106

82.5

84.1

31,903

1,176

4,366

2,063

210

0.0

102

70.0

71.5

28,130

838

3,651

12

17

3

36

33

35

As at or for the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

6,635

1,235

11,555

5,679

972

10,093

4,787

884

9,176

17

27

14

1Excludes interest and dividend income.
5 Interest, asset-based fees for portfolio management and fund distribution, account-based and advisory fees.

2Income/average invested assets.

3Business Unit performance before tax/average adjusted regulatory capital. 410% of BIS risk-weighted assets plus goodwill.

Components of operating income

Wealth Management International & Switzerland derives its operating
income principally from:
–
–
–
– net interest income.

fees for ﬁnancial planning and wealth management services;
fees for investment management services;
transaction-related fees; and

Wealth Management International & Switzerland’s fees are based on
the market value of invested assets and the level of transaction-
related activity. As a result, operating income is affected by factors
such as ﬂuctuations in invested assets, changes in market conditions,
investment performance and inﬂows and outﬂows of client funds.

2005

Key performance indicators

In 2005, net new money inﬂows totaled CHF 68.2 billion, up
61% from CHF 42.3 billion in 2004, representing an annual
growth rate of 8.8% of the underlying invested asset base at
end-2004. This excellent performance was driven by gains in
all geographical areas, especially from Asian clients, and a par-

ticularly  strong  CHF  21.8  billion  inﬂow  into  our  European
wealth management business.

Invested assets, at CHF 982 billion on 31 December 2005,
were up 26% from CHF 778 billion a year earlier, mainly re-
ﬂecting the strong inﬂow of net new money and the positive
market performance during the second half of the year, with
CHF 11.1 billion coming from new assets gained from acqui-
sitions we integrated in 2005. The 15% rise of the US dollar
against the Swiss franc contributed to the increase. Approxi-

Net new money  
CHF billion

Invested assets  
CHF billion

2003 

2004 

2005

31.12.03 

31.12.04 

31.12.05

68.2

42.3

29.7

1,000

   750

   500

   250

       0

210

491

216

562

253

729

International Clients  

Swiss Clients  

80

60

40

20

  0

30

 
 
mately 36% of invested assets were denominated in US dol-
lars at the end of 2005.

Net new money European wealth management  
CHF billion

The gross margin on invested assets was 102 basis points
in 2005, down 1 basis point from 103 basis points a year ear-
lier, as the asset base was boosted by the record inﬂows of
net new money. Overall, recurring income made up 75 basis
points of the margin in 2005, down from 76 basis points in
2004. Non-recurring income comprised 27 basis points of the
margin in 2005, unchanged from 2004.

Gross margin on invested assets  
bps

2003 

2004 

2005

101

103

102

110

100

  90

  80

  70

The pre-goodwill cost / income ratio improved to 53.7% in
2005 from 54.9% a year earlier, reﬂecting the strong rise in
income, which more than offset the increase in personnel ex-
penses (mainly performance-related compensation) and high-
er general and administrative costs. Excluding the European
wealth management business, the 2005 cost / income ratio
rose to 47.7% from 47.2% a year earlier.

Cost / income ratio   
in % 

2003 

2004 

2005

21.8

13.7

10.8

25

20

15

10

  5

  0

The level of invested assets was a record CHF 114 billion on
31 December 2005, a 39% increase compared to the CHF 82
billion a year earlier. As well as new inﬂows, this reﬂected ris-
ing equity market levels and a 15% appreciation of the US dol-
lar against the Swiss franc.

Invested assets European wealth management  
CHF billion

31.12.03 

31.12.04 

31.12.05

120

  90

  60

  30

    0

114

82

46

2003 

2004 

2005 

62.3

61.5

55.8 

54.9

53.7 
53.7

In 2005, income from our European wealth management
business was CHF 722 million, up 65% from a year earlier, re-
ﬂecting our growing asset and client base.

In 2005, the number of client advisors decreased by 35. The
decline was due to the reclassiﬁcation of some former Sauer-
born Trust employees initially accorded client advisor status,
and the departure of less productive client advisors.

70 

60 

50 

40 

30 

As reported   

Adjusted for goodwill  

Results

European wealth management

Our  European  wealth  management  business  continued  to
make signiﬁcant progress. With a particularly good perform-
ance in the UK and Germany, the inﬂow of net new money in
2005 was CHF 21.8 billion, up 59% from the previous year’s
intake of CHF 13.7 billion. The result reﬂects an annual net new
money inﬂow rate of 27% of the underlying asset base at year-
end 2004.

In 2005, pre-tax proﬁt, at CHF 4,161 million, was up 20% from
the pre-goodwill result in 2004. This increase reﬂects favorable
equity  markets,  which  drove  a  17%  increase  in  revenues
through higher asset-based fees, and strengthening client ac-
tivity. Rising interest income, a reﬂection of the expansion of our
margin lending activities, also bolstered revenues. At the same
time, our expenses, up 15% in 2005 from 2004 (pre-goodwill),
reﬂect our ongoing growth strategy. Personnel expenses, up
22%, rose due to the hiring of an additional 1,462 employees.

31

 
    
 
    
 
 
 
 
Financial Businesses
Global Wealth Management & Business Banking

Performance before tax  
CHF million

zation of intangible assets was CHF 7 million, practically un-
changed from CHF 8 million in 2004.

2003 

2004 

2005

4,161

3,396

2,557

5,000

4,000

3,000

2,000

1,000

       0

Operating income
Total operating income in 2005 was CHF 9,011 million, up
17% from CHF 7,693 million a year earlier. This was the high-
est level ever, reflecting a rise in recurring as well as in non-
recurring revenues. Recurring income increased 17% on ris-
ing asset-based fees, benefiting from gains in asset levels.
This was accentuated by higher interest income due to the
expansion of our margin lending activities. Non-recurring in-
come rose due to higher brokerage fees and commissions for
sales of investment funds, reflecting an increase in client ac-
tivity levels, which were particularly strong in the first quar-
ter and in the second half of the year. These positive effects
were supported by the appreciation of the US dollar against
the Swiss franc.

Operating expenses
At CHF 4,850 million, operating expenses in 2005 were up
15% from CHF 4,230 million (pre-goodwill) a year earlier, re-
flecting higher personnel expenses as well as the ongoing in-
vestment in our growth initiatives. Personnel expenses rose
22% to CHF 2,579 million in 2005 compared to CHF 2,119
million a year earlier, reflecting the increase in salaries from
the expansion of our business as well as higher performance-
related compensation. Expenses for share-based awards in-
creased with more shares and options being granted and the
rise of the share price during the year. General and admin-
istrative expenses, at CHF 804 million, were up 25% in 2005
from CHF 642 million a year earlier due to ongoing business
expansion  as  well  as  investments  in  our  physical  and  IT
infrastructure.  Expenses  for  services  from  other  business
units, at CHF 1,371 million in 2005, were down 2% from
CHF  1,395  million  the  previous  year,  mainly  due  to  lower
charges for insurance. Depreciation was CHF 89 million in
2005, up 35% from CHF 66 million a year earlier because of
higher  charges  for  information  technology  equipment.
Amortization of goodwill ceased in 2005, while the amorti-

32

2004

Key performance indicators

In 2004, net new money inﬂows totaled CHF 42.3 billion, up
42% from CHF 29.7 billion in 2003. The excellent perform-
ance  was  due  to  strong  inﬂows  into  our  European  wealth
management  business  as  well  as  signiﬁcant  inﬂows  from
clients in Asia and Eastern Europe.

Invested assets, at CHF 778 billion on 31 December 2004,
were up 11% from CHF 701 billion a year earlier, mainly re-
ﬂecting the strong inﬂow of net new money and CHF 22.4 bil-
lion in new assets gained from acquisitions integrated in 2004.
Rising equity markets also had a positive impact on asset lev-
els, helping to compensate for the negative effect of the US
dollar’s weakening against the Swiss franc. 35% of invested
assets were denominated in US dollars at the end of 2004.

The gross margin on invested assets was 103 basis points
in 2004, up 2 basis points from 101 basis points a year earli-
er, as revenues increased more than the average asset base.
Overall, recurring income made up 76 basis points of the mar-
gin in 2004, up from 71 basis points in 2003. Non-recurring
income  comprised  27  basis  points  of  the  margin  in  2004,
against 30 basis points in 2003.

The pre-goodwill cost / income ratio declined to 54.9% in
2004 from 61.5% a year earlier, reﬂecting the strong rise in
income, which more than offset the gain in performance-re-
lated compensation. Excluding the European wealth manage-
ment business, the cost / income ratio fell to 47.2% in 2004
from 53.2% a year earlier.

European wealth management

Our European wealth management business made signiﬁcant
progress. With a particularly good performance in the UK and
Germany, the inﬂow of net new money in 2004 was CHF 13.7
billion, up 27% from the previous year’s intake of CHF 10.8
billion. The result reﬂected an annual net new money inﬂow
rate of 30% of the underlying asset base at year-end 2003.

The level of invested assets was a record CHF 82 billion on 
31 December 2004, almost double the CHF 46 billion a year
earlier, with the gain reﬂecting healthy inﬂows of net new mon-
ey, and the integration of acquisitions made during the year.
In 2004, income from our European wealth management
business was CHF 437 million, up 64% from a year earlier, re-
ﬂecting our growing asset and client base.

The number of client advisors increased by 166 in 2004, of
which 144 were from businesses we acquired during the year.

 
Results

Wealth  Management  International  and  Switzerland’s  2004
pre-tax  proﬁt,  at  CHF  3,396  million,  increased  33%  from
2003, mainly due to a recovery in major ﬁnancial markets that
started in the middle of 2003, driving a 13% increase in rev-
enues through higher asset-based fees. At the same time, our
expenses only rose by 1% in 2004 from 2003, reﬂecting our
tight cost management.

Operating income
Total operating income in 2004 was CHF 7,693 million, up
13% from CHF 6,793 million in 2003. Recurring income in-
creased 19% on higher asset-based fees, the latter beneﬁt-
ing from gains in asset levels. Rising interest income, reﬂect-
ing the expansion of our margin lending activities, also had a
positive impact on revenues. Non-recurring income rose due
to higher brokerage fees, tracing the increase in client activi-
ty levels, which were particularly strong in the ﬁrst and fourth
quarters of the year.

Operating expenses
At CHF 4,297 million, operating expenses in 2004 were up
1% from CHF 4,236 million a year earlier, reﬂecting higher
personnel  expenses  as  well  as  the  ongoing  investment  in
growth initiatives. Personnel expenses in 2004 rose 6% to CHF
2,119 million from CHF 1,996 million a year earlier, reﬂecting
higher performance-related compensation as well as an in-
crease in salaries related to the expansion of our business.
General  and  administrative  expenses,  at  CHF  642  million,
were up 6% in 2004 from CHF 604 million a year earlier, due
to higher legal and operational provisions, an increase in trav-
el and entertainment expenses as well as a rise in marketing
costs. Expenses for services from other business units, at CHF
1,395 million in 2004, were down 6% from CHF 1,479 mil-
lion in the previous year, mainly due to lower charges for in-
surance and IT services. Depreciation was CHF 66 million in
2004, down 20% from CHF 82 million a year earlier because
of  lower  charges  for  information  technology  equipment.
Goodwill amortization was CHF 67 million in 2004, up 24%
from a year earlier.

33

Financial Businesses
Global Wealth Management & Business Banking

Wealth Management US

Business Unit reporting

CHF million

Private client revenues

Net goodwill funding 2

Income

Adjusted expected credit loss 3

Total operating income

Cash components

Share-based components 4

Total personnel expenses

General and administrative expenses

Services to / from other business units

Depreciation of property and equipment

Amortization of goodwill

Amortization of other intangible assets

Total operating expenses

Business Unit performance before tax

Business Unit reporting excluding acquisition costs

CHF million

Total operating income

Add back: Net goodwill funding 2

Operating income excluding acquisition costs

Total operating expenses

Retention payments

Amortization of goodwill

Amortization of other intangible assets

Operating expenses excluding acquisition costs

Business Unit performance before tax and acquisition costs

For the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

5,347

(189)

5,158

(2)

5,156

3,353

107

3,460

1,047

223

65

0

49

4,844

312

4,906

(165 )

4,741

(5 )

4,736

3,206

114

3,320

767

275

67

171

107

4,707

29

4,959 1

(211 )

4,748

(8 )

4,740

3,394

161

3,555

689

415

66

192

116

5,033

(293 )

9

(15 )

9

60

9

5

(6 )

4

37

(19 )

(3 )

(100 )

(54 )

3

976

For the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

5,156

189

5,345

4,844

0

0

(49)

4,795

550

4,736

165

4,901

4,707

(99 )

(171 )

(107 )

4,330

571

4,740

211

4,951

5,033

(299 )

(192 )

(116 )

4,426

525

9

15

9

3

100

100

54

11

(4 )

1 Includes gain on disposal of Correspondent Services Corporation of CHF 161 million.
3 In management accounts, adjusted expected credit loss rather than credit loss expense is reported for the Business Groups (see note 2 to the ﬁnancial statements).
social security contributions and expenses related to alternative investment awards.

2 Goodwill and intangible asset-related funding, net of risk-free return on the corresponding capital allocated.
4 Additionally includes related

34

Business Unit reporting (continued)

CHF million, except where indicated

KPIs

Invested assets (CHF billion)

Net new money (CHF billion) 1

Interest and dividend income (CHF billion) 2

Gross margin on invested assets (bps) 3

Gross margin on invested assets excluding acquisition costs (bps) 4

Cost / income ratio (%) 5

Cost / income ratio excluding acquisition costs (%) 6

Recurring income 7

Revenues per advisor (CHF thousand) 8

Capital return and BIS data

Return on adjusted regulatory capital (%) 9

Return on adjusted regulatory capital before acquisition costs (%) 10

BIS risk-weighted assets

Goodwill

Adjusted regulatory capital 11

Adjusted regulatory capital excluding goodwill and intangible assets 12

Additional information

Client assets (CHF billion)

Personnel (full-time equivalents)

Financial advisors (full-time equivalents)

For the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

752

26.9

18.3

75

78

93.9

89.7

2,834

715

5.8

31.1

18,928

3,841

5,734

1,818

31.12.05

826

17,034

7,520

606

18.1

15.3

77

80

99.3

88.3

2,343

655

0.6

35.5

17,664

2,472

4,238

1,610

As at

31.12.04

679

16,969

7,519

599

14.3

15.1

82

86

106.0

89.3

2,124

597

(6.5 )

36.3

16,248

2,875

4,500

1,444

24

20

(3 )

(3 )

21

9

7

55

35

13

% change from

31.12.03

31.12.04

690

17,029

7,766

22

0

0

1 Excludes  interest  and  dividend  income.
5 Operating expenses / income.
7 Interest, asset-based  fees  for  portfolio  management  and  fund  distribution, account-based  and  advisory  fees.
performance before tax / average adjusted regulatory capital.
assets.

4 Income, add  back  net  goodwill  funding / average  invested  assets.
6 Operating expenses less the amortization of goodwill (in 2004 and 2003), other intangible assets and retention payments / income, add back net goodwill funding.
9 Business  Unit
10 Business Unit performance before tax and acquisition costs / average adjusted regulatory capital excluding goodwill and intangible

8 Private  client  revenues / average  number  of  ﬁnancial  advisors.

12 10% of BIS risk-weighted assets excluding intangible assets.

11 10% of BIS risk-weighted assets plus goodwill.

2 For  purposes  of  comparison  with  US  peers.

3 Income / average  invested  assets.

Components of operating income

Wealth Management US principally derives its operating income from:
fees for ﬁnancial planning and wealth management services;
–
fees for investment management services;
–
transaction-related fees; and
–
interest income from client loans.
–

These fees are based on the market value of invested assets, the level
of transaction-related activity and the size of the loan book. As a
result, operating income is affected by such factors as ﬂuctuations in
invested assets, changes in market conditions, investment perform-
ance, inﬂows and outﬂows of client funds, and investor activity levels.

35

Financial Businesses
Global Wealth Management & Business Banking

2005

Gross margin on invested assets  
bps

Key performance indicators

2003 

2004 

2005

The inﬂow of net new money in 2005 was a strong CHF 26.9
billion, up 49% from CHF 18.1 billion in 2004. Including in-
terest and dividends, net new money in 2005 was CHF 45.2
billion, up from CHF 33.4 billion a year earlier. The increase in
net new money was mainly due to the hiring of highly efﬁ-
cient ﬁnancial advisors and inﬂows from ultra high net worth
clients.

90

80

70

60

50

86

82

80

77

78

75

Net new money  
CHF billion

30

25

20

15

10

2003 

2004 

2005

26.9

18.1

14.3

Wealth Management US had CHF 752 billion in invested
assets on 31 December 2005, up 24% from CHF 606 billion
on 31 December 2004. The increase was due to the strong
appreciation of the year-end US dollar spot rate against the
Swiss franc, the inﬂows of net new money as well as positive
market movements. In US dollar terms, invested assets were
8% higher on 31 December 2005 than they were on the same
date in 2004.

Invested assets  
CHF billion

31.12.03 

31.12.04 

31.12.05

752

As reported  

Excluding acquisition costs

The cost / income ratio before acquisition costs was 89.7%
for 2005, compared to 88.3% in 2004. The increase in the
cost / income ratio reﬂects higher expenses associated with lit-
igation provisions and personnel expenses, partially offset by
a rise in revenues due to higher recurring income.

Cost / income ratio  
in %

2003 

2004 

2005

106.0

89.3

99.3

88.3

93.9

89.7

120

100

  80

  60

  40

As reported  

Excluding acquisition costs 

In 2005, recurring income was CHF 2,834 million, up 21%
from CHF 2,343 million a year earlier. Excluding the impact
of currency  ﬂuctuations,  recurring  income  was  up  20%  in
2005 from 2004, mainly due to higher levels of managed ac-
count fees on a record level of invested assets in US dollar
terms, and increased net interest income from the lending
business. Flows into managed account products were USD

599

606

Recurring income  
CHF million

800

700

600

500

400

The gross margin on invested assets was 75 basis points in
2005, down from 77 basis points in 2004. The gross margin
on invested assets before acquisition costs (net goodwill fund-
ing costs) was 78 basis points, down from 80 basis points in
2004. The increase in average invested asset levels (up 11%)
outpaced the gain in revenues (up 9%) following a decrease
in transactional revenues over the year.

36

2003 

2004 

2005

2.834

2,343

2,124

3,000

2,500

2,000

1,500

1,000

 
 
 
   
   
 
   
   
 
16.7 billion in full-year 2005, comparing favorably to the USD
12.7 billion ﬂow for full-year 2004. Recurring income repre-
sented about 55% of income in 2005 compared with 49%
in 2004.

Revenues per advisor increased in 2005 to CHF 715,000
from CHF 655,000 in 2004 as practically the same number of
ﬁnancial advisors were able to produce higher recurring in-
come than a year earlier. The number of ﬁnancial advisors was
almost ﬂat compared to 2004, increasing by 1 advisor to 7,520
at the end of 2005. Increases in highly efﬁcient ﬁnancial ad-
visors and trainees were offset by attrition among less produc-
tive advisors.

Revenues per advisor  
CHF thousand

2003 

2004 

2005 

655

715

597

800

600

400

200

    0

Financial advisors  
full-time equivalents

31.12.03 

31.12.04 

31.12.05

7,766

7,519

7,520

8,000

7,000

6,000

5,000

4,000

Results

In  2005,  we  reported  a  pre-tax  proﬁt  of  CHF  312  million
compared to CHF 29 million in 2004. Excluding acquisition
costs, proﬁt was CHF 550 million in 2005 and CHF 571 mil-
lion  in  2004.  This  decrease  reﬂects  mainly  higher  litigation
provisions.  In  US  dollar  terms,  operational  performance 
(excluding acquisition costs) in 2005 was 4% lower than in
2004.

Operating income
In 2005, total operating income was CHF 5,156 million, up
9%  compared  to  CHF  4,736  million  in  2004.  The  same

Performance before tax  
CHF million

2003 

2004 

2005

  600

  400

  200

      0

–200

–400

550

312

571

(5)

29

525

(293)

As reported  

Excluding acquisition costs 

holds true for the operating income before acquisition costs.
On the same basis and excluding currency effects, operat-
ing income increased by 8% from 2004. The increase in op-
erating income is primarily due to higher recurring income
based on higher levels of assets, rising net interest income
in UBS Bank USA, slightly offset by lower transactional rev-
enues.

Operating expenses
Total  operating  expenses  rose  3%  to  CHF  4,844  million  in
2005 from CHF 4,707 million in 2004. Excluding acquisition
costs, the increase was 11%. Excluding currency effects and
acquisition costs, operating expenses were 10% higher. This
reﬂects the impact of increased litigation provisions in second
half 2005 which accounted for almost all the increase in non-
personnel expenses.

Personnel expenses increased by CHF 140 million due to
higher variable compensation, reﬂecting the higher level of
income partially offset by a credit related to a change in the
estimated service period used for the amortization of certain
long-term employee beneﬁts. Share based components de-
creased, reﬂecting less share and options awards. Excluding
the currency translation effect, the increase in personnel ex-
penses amounted to 3%. General and administrative expens-
es increased 37% to CHF 1,047 million in 2005 from CHF 767
million in 2004. In US dollar terms, they actually rose 35%,
reﬂecting higher litigation provisions, partially offset by low-
er professional fees. Services from other business units de-
creased mainly due to lower charges in from ITI. Deprecia-
tion was also lower due to a drop in infrastructure charges
(down CHF 2 million). The amortization of other intangibles
was CHF 49 million in 2005, down 54% from CHF 107 mil-
lion due to the reclassiﬁcation of certain intangible assets. Un-
der the new accounting rules, these assets are classiﬁed as
goodwill, which is no longer amortized.

37

600

350

100

-150

-400

 
   
   
 
 
   
   
Financial Businesses
Global Wealth Management & Business Banking

2004

Key performance indicators

In 2004, inﬂows of net new money were CHF 18.1 billion, CHF
3.8 billion higher than the CHF 14.3 billion reported in 2003.
Including interest and dividends, net new money in 2004 was
CHF 33.4 billion, higher than the CHF 29.4 billion reported in
2003. 

Wealth Management US had CHF 606 billion in invested
assets on 31 December 2004, up 1% from CHF 599 billion
on 31 December 2003. The increase was due to inﬂows of net
new money and the effects of market appreciation, partly off-
set by the weakening of the US dollar against the Swiss franc.
In US dollar terms, invested assets were 10% higher on 31 De-
cember 2004 than they were on the same date in 2003.

The gross margin on invested assets was 77 basis points in
2004, down from 82 basis points in 2003. The gross margin
on invested assets before acquisition costs (net goodwill fund-
ing costs) was 80 basis points, down from 86 basis points in
2003.

The cost / income ratio before acquisition costs was 88.3%
for 2004, compared to 89.3% in 2003. The improvement in
the cost / income ratio reﬂects our continuous cost control.

In 2004, recurring income was CHF 2,343 million, up 10%
from CHF 2,124 million a year earlier. Excluding the impact of
currency ﬂuctuations, recurring income was up 19% in 2004
from 2003, mainly due to higher levels of managed account
fees on a record level of invested assets in US dollar terms.
Flows into managed account products were USD 12.7 billion
in full-year 2004, comparing favorably to the USD 10.2 bil-
lion ﬂow for full-year 2003. 

Revenues per advisor increased in 2004 to CHF 655,000
from CHF 597,000 in 2003 as a lower number of ﬁnancial ad-
visors were able to produce roughly the same revenues as a
year  earlier.  The  number  of  ﬁnancial  advisors  decreased  to
7,519  in  2004  from  7,766  a  year  earlier  due  to  attrition
among less productive ﬁnancial advisors. 

Results

In 2004, we reported a pre-tax gain of CHF 29 million com-
pared to a loss of CHF 293 million in 2003. The 2003 results
include a pre-tax gain of CHF 161 million from the sale of Cor-
respondent Services Corporation (CSC) in second quarter. Af-
ter the exclusion of the CSC gain and before acquisition costs,
operational performance showed proﬁts of CHF 571 million
in 2004 and CHF 364 million in 2003. In US dollar terms, op-
erational performance (excluding the gain on sale of CSC) in
2004 was 69% higher than in 2003. This represents the best
result  since  PaineWebber  became  part  of  UBS,  reflecting
record recurring income and increased net interest revenues
beneﬁting from the ﬁrst full-year impact of UBS Bank USA.

Operating income
In 2004, total operating income was CHF 4,736 million, al-
most unchanged compared to CHF 4,740 million in 2003. Be-
fore acquisition costs and excluding the sale of our CSC busi-
ness, total operating income rose from a year earlier. On the
same basis and excluding currency effects, operating income
increased by 11% from 2003. The increase in operating in-
come is primarily due to higher recurring income, rising net
interest income due to UBS Bank USA, and higher transaction-
al revenues. 

Operating expenses
Total operating expenses decreased 6% to CHF 4,707 million
in 2004 from CHF 5,033 million in 2003. Excluding acquisi-
tion costs, the drop was 2%, mainly due to the weakening of
the US dollar against the Swiss franc. Excluding currency ef-
fects and acquisition costs, operating expenses were up 6%,
primarily due to an increase in general and administrative ex-
penses. Personnel expenses dropped to CHF 3,320 million in
2004, down 7% from CHF 3,555 million a year earlier. Exclud-
ing  the  effects  of  currency  translation,  personnel  expenses
were slightly higher than in 2003, reﬂecting higher bonus and
broker compensation, which gained in line with performance,
partially offset by lower retention payments, which ended in
June. Non-personnel related expenses dropped 6% to CHF
1,387 million in 2004 from CHF 1,478 million in 2003. In US
dollar terms, they actually rose 1%, reﬂecting higher legal fees
and settlement charges and increased consulting fees related
to key initiatives. This was partially offset by a declining good-
will amortization (down CHF 21 million) due to the sale of CSC.

38

Business Banking Switzerland

Business Unit reporting

CHF million, except where indicated

Interest income

Non-interest income

Income

Adjusted expected credit loss 1

Total operating income

Cash components

Share-based components 2

Total personnel expenses

General and administrative expenses

Services to / from other business units

Depreciation of property and equipment

Amortization of goodwill

Amortization of other intangible assets

Total operating expenses

Business Unit performance before tax

Business Unit performance before tax and amortization of goodwill

KPIs

Invested assets (CHF billion)

Net new money (CHF billion) 3

Cost / income ratio (%) 4

Cost / income ratio before goodwill (%) 4

Non-performing loans / gross loans (%)

Impaired loans / gross loans (%)

Capital return and BIS data

Return on adjusted regulatory capital (%) 5

Return on adjusted regulatory capital before goodwill (%) 5

BIS risk-weighted assets

Goodwill

Adjusted regulatory capital 6

Additional information

Deferral (included in adjusted expected credit loss)

Client assets (CHF billion)

Personnel (full-time equivalents)

For the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

3,317

1,632

4,949

122

5,071

2,408

42

2,450

994

(634)

72

0

0

2,882

2,189

2,189

153

3.4

58.2

58.2

1.6

2.3

25.6

25.6

85,051

0

8,505

3,390

1,674

5,064

(25 )

5,039

2,377

49

2,426

1,064

(533 )

69

0

0

3,026

2,013

2,013

140

2.6

59.8

59.8

2.3

3.0

23.2

23.2

84,437

0

8,444

3,542

1,705

5,247

(127 )

5,120

2,396

52

2,448

1,090

(609 )

88

0

0

3,017

2,103

2,103

136

2.5

57.5

57.5

3.2

4.6

24.0

24.0

87,728

0

8,773

(2 )

(3 )

(2 )

1

1

(14 )

1

(7 )

(19 )

4

(5 )

9

9

9

1

1

As at or for the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

485

834

16,023

411

655

15,508

383

622

16,181

18

27

3

1 In management accounts, adjusted expected credit loss rather than credit loss expense is reported for the Business Groups (see note 2 to the ﬁnancial statements).
social security contributions and expenses related to alternative investment awards.
tax / average adjusted regulatory capital.

6 10% of BIS risk-weighted assets plus goodwill.

3 Excludes interest and dividend income.

4 Operating expenses / income.

2 Additionally includes related
5 Business Unit performance before

Components of operating income

Business Banking Switzerland derives its operating income principally
from:
– net interest income from its loan portfolio and customer deposits;
–
–

fees for investment management services; and
transaction fees.

As a result, operating income is affected by movements in interest
rates, ﬂuctuations in invested assets, client activity levels, investment
performance, changes in market conditions and the credit environ-
ment.

39

Financial Businesses
Global Wealth Management & Business Banking

2005

Key performance indicators

Net new money was CHF 3.4 billion in 2005, CHF 0.8 billion
higher than the inﬂow of CHF 2.6 billion in 2004.

Invested assets rose to CHF 153 billion in 2005 from CHF
140 billion a year earlier, driven by positive market develop-
ments, net new money inﬂows as well as favorable currency
translation effects. This was partially offset by the transfer of
assets to Wealth Management International & Switzerland.
During the course of 2005, we transferred CHF 8.6 billion of
assets from the Business Banking Switzerland unit to Wealth
Management International & Switzerland, reﬂecting the sys-
tematic development of client relationships.

The cost / income ratio was 58.2%, 1.6 percentage points
below the ratio of 59.8% in 2004, mainly because of tight cost
control.

Cost / income ratio  
in %

2003 

57.5

2004 

59.8

2005

58.2

60

55

50

45

40

Business  Banking  Switzerland’s  loan  portfolio  was  CHF
141.3 billion on 31 December 2005, up CHF 4.2 billion from
the previous year. An increase in volumes of private client mort-
gages and higher credit demand from corporate clients was

partially offset by a further reduction in the recovery portfolio,
which fell to CHF 3.3 billion on 31 December 2005 from CHF
4.4 billion a year earlier. This positive development was also re-
ﬂected in the key credit quality ratios: the non-performing loan
ratio improved to 1.6% from 2.3%, while the ratio of impaired
loans to gross loans was 2.3% compared to 3.0% in 2004.

The return on adjusted regulatory capital was 25.6% for
2005, up 2.4 percentage points from 23.2% a year earlier. This
reﬂects the increased proﬁtability of the business unit, outpac-
ing the increase in risk-weighted assets.

Return on adjusted regulatory capital  
in %

31.12.03 

31.12.04 

31.12.05 

24.0

23.2

25.6

28

21

14

  7

  0

Results

Pre-tax proﬁt in 2005, at a record level of CHF 2,189 million,
was CHF 176 million or 9% higher than the result achieved
in 2004. It was achieved despite a CHF 115 million fall in in-
come,  driven  mainly  by  lower  interest  income.  The  result
shows the continued tight management of our cost base, with
a credit loss recovery of CHF 122 million reﬂecting the struc-
tural improvement in our loan portfolio in recent years. While
general and administrative costs were at their lowest levels,
personnel expenses increased slightly, reﬂecting an increase
in staff levels.

Impaired loans / gross loans  
in %

Performance before tax  
CHF million

31.12.03 

31.12.04 

31.12.05

2003 

2004 

2005

4.6

3.0

2.3

2,500

2,000

1,500

1,000

   500

       0

2,103

2,013

2,189

5

4

3

2

1

0

40

 
   
   
 
 
 
Operating income
Total operating income in 2005 was CHF 5,071 million, up
slightly from 2004’s level of CHF 5,039 million. Interest income
declined by 2% to CHF 3,317 million in 2005 from CHF 3,390
million in 2004. The decline reﬂects lower revenues from our
reduced recovery portfolio, as well as lower interest margins
in our mortgage business. This was partially offset by higher
private client mortgage volumes. Non-interest income dropped
by CHF 42 million to CHF 1,632 million in 2005 from CHF
1,674 million in 2004, reﬂecting the gain from the sale of a
participation in the Noga Hilton hotel in 2004, partially offset
by higher asset based fees and higher client activity levels. Ad-
justed expected credit loss recoveries, at CHF 122 million in
2005, increased from a credit loss expense of CHF 25 million
in 2004. This positive result reﬂects the deferred beneﬁt of the
structural improvement in our loan portfolio in recent years.

Operating expenses
Operating expenses in 2005 were CHF 2,882 million, down
5% from CHF 3,026 million in 2004. Personnel expenses, at
CHF 2,450 million, were up 1% from CHF 2,426 million in
2004, as higher salary costs reﬂected the 3% increase in per-
sonnel, partly offset by lower share based expenses as less
share awards have been granted. General and administrative
expenses, at CHF 994 million in 2005, continued to drop and
were 7% lower than the CHF 1,064 million recorded in 2004,
reﬂecting our continuing tight cost controls. Net charges to
other business units rose to CHF 634 million in 2005 from CHF
533 million in 2004 because of lower charge-ins for IT serv-
ices and insurance. Depreciation in 2005 slightly increased to
CHF 72 million from CHF 69 million in 2004 due to higher ex-
penses for information technology equipment.

2004

Key performance indicators

from the previous year. An increase in private client mortgage
volumes was offset by lower credit demand from corporate
clients and a further reduction in the recovery portfolio, which
fell to CHF 4.4 billion on 31 December 2004 from CHF 6.4
billion a year earlier. This positive development was also re-
ﬂected in the key credit quality ratios: the non-performing loan
ratio improved to 2.3% from 3.2%, while the ratio of impaired
loans to gross loans was 3.0% compared to 4.6% in 2003.

Results

Pre-tax proﬁt in 2004 was CHF 2,013 million, only CHF 90 mil-
lion or 4% lower than the record result achieved in 2003. It
was achieved despite a CHF 183 million fall in income, driv-
en mainly by lower interest income. The result showed the
continued tight management of our cost base, with lower
credit loss expenses reﬂecting the structural improvement in
our loan portfolio in recent years. In 2004, personnel expens-
es and depreciation reached their lowest levels since the UBS-
SBC merger in 1998.

Operating income
Total operating income in 2004 was CHF 5,039 million, down
slightly from 2003’s level of CHF 5,120 million. Interest income
declined by 4% to CHF 3,390 million in 2004 from CHF 3,542
million in 2003. The decline reﬂected lower revenues from our
reduced recovery portfolio, as well as lower interest margins
on savings and cash accounts. This was partially offset by high-
er  private  client  mortgage  volumes.  Non-interest  income
dropped by CHF 31 million to CHF 1,674 million in 2004 from
CHF 1,705 million in 2003, reﬂecting lower client activity lev-
els, partially offset by the gain from the sale of a participation
in the Noga Hilton hotel. Adjusted expected credit loss expens-
es, at CHF 25 million in 2004, decreased by 80% from CHF
127 million in 2003. This fall reﬂected the deferred beneﬁt of
the  structural  improvement  in  our  loan  portfolio  in  recent
years.

Net new money was CHF 2.6 billion in 2004, slightly higher
than the inﬂow of CHF 2.5 billion in 2003.

Invested assets rose to CHF 140 billion in 2004 from CHF
136 billion a year earlier as positive market developments and
net new money inﬂows were only partially offset by the weak-
ening of the US dollar against the Swiss franc and the trans-
fer of assets to the international and Swiss wealth manage-
ment businesses. During the course of 2004, we transferred
CHF 7.4 billion in assets to the international and Swiss wealth
management businesses, reﬂecting the increasingly sophisti-
cated needs of a portion of our clients.

The cost / income ratio was 59.8%, 2.3 percentage points
above the ratio of 57.5% in 2003, reﬂecting falling interest
income in the low interest rate environment.

Business  Banking  Switzerland’s  loan  portfolio  was  CHF
137.1 billion on 31 December 2004, down CHF 1.4 billion

Operating expenses
Operating  expenses  in  2004  were  CHF  3,026  million,  up
slightly from CHF 3,017 million in 2003. Personnel expens-
es, at CHF 2,426 million, were down 1% from CHF 2,448 mil-
lion in 2003, as falling salary costs reﬂected the 4% drop in
personnel, partly offset by an increase in performance-relat-
ed compensation. General and administrative expenses, at
CHF 1,064 million in 2004, continued to drop and were 2%
lower than the CHF 1,090 million recorded in 2003, reﬂect-
ing  our continuous tight cost  controls. Drops were  mainly
seen in professional fees. Net charges to other business units
fell to CHF 533 million in 2004 from CHF 609 million in 2003
because of lower charge-outs for IT services. Depreciation in
2004 dropped to CHF 69 million from CHF 88 million in 2003
due  to  lower  expenses  for  information  technology  equip-
ment.

41

Financial Businesses
Global Asset Management

Global Asset Management

Pre-tax proﬁt was CHF 1,057 million, an increase of 55% from the 2004 pre-goodwill proﬁt of CHF 681 million.
The increase was driven by higher operating income, which rose 23%, reﬂecting strong net new money
inﬂows, improved margins and consequently higher asset based revenues across all businesses. In addition,
performance fees, particularly in alternative and quantitative investments, increased signiﬁcantly.

Business Group reporting

CHF million, except where indicated

Institutional fees

Wholesale intermediary fees

Total operating income

Cash components

Share-based components 1

Total personnel expenses

General and administrative expenses

Services to / from other business units

Depreciation of property and equipment

Amortization of goodwill

Amortization of other intangible assets

Total operating expenses

Business Group performance before tax

Business Group performance before tax and amortization of goodwill

KPIs

Cost / income ratio (%) 2

Cost / income ratio before goodwill (%) 2

Institutional

Invested assets (CHF billion)

of which: money market funds

Net new money (CHF billion) 3

of which: money market funds

Gross margin on invested assets (bps) 4

For the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

1,330

1,157

2,487

899

89

988

304

116

21

0

1

1,430

1,057

1,057

57.5

57.5

441

16

21.3

(3.0)

34

1,085

937

2,022

822

71

893

299

126

23

129

0

1,470

552

681

72.7

66.3

344

17

23.7

(1.2 )

32

922

815

1,737

766

69

835

265

156

25

152

1

1,434

303

455

82.6

73.8

313

14

12.7

(5.0 )

32

23

23

23

9

25

11

2

(8 )

(9 )

(100 )

(3 )

91

55

28

(6 )

6

1 Additionally includes related social security contributions and expenses related to alternative investment awards. 2 Operating expenses / operating income.
4 Operating income / average invested assets.

3 Excludes interest and dividend income.

John A. Fraser | Chairman and CEO 
Global Asset Management

42

Business Group reporting (continued)

CHF million, except where indicated

Wholesale intermediary

Invested assets (CHF billion)

of which: money market funds

Net new money (CHF billion) 1

of which: money market funds

Gross margin on invested assets (bps) 2

Capital return and BIS data

Return on adjusted regulatory capital (%) 3

Return on adjusted regulatory capital before goodwill (%) 3

BIS risk-weighted assets

Goodwill

Adjusted regulatory capital 4

Additional information

Invested assets (CHF billion)

Personnel (full-time equivalents)

1 Excludes interest and dividend income.
assets plus goodwill.

For the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

324

62

28.2

(9.7)

40

69.9

69.9

1,570

1,438

1,595

257

64

(4.5 )

(20.6 )

36

36.4

44.8

1,702

1,189

1,359

261

87

(5.0 )

(23.0 )

31

18.6

27.9

2,325

1,400

1,633

26

(3 )

11

(8 )

21

17

31.12.05

765

2,861

As at

31.12.04

601

2,665

% change from

31.12.03

31.12.04

574

2,627

27

7

2 Operating income / average invested assets.

3 Business Group performance before tax / average adjusted regulatory capital.

4 10% of BIS risk-weighted

Components of operating income

Global Asset Management generates its revenue from the asset man-
agement and fund administration services it provides to ﬁnancial
intermediaries and institutional investors. Fees charged to institutional

clients and wholesale intermediary clients are based on the market
value of invested assets and on successful investment performance.
As a result, revenues are affected by changes in market and currency
valuation levels, as well as ﬂows of client funds, and relative invest-
ment performance.

43

82.6

73.8

72.7

66.3 

The gross margin for full-year 2005 was 34 basis points,

slightly above the 32 basis points of full-year 2004.

Gross margin on invested assets, institutional  
bps

57.5 

2003 

2004 

2005

Financial Businesses
Global Asset Management

2005

Key performance indicators

For 2005, the pre-goodwill cost/income ratio was 57.5%, a
decrease of 8.8 percentage points from 2004. This was a re-
sult  of  improving  operating  income  across  all  businesses,
mainly induced by higher asset based fees. This was partly off-
set  by  increased  operating  expenses,  mainly  the  result  of
higher personnel expenses reﬂecting the positive course of
business in 2005. 

Cost / income ratio   
in % 

2003 

2004 

2005 

As reported   

Adjusted for goodwill 

Institutional
Institutional invested assets were CHF 441 billion on 31 De-
cember 2005 – up 28% from CHF 344 billion on 31 Decem-
ber 2004, reﬂecting positive market performance, strong net
new money and favorable currency translation effects. 

For full-year 2005, net new money inﬂows were CHF 21.3
billion, down slightly from the CHF 23.7 billion recorded in

Invested assets, institutional   
CHF billion 

31.12.03 

31.12.04 

31.12.05 

16

425

14

299

17

327

90 

80 

70 

60 

50 

40 

500 

400 

300 

200 

100 

    0 

44

2004. Although inﬂows in traditional investments continued
to  grow,  alternative  and  quantitative  investments  did  not
reach the same level as a year earlier.

Net new money, institutional   
CHF billion 

2003 

2004 

2005 

  30 

  20 

  10 

    0 

–10 

24.9 

24.3 

17.7 

(5.0) 

(1.2) 

(3.0) 

Non-money market funds  

Money market funds  

32

32

34

35

30

25

20

15

Wholesale intermediary
Invested assets were CHF 324 billion on 31 December 2005,
up by CHF 67 billion from 31 December 2004. For full-year
2005, the net new money inﬂow was CHF 28.2 billion com-
pared with a CHF 4.5 billion outﬂow in 2004.

Invested assets, wholesale intermediary   
CHF billion 

31.12.03 

31.12.04 

31.12.05 

400 

300 

200 

100 

    0 

87 

174 

64 

193 

62 

262 

Non-money market funds  

Money market funds  

Non-money market funds  

Money market funds  

 
 
    
 
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The money market outﬂow in 2005 was CHF 9.7 billion,
compared with CHF 20.6 billion a year earlier. In 2005, this
outﬂow was offset by positive inﬂows of CHF 37.9 billion,
recorded across all traditional asset classes (equities, ﬁxed in-
come, asset allocation).

Net new money, wholesale intermediary  
CHF billion

2003 

2004 

2005 

37.9 

18.0 

16.1 

(23.0) 

(20.6) 

(9.7) 

  45 

  30 

  15 

    0 

–15 

–30 

Non-money market funds  

Money market funds  

The 2005 gross margin was 40 basis points, up by 4 basis
points from a year earlier, reﬂecting shifts into higher margin
asset classes.

Gross margin on invested assets,
wholesale intermediary  
bps

2003 

2004 

2005

40

36

31

50

40

30

20

10

Results

We had a very strong full-year result in 2005. Pre-tax proﬁt
was CHF 1,057 million, an increase of 55% from the 2004
pre-tax proﬁt of CHF 681 million. The increase was driven by
higher operating income, which rose 23%, reﬂecting strong
net new money inﬂows and a positive market environment
that resulted in higher asset valuations. In addition, perform-
ance fees, particularly in alternative and quantitative invest-
ments, increased. This was only partially offset by a slight rise
in operating expenses (pre-goodwill), mainly due to higher
personnel expenses, in line with business growth.

Performance before tax  
CHF million

2003 

2004 

2005

1,200

   900

   600

   300

       0

1,057

552

303

Operating income
In full-year 2005, operating income was CHF 2,487 million,
up 23% from CHF 2,022 million a year earlier. The increase
reﬂects strong net new money inﬂows and a positive market
environment resulting in higher asset valuations and conse-
quently higher asset-based income across all businesses. In ad-
dition, performance fees, particularly in alternative and quan-
titative  investments,  increased  significantly.  Institutional
revenues increased by 23% to CHF 1,330 million in 2005 from
CHF 1,085 million in 2004, reﬂecting higher management fees
in all areas, and higher performance fees, mainly in alterna-
tive  and  quantitative  investments.  Wholesale  intermediary
revenues rose by 23% to CHF 1,157 million in 2005 from CHF
937 million in 2004, reﬂecting higher management fees in all
areas due to net new money inﬂows and higher market val-
uations.

Operating expenses
In 2005, operating expenses decreased to CHF 1,430 million
from CHF 1,470 million in 2004. Pre-goodwill, operating ex-
penses increased by CHF 89 million, primarily due to higher
personnel costs, which rose in line with business growth. Per-
sonnel expenses were CHF 988 million in 2005, 11% above
2004. General and administrative expenses increased by 2%
to CHF 304 million in 2005 from CHF 299 million in 2004. Net
charges from other business units decreased by CHF 10 mil-
lion to CHF 116 million in 2005 from CHF 126 million in 2004,
partly due to higher charge-outs to the wealth management
businesses reﬂecting the higher demand for specialized invest-
ment research. Over the same period, depreciation remained
virtually unchanged at CHF 21 million, down by only CHF 2
million.  Amortization  of  goodwill  ceased  in  2005,  and  the
amortization of intangible assets increased slightly to CHF 1
million due to the acquisition of Siemens' real estate business.

45

 
   
 
 
 
 
 
 
Financial Businesses
Global Asset Management

2004

Key performance indicators

For 2004, the pre-goodwill cost / income ratio was 66.3%, a
decrease of 7.5 percentage points from 2003. This was a re-
sult of improving operating income combined with modest
cost growth. Higher market valuations coupled with strong
net new money inﬂows resulted in increased invested asset
levels and, subsequently, higher asset-based fees. The contin-
uing change in asset mix towards higher-margin products in-
creased operating income and overall proﬁtability.

Institutional
Institutional invested assets were CHF 344 billion on 31 De-
cember 2004 – at their highest level since 2000, and up 10%
from CHF 313 billion on 31 December 2003, reﬂecting both
strong net new money and rising ﬁnancial markets. This in-
crease was partly offset by the weakening of the US dollar
against the Swiss franc.

For full-year 2004, net new money inﬂows were CHF 23.7
billion, up signiﬁcantly from the CHF 12.7 billion recorded in
2003. Alternative and quantitative investments, equity and
ﬁxed income mandates experienced strong inﬂows, partially
offset by outﬂows from asset allocation mandates and mon-
ey market funds.

The gross margin for full-year 2004 was 32 basis points, on

par with full-year 2003.

Wholesale intermediary
Invested assets were CHF 257 billion on 31 December 2004,
down by CHF 4 billion from 31 December 2003. For full-year
2004, the net new money outﬂow was CHF 4.5 billion com-
pared with a CHF 5.0 billion outﬂow in 2003.

The money market outﬂow in 2004 was CHF 20.6 billion.
This was partly offset by positive inﬂows of CHF 16.1 billion,
recorded mainly in ﬁxed income mandates (inﬂow of CHF 7.7
billion) and to a lesser extent in asset allocation and equity funds.
The 2004 gross margin was 36 basis points, up by 5 basis
points from a year earlier, reﬂecting the signiﬁcant improvement
of wholesale intermediary fees as a result of the continuing shift
to higher-margin products.

Money market sweep accounts
Some of the money market fund assets managed by our US
wholesale intermediary business represent the cash portion of
private client accounts. Before launching UBS Bank USA in
2003, the cash balances of private clients in the US were swept
into our money market funds. Since the bank’s launch, those
cash  proceeds  have  been  automatically  redirected  into  its
FDIC-insured deposit accounts. Although there was no one-
time bulk transfer of client money market assets to the bank,
the funds invested in our sweep accounts are being used to
complete client transactions and will therefore gradually de-

46

plete over time. Such funds are a low-fee component of in-
vested assets. In 2004, total money market outﬂows in the US
were CHF 13.6 billion, with CHF 11 billion related to UBS Bank
USA.

Results

Pre-tax proﬁt was CHF 552 million in 2004, an increase of 82%
from 2003. The signiﬁcant improvement was driven by higher
operating income, which rose 16%, reﬂecting strong net new
money inﬂows, a continuing change in asset mix towards high-
er-margin products, and a rise in market valuations producing
increased asset levels and revenues. This was only partially off-
set by a slight rise in operating expenses, mainly due to higher
incentive-based compensation as a result of the higher revenues.

Operating income
In full-year 2004, operating income was CHF 2,022 million, up
16% from CHF 1,737 million a year earlier. The increase reﬂects
higher ﬁnancial market valuations and strong inﬂows into al-
ternative and quantitative investments, and equities and ﬁxed
income mandates, resulting in higher invested asset levels and,
consequently, higher asset-based revenues. Performance-relat-
ed fees, especially in alternative and quantitative investments,
remained at the strong levels seen in 2003. Institutional revenues
increased to CHF 1,085 million in full-year 2004 from CHF 922
million in 2003, driven by both the improved market environ-
ment and strong asset inﬂows. Wholesale intermediary revenues
rose to CHF 937 million in 2004 from CHF 815 million in 2003,
reﬂecting higher market valuations and an improvement in the
asset mix – as low-margin money market outﬂows were most-
ly offset by inﬂows into higher-margin products.

Operating expenses
In 2004, operating expenses increased to CHF 1,470 million
from CHF 1,434 million in 2003, primarily due to higher incen-
tive-based compensation as a result of increased proﬁtability.
Personnel expenses were CHF 893 million in 2004, 7% above
2003. General and administrative expenses increased by 13%
to CHF 299 million in 2004 from CHF 265 million in 2003. This
increase was mainly due to a restructuring provision in our busi-
ness in the Americas booked in third quarter 2004 and the dam-
age caused by Hurricane Ivan in the Cayman Islands. Travel and
entertainment costs, IT expenses and professional fees increased
year-on-year. Net charges from other business units decreased
by CHF 30 million to CHF 126 million in 2004 from CHF 156
million in 2003, partly due to higher charge-outs to the wealth
management businesses reﬂecting the increase in the distribu-
tion of alternative investment products. Over the same period,
depreciation remained virtually unchanged at CHF 23 million,
down  by  only  CHF  2  million.  Amortization  of  goodwill  de-
creased to CHF 129 million in 2004 from CHF 152 million a year
earlier, due to the full amortization of the goodwill of some busi-
nesses and the US dollar’s decline against the Swiss franc.

Financial Businesses
Investment Bank

Investment Bank

In 2005, the Investment Bank’s pre-tax proﬁt was CHF 5,181 million, up 6% from a year earlier (pre-goodwill).
Results were driven by increased revenues, mainly in equities and investment banking.

Business Group reporting

CHF million

Equities

Fixed income, rates and currencies

Investment banking

Income

Adjusted expected credit loss 1

Total operating income

Cash components

Share-based components 2

Total personnel expenses

General and administrative expenses

Services to / from other business units

Depreciation of property and equipment

Amortization of goodwill

Amortization of other intangible assets

Total operating expenses

Business Group performance before tax

Business Group performance before tax and amortization of goodwill

For the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

6,980

7,962

2,506

17,448

36

17,484

8,065

1,194

9,259

2,215

640

136

0

53

12,303

5,181

5,181

5,906

8,269

1,915

16,090

(7 )

16,083

7,130

1,022

8,152

2,538

226

243

278

36

11,473

4,610

4,888

4,875

7,932

1,703

14,510

(55 )

14,455

6,690

1,047

7,737

2,068

175

248

279

27

10,534

3,921

4,200

18

(4 )

31

8

9

13

17

14

(13 )

183

(44 )

(100 )

47

7

12

6

Huw Jenkins | CEO
Investment Bank 
(and Chairman from 1 January 2006)

John P. Costas | Chairman 
Investment Bank
(until 31 December 2005)

47

Financial Businesses
Investment Bank

Investment Bank (continued)

CHF million, except where indicated

KPIs

Compensation ratio (%) 3

Cost / income ratio (%) 4

Cost / income ratio before goodwill (%) 4

Non-performing loans / gross loans (%)

Impaired loans / gross loans (%)

Average VaR (10-day 99%) 5

Capital return and BIS data

Return on adjusted regulatory capital (%) 6

Return on adjusted regulatory capital before goodwill (%) 6

BIS risk-weighted assets

Goodwill

Adjusted regulatory capital 7

Additional information

Deferral (included in adjusted expected credit loss)

Client assets (CHF billion)

Personnel (full-time equivalents)

For the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

53

70.5

70.5

0.2

0.2

346

28.6

28.6

51

71.3

69.6

0.4

0.6

358

30.5

32.4

53

72.6

70.7

0.6

1.1

295

27.9

29.9

151,313

4,309

19,440

116,512

3,579

15,230

102,517

3,812

14,064

(3 )

30

20

28

As at or for the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

155

164

18,174

85

147

16,970

29

143

15,633

82

12

7

1 In management accounts, adjusted expected credit loss rather than credit loss expense is reported for the Business Groups (see note 2 to the ﬁnancial statements).
social security contributions and expenses related to alternative investment awards.
municipal securities business of Wealth Management US from 1 January 2005. The business was transferred to the Investment Bank on 1 July 2005.
adjusted regulatory capital.

7 10% of BIS risk-weighted assets plus goodwill.

4 Operating expenses / income.

3 Personnel expenses / income.

2 Additionally includes related
5 VaR for the Investment Bank includes the
6 Business Group performance before tax / average

–

interest income on principal transactions and from the loan port
folio; and

– gains and losses on market making, proprietary, and arbitrage 

positions.

As a result, operating income is affected by movements in market
conditions, interest rate swings, the level of trading activity in primary
and secondary markets and the extent of merger and acquisition
activity. These and other factors have had, and may in the future
have, a signiﬁcant impact on results of operations from year to year.

Components of operating income

The Investment Bank generates operating income from:
–

commissions on agency transactions and spreads or markups on 
principal transactions;
fees from debt and equity capital markets transactions, leveraged 
ﬁnance, and the structuring of derivatives and complex transac-
tions;

–

– mergers and acquisitions and other advisory fees;

48

2005

Average VaR (10-day 99%)   
CHF million 

Key performance indicators

2003 

2004 

2005 

The pre-goodwill cost/income ratio rose to 70.5% in 2005
from 69.6% a year earlier. Revenue growth, driven by strong
performances in investment banking and equities, was off-
set by higher personnel expenses.

Cost / income ratio   
in % 

2003 

2004 

2005 

72.6 

70.7 

71.3 

69.6 

70.5

80 

70 

60 

50 

40 

As reported   

Adjusted for goodwill 

The full-year compensation ratio, at 53%, rose two per-
centage points between 2004 and 2005. This reﬂects high-
er performance-related compensation and increased staff lev-
els. In particular, client-facing business areas, which are more
service intensive but use less capital, saw faster growth this
year.  Share-based  compensation  was  also  higher,  since
awards made in 2005 for the 2004 ﬁnancial year contained
an increased proportion of stock. 

358 

346 

295

400 

300 

200 

100 

    0 

Impaired loans / gross loans  
in %

31.12.03 

31.12.04 

31.12.05

1.2

0.9

0.6

0.3

0.0

1.1

0.6

0.2

nesses as well as increased underwriting activity. The impaired
loans  to  total  loans  ratio  fell  to  0.2%  at  the  end  of  2005
from 0.6% on 31 December 2004. The non-performing loans
to  total  loans  ratio  fell  to  0.2%  from  0.4%  in  the  same 
period.

Compensation ratio  
in %

Return on adjusted regulatory capital  
in %

2003 

2004 

2005

2003 

2004 

2005 

55

50

45

40

35

53

53

51

50

40

30

20

10

29.9

27.9

32.4

30.5

28.6

As reported   

Adjusted for goodwill 

Market risk for the Investment Bank, as measured by the
10-day 99% Value at Risk (VaR), ended the year at CHF 355
million  and  averaged  CHF  346  million  for  2005,  a  slight 
increase on the 2004 year-end value of CHF 332 million but
below the 2004 average of CHF 358 million.

Total  loans  were  CHF  87  billion  on  31  December  2005
compared with CHF 68 billion on 31 December 2004, reﬂect-
ing our expanding prime brokerage and equity ﬁnance busi-

The  return  on  adjusted  regulatory  capital  in  2005  was
28.6%, down 3.8 percentage points from the pre-goodwill
return of 32.4% a year earlier, despite the growth in pre-tax
proﬁt. This reﬂects the 30% increase in risk-weighted assets
which rose due to currency movements and in line with in-
creased  lending  activity  to  the  Investment  Bank’s  growing
client base.

49

 
 
 
 
 
 
   
   
 
 
    
 
    
 
 
   
   
Financial Businesses
Investment Bank

Results

2005 was our most proﬁtable year since 2000. Pre-tax proﬁt
was CHF 5,181 million, up 12% from 2004. Before goodwill,
pre-tax proﬁt was up 6%. The result was driven by strong rev-
enues in investment banking (up 31%) and in equities (up
18%),  reflecting  our  successful  expansion  in  significant
growth areas such as M&A, in particular in Asia Paciﬁc, equi-
ty derivatives and prime brokerage. Results in the ﬁxed in-
come, rates and currencies business were slightly lower than
last year’s all-time high. Lower revenues in structured credit –
mainly driven by lower volumes and following the turmoil in
the automotive sector in second quarter 2005 – were offset
by an increase in the rates business. At the same time, costs
increased as our business continued to expand.

Performance before tax  
CHF million

2003 

2004 

2005

6,000

5,000

4,000

3,000

2,000

5,181

4,610

3,921

Operating income
Total operating income in 2005 was CHF 17,484 million, up
9% from CHF 16,083 million a year earlier, as revenues rose
strongly in the equities business and in investment banking.
Equities revenues, at CHF 6,980 million in 2005, were up 18%
from CHF 5,906 million in 2004. Signiﬁcant drivers of the increase
were the derivatives business in the Asia Paciﬁc region and Eu-
rope as well as prime brokerage where we saw an impressive rev-
enue gain in the US, reﬂecting the growth of our client base in
the last 12 months. Our proprietary and our equity-linked busi-
nesses contributed slightly lower returns than the previous year.
Fixed  income,  rates  and  currencies  revenues  were  CHF
7,962 million, down 4% from CHF 8,269 million a year ear-
lier. Revenues in the rates business were up against the prior
year as a result of rising revenues in energy trading and de-
rivatives. Credit ﬁxed income saw lower revenues in structured
credit, notably in the US and in credit trading as well as in the
high-yield sector. Credit default swaps hedging loan exposures
recorded gains of CHF 103 million compared with losses of
CHF 62 million a year earlier.

The foreign exchange business decreased as derivatives
trading was negatively impacted by historically low volatili-
ty levels. This was partially offset by rising cash and collat-
eral trading revenues due to higher market share and vol-
umes.

50

Investment  banking  revenues,  at  CHF  2,506  million  in
2005, increased 31% from CHF 1,915 million a year earlier.
This reﬂected growth in each region. Advisory revenues grew
signiﬁcantly, in line with the strong momentum in the M&A
business and our increased presence in important transactions.
During 2005, our Investment Bank advised on a total of 343
transactions with a deal volume of USD 496 billion, more than
double from 2004. Its pace last year exceeded market growth
and included some of the largest deals announced during the
year – among them advising Gillette on its sale to Procter &
Gamble. Revenues in the capital markets business rose as well,
mainly in debt underwriting and in global syndicated ﬁnance,
reﬂecting improved market conditions and our strengthened
competitive position.

Operating expenses
Higher personnel costs and increased allocated costs prompt-
ed total operating expenses in 2005 to rise to CHF 12,303 mil-
lion, a 7% increase from CHF 11,473 million a year earlier.

Personnel  expenses,  at  CHF  9,259  million  in  2005,  in-
creased 14% from a year earlier, reﬂecting an increase in the
bonus accrual and additional increased salaries due to high-
er staff levels. Share-based compensation rose 17% from pri-
or year due to an increase in share-based awards and the high-
er UBS share price in 2005 compared with 2004.

General and administrative expenses were CHF 2,215 mil-
lion in 2005, down 13% from 2004’s CHF 2,538 million. Pro-
visions were lower than in 2004, when we recorded a civil
penalty levied by the Federal Reserve Board relating to our
banknote trading business. This was partially offset by an in-
crease in IT and other outsourcing costs. Services from other
business units increased to CHF 640 million in 2005 from CHF
226 million in 2004. Depreciation eased 44% to CHF 136 mil-
lion in 2005 from CHF 243 million in 2004 due to the trans-
fer of further IT infrastructure functions into our central ITI unit
in  Corporate  Center.  Amortization  of  goodwill  ceased  in
2005, while the amortization of other intangible assets, at CHF
53 million in 2005, was up 47% from CHF 36 million a year
earlier due to the inclusion of the rest of Brunswick and the
capital markets division of Charles Schwab, acquired in third
quarter 2004, and the purchase of our remaining stake in Pre-
diction, which became part of UBS in 2005.

2004

Key performance indicators

The  pre-goodwill  cost / income  ratio  improved  to  69.6%  in
2004 from 70.7% a year earlier. It reﬂected a strong revenue
performance in all businesses.

Our  compensation  ratio  in  2004  was  51%,  down  from
53% in 2003, reﬂecting the completion of the aggressive in-
vestment banking hiring program. Payout levels were driven

 
by the revenue mix across business areas and managed in line
with market levels.

Total loans were CHF 68 billion on 31 December 2004, up
24% from CHF 55 billion a year earlier, reﬂecting the strength-
ened business franchise. Continued successful recovery efforts
led the ratio of impaired loans to total loans to fall to 0.6%
at the end of 2004 from 1.1% on 31 December 2003. The
non-performing loans to total loans ratio fell to 0.4% from
0.6% in the same period.

From the beginning of 2005, private equity investments
were reported as part of the Industrial Holding segment. Fig-
ures were restated for 2003 and 2004 to reﬂect the change.

Results

Pre-tax proﬁt was CHF 4,610 million in 2004, up 18% from a
year earlier and at its highest level since 2000. Our result was
achieved despite the signiﬁcant weakening of the US dollar
against the Swiss franc and reﬂected revenue growth across
all our businesses. In particular, our ﬁxed income, rates and cur-
rencies  business  posted  a  record  result,  up  4%  from  2003,
while the equities business reported a 21% increase in rev-
enues on the strong improvement in market conditions. Invest-
ment banking also contributed to our result, recording rev-
enues of CHF 1,915 million, a 12% improvement compared
to 2003. At the same time, costs increased as our businesses
continued to expand, with speciﬁc operational provisions also
a factor.

rivative  activity.  Losses  of  CHF  62  million  relating  to  Credit
Default Swaps (CDSs) hedging existing credit exposure in the
loan book had a negative impact on the ﬁxed income, rates
and currencies result. But they were signiﬁcantly lower than
the losses of CHF 678 million in 2003. 

Investment  banking  revenues,  at  CHF  1,915  million  in
2004, increased 12% from CHF 1,703 million a year earlier.
Excluding currency ﬂuctuations and hedging costs, revenues
were up 32%, reﬂecting improving corporate activity levels.
It was a record year for our global advisory business, with dou-
ble-digit growth seen in Europe, the US and Asia. According
to a Dealogic survey 1, we ranked ﬁfth for investment bank-
ing fees in 2004 with a market share of 5.3%, up from sixth
and a market share of 5.0% a year earlier.

Income by business area  
CHF million

20,000

15,000

10,000

  5,000

         0

2003 

2004 

2005

1,703

4,875

7,932

1,915

5,906

8,269

2,506

6,980

7,962

Fixed income, rates and currencies  

(1,602)

Equities  

Investment banking  

Operating income
Total operating income in 2004 was CHF 16,083 million, up
11% from CHF 14,455 million a year earlier, reﬂecting strong
improvements in all businesses.

Equities revenues, at CHF 5,906 million in 2004, were up
21% from CHF 4,875 million in 2003. Growth in revenues oc-
curred around the globe, but was particularly strong in the US
and Europe. Signiﬁcant increases were seen in secondary cash
commissions and proprietary trading revenues. Prime broker-
age saw an impressive revenue gain following the acquisition
of ABN Amro’s prime brokerage business in the US.

Fixed  income,  rates  and  currencies  revenues  were  CHF
8,269 million, up 4% from CHF 7,932 million a year earlier.
Strong gains were seen in the rates business, mainly due to
the structured LIBOR and mortgage businesses. Fixed income
was driven by credit derivatives, emerging markets and glob-
al syndicated ﬁnance businesses, foreign exchange and cash
and collateral trading. The positive result was slightly offset
by lower revenues in our municipal securities business due to
lower transaction and underwriting volumes and reduced de-

Operating expenses
Higher personnel costs and general and administrative expens-
es prompted total operating expenses in 2004 to rise to CHF
11,473 million, a 9% increase from CHF 10,534 million a year
earlier. Personnel expenses, at CHF 8,152 million in 2004, in-
creased 5% from a year earlier, reﬂecting higher performance-
related compensation, which rose due to higher revenues, as
well as an increase in salaries reﬂecting the 9% rise in employ-
ees. General and administrative expenses were CHF 2,538 mil-
lion in 2004, up 23% from 2003’s CHF 2,068 million. The in-
crease  reflected  higher  operational  provisions,  climbing
professional fees and raised IT spending. This was partially off-
set by a drop in administration and occupancy expenses. Ser-
vices from other business units increased to CHF 226 million
in 2004 from CHF 175 million in 2003. Depreciation fell 2%
to CHF 243 million in 2004 from CHF 248 million in 2003 on
declining writeoffs. Amortization of goodwill, at CHF 278 mil-
lion, was slighty down from a year earlier. Amortization of oth-
er intangible assets was CHF 36 million, up 33% from a year
earlier, reﬂecting the ABN Amro acquisition.

1 Financial Times, 26 January 2005. Table: Global fee ranking 2004

51

 
Financial Businesses
Corporate Center

Corporate Center

With the sale of Private Banks & GAM at the end of the year, Corporate Center recorded a pre-tax gain of CHF
3,856 million in 2005. The continuing operations of Corporate Center reported a pre-tax loss of CHF 708 million,
compared with a loss before goodwill of CHF 777 million in 2004. 

Business Group reporting

CHF million, except where indicated

Income

Credit loss (expense) / recovery 1

Total operating income

Cash components

Share-based components 2

Total personnel expenses

General and administrative expenses

Services to / from other business units

Depreciation of property and equipment

Amortization of goodwill

Amortization of other intangible assets

Total operating expenses 3

Business Group performance from continuing operations before tax

Business Group performance from discontinued operations before tax

Business Group performance before tax

Business Group performance from continuing operations before tax and amortization of goodwill

Additional information

BIS risk-weighted assets (CHF million)

Personnel (full-time equivalents)

Personnel excluding IT Infrastructure (ITI) (full-time equivalents)

Personnel for ITI (full-time equivalents)

For the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

455

232

687

1,059

108

1,167

1,084

(1,730)

857

0

17

1,395

(708)

4,564

3,856

(708)

31.12.05

8,143

3,922

1,370

2,552

112

286

398

728

68

796

1,077

(1,509 )

794

1

17

1,176

(778 )

396

(382 )

(777 )

As at

31.12.04

9,841

5,202

2,848

2,354

20

92

112

725

60

785

1,166

(1,639 )

811

0

20

1,143

(1,031 )

220

(811 )

(1,031 )

306

(19 )

73

45

59

47

1

(15 )

8

(100 )

0

19

9

9

31.12.03

13,406

5,233

2,878

2,355

% change from

31.12.04

(17 )

(25 )

(52 )

8

1 In order to show the relevant Business Group performance over time, adjusted expected credit loss rather than credit loss expense is reported for all Business Groups. The difference between the
adjusted expected credit loss and credit loss expense recorded at Group level is reported in Corporate Functions (see note 2 to the ﬁnancial statements).
2 Additionally includes related social security
contributions and expenses related to alternative investment awards.
3 Includes expenses for the Chairman’s Ofﬁce (comprising the Company Secretary, Board of Directors, and Group Internal Audit).

Clive Standish | UBS Chief Financial Ofﬁcer
and Head, Corporate Center

52

2005

Results

Corporate Center’s result from continuing operations – for-
merly reported as the separate Business Unit Corporate Func-
tions – was a loss of CHF 708 million in full-year 2005, com-
pared to a loss of CHF 777 million (pre-goodwill) a year earlier.
The improvement was driven by a CHF 343 million increase
in income. This was partly offset by lower credit loss recover-
ies and a rise in performance-related personnel costs.

Private Banks & GAM (discontinued operations)
The sale of Private Banks & GAM to Julius Baer was success-
fully completed on 2 December 2005. The disposal gain and
the operating result realized during the year before the deal
closed are reported as discontinued operations, resulting in a
pre-tax gain of CHF 4,564 million. This consists of the dispos-
al gain of CHF 4,094 million before tax (CHF 3,705 million af-
ter tax) and CHF 470 million in operating pre-tax proﬁt.

Operating income
Total operating income increased to CHF 687 million in 2005
from CHF 398 million in 2004. The result was driven by high-
er revenues, partially offset by lower credit loss recoveries. 

The credit loss expense or recovery booked in Corporate
Center represents the difference between the adjusted expect-
ed credit losses charged to the business units and the actual
credit  loss  recognized  in  the  UBS  Financial  Statements.  In
2005, UBS recorded a credit loss recovery of CHF 375 million,
compared to a recovery of CHF 241 million in 2004. In both
years, credit loss expense was lower than the adjusted expect-
ed credit loss charged to the business units, resulting in a cred-
it loss recovery in Corporate Center of CHF 232 million in 2005
and CHF 286 million a year earlier.

Income increased by CHF 343 million to CHF 455 million
in 2005 mainly due to the diversiﬁcation of capital into US dol-
lars. The higher average equity base produced a positive im-
pact on treasury income, as did a timing effect related to cash
ﬂow hedging.

Operating expenses
Total operating expenses were CHF 1,395 million in 2005, up
CHF 219 million from CHF 1,176 million in 2004. At CHF 1,167
million in 2005, personnel expenses were up 47% from CHF
796 million in 2004, mainly reﬂecting the further integration
of UBS's IT infrastructure into ITI. It was also due to addition-
al hiring and accruals for performance-related compensation.
In the same period, general and administrative expenses in-
creased 1% to CHF 1,084 million from CHF 1,077 million. Low-
er costs for rent and maintenance of IT equipment in ITI and a
release of capital tax accruals were offset by costs incurred for
the implementation of new accounting standards and regula-

tory requirements. Additionally, we saw higher expenses for
our brand initiative and corporate real estate. Other business-
es were charged CHF 1,730 million compared to CHF 1,509
million, reﬂecting the further integration of UBS's IT infrastruc-
ture into ITI. Amortization of other intangible assets was CHF
17 million in 2005, at the same level as in 2004.

IT infrastructure

In 2005 the information technology infrastructure cost per av-
erage  number  of  financial  business  employees  was  CHF
26,731, down CHF 1,600 from CHF 28,331 in 2004, show-
ing the positive effects of managing our information technol-
ogy infrastructure centrally.

2004

Results

The pre-tax loss was CHF 382 million in 2004, down from a
loss of CHF 811 million a year earlier. Private Banks & GAM,
which is shown under discontinued operations, contributed
proﬁt of CHF 396 million, whereas continuing operations – or
our Corporate Functions – saw a loss of CHF 778 million.

Operating income
Total operating income increased to CHF 398 million in 2004
from CHF 112 million in 2003. The result was driven by high-
er credit loss recoveries as well as higher revenues. Income in-
creased by CHF 92 million to CHF 112 million in 2004, main-
ly due to lower writedowns of ﬁnancial investments (in 2003
we recorded a writedown in our stake in Swiss International
Airlines Ltd.). This was partially offset by lower interest income
from invested equity as we continued to repurchase shares.
In 2004, credit loss recovery recorded in Corporate Center
was CHF 286 million compared to CHF 92 million in 2003. This
represents  the  difference  between  the  adjusted  expected
credit losses charged to the business units and the credit loss
recognized in the UBS ﬁnancial statements (recovery of CHF
241 million in 2004 and a loss of CHF 102 million in 2003).
In both years, credit loss expense for UBS was lower than the
adjusted expected credit loss charged to the business units,
resulting in the above mentioned credit loss recoveries in Cor-
porate Center.

Operating expenses
Total operating expenses were CHF 1,176 million in 2004,
up CHF 33 million from CHF 1,143 million in 2003. At CHF
796 million in 2004, personnel expenses were up 1% from
CHF 785 million in 2003, reflecting higher performance-re-
lated compensation. In the same period, general and admin-
istrative expenses dropped 8% to CHF 1,077 million from
CHF 1,166 million. This was mainly due to falling IT costs re-

53

Financial Businesses
Corporate Center

lated to infrastructure cost savings as well as lower legal pro-
visions. Other business units were charged CHF 1,509 mil-
lion for services provided by Corporate Functions in 2004,
compared with CHF 1,639 million in 2003. This drop was
due to reduced charges reflecting cost savings at our ITI unit
as  well  as  lower  project-related  charges.  Depreciation

dropped to CHF 794 million in 2004 from CHF 811 million
in 2003, reflecting lower IT-related charges, partially offset
by higher costs for real estate. Amortization of other intan-
gible assets was CHF 17 million in 2004, down CHF 3 mil-
lion  from  2003  due  to  the  weakening  of  the  US  dollar
against the Swiss franc.

54

Industrial Holdings

Industrial Holdings

Industrial Holdings

Income statement 1

CHF million, except where indicated

Continuing operations

Revenues from industrial holdings

Other income

Total operating income

Personnel expenses

General and administrative expenses

Services to / from other business units

Depreciation of property and equipment

Amortization of goodwill

Amortization of other intangible assets

Goods and materials purchased

Total operating expenses

Operating proﬁt / (loss) from continuing operations before tax

Tax expense

Net proﬁt / (loss) from continuing operations

Discontinued operations

Proﬁt from discontinued operations before tax

Tax expense

Net proﬁt from discontinued operations

Net proﬁt / (loss) 

Net proﬁt / (loss) attributable to minority interests

from continuing operations

from discontinued operations

Net proﬁt / (loss) attributable to UBS shareholders

from continuing operations

from discontinued operations

Private equity 3

CHF billion

Investment 4

Portfolio fair value

Additional information

Cost / income ratio (%) 5

BIS risk-weighted assets (CHF million)

Personnel (full-time equivalents)

For the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

10,515

564

11,079

1,146

599

14

253

0

207

8,003

10,222

857

253

604

124

9

115

719

207

202

5

512

402

110

6,086

354

6,440

906

773

20

215

7

169

3,885

5,975

465

120

345

140 2

32

108

453

93

93

0

360

252

108

2,900

(230 )

2,670

862

748

23

178

26

8

1,113

2,958

(288 )

10

(298 )

259 2

27

232

(66 )

(11 )

(17 )

6

(55 )

(281 )

226

73

59

72

26

(23 )

(30 )

18

(100 )

22

106

71

84

111

75

(11 )

(72 )

6

59

123

117

42

60

2

31.12.05

0.7

1.0

As at

31.12.04

1.2

1.7

% change from

31.12.03

31.12.04

1.4

1.6

(42 )

(41 )

For the year ended or as at

% change from

31.12.05

31.12.04

31.12.03

31.12.04

92.3

2,035

21,636

92.8

2,773

29,453

110.8

2,044

29,121

(27 )

(27 )

1 Please refer to note 1 non-current assets held for sale and discontinued operations for further explanation.
31  December  2004  and  the  year  ended  31  December  2003  respectively.
impairments.

5 Operating expenses / operating income.

3 Only  comprises  ﬁnancial  investments  available-for-sale.

2 Includes goodwill amortization of CHF 1 million and CHF 2 million for the year ended 
4 Historical  cost  of  investments  made, less  divestments  and

56

Major participations

Our  private  equity  investments  were  moved  to  our  Indust-
rial Holdings segment in ﬁrst quarter 2005, matching our strat-
egy of de-emphasizing and reducing exposure to this asset
class while capitalizing on orderly exit opportunities as they
arise.

The segment also includes UBS’s majority stake in Motor-
Columbus, a ﬁnancial holding company whose most signif-
icant asset is an interest in the Atel Group (Aare-Tessin Ltd.
for  Electricity).  In  late  September  2005,  UBS  announced
that it would sell its 55.6% stake in Motor-Columbus to a
consortium of Atel’s Swiss minority shareholders, EOS Hold-
ing and Atel, as well as to French utility Electricité de France
(EDF), after corresponding agreements to that effect were
signed.

At the end of February the European Commission and the
Swiss Competition Commission have cleared the acquisition
of the participation held by UBS. At the date of the print or-
der of this Annual Report (8 March 2006), the transaction is
expected to be completed as soon as all contractual conditions
have been met and the boards of the buyers have passed the
appropriate revolutions.

2005

In 2005, the Industrial Holdings segment reported a net prof-
it of CHF 719 million, of which CHF 512 million was attribut-
able to UBS shareholders.

In 2005, it completed the sale of four fully consolidated in-
vestments. The operating proﬁt or loss and gains on disposal
are  presented  as  discontinued  operations  for  the  industrial

holdings. Previous income statements have also been restat-
ed to reﬂect these divestments.

In 2005, unconsolidated private equity investments, includ-
ing those accounted for under the equity method, recorded
total divestment gains of CHF 684 million. The level of ﬁnan-
cial investments available-for-sale fell to CHF 0.7 billion on 31
December 2005 from CHF 1.2 billion a year earlier due to a
number of exits which were partially offset by the funding of
existing commitments. The fair value of this part of the port-
folio decreased to CHF 1.0 billion in 2005 from CHF 1.7 bil-
lion in 2004. Unfunded commitments on 31 December 2005
were CHF 367 million, down from CHF 769 million at the end
of December 2004, primarily due to the exit from one invest-
ment.

2004

In 2004, industrial holdings reported a net proﬁt of CHF 453
million,  of  which  CHF  360  million  was  attributable  to  UBS
shareholders. Of the investments fully consolidated in the pe-
riod, we sold ﬁve in 2004.

In 2004, unconsolidated private equity investments, includ-
ing those accounted for under the equity method, recorded
total divestment gains of CHF 330 million and writedowns of
CHF 57 million.

The level of ﬁnancial investments available-for-sale fell to
CHF 1.2 billion on 31 December 2004 from CHF 1.4 billion a
year earlier. The fair value of this part of the private equity port-
folio increased to CHF 1.7 billion at the end of 2004 from CHF
1.6 billion on 31 December 2003. Unfunded commitments on
31 December 2004 were CHF 769 million, down from CHF
1,493 million at the end of 2003.

57

58

Balance Sheet and Cash Flows

Balance Sheet and Cash Flows
Balance sheet and off-balance sheet

Balance sheet and off-balance sheet

UBS’s total assets stood at CHF 2,060.3 billion on 31 Decem-
ber  2005,  up  from  CHF  1,737.1  billion  on  31  December
2004. The increase in total assets was largely due to curren-
cy movements against the Swiss franc (mainly the 15% ap-
preciation of the US dollar). Other factors contributing to the
rise were the growth in collateral trading (up CHF 127 bil-
lion), the trading portfolio (up CHF 105 billion), positive re-
placement values (up CHF 49 billion) and the loan book (up
CHF 38 billion). Total liabilities rose due to higher borrow-
ing (up CHF 174 billion), collateral trading liabilities (up CHF
72 billion) and negative replacement values (up CHF 34 bil-
lion).

Lending and borrowing

Lending
Cash  was  CHF  5.4  billion  on  31  December  2005,  down
slightly  (CHF  0.7  billion)  from  a  year  earlier,  mainly  from
lower  sight  deposit  balances  held  with  central  banks.  At
CHF 33.6 billion on 31 December 2005, the due from banks
line decreased by CHF 1.8 billion largely due to the sale of
Private Banks & GAM. The decline was partially offset by in-
creased balances in Global Wealth Management & Business
Banking  related  to  higher  current  account  balances.  Our
loans to customers stood at CHF 270 billion on 31 Decem-
ber 2005, up by CHF 37.8 billion from a year earlier, reflect-
ing higher mortgages in Switzerland and secured lending,
mainly in our international wealth management businesses.
This was further accentuated by an increase in the Invest-
ment Bank’s secured lending to US mortgage originators, as
well as its global syndicated finance, prime brokerage and
equity traded derivatives lending businesses.

Borrowing
The due to banks line rose by CHF 4.3 billion because of in-
creased deposits on current accounts. Major movements in
the Investment Bank's cash and collateral trading activities
were also behind the rise, although they were offset by a
lower proportion of funding secured from European central
banks.

Total debt issued (including ﬁnancial liabilities designated
at fair value) increased to CHF 278.1 billion on 31 December
2005, up CHF 94.5 billion from a year earlier. Money market
paper issuance increased by CHF 23.3 billion, mainly due to
higher volume and foreign exchange rate ﬂuctuations. The
long-term debt issued (including ﬁnancial liabilities designat-
ed at fair value) grew by CHF 71.2 billion to CHF 175.4 bil-
lion. Equity Linked Notes, a class of hybrid instruments issued
by UBS totalling approximately CHF 39 billion, had to be re-

classiﬁed in the balance sheet from negative replacement val-
ues to ﬁnancial liabilities designated at fair value. Currency and
fair value movements and increased securitization activities al-
so increased during the same period. We believe the maturi-
ty proﬁle of our long-term debt portfolio adequately match-
es the maturity proﬁle of our assets. For further details, please
refer to note 18 to the ﬁnancial statements. 

The due to customers line was up CHF 75.5 billion, main-
ly  reflecting  growing  deposits  from  private  clients  in  our
wealth management and retail banking businesses as well as
growth in our prime brokerage business.

Repo and securities borrowing/lending
In 2005, cash collateral on securities borrowed and reverse re-
purchase agreements increased by CHF 127 billion or 22% to
CHF 705 billion, while the sum of securities lent and repos
grew by CHF 72 billion or 15% to CHF 556 billion. The in-
crease stems largely from the Investment Bank’s securities bor-
rowing  and  equity  ﬁnancing  activities,  while  the  matched
book (a repo portfolio comprised of assets and liabilities with
equal maturities and equal value, so that substantially all the
risks cancel each other out) decreased by realizing additional
netting opportunities. 

Trading portfolio
Trading assets increased by CHF 105 billion to CHF 654 bil-
lion on 31 December 2005 from CHF 549 billion on 31 De-
cember 2004. Money market paper inventories of our ﬁxed
income, rates and currencies business increased by CHF 13 bil-
lion. As spreads became more attractive, net assets within cash
and collateral proprietary trading were increased and were
pledged to central banks. A net increase was also registered
in debt instruments (up CHF 33 billion), mainly in our princi-
pal ﬁnance  and credit arbitrage and credit ﬁxed income busi-
nesses where growth was driven by the expanding local pres-
ence  of  the  emerging  market  business.  Equity  instruments
were up by CHF 38 billion, largely driven by the derivatives
business, and traded loans rose by CHF 20 billion, mainly in
the securitization business. Over the same period, short trad-
ing positions increased by CHF 18 billion to CHF 189 billion.

Replacement values
In 2005 positive replacement values increased by CHF 49 bil-
lion to CHF 334 billion, while negative replacement values in-
creased by CHF 34 billion up to CHF 338 billion over the same
period. Three main factors contributed to this development:
movements in interest rates (in particular in the ﬁrst half of
2005), foreign exchange rate movements in major currencies,
and higher trading volumes.

60

Other assets / liabilities 
Investments in associates rose by 11%, to CHF 3.0 billion on
31 December 2005. The increase was related to private eq-
uity and corporate real estate investments as well as invest-
ments  by  Motor-Columbus.  Property  and  equipment  was
down 1% to CHF 9.4 billion, mainly driven by disposals and
write-offs. Goodwill and other intangible assets, at CHF 13.5
billion on 31 December 2005, rose 11% from a year earlier,
mainly due to foreign exchange rate movements. Addition-
ally, it reflects the acquisition of several businesses during
2005.

Equity
At CHF 44.3 billion on 31 December 2005, equity attributable
to UBS shareholders increased by CHF 10.4 billion from 2004.
The increase reﬂects the attributable proﬁt of CHF 14.0 billion,
which includes the gain on sale of Private Banks & GAM and
the strengthening of the US dollar against the Swiss franc, par-
tially offset by dividend payments and share repurchases.

Equity attributable to minority interests increased by 40%
to CHF 7.6 billion on 31 December 2005 from CHF 5.4 billion
on the same date a year ago, mainly reﬂecting the new is-
suance of preferred securities.

Contractual obligations

The table below summarizes our contractual obligations as
of 31 December 2005. All contracts, with the exception of
purchase obligations (those where we are committed to pur-
chase determined volumes of goods and services), are either
recognized as liabilities on our balance sheet or, in the case
of  operating  leases,  disclosed  in  note  25  to  the  Financial
Statements.

The following liabilities recognized on the balance sheet
are  excluded  from  the  table  because  we  do  not  consider
these obligations as contractual: provisions, current and de-
ferred tax liabilities, liabilities to employees for equity par-
ticipation  plans,  settlement  and  clearing  accounts  and
amounts due to banks and customers.

Within purchase obligations, we have excluded our obli-
gation  to  employees  under  the  mandatory  notice  period,
during which we are required to pay employees contractu-
ally agreed salaries.

Off-balance sheet arrangements

In  the  normal  course  of  business,  UBS  enters  into  arrange-
ments that,  under  IFRS,  are  not  recognized  on  the  balance
sheet and  do  not  affect  the  income  statement.  These  types
of arrangements  are  kept  off-balance  sheet  as  long  as  UBS
does not incur an obligation from them or become entitled to
a speciﬁc asset. As soon as an obligation is incurred, it is recog-
nized on the balance sheet, with the resulting loss recorded
in the  income  statement.  It  should  be  noted,  however,  that
the amount recognized on the balance sheet does not, in many
instances,  represent  the  full  loss  potential  inherent  in  such
arrangements.

For the most part, the arrangements discussed below either
meet the ﬁnancial needs of customers or offer investment op-
portunities through entities that are not controlled by UBS. The
importance of such arrangements to us, with respect to liquid-
ity, capital resources or market and credit risk support, is mini-
mal. We do not rely on such arrangements as a major source
of revenue. They have also not incurred signiﬁcant expenses and
we do not expect them to result in any in the future. The fol-
lowing paragraphs discuss three distinct areas of off-balance
sheet arrangements as of 31 December 2005 and any poten-
tial obligations that may arise from them.

Guarantees
In the normal course of business, we issue various forms of guar-
antees to support our customers. These guarantees, with the
exception of related premiums, are kept off-balance sheet un-
less a provision is needed to cover probable losses. The contin-
gent liabilities arising from these guarantees are disclosed in
note 24 to the ﬁnancial statements. In 2005, our contingent li-
abilities from guarantees are slightly above the level compared
to a year earlier. Fee income earned from issuing guarantees is
not material to our total revenues. Losses incurred under guar-
antees and income from the release of related provisions were
insigniﬁcant for each of the last three years.

Retained interests
UBS sponsors the creation of Special Purpose Entities (SPEs) that
facilitate the securitization of acquired residential and commer-
cial mortgage loans and related securities. We also securitize
customers’ debt obligations in transactions that involve SPEs

Contractual obligations

CHF million

Long-term debt

Capital lease obligations

Operating leases

Purchase obligations

Other long-term liabilities

Total

Less than 1 year

1–3 years

3–5 years More than 5 years

Payment due by period

53,720

135

963

20,082

222

75,122

25,071

317

1,752

11,183

1,039

39,362

29,512

275

1,455

2,545

59,469

3,973

8,251

33,787

71,693

61

Balance Sheet and Cash Flows
Balance sheet and off-balance sheet

which issue collateralized debt obligations. A typical securitiza-
tion transaction of this kind would involve the transfer of as-
sets into a trust or corporation in return for beneﬁcial interests
in the form of securities. Generally, the beneﬁcial interests are
sold to third parties shortly after securitization. We do not pro-
vide guarantees or other forms of credit support to these SPEs.
Assets  are  no  longer  reported  in  our  consolidated  ﬁnancial
statements as soon as their risk or reward is transferred to a third
party. For further discussion of our securitization activities, see
note 33 to the ﬁnancial statements.

Derivative instruments recorded in equity attributable 
to UBS shareholders
We have no derivative contracts linked to our own shares that
are accounted for as equity instruments. With the exception of
physically settled written put options (see note 1 to the ﬁnan-
cial statements), derivative contracts linked to our shares are ac-
counted for as derivative instruments and are carried at fair val-
ue on the balance sheet under positive replacement values or
negative replacement values.

62

Balance Sheet and Cash Flows
Cash ﬂows

Cash ﬂows

2005

At end-2005, the level of cash and cash equivalents rose to
CHF 91.0 billion, up CHF 3.9 billion from CHF 87.1 billion at
end-2004.

Operating activities
Net cash ﬂow used in operating activities was CHF 63.2 bil-
lion in 2005 compared to CHF 24.1 billion in 2004. Operat-
ing cash inﬂows (before changes in operating assets and lia-
bilities  and  income  taxes  paid)  totaled  CHF  14.6  billion  in
2005, an increase of CHF 3.4 billion from 2004. Our net prof-
it rose by CHF 6.2 billion compared to 2004. Discontinued op-
erations contributed CHF 3.8 billion which had to be reclas-
siﬁed to cash ﬂow from investing activities.

Cash of CHF 162.6 billion was used to fund the net increase
in operating assets, while a net increase in operating liabili-
ties generated cash inﬂows of CHF 87.2 billion. The increase
in cash was used to fund operating assets – in line with the
expansion of our business. The comparative amounts in 2004
and 2003 were smaller, primarily due to the continuing recov-
ery seen in the ﬁnancial markets. Payments to tax authorities
were CHF 2.4 billion in 2005, up CHF 1.1 billion from a year
earlier, reﬂecting the increase in net proﬁt between 2004 and
2003.

Investing activities
Investing activities generated a cash outﬂow of CHF 2.4 bil-
lion, due to our acquisition of new businesses totalling CHF
1.5 billion, increase of purchase of property and equipment
of CHF 1.9 billion and net increase of ﬁnancial investments of
CHF  2.5  billion.  Disposals  of  subsidiaries  and  associates  in
2005 generated a cash inﬂow of CHF 3.2 billion, mainly due
to the sale of Private Banks & GAM of CHF 1.9 billion. By con-
trast, in 2004 we saw a net cash outﬂow from investing ac-
tivities of CHF 1.0 billion mainly due to the acquisitions of new
businesses of CHF 2.5 billion at a net purchase of property and
equipment of CHF 0.5 billion. This was only partially offset by
disposals of subsidiaries and associates and net sales of ﬁnan-
cial investments.

Financing activities
In 2005, ﬁnancing activities generated cash ﬂows of CHF 64.5
billion, which was used to ﬁnance the expansion of our busi-
ness activities. This reﬂected the net issuance of money mar-
ket paper of CHF 23.2 billion and the issuance of CHF 76.3
billion in long-term debt – the latter signiﬁcantly outpacing
long-term debt repayments, which totaled CHF 30.5 billion.

That inﬂow was partly offset by outﬂows attributable to net
movements in treasury shares and own equity derivative ac-
tivity (CHF 2.4 billion), and dividend payments (CHF 3.1 bil-
lion). In contrast, in 2004, we had also a net cash inﬂow of
CHF 39.8 billion from our ﬁnancing activities. The difference
between the two years was mainly due to the fact that long-
term debt issuance increased by CHF 25.1 billion in 2005. 

2004

At end-2004, the level of cash and cash equivalents rose to
CHF 87.1 billion, up CHF 13.7 billion from CHF 73.4 billion at
end-2003.

Operating activities
Net cash ﬂow from operating activities was negative CHF 24.1
billion in 2004 compared to positive CHF 3.3 billion in 2003.
Operating cash inﬂows (before changes in operating assets
and liabilities and income taxes paid) totaled CHF 11.2 billion
in 2004, an increase of CHF 2.3 billion from 2003. While our
net proﬁt rose by CHF 2.2 billion between 2004 and 2003,
we had considerably higher non-cash expenses in 2003, which
reduce net proﬁt but do not affect cash ﬂows. With our adop-
tion of IAS 39 in 2004, we started to account for some of our
debt issues at fair value, leading to the recognition of an ad-
ditional non-cash expense item of CHF 1.2 billion, essentially
comprising an add-back to operating cash ﬂows.

Cash of CHF 70.9 billion was used to fund the net increase
in operating assets, while a net increase in operating liabili-
ties generated cash inﬂows of CHF 37.0 billion. The compar-
ative  amounts  in  2003  were  higher,  primarily  reﬂecting  a
pick-up in activities in 2003 related to the recovery seen in the
ﬁnancial markets. Payments to tax authorities were CHF 1.3
billion in 2004, up CHF 228 million from a year earlier, reﬂect-
ing the increase in net proﬁt between 2003 and 2002.

Investing activities
Investing activities generated a cash outﬂow of CHF 1.0 bil-
lion, mainly due to our acquisition of new businesses, which
totaled CHF 1.2 billion net of disposals. By contrast, in 2003,
we saw a cash inﬂow of CHF 1.9 billion, mainly from our di-
vestments of ﬁnancial investments and the sale of the Corre-
spondent Services Corporation, which was partially offset by
the purchase of property and equipment of CHF 1.4 billion.

Financing activities
The overall increase in cash inﬂows seen in 2004 is attribut-
able  to  our  financing  activities,  which  generated  positive

63

Balance Sheet and Cash Flows
Cash ﬂows

cash  flows  of  CHF  39.8  billion.  This  reflected  the  net 
issuance of money market paper of CHF 21.4 billion and the
issuance of CHF 51.2 billion in long-term debt – the latter
signiﬁcantly  outpacing  long-term  debt  repayments,  which
totaled CHF 24.7 billion. That inﬂow was partly offset by out-
ﬂows attributable to net movements in treasury shares and
own equity derivative activity (CHF 5.0 billion), and dividend

payments  (CHF  2.8  billion).  In  contrast,  in  2003,  we  had
experienced a negative cash ﬂow of CHF 13.7 billion from our
ﬁnancing  activities.  The  difference  between  the  two  years
was  mainly  due  to  the  fact  that  long-term  debt  issuance
more than  doubled  from  2003,  and  because  we  issued
CHF 21.4 billion in money market paper in 2004 after repay-
ing CHF 14.7 billion a year earlier.

64

Accounting Standards and Policies

Accounting Standards and Policies
Accounting principles

Accounting principles

The UBS ﬁnancial statements have been prepared in accor-
dance with International Financial Reporting Standards (IFRS).
As a US listed company, we also provide a description in note
41 to the ﬁnancial statements of the signiﬁcant differences
which would arise were our accounts to be presented under
the United States Generally Accepted Accounting Principles
(US GAAP), and a detailed reconciliation of IFRS shareholders’
equity and net proﬁt to US GAAP.

Except where clearly identiﬁed, all of UBS’s ﬁnancial infor-
mation presented in this document is presented on a consol-
idated basis under IFRS.

Pages 191 to 203 contain the ﬁnancial statements for the
UBS AG Parent Bank – the Swiss company, including branch-
es worldwide, which owns all the UBS companies, directly or
indirectly. The Parent Bank’s ﬁnancial statements are prepared
in order to meet Swiss regulatory requirements and in com-
pliance with Swiss Banking Law. Except  in those pages, or
where otherwise explicitly stated, all references to “UBS” re-
fer to the UBS Group and not to the Parent Bank.

All references to 2005, 2004 and 2003 refer to the UBS
Group and the Parent Bank’s ﬁscal years ended 31 December
2005 and 2004. The ﬁnancial statements for the UBS Group
and the Parent Bank have been audited by Ernst & Young Ltd.
An explanation of the critical accounting policies applied in
the preparation of our ﬁnancial statements is provided below.
The basis of our accounting is given in note 1 to the ﬁnancial
statements.

Standards for management accounting

Our management reporting systems and policies determine
the revenues and expenses directly attributable to each busi-
ness unit. The presentation of the business segments reﬂects
UBS's organization structure and management responsibili-
ties. Internal charges and transfer pricing adjustments are re-
ﬂected in the performance of each business unit.

Inter-business unit revenues and expenses. Revenue-shar-
ing agreements are used to allocate external customer rev-
enues to business units on a reasonable basis. Transactions be-
tween  business  units  are  conducted  at  internally  agreed
transfer prices or at arm’s length. Inter-business unit charges
are  reported  in  the  line  “Services  to / from  other  Business

Units” for both Business Units concerned (see page 11). The
corporate functions within Corporate Center expenses are al-
located to the operating business units to the extent that it is
appropriate.

Net interest income is allocated to the business units based
on their balance sheet positions. Assets and liabilities of the
ﬁnancial businesses are funded through and invested with the
central treasury departments, with the net margin reﬂected in
the results of each business unit. To complete the allocation,
the ﬁnancial businesses are credited with a risk-free return on
the regulatory capital adjusted for goodwill (see below). 

Commissions are credited to the business unit with the cor-
responding  customer  relationship,  with  revenue-sharing
agreements for the allocation of customer revenues where
several business units are involved in value creation.

For internal management reporting purposes and in the re-
sults discussion, we measure credit loss using an expected loss
concept. Expected credit loss reﬂects the average annual costs
that are expected to arise over time from positions in the cur-
rent portfolio that become impaired. The adjusted expected
credit loss reported for each Business Group is the expected
credit loss on its portfolio plus the difference between credit
loss expense and expected credit loss, amortized over a three-
year period (shown as ‘deferral’ in the table). The difference
between the sum of these adjusted expected credit loss ﬁg-
ures, which are charged to the Business Groups or Units, and
the credit loss expense recorded at Group level for ﬁnancial
reporting purposes is reported in Corporate Functions. The
table on the next page shows the adjusted expected credit loss
charged to the Business Groups.

Regulatory capital requirements for the Business Units are
deﬁned as 10% of BIS risk-weighted assets. To measure cap-
ital consumption of the business units, we adjust regulatory
capital for the goodwill allocated. Return on adjusted regula-
tory capital is a key performance indicator for the Investment
Bank and the Business Banking Switzerland unit.

The levels of personnel are expressed in terms of full-time
equivalents  (FTE)  and  measured  as  a  percentage  of  the
standard  hours  normally  worked  by  permanent  full-time
staff. The FTE level cannot exceed 1.0 for any particular in-
dividual. Personnel includes all staff and trainees other than
contractors.

66

Credit loss expense charged to the Business Groups

CHF million

Global Wealth Management & Business Banking

Investment Bank

UBS Total

Wealth Management
International & Switzerland

Wealth 
Management US

Business
Banking CH

For the year ended 31.12.05

Actuarial expected loss

Deferrals

Adjusted expected credit loss

Credit loss (expense) / recovery

Balancing item credited as credit loss recovery in Corporate Functions

(54 )

41

(13)

(8)

(8 )

6

(2)

0

(363 )

485

122

231

(119 )

155

36

152

(544)

687

143

375

232

67

Accounting Standards and Policies
Critical accounting policies

Critical accounting policies

Basis of preparation and selection of policies

We prepare our Financial Statements in accordance with IFRS,
and provide a reconciliation to generally accepted account-
ing principles in the United States (US GAAP). The application
of certain of these accounting principles requires a signiﬁcant
amount of judgment based upon estimates and assumptions
that involve signiﬁcant uncertainty at the time they are made.
Changes in assumptions may have a signiﬁcant impact on the
Financial Statements in the periods where assumptions are
changed. Accounting treatments, where signiﬁcant assump-
tions and estimates are used, are discussed in this section, as
a guide to understanding how their application affects our re-
ported results. A broader and more detailed description of the
accounting policies we employ is shown in Note 1 to the Fi-
nancial Statements.

The application of assumptions and estimates means that
any selection of different assumptions would cause our report-
ed results to differ. We believe that the assumptions we have
made  are  appropriate,  and  that  our  Financial  Statements
therefore present our ﬁnancial position and results fairly, in all
material respects. The alternative outcomes discussed below
are presented solely to assist the reader in understanding our
Financial Statements, and are not intended to suggest that
other assumptions would be more appropriate.

Many  of  the  judgements  we  make  when  applying  ac-
counting principles depend on an assumption, which we be-
lieve to be correct, that UBS maintains sufﬁcient liquidity to
hold positions or investments until a particular trading strat-
egy matures – i.e. that we do not need to realize positions at
unfavorable prices in order to fund immediate cash needs. Liq-
uidity is discussed in more detail on pages 80 to 82 of the
Handbook 2005/2006.

Fair value of ﬁnancial instruments

Assets and liabilities in our trading portfolio, ﬁnancial assets
and liabilities designated as held at fair value and derivative
instruments are recorded at fair value on the balance sheet,
with changes in fair value recorded in net trading income in
the income statement. Key judgments affecting this account-
ing policy relate to how we determine fair value for such as-
sets and liabilities.

Where no active market exists, or where quoted prices are
not otherwise available, we determine fair value using a va-
riety  of  valuation  techniques.  These  include  present  value
methods,  models  based  on  observable  input  parameters,
and models where some of the input parameters are unob-
servable. 

Valuation  models  are  used  primarily  to  value  derivatives
transacted in the over-the-counter market, including credit de-
rivatives and unlisted securities with embedded derivatives. All
valuation models are validated before they are used as a ba-
sis for ﬁnancial reporting, and periodically reviewed thereafter,
by qualiﬁed personnel independent of the area that created
the model. Wherever possible, we compare valuations derived
from  models  with  quoted  prices  of  similar  ﬁnancial  instru-
ments, and with actual values when realized, in order to fur-
ther validate and calibrate our models.

A variety of factors are incorporated into our models, in-
cluding actual or estimated market prices and rates, such as
time  value  and  volatility,  and  market  depth  and  liquidity.
Where available, we use market observable prices and rates
derived from market veriﬁable data. Where such factors are
not market observable, changes in assumptions could affect
the reported fair value of ﬁnancial instruments. We apply our
models  consistently  from  one  period  to  the  next,  ensuring
comparability and continuity of valuations over time, but es-
timating fair value inherently involves a signiﬁcant degree of
judgment. Management therefore establishes valuation ad-
justments to cover the risks associated with the estimation of
unobservable input parameters and the assumptions within
the models themselves. Valuation adjustments are also made
to reﬂect such elements as aged positions, deteriorating cred-
itworthiness (including country speciﬁc risks), concentrations
in speciﬁc types of instruments and market risk factors (inter-
est rates, currencies etc), and market depth and liquidity. Al-
though a signiﬁcant degree of judgment is, in some cases, re-
quired in establishing fair values, management believes the fair
values recorded in the balance sheet and the changes in fair
values recorded in the income statement are prudent and re-
ﬂective of the underlying economics, based on the controls
and procedural safeguards we employ. Nevertheless, for val-
uations derived from models we have estimated the effect that
a change in assumptions to reasonably possible alternatives
could have on fair values where inputs are not market observ-
able. To estimate that effect on the Financial Statements, we
recalculated the model valuation adjustments at higher and
lower conﬁdence levels than originally applied. A similar ap-
proach was used for valuations other than those based on
models. For the comparative prior year this assessment was
based on estimates. For all ﬁnancial instruments carried at fair
value which rely on assumptions for their valuation, we esti-
mate that fair value could lie in a range from CHF 1,094 mil-
lion lower to CHF 1,176 million higher than the fair values rec-
ognized in the Financial Statements. In 2004 the estimate of
that range was CHF 579 million lower to CHF 927 million high-
er than the amounts recognized on the balance sheet.

68

Recognition of deferred Day 1 proﬁt and loss

A closely related issue to determining fair value of ﬁnancial
instruments is the recognition of deferred Day 1 proﬁt and
loss. We have entered into transactions, some of which will
mature after more than ten years, where we determine fair
value using valuation models for which not all inputs are mar-
ket observable prices or rates. We initially recognize a ﬁnan-
cial instrument at the transaction price, which is the best in-
dicator of fair value, although the value obtained from the
relevant  valuation  model  may  differ.  Such  a  difference  be-
tween the transaction price and the model value is common-
ly referred to as "Day 1 proﬁt and loss". In accordance with
applicable accounting literature, we do not recognize that ini-
tial difference, usually a gain, immediately in proﬁt and loss.
While  applicable  accounting  literature  prohibits  immediate
recognition of Day 1 proﬁt and loss, it does not address the
recognition of Day 1 proﬁt and loss in the income statement
prior to the time when fair value can be determined using mar-
ket observable inputs or by reference to prices for similar in-
struments in active markets. It also does not address subse-
quent measurement of these instruments and recognition of
subsequent fair value changes indicated by the model.

Our decisions regarding recognizing deferred Day 1 prof-
it and loss are made after careful consideration of facts and
circumstances to ensure we do not prematurely release a por-
tion of the deferred proﬁt to income. For each transaction, we
determine individually the appropriate method of recogniz-
ing the Day 1 proﬁt and loss amount in the income statement.
Deferred Day 1 proﬁt and loss is either amortized over the life
of  the  transaction,  deferred  until  fair  value  can  be  deter-
mined using market observable inputs, or realized through set-
tlement. In all instances, any unrecognized Day 1 proﬁt and
loss is immediately released to income if fair value of the ﬁ-
nancial instrument in question can be determined either by
using market observable model inputs or by reference to a
quoted price for the same product in an active market.

After entering into a transaction, we measure the ﬁnan-
cial instrument at fair value, adjusted for the deferred Day 1
proﬁt and loss. Subsequent changes in fair value are recog-
nized immediately in the income statement without reversal
of deferred Day 1 proﬁts and losses.

Special Purpose Entities and Securitizations

UBS sponsors the formation of Special Purpose Entities (SPEs)
primarily to allow clients to hold investments in separate le-
gal entities, to allow clients to jointly invest in alternative as-
sets, for asset securitization transactions, and for buying or
selling credit protection. In accordance with IFRS we do not
consolidate SPEs that we do not control. As it can sometimes
be difﬁcult to determine whether we exercise control over an
SPE, we have to make judgments about risks and rewards as
well as our ability to make operational decisions for the SPE.

In many instances, elements are present that, considered in
isolation, indicate control or lack of control over an SPE, but
when considered together make it difﬁcult to reach a clear
conclusion. When assessing whether we have to consolidate
an SPE we evaluate a range of factors, including whether (a)
we will obtain the majority of the beneﬁts of the activities of
an SPE, (b) we retain the majority of the residual ownership
risks related to the assets in order to obtain the beneﬁts from
its activities, (c) we have decision-making powers to obtain the
majority of the beneﬁts, or (d) the activities of the SPE are be-
ing conducted on our behalf according to our speciﬁc busi-
ness needs so that we obtain the beneﬁts from the SPE’s op-
erations.  We  consolidate  an  SPE  if  our  assessment  of  the
relevant factors indicate that we obtain the majority of the
beneﬁts or risks of its activities.

SPEs used to allow clients to hold investments are struc-
tures that allow one or more clients to invest in an asset or set
of assets, which are generally purchased by the SPE in the
open market and not transferred from UBS. The risks and re-
wards of the assets held by the SPE reside with the clients. Typ-
ically, UBS will receive service and commission fees for creation
of the SPE, or because it acts as investment manager, custo-
dian  or  in  some  other  function.  Many  of  these  SPEs  are 
single-investor  or  family  trusts  while  others  allow  a  broad
number  of  investors  to  invest  in  a  diversified  asset  base
through a single share or certiﬁcate. These latter SPEs range
from mutual funds to trusts investing in real estate. As an ex-
ample, UBS Alternative Portfolio AG provides a vehicle for in-
vestors to invest in a diversiﬁed range of alternative investments
through a single share. The majority of our SPEs are created
for client investment purposes and are not consolidated.

SPEs used to allow clients to jointly invest in alternative as-
sets, e.g. feeder funds, for which generally no active markets
exist, are often in the form of limited partnerships. Investors
are the limited partners and contribute all or the majority of
the capital, whereas UBS serves as the general partner. In that
capacity, UBS is the investment manager and has sole discre-
tion about investment and other administrative decisions, but
has no or only a nominal amount of capital invested. UBS typ-
ically receives service and commission fees for its services as
general partner, but does not, or only to a minor extent, par-
ticipate in the risks and rewards of the vehicle, which reside
with the limited partners. In most instances, limited partner-
ships  are  not  consolidated  because  UBS  neither  controls
them nor receives the majority of the beneﬁts. In some in-
stances however, limited partnerships are consolidated be-
cause  UBS  may  have  invested  more  than  just  a  nominal
amount and the limited partners have no right to liquidate
the partnership or replace UBS as investment manager. Un-
der US GAAP we consolidate some of the limited partnerships
not consolidated under IFRS, because we are deemed to con-
trol the entity as general partner through majority of votes,
although the majority of risks and beneﬁts are with the lim-
ited partners.

69

Accounting Standards and Policies
Critical accounting policies

SPEs used for securitization. SPEs for securitization are cre-
ated when UBS has assets (for example a portfolio of loans)
which it sells to an SPE, and the SPE in turn sells interests in
the assets as securities to investors. Consolidation of these
SPEs depends mainly on whether UBS retains the majority of
the beneﬁts or risks of the assets in the SPE.

We do not consolidate SPEs for securitization if UBS has no
control over the assets and no longer retains any signiﬁcant
exposure (for gain or loss) to the income or investment returns
on the assets sold to the SPE or the proceeds of their liquida-
tion. This type of SPE is a bankruptcy remote entity – if UBS
were to go bankrupt the holders of the securities would clear-
ly be owners of the asset, while if the SPE were to go bank-
rupt the securities holders would have no recourse to UBS.

SPEs for credit protection are set up to allow UBS to sell
the credit risk on portfolios, which may or may not be held by
UBS, to investors. They exist primarily to allow UBS to have a
single counterparty (the SPE), which sells credit protection to
UBS. The SPE in turn has investors who provide it with capi-
tal and participate in the risks and rewards of the credit events
that it insures. SPEs used for credit protection are generally
consolidated.

Allowances and provisions for credit losses

Assets accounted for at amortized cost are assessed for ob-
jective evidence of impairment and required allowances and
provisions are estimated in accordance with IAS 39. Impair-
ment exists if the book value of a claim or a portfolio of claims
exceeds the present value of the cash ﬂows actually expect-
ed in future periods. These cash ﬂows include scheduled in-
terest payments, principal repayments, or other payments due
(for example on guarantees), including liquidation of collat-
eral where available.

The total allowance and provision for credit losses consists
of two components: speciﬁc counterparty allowances and pro-
visions,  and  collectively  assessed  allowances.  The  specific
counterparty component applies to claims evaluated individ-
ually for impairment and is based upon management’s best
estimate of the present value of the cash ﬂows which are ex-
pected to be received. In estimating these cash ﬂows, man-
agement makes judgments about a counterparty’s ﬁnancial
situation and the net realizable value of any underlying col-
lateral or guarantees in our favor. Each impaired asset is as-
sessed on its merits, and the workout strategy and estimate
of cash ﬂows considered recoverable are independently ap-
proved by the Credit Risk Control function. Collectively as-
sessed credit loss allowances and provisions cover credit loss-
es  inherent  in  portfolios  of  claims  with  similar  economic
characteristics where there is objective evidence to suggest
that they contain impaired claims but the individual impaired
items cannot yet be identiﬁed. In assessing the need for col-
lective loan loss allowances and provisions, management con-

siders factors such as credit quality, portfolio size, concentra-
tions, and economic factors. In order to estimate the required
allowance or provision, we make assumptions both to deﬁne
the way we model inherent losses and to determine the re-
quired input parameters, based on historical experience and
current economic conditions.

The accuracy of the allowances and provisions we make de-
pends on how well we estimate future cash ﬂows for speciﬁc
counterparty allowances and provisions and the model assump-
tions and parameters used in determining collective allowances
and provisions. While this necessarily involves judgment, we be-
lieve that our allowances and provisions are reasonable and
supportable.

Further details on this subject are given in Note 1q) to the
Financial  Statements  and  in  the  Credit  Risk  section  of  the
Handbook 2005/2006, on pages 57 to 69.

Equity compensation

IFRS 2, Share-based Payment, addresses the accounting for
share-based  employee  compensation  and  was  adopted  by
UBS on 1 January 2005 on a fully retrospective basis. The ef-
fect of applying IFRS 2 is disclosed in Note 1 aa) to the ﬁnan-
cial statements, and further information on UBS equity com-
pensation plans, including inputs used to determine fair value
of options, is disclosed in Note 31. 

IFRS 2 requires that share options awarded to employees are
recognized as compensation expense based on their fair val-
ue at grant date. The share options we issue to our employ-
ees have features that make them incomparable to options on
our shares traded in active markets. Accordingly, we cannot de-
termine fair value by reference to a quoted market price, but
we rather estimate it using an option valuation model. The
model, a Monte Carlo simulation, requires inputs such as in-
terest rates, expected dividends, volatility measures and spe-
ciﬁc employee exercise behavior patterns based on statistical
data. Some of the inputs we use are not market-observable and
have to be estimated or derived from available data. Use of dif-
ferent estimates would produce different option values, which
in turn would result in higher or lower compensation expense
recognized. We have not run the model with alternative inputs
to quantify their effects on the fair value of the options.

To value options, several recognized valuation models ex-
ist. None of these models can be singled out as being the best
or most correct one. The model we apply is able to handle some
of the speciﬁc features included in the options granted to our
employees, which is the reason for its use. If we were to use a
different model, the option values would differ despite using
the same inputs. Accordingly, using different assumptions cou-
pled with using a different valuation model could have a sig-
niﬁcant impact on the fair value of employee stock options. Fair
value could be either higher or lower than the ones produced
by the model we apply and the inputs we used.

70

Financial Statements

Financial Statements
Table of Contents

Financial Statements
Table of Contents

73

74

74
75
76
78

80

80
93
100

101
101
102
103
103
103
104

105
105
106
106
106

107
108
109
111
111
112
114

Report of the Group Auditors

Financial Statements

Income Statement
Balance Sheet
Statement of Changes in Equity
Statement of Cash Flows

Notes to the Financial Statements

1
2a
2b

Summary of Signiﬁcant Accounting Policies
Segment Reporting by Business Group
Segment Reporting by Geographic Location

Income Statement
3
4
5
6
7
8

Net Interest and Trading Income
Net Fee and Commission Income
Other Income
Personnel Expenses
General and Administrative Expenses
Earnings per Share (EPS) and Shares Outstanding

Balance Sheet: Assets
9a
9b
9c
9d
10

Due from Banks and Loans
Allowances and Provisions for Credit Losses
Impaired Due from Banks and Loans
Non-Performing Due from Banks and Loans
Securities Borrowing, Securities Lending, 
Repurchase and Reverse Repurchase Agreements
Trading Portfolio
Financial Investments (available-for-sale)
Investments in Associates
Property and Equipment
Goodwill and Other Intangible Assets
Other Assets

11
12
13
14
15
16

72

Balance Sheet: Liabilities
17
18

Due to Banks and Customers
Financial Liabilities Designated 
at Fair Value and Debt Issued
Other Liabilities
Provisions
Income Taxes
Derivative Instruments

19
20
21
22

Off-Balance Sheet Information
23
24
25

Fiduciary Transactions
Commitments and Contingent Liabilities
Operating Lease Commitments

Additional Information
26

115
115

115
117
117
117
119

124
124
124
126

127

Pledged Assets and Pledgeable 
127
Off-Balance Sheet Securities
127
Litigation
128
Financial Instruments Risk Position
138
Fair Value of Financial Instruments
Pension and Other Post-Retirement Beneﬁt Plans
143
Equity Participation and Other Compensation Plans 149
153
Related Parties
156
Securitizations
156
Post-Balance Sheet Events
157
Signiﬁcant Subsidiaries and Associates
161
Invested Assets and Net New Money
162
Business Combinations
167
Discontinued Operations
169
Currency Translation Rates
170
Swiss Banking Law Requirements
171
Reconciliation to US GAAP
Additional Disclosures Required under 
US GAAP and SEC Rules

182

27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42

Financial Statements
Report of the Group Auditors

73

Financial Statements

Financial Statements

Income Statement

CHF million, except per share data

Note

31.12.05

31.12.04

31.12.03

31.12.04

For the year ended

% change from

Continuing operations

Interest income

Interest expense

Net interest income

Credit loss (expense) / recovery

Net interest income after credit loss expense

Net fee and commission income

Net trading income

Other income

Revenues from industrial holdings

Total operating income

Personnel expenses

General and administrative expenses

Depreciation of property and equipment

Amortization of goodwill

Amortization of other intangible assets

Goods and materials purchased

Total operating expenses

Operating proﬁt from continuing operations before tax

Tax expense

Net proﬁt from continuing operations

Discontinued operations

Proﬁt from discontinued operations before tax

Tax expense

Net proﬁt from discontinued operations

Net proﬁt

Net proﬁt attributable to minority interests

from continuing operations

from discontinued operations

Net proﬁt attributable to UBS shareholders

from continuing operations

from discontinued operations

Earnings per share

Basic earnings per share (CHF)

from continuing operations

from discontinued operations

Diluted earnings per share (CHF)

from continuing operations

from discontinued operations

74

3

3

3

4

3

5

6

7

14

15

15

21

38

21

8

8

59,286

(49,758)

9,528

375

9,903

21,436

7,996

1,125

10,515

50,975

21,049

7,047

1,493

0

334

8,003

37,926

13,049

2,549

10,500

4,688

498

4,190

14,690

661

656

5

14,029

9,844

4,185

13.93

9.78

4.15

13.36

9.39

3.97

39,228

(27,484 )

11,744

241

11,985

18,506

4,902

932

6,086

42,411

18,612

7,160

1,477

653

337

3,885

32,124

10,287

2,224

8,063

536

129

407

8,470

454

454

0

8,016

7,609

407

7.78

7.39

0.39

7.40

7.04

0.36

40,045

(27,784 )

12,261

(102 )

12,159

16,673

3,670

225

2,900

35,627

18,218

6,630

1,498

703

193

1,113

28,355

7,272

1,419

5,853

479

79

400

6,253

349

343

6

5,904

5,510

394

5.44

5.07

0.37

5.19

4.84

0.35

51

81

(19 )

56

(17 )

16

63

21

73

20

13

(2 )

1

(100 )

(1 )

106

18

27

15

30

775

286

929

73

46

44

75

29

928

79

32

964

81

33

Balance Sheet

CHF million

Assets

Cash and balances with central banks

Due from banks

Cash collateral on securities borrowed

Reverse repurchase agreements

Trading portfolio assets

Trading portfolio assets pledged as collateral

Positive replacement values

Financial assets designated at fair value

Loans

Financial investments

Accrued income and prepaid expenses

Investments in associates

Property and equipment

Goodwill and other intangible assets

Other assets

Total assets

Liabilities

Due to banks

Cash collateral on securities lent

Repurchase agreements

Trading portfolio liabilities

Negative replacement values

Financial liabilities designated at fair value

Due to customers

Accrued expenses and deferred income

Debt issued

Other liabilities

Total liabilities

Equity

Share capital

Share premium

Net gains / (losses) not recognized in the income statement, net of tax

Revaluation reserve from step acquisitions, net of tax

Retained earnings

Equity classiﬁed as obligation to purchase own shares

Treasury shares

Equity attributable to UBS shareholders

Equity attributable to minority interests

Total equity

Total liabilities and equity

Note

31.12.05

31.12.04

31.12.04

% change from

9

10

10

11

11

22

9

12

13

14

15

16, 21

17

10

10

11

22

18

17

18

19, 20, 21

5,359

33,644

300,331

404,432

499,297

154,759

333,782

1,153

269,969

6,551

8,918

2,956

9,423

13,486

16,190

6,036

35,419

220,242

357,164

389,487

159,115

284,577

653

232,167

4,188

6,309

2,675

9,510

12,201

17,375

2,060,250

1,737,118

124,328

77,267

478,508

188,631

337,663

117,401

451,533

18,392

160,710

53,874

120,026

61,545

422,587

171,033

303,712

65,756

376,076

15,040

117,856

44,120

2,008,307

1,697,751

871

9,992

(182)

101

44,414

(133)

(10,739)

44,324

7,619

51,943

901

9,231

(2,081 )

90

37,001

(96 )

(11,105 )

33,941

5,426

39,367

2,060,250

1,737,118

(11 )

(5 )

36

13

28

(3 )

17

77

16

56

41

11

(1 )

11

(7 )

19

4

26

13

10

11

79

20

22

36

22

18

(3 )

8

91

12

20

(39 )

3

31

40

32

19

75

Financial Statements

Statement of Changes in Equity

CHF million

Share capital

Balance at the beginning of the year

Issue of share capital

Cancellation of second trading line treasury shares (2002 program)

Cancellation of second trading line treasury shares (2003 program)

Cancellation of second trading line treasury shares (2004 program)

Balance at the end of the year

Share premium

Balance at the beginning of the year

Change in accounting policy

Premium on shares issued and warrants exercised

Net premium / (discount) on treasury share and own equity derivative activity

Employee share and share option plans

Cancellation of second trading line treasury shares (2002 program) 1

Balance at the end of the year

Net gains / (losses) not recognized in the income statement, net of tax

Foreign currency translation

Balance at the beginning of the year

Change in accounting policy

Movements during the year

Subtotal – balance at the end of the year 2

Net unrealized gains / (losses) on available-for-sale investments, net of tax

Balance at the beginning of the year

Change in accounting policy

Net unrealized gains / (losses) on available-for-sale investments

Impairment charges reclassiﬁed to the income statement

Realized gains reclassiﬁed to the income statement

Realized losses reclassiﬁed to the income statement

Subtotal – balance at the end of the year

Change in fair value of derivative instruments designated as cash ﬂow hedges, net of tax

Balance at the beginning of the year

Net unrealized gains / (losses) on the revaluation of cash ﬂow hedges

Net realized (gains) / losses reclassiﬁed to the income statement

Subtotal – balance at the end of the year

Balance at the end of the year

Revaluation reserve from step acquisitions, net of taxes

Balance at the beginning of the year

Movements during the year

Balance at the end of the year

Retained earnings

Balance at the beginning of the year

Change in accounting policy

Net proﬁt attributable to UBS shareholders for the year

Dividends paid 3

Cancellation of second trading line treasury shares (2003 program) 1

Cancellation of second trading line treasury shares (2004 program) 1

Balance at the end of the year

For the year ended

31.12.05

31.12.04

31.12.03

901

2

(32)

871

946

2

(47 )

901

1,005

2

(61 )

946

9,231

7,595

12,641

660

103

(130 )

(211 )

(5,468 )

7,595

(849 )

(50 )

(795 )

(1,694 )

946

(406 )

(108 )

285

(340 )

22

399

(256 )

116

(4 )

(144 )

(1,439 )

32,700

(46 )

5,904

(2,298 )

295

(302)

768

325

(20 )

1,331

9,992

9,231

(2,520)

(1,694 )

2,088

(432)

(826 )

(2,520 )

761

463

96

(396)

7

931

(322)

(474)

115

(681)

(182)

90

11

101

399

501

192

(353 )

22

761

(144 )

(223 )

45

(322 )

(2,081 )

90

90

37,001

36,260

8,016

(2,806 )

(4,469 )

14,029

(3,105)

(3,511)

44,414

1 In 2004 and 2005 the cancellation of second trading line treasury shares is made against retained earnings. In 2003 it was made against the share premium account.
236 million and CHF 121 million of related taxes for the years ended 2005, 2004 and 2003, respectively.
2003, 20 April 2004 and 26 April 2005, respectively.

2 Net of CHF (292) million, CHF
3 Dividends of CHF 2.00 per share, CHF 2.60 per share and CHF 3.00 were paid on 23 April

76

37,001

36,260

Statement of Changes in Equity (continued)

CHF million

Equity classiﬁed as obligation to purchase own shares

Balance at the beginning of the year

Movements during the year

Balance at the end of the year

Treasury shares

Balance at the beginning of the year

Change in accounting policy

Acquisitions

Disposals

Cancellation of second trading line treasury shares (2002 program)

Cancellation of second trading line treasury shares (2003 program)

Cancellation of second trading line treasury shares (2004 program)

Balance at the end of the year

Equity attributable to UBS shareholders

Equity attributable to minority interests

Balance at the beginning of the year

Change in accounting policy

Issuance of preferred securities

Other increases

Decreases and dividend payments

Foreign currency translation

Minority interest in net proﬁt

Balance at the end of the year

Total equity

Shares issued

Number of shares

Balance at the beginning of the year

Issue of share capital

For the year ended

31.12.05

31.12.04

31.12.03

(96)

(37)

(133)

(49 )

(47 )

(96 )

(11,105)

(9,654 )

(8,375)

5,198

3,543

(10,739)

44,324

(9,368 )

3,401

4,516

(11,105 )

33,941

(104 )

55

(49 )

(7,131 )

(1,474 )

(8,424 )

1,846

5,529

(9,654 )

33,659

5,426

3,879

3,529

1,539

44

(595)

544

661

7,619

51,943

1,922

(523 )

(306 )

454

5,426

39,367

143

372

247

(357 )

(404 )

349

3,879

37,538

For the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

1,126,858,177

1,183,046,764

1,256,297,678

1,709,439

3,293,413

2,719,166

(5 )

(48 )

Cancellation of second trading line treasury shares (2002 program)

Cancellation of second trading line treasury shares (2003 program)

(75,970,080 )

(59,482,000 )

Cancellation of second trading line treasury shares (2004 program)

(39,935,094)

Balance at the end of the year

1,088,632,522

1,126,858,177

1,183,046,764

(3 )

Treasury shares

Number of shares

Balance at the beginning of the year

Change accounting policy

Acquisitions

Disposals

Cancellation of second trading line treasury shares (2002 program)

Cancellation of second trading line treasury shares (2003 program)

For the year ended

31.12.05

31.12.04

124,663,310

136,741,227

31.12.03

97,181,094

25,380,535

78,218,035

96,139,004

116,080,976

(58,686,377)

(48,734,921 )

(25,931,298 )

(75,970,080 )

(59,482,000 )

% change from

31.12.04

(9 )

(19 )

(20 )

Cancellation of second trading line treasury shares (2004 program)

(39,935,094)

Balance at the end of the year

104,259,874

124,663,310

136,741,227

(16 )

During the year a total of 39,935,094 shares acquired under the
second trading line buyback program 2004 were cancelled. On
31December2005, a maximum of1,823,501shares can be issued
against the future exercise of options from former PaineWebber
employee option plans. These shares are shown as conditional
share capital in the UBS AG (Parent Bank) disclosure. Out of

the total number of 104,259,874 treasury shares, 33,885,000
shares (CHF 3,597 million) have been repurchased for cancella-
tion. The Board of Directors will propose to the Annual General
Meeting on 19 April 2006 to reduce the outstanding number
of shares and the share capital by the number of shares pur-
chased for cancellation. All issued shares are fully paid.

77

Financial Statements

Statement of Cash Flows

CHF million

Cash ﬂow from / (used in) operating activities

Net proﬁt

Adjustments to reconcile net proﬁt to cash ﬂow from / (used in) operating activities

Non-cash items included in net proﬁt and other adjustments:

Depreciation of property and equipment

Amortization of goodwill and other intangible assets

Credit loss expense / (recovery)

Equity in income of associates

Deferred tax expense / (beneﬁt)

Net loss / (gain) from investing activities

Net loss / (gain) from ﬁnancing activities

Net (increase) / decrease in operating assets:

Net due from / to banks

Reverse repurchase agreements and cash collateral on securities borrowed

Trading portfolio and net replacement values

Loans / due to customers

Accrued income, prepaid expenses and other assets

Net increase / (decrease) in operating liabilities:

Repurchase agreements and cash collateral on securities lent

Accrued expenses and other liabilities

Income taxes paid

Net cash ﬂow from / (used in) operating activities

Cash ﬂow from / (used in) investing activities

Investments in subsidiaries and associates

Disposal of subsidiaries and associates

Purchase of property and equipment

Disposal of property and equipment

Net (investment in) / divestment of ﬁnancial investments

Net cash ﬂow from / (used in) investing activities

For the year ended

31.12.05

31.12.04

31.12.03

14,690

8,470

6,253

1,556

340

(374)

(152)

(382)

(5,062)

4,025

(1,690)

(127,357)

(74,799)

42,440

(1,227)

71,643

15,536

(2,394)

(63,207)

(1,540)

3,240

(1,892)

270

(2,487)

(2,409)

1,576

1,066

(241 )

(67 )

171

(1,008 )

1,203

(7,471 )

(42,975 )

(19,733 )

10,093

(10,809 )

14,991

22,019

(1,345 )

(24,060 )

(2,511 )

1,277

(1,149 )

704

703

(976 )

1,570

980

102

(138 )

360

(301 )

115

42,916

(101,381 )

(52,193 )

38,636

(20,296 )

65,413

22,420

(1,117 )

3,339

(428 )

1,234

(1,376 )

123

2,317

1,870

78

Statement of Cash Flows (continued)

CHF million

Cash ﬂow from / (used in) ﬁnancing activities

Net money market paper issued / (repaid)

Net movements in treasury shares and own equity derivative activity

Capital issuance

Dividends paid

Issuance of long-term debt, including ﬁnancial liabilities designated at fair value

Repayment of long-term debt, including ﬁnancial liabilities designated at fair value

Increase in minority interests 1

Dividend payments to / purchase from minority interests

Net cash ﬂow from / (used in) ﬁnancing activities

Effects of exchange rate differences

Net increase / (decrease) in cash and cash equivalents

Cash and cash equivalents, beginning of the year

Cash and cash equivalents, end of the year

Cash and cash equivalents comprise:

Cash and balances with central banks

Money market paper 2

Due from banks with original maturity of less than three months

Total

Signiﬁcant non-cash investing and ﬁnancing activities

Provisions for reinstatement costs

Property and equipment

Motor-Columbus, Baden, from valuation at equity to full consolidation

Financial investments

Investments in associates

Property and equipment

Goodwill and other intangible assets

Debt issued

Minority interests

Investment funds transferred to other liabilities according to IAS 32

Minority interests

Private Banks and GAM, deconsolidation

Financial investments

Property and equipment

Goodwill and other intangible assets

Debt issued

Private equity investments, deconsolidation

Property and equipment

Goodwill and other intangible assets

Minority interests

Acquisitions of businesses

Financial investments

Property and equipment

Goodwill and other intangible assets

Minority interests

For the year ended

31.12.05

31.12.04

31.12.03

(14,737 )

(6,810 )

2

(2,298 )

23,644

(13,615 )

419

(278 )

(13,673 )

(524 )

(8,988 )

82,344

73,356

3,584

40,599

29,173

73,356

137

21,379

(4,999 )

2

(2,806 )

51,211

(24,717 )

85

(332 )

39,823

(1,052 )

13,735

73,356

87,091

6,036

45,523

35,532

87,091

644

261

2,083

1,194

727

1,742

336

23,221

(2,416)

2

(3,105)

76,307

(30,457)

1,572

(575)

64,549

5,018

3,951

87,091

91,042

5,359

57,826

27,857

91,042

60

180

362

5

248

3

27

35

112

377

6

2 Money market paper is included 
1 Includes issuance of preferred securities of CHF 1,539 million for the year ended 31 December 2005 and CHF 372 million for the year ended 31 December 2003.
in the balance sheet under Trading portfolio assets and Financial investments. CHF 4,744 million, CHF 5,289 million and CHF 6,430 million were pledged at 31 December 2005, 31 December 2004 and
31 December 2003, respectively.

Cash paid for interest was CHF 44,392 million and CHF 24,192 million for 2005 and 2004 respectively.

79

Financial Statements
Notes to the Financial Statements

Notes to the Financial Statements

Note 1 Summary of Signiﬁcant Accounting Policies

a) Basis of accounting
UBS AG and subsidiaries (“UBS” or the “Group”) provide a
broad range of ﬁnancial services including advisory services,
underwriting, ﬁnancing, market making, asset management
and  brokerage  on  a  global  level,  and  retail  banking  in
Switzerland. The Group was formed on 29 June 1998 when
Swiss  Bank  Corporation  and  Union  Bank  of  Switzerland
merged. The merger was accounted for using the uniting of
interests method of accounting.

The consolidated ﬁnancial statements of UBS (the “Finan-
cial Statements”) are prepared in accordance with Internatio-
nal  Financial  Reporting  Standards  (IFRS),  issued  by  the
International Accounting Standards Board (IASB), and stated
in Swiss francs (CHF), the currency of the country in which
UBS  AG  is  incorporated.  On  2  March  2006,  the  Board  of
Directors approved them for issue.

b) Use of estimates in the preparation of Financial
Statements
In  preparing  the  Financial  Statements,  management  is  re-
quired  to  make  estimates  and  assumptions  that  affect  re-
ported income, expenses, assets, liabilities and disclosure of
contingent assets and liabilities. Use of available information
and application of judgment are inherent in the formation of
estimates. Actual results in the future could differ from such
estimates,  and  the  differences  may  be  material  to  the
Financial Statements.

c) Consolidation
The Financial Statements comprise those of the parent com-
pany (UBS AG), its subsidiaries and certain special purpose en-
tities, presented as a single economic entity. The effects of
intra-group  transactions  are  eliminated  in  preparing  the
Financial Statements. Subsidiaries and special purpose entities
that are directly or indirectly controlled by the Group are con-
solidated.  Subsidiaries  acquired  are  consolidated  from  the
date control is transferred to the Group. Subsidiaries to be di-
vested are consolidated up to the date of disposal. 

Assets held in an agency or ﬁduciary capacity are not as-
sets  of  the  Group  and  are  not  reported  in  the  Financial
Statements.

Equity and net income attributable to minority interests are
shown  separately  in  the  balance  sheet  and  income  state-
ment.

Investments in associates in which UBS has a signiﬁcant
inﬂuence are accounted for under the equity method of ac-
counting. Signiﬁcant inﬂuence is normally evidenced when

80

UBS  owns  20%  or  more  of  a  company’s  voting  rights.
Investments in associates are initially recorded at cost, and the
carrying amount is increased or decreased to recognize the
Group’s share of the investee’s proﬁts or losses after the date
of acquisition. 

Assets and liabilities of subsidiaries and investments in as-
sociates are classiﬁed as “held for sale” if UBS has entered into
an agreement for their disposal within a period of 12 months.
Major lines of business and subsidiaries that were acquired ex-
clusively with the intent for resale are presented as discontin-
ued operations in the income statement in the period where
the  sale  occurred  or  it  becomes  clear  that  a  sale  will  occur
within 12 months. Discontinued operations are presented in
the income statement as a single amount comprising the total
of proﬁt after tax from operations and net gain or loss on sale.
The Group sponsors the formation of entities, which may
or may not be directly or indirectly owned subsidiaries, for the
purpose  of  asset  securitization  transactions  and  structured
debt issuance, and to accomplish certain narrow and well de-
ﬁned objectives. These companies may acquire assets directly
or indirectly from UBS or its afﬁliates. Some of these compa-
nies  are  bankruptcy-remote  entities  whose  assets  are  not
available to satisfy the claims of creditors of the Group or any
of  its  subsidiaries.  Such  companies  are  consolidated  in  the
Group’s Financial Statements when the substance of the re-
lationship  between  the  Group  and  the  company  indicates
that the company is controlled by the Group. Certain trans-
actions of consolidated entities meet the criteria for derecog-
nition of ﬁnancial assets, see section d) below. These transac-
tions do not affect the consolidation status of an entity.

d) Derecognition
UBS enters into transactions where it transfers assets recog-
nized on its balance sheet but retains either all risks and re-
wards of the transferred assets or a portion of them. If all or
substantially  all  risks  and  rewards  are  retained,  the  trans-
ferred assets are not derecognized from the balance sheet.
Transfers of assets with retention of all or substantially all risks
and rewards include, for example, securities lending and re-
purchase transactions described under paragraphs f) and g)
below. They further include transactions where assets are sold
to a third party with a concurrent total rate of return swap on
the  transferred  assets  to  retain  all  their  risks  and  rewards.
These  types  of  transactions  are  accounted  for  as  secured
ﬁnancing transactions similar to repurchase agreements.

In  transactions  where  substantially  all  the  risks  and  re-
wards of ownership of a ﬁnancial asset are neither retained

nor transferred, UBS derecognizes the asset if control over the
asset is lost. The rights and obligations retained in the trans-
fer are recognized separately as assets and liabilities as appro-
priate. In transfers where control over the asset is retained, the
Group continues to recognize the asset to the extent of its con-
tinuing involvement, determined by the extent to which it is
exposed to changes in the value of the transferred asset.

In certain transactions, UBS retains rights to service a trans-
ferred ﬁnancial asset for a fee. The transferred asset is dere-
cognized in its entirety if it meets the derecognition criteria.
An asset or liability is recognized for the servicing rights, de-
pending on whether the servicing fee is more than adequate
to cover servicing expenses (asset) or is less than adequate for
performing the servicing (liability).

e) Securitizations
UBS securitizes various consumer and commercial ﬁnancial
assets, which generally results in the sale of these assets to
special purpose entities, which in turn issue securities to in-
vestors. Interests in the securitized ﬁnancial assets may be re-
tained in the form of senior or subordinated tranches, inter-
est-only strips or other residual interests (‘retained interests’).
Retained interests are primarily recorded in Trading portfolio
assets and carried at fair value. Gains or losses on securitiza-
tion depend in part on the carrying amount of the transferred
ﬁnancial assets, allocated between the ﬁnancial assets dere-
cognized and the retained interests based on their relative fair
values at the date of the transfer. Gains or losses on securiti-
zation are recorded in Net trading income.

f) Securities borrowing and lending
Securities borrowing and securities lending transactions are
generally entered into on a collateralized basis, predominantly
with securities delivered or received as collateral. Transfer of
the  securities  themselves,  whether  in  a  borrowing / lending
transaction or as collateral, is not reﬂected on the balance
sheet  unless  the  risks  and  rewards  of  ownership  are  also
transferred. In such transactions where UBS transfers owned
securities and where the borrower is granted the right to sell
or re-pledge them, the securities are reclassiﬁed on the bal-
ance sheet to Trading portfolio assets pledged as collateral.
Cash collateral received is recognized with a corresponding
obligation to return it (Cash collateral on securities lent). Cash
collateral delivered is derecognized with a corresponding re-
ceivable reﬂecting UBS’s right to receive it back (Cash collat-
eral on securities borrowed).

Securities received in a lending or borrowing transaction
are disclosed as off-balance sheet items if UBS has the right
to resell or re-pledge them, with securities that UBS has actu-
ally resold or re-pledged also disclosed separately.

UBS monitors the market value of securities borrowed and
lent on a daily basis and provides or requests additional col-
lateral  or  recalls  or  returns  surplus  collateral  in  accordance
with the underlying agreements.

Fees and interest received or paid are recognized on an ac-
crual  basis  and  recorded  as  Interest  income  or  Interest  ex-
pense.

g) Repurchase and reverse repurchase transactions
Securities purchased under agreements to resell (Reverse re-
purchase agreements) and securities sold under agreements
to repurchase (Repurchase agreements) are generally treated
as collateralized ﬁnancing transactions. In reverse repurchase
agreements, the cash delivered is derecognized and a corre-
sponding receivable, including accrued interest, is recorded,
recognizing UBS’s right to receive it back (Reverse repurchase
agreements). In repurchase agreements, the cash received, in-
cluding accrued interest, is recognized on the balance sheet
with  a  corresponding  obligation  to  return  it  (Repurchase
agreements).

Securities received under reverse repurchase agreements
and securities delivered under repurchase agreements are not
recognized on or derecognized from the balance sheet, un-
less the risks and rewards of ownership are obtained or relin-
quished. 

UBS monitors the market value of the securities received
or delivered on a daily basis and provides or requests addi-
tional collateral or recalls or returns surplus collateral in accor-
dance with the underlying agreements.

In repurchase agreements where UBS transfers owned se-
curities and where the recipient is granted the right to resell
or re-pledge them, the securities are reclassiﬁed in the balance
sheet  to  Trading  portfolio  assets  pledged  as  collateral.
Securities received in a reverse repurchase agreement are dis-
closed as off-balance sheet items if UBS has the right to resell
or re-pledge them, with securities that UBS has actually resold
or re-pledged also disclosed separately.

Interest earned on reverse repurchase agreements and inter-
est incurred on repurchase agreements is recognized as inter-
est income or interest expense over the life of each agreement.
The Group offsets reverse repurchase agreements and re-
purchase agreements with the same counterparty for trans-
actions covered by legally enforceable master netting agree-
ments when net or simultaneous settlement is intended.

h) Segment reporting
UBS’s ﬁnancial businesses are organized on a worldwide basis
into four Business Groups and the Corporate Center. Global
Wealth Management & Business Banking is segregated into
three segments, Wealth Management International & Swit-
zerland, Wealth Management US and Business Banking Swit-
zerland. The Corporate Center also consists of two segments,
Private Banks & GAM and Corporate Functions. Private Banks
& GAM was sold on 2 December 2005 and are presented as
a discontinued operation in these Financial Statements. The
Industrial  Holdings  segment  holds  all  industrial  operations
controlled by the Group. In total, UBS reports eight business
segments. 

81

Financial Statements
Notes to the Financial Statements

Segment  income,  segment  expenses  and  segment  per-
formance include transfers between business segments and
between  geographical  segments.  Such  transfers  are  con-
ducted either at internally agreed transfer prices or, where
possible, at arm’s length.

i) Foreign currency translation
Foreign currency transactions are recorded at the rate of ex-
change on the date of the transaction. At the balance sheet
date, monetary assets and liabilities denominated in foreign
currencies  are  reported  using  the  closing  exchange  rate.
Exchange  differences  arising  on  the  settlement  of  trans-
actions at rates different from those at the date of the trans-
action, as well as unrealized foreign exchange differences on
unsettled foreign currency monetary assets and liabilities, are
recognized in the income statement.

Unrealized exchange differences on non-monetary ﬁnan-
cial assets (investments in equity instruments) are a compo-
nent of the change in their entire fair value. For a non-mon-
etary ﬁnancial asset classiﬁed as held for trading, unrealized
exchange  differences  are  recognized  in  the  income  state-
ment.  For  non-monetary  ﬁnancial  investments,  which  are
classiﬁed  as  available-for-sale,  unrealized  exchange  differ-
ences are recorded directly in Equity until the asset is sold or
becomes impaired.

When preparing consolidated ﬁnancial statements, assets
and liabilities of foreign entities are translated at the exchange
rates at the balance sheet date, while income and expense
items are translated at weighted average rates for the period.
Differences resulting from the use of closing and weighted 
average exchange rates and from revaluing a foreign entity’s
opening net asset balance at the closing rate are recognized
directly in Foreign currency translation within Equity.

j) Cash and cash equivalents
Cash and cash equivalents consist of Cash and balances with 
central  banks,  balances  included  in  Due  from  banks  with
original maturity of less than three months and Money mar-
ket paper included in Trading portfolio assets and Financial
investments.

k) Fee income
UBS earns fee income from a diverse range of services it pro-
vides to its customers. Fee income can be divided into two
broad categories: income earned from services that are pro-
vided over a certain period of time, for which customers are
generally billed on an annual or semi-annual basis, and in-
come earned from providing transaction-type services. Fees
earned from services that are provided over a certain period
of time are recognized ratably over the service period. Fees
earned  from  providing  transaction-type  services  are  recog-
nized  when  the  service  has  been  completed.  Performance
linked fees or fee components are recognized when the per-
formance criteria are fulﬁlled.

The following fee income is predominantly earned from
services that are provided over a period of time: investment
fund fees, ﬁduciary fees, custodian fees, portfolio and other
management  and  advisory  fees,  insurance-related  fees,
credit-related  fees  and  commission  income.  Fees  predomi-
nantly  earned  from  providing  transaction-type  services  in-
clude underwriting fees, corporate ﬁnance fees and broker-
age fees.

l) Determination of fair value
The determination of fair values of ﬁnancial assets and ﬁnan-
cial liabilities is based on quoted market prices or dealer price
quotations for ﬁnancial instruments traded in active markets.
For  all  other  ﬁnancial  instruments  fair  value  is  determined
using valuation techniques. Valuation techniques include net
present value techniques, the discounted cash ﬂow method,
comparison to similar instruments for which market observ-
able prices exist and valuation models. UBS uses widely rec-
ognized valuation models for determining fair value of com-
mon and more simple ﬁnancial instruments like options or in-
terest  rate  and  currency  swaps.  For  these  ﬁnancial  instru-
ments, inputs into models are market-observable.

For more complex instruments, UBS uses internally devel-
oped models, which are usually based on valuation methods
and techniques generally recognized as standard within the
industry. Some of the inputs to these models may not be mar-
ket-observable and are therefore estimated based on assump-
tions.  When  entering  into  a  transaction  where  any  model
input is unobservable, the ﬁnancial instrument is initially rec-
ognized at the transaction price, which is the best indicator
of fair value. This may differ from the value obtained from the
valuation model. The timing of the recognition in income of
this initial difference in fair value depends on the individual
facts and circumstances of each transaction but is never later
than when the market data become observable.

The output of a model is always an estimate or approxi-
mation of a value that cannot be determined with certainty,
and valuation techniques employed may not fully reﬂect all
factors  relevant  to  the  positions  UBS  holds.  Valuations  are
therefore adjusted, where appropriate, to allow for additional
factors including model risks, liquidity risk and counterparty
credit risk. Management believes that these valuation adjust-
ments are necessary and appropriate to fairly state the values
of ﬁnancial instruments carried at fair value on the balance
sheet.

m) Trading portfolio
Trading portfolio assets consist of money market paper, other
debt instruments, including traded loans, equity instruments,
precious metals and commodities owned by the Group (‘long’
positions). Trading portfolio liabilities consist of obligations to
deliver trading securities such as money market paper, other
debt  instruments  and  equity  instruments  which  the  Group
has sold to third parties but does not own (’short’ positions).

82

The  trading  portfolio  is  carried  at  fair  value.  Gains  and
losses realized on disposal or redemption and unrealized gains
and losses from changes in the fair value of trading portfolio
assets or liabilities are reported as Net trading income. Interest
and dividend income and expense on trading portfolio assets
or liabilities are included in Interest and dividend income or
Interest and dividend expense.

The Group uses settlement date accounting when record-
ing trading portfolio transactions. It recognizes from the date
the  transaction  is  entered  into  (trade  date)  any  unrealized
proﬁts and losses arising from revaluing that contract to fair
value in the income statement. When the transaction is con-
summated (settlement date), a resulting ﬁnancial asset or li-
ability is recognized on the balance sheet at the fair value of
the consideration given or received plus or minus the change
in fair value of the contract since the trade date. When the
Group becomes party to a sales contract of a ﬁnancial asset
classiﬁed in its trading portfolio, it derecognizes the asset on
the day of its transfer.

n) Financial instruments designated as held at fair value
through proﬁt and loss
UBS has designated almost all of its issued compound debt
instruments as ﬁnancial liabilities held at fair value through
proﬁt and loss. These liabilities are presented in a separate line
on the face of the balance sheet. In addition, a small amount
of ﬁnancial assets has been designated as ﬁnancial assets held
at fair value through proﬁt and loss, and they are likewise pre-
sented in a separate line. A ﬁnancial instrument may only be
designated at inception as held at fair value through proﬁt
and loss and cannot subsequently be changed. When adopt-
ing revised IAS 39 on 1 January 2004, the Group designated
approximately CHF 35.3 billion of existing issued compound
debt instruments as held at fair value through proﬁt and loss
in accordance with the revised standard’s transition guidance.
All fair value changes related to ﬁnancial instruments held at
fair value through proﬁt and loss are recognized in Net trad-
ing income.

o) Derivative instruments and hedging
All derivative instruments are carried at fair value on the bal-
ance sheet and are reported as Positive replacement values or
Negative replacement values. Where the Group enters into
derivatives for trading purposes, realized and unrealized gains
and losses are recognized in Net trading income.

The Group also uses derivative instruments as part of its
asset  and  liability  management  activities  to  manage  expo-
sures to interest rate, foreign currency and credit risks, includ-
ing exposures arising from forecast transactions. The Group
applies either fair value or cash ﬂow hedge accounting when
transactions meet the speciﬁed criteria to obtain hedge ac-
counting treatment.

At the time a ﬁnancial instrument is designated as a hedge,
the Group formally documents the relationship between the

hedging instrument(s) and hedged item(s), including the risk
management  objectives  and  strategy  in  undertaking  the
hedge transaction, together with the methods that will be
used to assess the effectiveness of the hedging relationship.
Accordingly, the Group assesses, both at the inception of the
hedge and on an ongoing basis, whether the hedging deriv-
atives have been “highly effective” in offsetting changes in
the fair value or cash ﬂows of the hedged items. A hedge is
normally  regarded  as  highly  effective  if,  at  inception  and
throughout its life, the Group can expect, and actual results
indicate, that changes in the fair value or cash ﬂows of the
hedged item are effectively offset by the changes in the fair
value or cash ﬂows of the hedging instrument and that ac-
tual results are within a range of 80% to 125%. In the case
of hedging a forecast transaction, the transaction must have
a high probability of occurring and must present an exposure
to variations in cash ﬂows that could ultimately affect the re-
ported Net proﬁt or loss. The Group discontinues hedge ac-
counting when it determines that a derivative is not, or has
ceased to be, highly effective as a hedge; when the derivative
expires or is sold, terminated or exercised; when the hedged
item matures or is sold or repaid; or when a forecast transac-
tion is no longer deemed highly probable.

Hedge ineffectiveness represents the amount by which the
changes in the fair value of the hedging derivative differ from
changes in the fair value of the hedged item or the amount
by which changes in the cash ﬂow of the hedging derivative
differ from changes (or expected changes) in the cash ﬂow of
the hedged item. Such gains and losses are recorded in cur-
rent period earnings in Net trading income, as are gains and
losses  on  components  of  a  hedging  derivative  that  are  ex-
cluded from assessing hedge effectiveness.

For qualifying fair value hedges, the change in fair value of
the hedging derivative is recognized in Net proﬁt and loss.
Those changes in fair value of the hedged item that are attrib-
utable to the risks hedged with the derivative instrument are
reﬂected in an adjustment to the carrying value of the hedged
item, which is also recognized in Net proﬁt or loss. The fair
value change of the hedged item in a portfolio hedge of in-
terest rate risks is reported separately from the hedged port-
folio in Other assets or Other liabilities as appropriate. If the
hedge relationship is terminated for reasons other than the
derecognition of the hedged item, the difference between the
carrying value of the hedged item at that point and the value
at which it would have been carried had the hedge never ex-
isted (the “unamortized fair value adjustment”), is, in the case
of interest bearing instruments, amortized to Net proﬁt and
loss over the remaining term of the original hedge, while for
non-interest bearing instruments that amount is immediately
recognized in earnings. If the hedged item is derecognized,
e.g. due to sale or repayment, the unamortized fair value ad-
justment  is  recognized  immediately  in  Net  proﬁt  and  loss.
A fair value gain or loss associated with the effective por-
tion of a derivative designated as a cash ﬂow hedge is recog-

83

Financial Statements
Notes to the Financial Statements

nized  initially  in  Equity  attributable  to  UBS  shareholders.
When the cash ﬂows that the derivative is hedging material-
ize, resulting in income or expense, then the associated gain
or loss on the hedging derivative is simultaneously transferred
from  Equity  attributable  to  UBS  shareholders  to  the  corre-
sponding income or expense line item.

If a cash ﬂow hedge for a forecast transaction is deemed
to be no longer effective, or if the hedge relationship is ter-
minated, the cumulative gain or loss on the hedging deriva-
tive previously reported in Equity attributable to UBS share-
holders remains there until the committed or forecast trans-
action occurs or is no longer probable of occurring, at which
point it is transferred to the income statement.

Derivative instruments transacted as economic hedges but
not qualifying for hedge accounting are treated in the same
way as derivative instruments used for trading purposes, i.e.
realized and unrealized gains and losses are recognized in Net
trading income. In particular, the Group has entered into eco-
nomic hedges of credit risk within the loan portfolio using
credit default swaps to which it cannot apply hedge account-
ing. In the event that the Group recognizes an impairment on
a loan that is economically hedged in this way, the impairment
is recognized in Credit loss expense, whereas any gain on the
credit  default  swap  is  recorded  in  Net  trading  income,  see
Note 22 for additional information.

A derivative may be embedded in a ‘host contract’. Such
combinations are known as compound instruments and arise
predominantly from the issuance of certain structured debt in-
struments. If the host contract is not carried at fair value with
changes in fair value reported in Net proﬁt and loss, the em-
bedded derivative is separated from the host contract and ac-
counted for as a stand-alone derivative instrument at fair value
if the economic characteristics and risks of the embedded de-
rivative are not closely related to the economic characteristics
and risks of the host contract and the embedded derivative ac-
tually meets the deﬁnition of a derivative.

p) Loans
Loans include loans originated by the Group where money is
provided directly to the borrower, participation in a loan from
another lender and purchased loans that are not quoted in
an active market and for which no intention of immediate or
short-term resale exists. Originated and purchased loans that
are  intended  to  be  sold  in  the  short  term  are  recorded  as
Trading portfolio assets. 

Loans are recognized when cash is advanced to borrow-
ers. They are initially recorded at fair value, which is the cash
given to originate the loan, plus any transaction costs, and are
subsequently measured at amortized cost using the effective
interest rate method.

Interest on loans is included in Interest earned on loans and
advances and is recognized on an accrual basis. Fees and di-
rect costs relating to loan origination, reﬁnancing or restruc-
turing and to loan commitments are deferred and amortized

to Interest earned on loans and advances over the life of the
loan using the straight-line method which approximates the
effective interest rate method. Fees received for commitments
that are not expected to result in a loan are included in Credit-
related fees and commissions over the commitment period.
Loan syndication fees where UBS does not retain a portion of
the syndicated loan are credited to commission income. 

q) Allowance and provision for credit losses 
An allowance or provision for credit losses is established if
there is objective evidence that the Group will be unable to
collect all amounts due on a claim according to the original
contractual terms or the equivalent value. A ‘claim’ means a
loan carried at amortized cost, a commitment such as a let-
ter of credit, a guarantee, a commitment to extend credit or
other credit product. 

An allowance for credit losses is reported as a reduction of
the carrying value of a claim on the balance sheet, whereas
for an off-balance sheet item such as a commitment a provi-
sion for credit loss is reported in Other liabilities. Additions to
the  allowances  and  provisions  for  credit  losses  are  made
through Credit loss expense.

Allowances and provisions for credit losses are evaluated
at a counterparty-speciﬁc level and collectively based on the
following principles:

Counterparty-speciﬁc: a claim is considered impaired when
management determines that it is probable that the Group
will not be able to collect all amounts due according to the
original contractual terms or the equivalent value.

Individual  credit  exposures  are  evaluated  based  on  the
borrower’s  character,  overall  ﬁnancial  condition,  resources
and  payment  record;  the  prospects  for  support  from  any
ﬁnancially responsible guarantors; and, where applicable, the
realizable value of any collateral.

The  estimated  recoverable  amount  is  the  present  value,
using the loan’s original effective interest rate, of expected fu-
ture cash ﬂows, that may result from restructuring or liquida-
tion. Impairment is measured and allowances for credit losses
are  established  for  the  difference  between  the  carrying
amount and the estimated recoverable amount.

Upon impairment, the accrual of interest income based on
the  original  terms  of  the  claim  is  discontinued,  but  the  in-
crease of the present value of impaired claims due to the pas-
sage of time is reported as Interest income.

All impaired claims are reviewed and analyzed at least an-
nually. Any subsequent changes to the amounts and timing
of the expected future cash ﬂows compared with the prior es-
timates result in a change in the allowance for credit losses
and are charged or credited to Credit loss expense. 

An allowance for impairment is reversed only when the
credit quality has improved to such an extent that there is rea-
sonable assurance of timely collection of principal and inter-
est in accordance with the original contractual terms of the
claim agreement.

84

A write-off is made when all or part of a claim is deemed
uncollectible or forgiven. Write-offs are charged against pre-
viously established allowances for credit losses or directly to
Credit  loss  expense  and  reduce  the  principal  amount  of  a
claim. Recoveries in part or in full of amounts previously writ-
ten off are credited to Credit loss expense.

A loan is classiﬁed as non-performing when the payment
of interest, principal or fees is overdue by more than 90 days
and there is no ﬁrm evidence that they will be made good by
later payments or the liquidation of collateral, or when insol-
vency  proceedings  have  commenced,  or  when  obligations
have been restructured on concessionary terms. 

Collectively: all loans for which no impairment is identiﬁed
on a counterparty-speciﬁc level are grouped into portfolios
with  similar  credit  risk  characteristics  to  collectively  assess
whether  impairment  exists  within  a  portfolio.  Allowances
from collective assessment of impairment are recognized as
Credit loss expense and result in an offset to the loan posi-
tion. As the allowance cannot be allocated to individual loans,
interest is accrued on all loans according to contractual terms.
Where, in management’s opinion, it is probable that some
claims or obligors in a country are affected by a systemic cri-
sis,  transfer  restrictions  or  non-enforceability,  country  al-
lowances and provisions for probable losses are established.
They are based on country-speciﬁc scenarios, taking into con-
sideration the nature of the individual exposures but exclud-
ing  those  amounts  covered  by  counterparty-speciﬁc  al-
lowances and provisions. Such country allowances and pro-
visions  are  part  of  the  collectively  assessed  loan  loss  al-
lowances and provisions.

r) Financial investments
Financial investments are classiﬁed as available-for-sale and
recorded on a settlement date basis. Available-for-sale ﬁnan-
cial investments are instruments that, in management’s opin-
ion, may be sold in response to or in anticipation of needs for
liquidity or changes in interest rates, foreign exchange rates
or equity prices. Financial investments consist of money mar-
ket paper, other debt instruments and equity instruments, in-
cluding certain private equity investments. 

Available-for-sale ﬁnancial investments are carried at fair
value. Unrealized gains or losses on available-for-sale invest-
ments are reported in Equity attributable to UBS sharehold-
ers, net of applicable income taxes, until such investments are
sold, collected or otherwise disposed of, or until such invest-
ment is determined to be impaired. On disposal of an avail-
able-for-sale investment, the accumulated unrealized gain or
loss  included  in  Equity  attributable  to  UBS  shareholders  is
transferred to Net proﬁt and loss for the period and reported
in Other income. Gains and losses on disposal are determined
using the average cost method.

Interest and dividend income on available-for-sale ﬁnancial
investments is included in Interest and dividend income from
ﬁnancial investments.

If an available-for-sale investment is determined to be im-
paired, the cumulative unrealized loss previously recognized in
Equity attributable to UBS shareholders is included in Net proﬁt
and loss for the period and reported in Other income. A ﬁnan-
cial investment is considered impaired if its cost exceeds the
recoverable amount. For non-quoted equity investments, the
recoverable amount is determined by applying recognized val-
uation techniques. The standard method applied is based on
the multiple of earnings observed in the market for compa-
rable companies. Management may adjust valuations deter-
mined in this way based on its judgment. For quoted ﬁnancial
investments, the recoverable amount is determined by refer-
ence to the market price. They are considered impaired if ob-
jective evidence indicates that the decline in market price has
reached such a level that recovery of the cost value, adjusted
for impairments recognized in prior periods as applicable, can-
not  be  reasonably  expected  within  the  foreseeable  future.

s) Property and equipment
Property  and  equipment  includes  own-used  properties,  in-
vestment  properties,  leasehold  improvements,  IT,  software
and  communication,  plant  and  manufacturing  equipment,
and other machines and equipment.

Own-used  property  is  deﬁned  as  property  held  by  the
Group for use in the supply of services or for administrative
purposes, whereas investment property is deﬁned as property
held to earn rental income and / or for capital appreciation. If
a property of the Group includes a portion that is own-used
and another portion that is held to earn rental income or for
capital appreciation, the classiﬁcation is based on whether or
not these portions can be sold separately. If the portions of
the property can be sold separately, they are accounted for as
own-used property and investment property. If the portions
cannot be sold separately, the whole property is classiﬁed as
own-used  property  unless  the  portion  used  by  the  bank  is
minor. The classiﬁcation of property is reviewed on a regular
basis to account for major changes in its usage.

Leasehold  improvements  are  investments  made  to  cus-
tomize buildings and ofﬁces occupied under operating lease
contracts to make them suitable for the intended purpose.
The present value of estimated reinstatement costs to bring
a leased property into its original condition at the end of the
lease, if required, is capitalized as part of the total leasehold
improvements costs. At the same time, a corresponding li-
ability is recognized to reﬂect the obligation incurred. Rein-
statement costs are recognized in proﬁt and loss through de-
preciation  of  the  capitalized  leasehold  improvements  over
their estimated useful life.

Software  development  costs  are  capitalized  when  they
meet certain criteria relating to identiﬁability, it is probable
that future economic beneﬁts will ﬂow to the enterprise, and
the cost can be measured reliably. Internally developed soft-
ware meeting these criteria and purchased software is classi-
ﬁed within IT, software and communication.

85

Financial Statements
Notes to the Financial Statements

Plant  and  manufacturing  equipment  include  primarily
thermal and hydroelectric power plants and power transmis-
sion grids and equipment. The useful life is estimated based
on the economic utilization of the asset, or for power plants
on the end of operating life.

With the exception of investment properties, Property and
equipment  is  carried  at  cost  less  accumulated  depreciation
and accumulated impairment losses. Property and equipment
is periodically reviewed for impairment.

Property and equipment is depreciated on a straight-line

basis over its estimated useful life as follows:

Properties, excluding land

Leasehold improvements

Other machines and equipment

IT, software and communication

Plant and manufacturing equipment:

– Power plants

– Transmission grids and equipment

Not exceeding 50 years

Residual lease term,
but not exceeding 10 years

Not exceeding 10 years

Not exceeding 5 years

25 to 80 years

15 to 40 years

Property formerly own-used or leased to third parties under
an operating lease and equipment the Group has decided to
sell are classiﬁed as assets held for sale and recorded in Other
assets. Upon classiﬁcation as held for sale, they are no longer
depreciated and are carried at the lower of book value or fair
value  less  costs  to  sell.  Foreclosed  property  is  deﬁned  as
Properties held for resale and recorded in Other assets. They
are carried at the lower of cost and recoverable value. 

Investment property is carried at fair value with changes in
fair value recognized in the income statement in the period
of change. UBS employs internal real estate experts who de-
termine the fair value of investment property by applying rec-
ognized valuation techniques. In cases where prices of recent
market transactions of comparable properties are available,
fair value is determined by reference to these transactions.

t) Goodwill and other intangible assets
Goodwill represents the excess of the cost of an acquisition over
the fair value of the Group’s share of net identiﬁable assets of
the acquired entity at the date of acquisition. Goodwill is not
amortized  but  tested  annually  for 
impairment.  Until
31 December 2004, goodwill acquired in business combina-
tions entered into prior to 31 March 2004 was amortized over
its  estimated  useful  economic  life,  not  exceeding  20  years,
using  the  straight-line  method.  The  impairment  test  is  con-
ducted at the segment level as reported in Note 2a. The segment
has been determined as the cash generating unit for impair-
ment testing purposes as this is the level at which the perform-
ance of investments is reviewed and assessed by management.
Other intangible assets comprise separately identiﬁable in-
tangible items arising from acquisitions and certain purchased
trademarks and similar items. Other intangible assets are rec-
ognized on the balance sheet at cost determined at the date

of  acquisition  and  are  amortized  using  the  straight-line
method over their estimated useful economic life, generally
not exceeding 20 years. At each balance sheet date, other in-
tangible assets are reviewed for indications of impairment or
changes in estimated future beneﬁts. If such indications exist,
the intangible assets are analyzed to assess whether their car-
rying amount is fully recoverable. A write-down is made if the
carrying amount exceeds the recoverable amount.

Intangible  assets  are  classiﬁed  into  two  categories:
Infrastructure, and Customer relationships, contractual rights
and other. Infrastructure includes one intangible asset recog-
nized  in  connection  with  the  acquisition  of  PaineWebber
Group,  Inc.  Customer  relationships,  contractual  rights  and
other include customer relationship intangibles from the ac-
quisition of ﬁnancial services businesses as well as from the ac-
quisition of Motor-Columbus, where other contractual rights
from delivery and supply contracts were identiﬁed. These con-
tractual  rights  are  amortized  over  the  remaining  contract
terms, which are up to 24 years at 31 December 2005. The
most signiﬁcant contract, however, is amortized over its re-
maining contract life of six years at 31 December 2005, which
is the shortest useful life of all contractual rights recognized.

u) Income taxes
Income tax payable on proﬁts is recognized as an expense
based on the applicable tax laws in each jurisdiction in the pe-
riod in which proﬁts arise. The tax effects of income tax losses
available for carry-forward are recognized as a deferred tax
asset if it is probable that future taxable proﬁt will be avail-
able against which those losses can be utilized.

Deferred tax liabilities are recognized for temporary differ-
ences between the carrying amounts of assets and liabilities in
the balance sheet and their amounts as measured for tax pur-
poses, which will result in taxable amounts in future periods.
Deferred tax assets are recognized for temporary differences
that will result in deductible amounts in future periods, but only
to the extent it is probable that sufﬁcient taxable proﬁts will be
available against which these differences can be utilized.

Deferred tax assets and liabilities are measured at the tax
rates that are expected to apply in the period in which the
asset will be realized or the liability will be settled based on
enacted rates.

Current as well as deferred tax assets and liabilities are off-
set when they arise from the same tax reporting group, relate
to the same tax authority, the legal right to offset exists, and
they are intended to be settled net or realized simultaneously.
Current and deferred taxes are recognized as Income tax
beneﬁt or expense except for (i) deferred taxes recognized or
disposed of upon the acquisition or disposal of a subsidiary,
and (ii) unrealized gains or losses on available-for-sale invest-
ments and changes in fair value of derivative instruments des-
ignated as cash ﬂow hedges, which are recorded net of taxes
in Net gains or losses not recognized in the income statement
within Equity attributable to UBS shareholders.

86

v) Debt issued
Debt issued is initially measured at fair value, which is the con-
sideration received, net of transaction costs incurred. Subse-
quent measurement is at amortized cost, using the effective
interest rate method to amortize cost at inception to the re-
demption value over the life of the debt.

Compound  debt  instruments  that  are  related  to  non-
UBS AG equity instruments, foreign exchange, credit instru-
ments  or  indices  are  considered  structured  instruments.  If
such  instruments  have  not  been  designated  at  fair  value
through proﬁt and loss, the embedded derivative is separated
from the host contract and accounted for as a stand-alone de-
rivative if the criteria for separation are met. The host contract
is subsequently measured at amortized cost. UBS has desig-
nated most of its structured debt instruments as held at fair
value through proﬁt and loss, see section n).

Debt  instruments  with  embedded  derivatives  that  are
related to UBS AG shares or to a derivative instrument that
has UBS AG shares as its underlying are separated into a lia-
bility and an equity component at issue date if they require
physical  settlement.  Initially,  a  portion  of  the  net  proceeds
from issuing the compound debt instrument is allocated to
the  debt  component  based  on  its  fair  value. The  determi-
nation  of  fair  value  is  generally  based  on  quoted  market
prices for UBS debt instruments with comparable terms. The
liability component is subsequently measured at amortized
cost. The remaining amount is allocated to the equity com-
ponent and reported in Share premium. Subsequent changes
in fair value of the separated equity component are not rec-
ognized. However, if the compound instrument or the em-
bedded derivative related to UBS AG shares is cash settled
or if it contains a settlement alternative, then the separated
derivative  is  accounted  for  as  a  trading  instrument,  with
changes in fair value recorded in income or the entire com-
pound instrument is designated as held at fair value through
proﬁt and loss.

It  is  the  Group’s  policy  to  hedge  the  ﬁxed  interest  rate
risk on  debt  issues  (except  for  certain  subordinated  long-
term note  issues,  see  Note  29),  and  to  apply  fair  value
hedge accounting.  When  hedge  accounting  is  applied  to
ﬁxed-rate  debt  instruments,  the  carrying  values  of  debt  is-
sues are  adjusted  for  changes  in  fair  value  related  to  the
hedged  exposure  rather  than  carried  at  amortized  cost.
See o) Derivative  instruments  and  hedging  for  further  dis-
cussion.

Own bonds held as a result of market making activities
or deliberate  purchases  in  the  market  are  treated  as  a  re-
demption of debt. A gain or loss on redemption is recorded
depending  on  whether  the  repurchase  price  of  the  bond
was lower  or  higher  than  its  carrying  value.  A  subsequent
sale of own bonds in the market is treated as a reissuance of
debt.

Interest expense on debt instruments is included in Interest

on debt issued.

w) Treasury shares and contracts on UBS shares
UBS  AG  shares  held  by  the  Group  are  classiﬁed  in  Equity
attributable  to  UBS  shareholders  as  Treasury  shares  and
accounted  for  at  weighted  average  cost.  The  difference
between the proceeds from sales of treasury shares and their
cost (net of tax, if any) is classiﬁed as Share premium.

Contracts  that  require  physical  settlement  in  UBS  AG
shares  are  classiﬁed  as  Equity  attributable  to  UBS  share-
holders and reported as Share premium. Upon settlement of
such contracts, the proceeds received – less cost (net of tax,
if any) – are reported as Share premium.

Contracts on UBS AG shares that require net cash settle-
ment or provide for a choice of settlement are classiﬁed as
trading instruments, with the changes in fair value reported
in the income statement.

An  exception  to  this  treatment  are  physically  settled
written put options and forward share purchase contracts,
including  contracts  where  physical  settlement  is  a  settle-
ment alternative.  In  both  cases,  the  present  value  of  the
obligation  to  purchase  own  shares  in  exchange  for  cash  is
transferred  out  of  Equity  attributable  to  UBS  shareholders
and recognized as a liability at inception of a contract. The
liability is subsequently accreted, using the effective interest
rate  method,  over  the  life  of  the  contract  to  the  nominal
purchase  obligation  by  recognizing  interest  expense.  Upon
settlement  of  a  contract,  the  liability  is  derecognized,  and
the amount of equity originally transferred to liability is re-
classiﬁed within Equity attributable to UBS shareholders to
Treasury shares. The premium received for writing put options
is recognized directly in Share premium.

x) Retirement beneﬁts
UBS sponsors a number of retirement beneﬁt plans for its em-
ployees worldwide. These plans include both deﬁned beneﬁt
and deﬁned contribution plans and various other retirement
beneﬁts such as post-employment medical beneﬁts. Contri-
butions to deﬁned contribution plans are expensed when em-
ployees have rendered services in exchange for such contri-
butions, generally in the year of contribution.

The Group uses the projected unit credit actuarial method
to determine the present value of its deﬁned beneﬁt plans
and the related service cost and, where applicable, past serv-
ice cost.

The principal actuarial assumptions used by the actuary are

set out in Note 30.

The Group recognizes a portion of its actuarial gains and
losses as income or expense if the net cumulative unrecog-
nized actuarial gains and losses at the end of the previous re-
porting period are outside the corridor deﬁned as the greater
of:

a) 10% of present value of the deﬁned beneﬁt obligation at that date (before

deducting plan assets); and

b) 10% of the fair value of any plan assets at that date.

87

Financial Statements
Notes to the Financial Statements

The unrecognized actuarial gains and losses exceeding the
greater  of  these  two  values  are  recognized  in  the  income
statement over the expected average remaining working lives
of the employees participating in the plans.

If an excess of the fair value of the plan assets over the
present value of the deﬁned beneﬁt obligation cannot be re-
covered fully through refunds or reductions in future contri-
butions, no gain is recognized solely as a result of deferral of
an actuarial loss or past service cost in the current period, and
no loss is recognized solely as a result of deferral of an actu-
arial gain in the current period.

y) Equity participation plans
UBS provides various equity participation plans in the form of
stock plans and stock option plans. UBS recognizes the fair
value  of  stock  and  stock  option  awards  determined  at  the
date  of  grant  as  compensation  expense  over  the  required
service period, which generally is equal to the vesting period.
The fair value of stock awards is equal to the market price at
the date of grant. For stock options, fair value is determined
using a proprietary option valuation model that reﬂects em-
ployees’ exercise behavior and the speciﬁc terms and condi-
tions  under  which  the  options  are  granted.  Equity-settled
awards are classiﬁed as equity instruments and are not re-
measured subsequent to the grant date, unless an award is
modiﬁed such that its fair value immediately after modiﬁca-
tion exceeds its fair value immediately prior to modiﬁcation.
Any increase in fair value resulting from a modiﬁcation is rec-
ognized as compensation expense, either over the remaining
service period or immediately for vested awards.

Cash settled awards are classiﬁed as liabilities and re-measured
to fair value at each balance sheet date as long as they are out-
standing. Decreases in fair value reduce compensation expense,
and no compensation expense, on a cumulative basis, is recog-
nized  for  awards  that  expire  worthless  or  remain  unexercised.
Plans  where  participants  have  the  option  to  roll  stock-based
awards into alternative investments are treated as cash settled. 

z) Earnings per share (EPS)
Basic earnings per share are calculated by dividing the Net
proﬁt and loss for the period attributable to ordinary share-
holders by the weighted average number of ordinary shares
outstanding during the period.

Diluted earnings per share are calculated using the same
method as for basic EPS, but the determinants are adjusted to
reﬂect the potential dilution that could occur if options, war-
rants, convertible debt securities or other contracts to issue or-
dinary shares were converted or exercised into ordinary shares.

aa) Changes in accounting policies and comparability
Private equity investments
On 1 January 2005, UBS adopted revised IAS 27 Consolidated
and  Separate  Financial  Statements and  revised  IAS  28
Investments in Associates.

IAS  27  was  amended  to  eliminate  the  exemption  from
consolidating  a  subsidiary  where  control  is  exercised  tem-
porarily. UBS has several private equity investments where it
owns a controlling interest that used to be classiﬁed and ac-
counted for as Financial investments available-for-sale. UBS
adopted IAS 27 on1 January 2005 retrospectively and restated
comparative  prior  years  2004  and  2003. The  effect  of  the
adoption and consolidating these investments was as follows:
at 1 January 2003, equity including minority interests was re-
duced  by  CHF  723  million,  representing  the  difference  be-
tween the carrying value as Financial investments available-
for-sale and the book value on a consolidated basis. Consoli-
dation led to recognition of total assets in the amount of CHF
1.7 billion and CHF 2.9 billion at 31 December 2004 and 2003
respectively. Signiﬁcant balance sheets line items affected in-
clude  Property  and  equipment,  Intangible  assets,  Goodwill
and Other assets. These investments generated additional op-
erating income of CHF 2.5 billion and CHF 2.7 billion in 2004
and 2003 respectively and additional Net proﬁt attributable
to UBS shareholders of CHF 142 million and CHF 74 million
in 2004 and 2003 respectively.

IAS 28 was likewise amended to eliminate the exemption
from equity method accounting for investments that are held
exclusively for disposal. Private equity investments where UBS
has signiﬁcant inﬂuence are now accounted for using the eq-
uity  method  whereas  they  were  previously  classiﬁed  as
Financial  investments  available-for-sale.  The  adoption  was
made retrospectively from 1 January 2003 and prior periods
were restated. Application of the equity method of account-
ing  for  these  investments  had  the  following  effects:  on
1 January 2003, opening equity was debited by CHF 266 mil-
lion, representing the difference between the carrying value
as Financial investments available-for-sale and the book value
on an equity method basis. The carrying value of these equity
method investments was CHF 248 million and CHF 393 mil-
lion at 31 December 2004 and 2003 respectively, which in-
cludes equity in losses of CHF 55 million and gains of CHF 10
million recognized in the income statement in 2004 and 2003
respectively. Gains on sale recognized in 2004 and 2003 were
CHF 1 million and zero respectively. When accounted for as
Financial investments available-for-sale, gains on sale recog-
nized  were  CHF  70  million  in  2004  and  CHF  34  million  in
2003.

These entities, along with all other investments made by
the private equity business unit, were reclassiﬁed from the
Investment Bank segment to the Industrial Holdings segment
effective 1 January 2005. In addition, nine of the newly con-
solidated investments held at 1 January 2003 were sold after
that date and are presented as Discontinued operations in the
restated comparative prior periods in accordance with IFRS 5
which  is  discussed  below.  Gain  on  sale  in  the  amount  of
CHF 90 million and CHF 194 million were reported in 2004
and 2003 in connection with private equity investments sold
after 1 January 2003. On a restated basis, the Net proﬁt from

88

discontinued operations related to these entities was CHF 145
million and CHF 186 million in 2004 and 2003 respectively.

IFRS 2 Share-based Payment
In February 2004, the IASB issued IFRS 2 Share-based Pay-
ment, which  requires  share-based  payments  made  to  em-
ployees and non-employees to be recognized in the ﬁnan-
cial statements based on the fair value of these awards meas-
ured at the date of grant. UBS adopted the new standard on
1 January 2005 and fully restated the two comparative prior
years. In accordance with IFRS 2, UBS applied the new require-
ments of the standard to all prior period awards that affect
income  statements  commencing  1  January  2003.  This  in-
cludes all unvested equity settled awards and all outstanding
cash settled awards on 1 January 2003. The effects of restate-
ment were as follows: the opening balance of retained earn-
ings  at  1  January  2003  was  credited  by  CHF  559  million.
Additional compensation expense of zero and CHF 558 mil-
lion  was  recognized  in  2004  and  2003  respectively.  The
change in compensation expense is attributable to the ﬁrst-
time recognition of compensation expense for the fair value
of share options, as well as the recognition of expense for
share awards over the vesting period. Previously, share awards
were recognized as compensation expense in the perform-
ance year, which is generally the year prior to grant. The rea-
son for the zero impact in 2004 was that a signiﬁcantly higher
amount of bonus payments were made in the form of share
awards rather than cash. The reversal of compensation ex-
pense attributable to these share payments offsets the effect
from recognizing options at fair value and share awards made
prior to 2004 over the vesting period.

UBS introduced a new valuation model to determine the
fair value of share options granted in 2005 and later. Share op-
tions granted in 2004 and earlier were not affected by this
change in valuation model. As part of the implementation of
IFRS 2, UBS thoroughly reviewed the option valuation model
employed in the past by comparing it with alternative mod-
els. As a result of this review, a valuation model was identiﬁed
that better reﬂects the exercise behavior of employees and the
speciﬁc terms and conditions under which the share options
are  granted.  Concurrent  with  the  introduction  of  the  new
model, UBS is using implied and historical volatility as inputs.
UBS  also  has  employee  beneﬁt  trusts  that  are  used  in
connection  with  share-based  payment  arrangements  and
deferred compensation schemes. In connection with the is-
suance of IFRS 2, the IFRIC amended SIC 12 Consolidation –
Special Purpose Entities, an interpretation of IAS 27, to elim-
inate  the  scope  exclusion  for  equity  compensation  plans.
Therefore, pursuant to the criteria set out in SIC 12, an entity
that controls an employee beneﬁt trust (or similar entity) set
up for the purpose of a share-based payment arrangement is
required to consolidate that trust. Consolidating these trusts
had the following effects: on 1 January 2003, no adjustment
to opening retained earnings was made as assets and liabili-

ties of the trusts were equal. Consolidation led to recognition
of total assets in the amount of CHF 1.1 billion and CHF 1.3
billion and liabilities of CHF 1.1 billion and CHF 1.3 billion at
31  December  2004  and  2003  respectively.  The  amount  of
treasury shares increased by CHF 2,029 million and CHF 1,474
million  at  31  December  2004  and  2003  respectively.  The
weighted average number of treasury shares held by these
trusts was 22,995,954 in 2004 and 30,792,147 in 2003, thus
decreasing the denominator used to calculate basic earnings
per  share.  The  reduction  in  weighted  average  shares  out-
standing increased basic earnings per share, but had no im-
pact on diluted earnings per share as the additional treasury
shares will be fully added back for calculating diluted earn-
ings per share.

Goodwill and Intangible Assets
On 31 March 2004, the IASB issued IFRS 3 Business Combi-
nations, revised IAS 36 Impairment of Assets and revised IAS
38  Intangible  Assets.  UBS  prospectively  adopted  the  stan-
dards for goodwill and intangible assets existing at 31 March
2004 on 1 January 2005, whereas goodwill and intangible as-
sets  recognized  from  business  combinations  entered  into
after 31 March 2004 were accounted for immediately in ac-
cordance with IFRS 3. Goodwill is no longer amortized, but
instead  reviewed  annually  for  impairment.  UBS  recorded
goodwill amortization expense of CHF 722 million in 2004
and CHF 784 million in 2003.

Intangible assets acquired in a business combination must
be recognized separately from goodwill if they meet deﬁned
recognition  criteria.  Existing  intangible  assets  that  do  not
meet the recognition criteria under the new standards have
to be reclassiﬁed to goodwill. On 1 January 2005, UBS reclas-
siﬁed  the  trained  workforce  intangible  asset  recognized  in
connection with the acquisition of PaineWebber with a book
value of CHF 1.0 billion to goodwill.

Insurance Contracts
On 31 March 2004, the IASB issued IFRS 4 Insurance Con-
tracts. The standard applies to all insurance contracts written
and to reinsurance contracts held. The majority of insurance
products issued by UBS is considered to be investment con-
tracts and is accounted for as ﬁnancial liabilities and not as
insurance contracts under IFRS 4. The related assets of CHF
19 billion were reclassiﬁed from Other assets to Trading port-
folio  assets  in  2004.  UBS  adopted  the  new  standard  as  of 
1 January 2005 and applies it to its insurance contracts. The
new standard did not have a material effect on the Financial
Statements.

Non-current Assets Held for Sale and Discontinued
Operations
On 31 March 2004, the IASB issued IFRS 5 Non-current Assets
Held for Sale and Discontinued Operations. The standard re-
quires that non-current assets or disposal groups be classiﬁed

89

Financial Statements
Notes to the Financial Statements

as held for sale if their carrying amount is recovered princi-
pally through a sale transaction rather than through contin-
uing use. Such assets are measured at the lower of carrying
amount and fair value less costs to sell and are classiﬁed sep-
arately from other assets in the balance sheet. Netting of as-
sets and liabilities is not permitted. Discontinued operations
are presented on the face of the income statement as a sin-
gle amount comprising the total of the Net proﬁt and loss
from discontinued operations and the gain or loss after tax
recognized on the sale or the measurement to fair value less
costs to sell of the net assets constituting the discontinued op-
erations. In the period where an operation is presented for the
ﬁrst time as discontinued, the income statements for all com-
parative prior periods presented are restated to present that
operation as discontinued.

IFRS 5 provides certain criteria to be met for a component
of an entity to be deﬁned as a discontinued operation. Certain
private equity investments meet this deﬁnition and will be re-
classiﬁed to Discontinued operations. UBS adopted the new
standard on 1 January 2005 and restated comparative prior
years 2004 and 2003. The income statement is now divided
into two sections: Net proﬁt from continuing operations and
Net proﬁt from discontinued operations. 

Presentation of minority interests and earnings per share
With the adoption of revised IAS 1 Presentation of Financial
Statements on 1 January 2005, Net proﬁt and Equity are pre-
sented including minority interests. Net proﬁt is split into Net
proﬁt attributable to UBS shareholders and Net proﬁt attrib-
utable to minority interests. Earnings per share continue to be
calculated based on Net proﬁt attributable to UBS sharehold-
ers, but they are split into Earnings per share from continuing
operations and from discontinued operations. Minority inter-
ests and Earnings per share are presented on the face of the
income statement.

Financial Instruments
On  1  January  2004,  UBS  adopted  revised  IAS  32  Financial
Instruments: Disclosure and Presentation and revised IAS 39
Financial Instruments: Recognition and Measurement, which
were  applied  retrospectively  to  all  ﬁnancial  instruments  af-
fected by the two standards, except the guidance relating to
derecognition of ﬁnancial assets and liabilities and, in part,
recognition  of  Day  1  proﬁt  and  loss,  which  were  applied
prospectively. As a result of adopting the revised standards,
UBS restated prior period comparative information.

Revised IAS 32 amended the accounting for certain deriv-
ative contracts linked to an entity’s own shares. Physically set-
tled written put options and forward purchase contracts with
UBS shares as their underlying are recorded as liabilities, see
section w). UBS currently has physically settled written put op-
tions linked to own shares. The present value of the contrac-
tual amount of these options is recorded as a liability, while
the premium received is credited to Equity. Liabilities of CHF

96 million at 31 December 2004 and CHF 49 million at 31
December 2003 were debited to Equity attributable to UBS
shareholders due to written options. The impact on the in-
come statement of all periods presented is insigniﬁcant. All
other existing derivative contracts linked to own shares are ac-
counted for as derivative instruments and are carried at fair
value on the balance sheet under Positive replacement values
or Negative replacement values.

Revised IAS 39 permits any ﬁnancial instrument to be des-
ignated at inception, or at adoption of revised IAS 39, as car-
ried at fair value through proﬁt and loss. Upon adoption of
revised IAS 39, UBS made that designation for the majority of
its compound instruments issued. Previously, UBS separated
the  embedded  derivative  from  the  host  contract  and  ac-
counted for the separated derivative as a trading instrument.
The amounts are now included on the balance sheet within
the line item Financial liabilities designated at fair value, with
amounts of CHF 117,401 million and CHF 65,756 million at
31  December  2005  and  2004  being  reported  in  that  line.
Also, at 31 December 2005 and 2004 assets in the amount
of CHF 1,153 million and CHF 653 million are reported in the
line Financial assets designated at fair value.

The guidance governing recognition and derecognition of
a ﬁnancial asset is considerably more complex under revised
IAS  39  than  previously  and  requires  a  multi-step  decision
process to determine whether derecognition is appropriate.
See section d) for a discussion of the accounting policies re-
garding derecognition. As a result, certain transactions are
now accounted for as secured ﬁnancing transactions instead
of purchases or sales of trading portfolio assets with an ac-
companying swap derivative. The provisions of this guidance
were applied prospectively from 1 January 2004.

The effect of restating the income statement due to the
adoption of revised IAS 32 and 39 on the comparative prior
periods is a reduction of Net proﬁt by CHF 82 million for 2003.

Investment properties
Effective 1 January 2004, UBS changed its accounting policy
for investment property from historical cost less accumulated
depreciation to the fair value model. All changes in the fair
value of investment property are now recognized in the in-
come  statement,  and  depreciation  expense  is  no  longer
recorded. Investment property is deﬁned as property held ex-
clusively to earn rental income and / or beneﬁt from appreci-
ation  in  value.  Fair  value  of  investment  property  is  deter-
mined by appropriate valuation techniques employed in the
real estate industry, taking into account the speciﬁc circum-
stances  for  each  item.  Comparative  prior  periods  were  re-
stated and resulted in a reduction of Net proﬁt by CHF 64 mil-
lion in 2003.

Credit losses incurred on OTC derivatives
Effective 1 January 2004, the method of accounting for credit
losses  incurred  on  over-the-counter  (OTC)  derivatives  was

90

changed. All such credit losses are now reported in Net trad-
ing income and are no longer reported in Credit loss expense.
This change did not affect Net proﬁt or Earnings per share. It
did, however, affect segment reporting, since losses reported
as Credit loss expense were previously deferred over a three-
year  period  in  the  Business  Group  segment  reporting,
whereas, under the changed method of accounting, losses in
trading income are not subject to such a deferral. In the seg-
ment report, therefore, losses on OTC derivatives are now re-
ported as they are incurred. The changed method of account-
ing had the following impact on the performance before tax
of the Business Groups: in 2003, it reduced Business Banking’s
pre-tax performance by CHF 8 million, it raised the Investment
Bank’s by CHF 37 million and it caused Corporate Functions’
result to fall by CHF 29 million. 

Segment reporting
On July 1 2005, UBS integrated its two wealth management
businesses into one Business Group, Global Wealth Manage-
ment & Business Banking. As part of the integration, the mu-
nicipal securities unit within the former Wealth Management
US was transferred into the Investment Bank. The integration
had no effect on the presentation of segments in Note 2a, and
Wealth Management US continues to be reported as a sepa-
rate segment. The comparative prior period information for
the Wealth Management US and Investment Bank segments
has been restated to reﬂect the transfer of the municipal se-
curities unit. In the past two years, the municipal securities unit
contributed between 7% and 9% to Wealth Management US
revenues and a substantial portion to performance before tax.
On 1 July 2004, UBS purchased an additional 20% inter-
est in Motor-Columbus AG, increasing its overall ownership
stake  to  55.6%.  Motor-Columbus  has  been  consolidated
since 1 July 2004, when UBS gained control over the com-
pany. Due to its size and the nature of its business (produc-
tion, distribution and trading of electricity) a new business
segment,  Industrial  Holdings,  was  added  in  which  Motor-
Columbus is reported. Also included in that segment are also
all private equity investments, which comprise businesses of
a predominantly industrial nature.

As at 1 January 2003, the ﬁve private label banks (three of
which were subsequently merged into one bank) owned by
UBS were transferred out of Wealth Management & Business
Banking into the Corporate Center. At the same time, GAM
was  transferred  out  of  Global  Asset  Management  into  the
Corporate  Center.  The  two  businesses  formed  the  Private
Banks & GAM segment, whereas the remainder of the Cor-
porate Center is reported as the Corporate Functions segment.
On  2  December  2005,  PB  &  GAM  was  sold  to  Julius  Baer.
Note 2 to these Group Financial Statements reﬂects the
new segment reporting structure. In all applicable instances,
prior period comparative amounts of the affected Business
Groups have been restated to conform to the current year
presentation.

Business combinations
On 1 April 2004, UBS adopted IFRS 3 Business Combinations
for  all  business  combinations  entered  into  after  31  March
2004. Subsequent to the adoption of the new standard, UBS
has entered into and completed a number of business com-
binations that were all accounted for under the new standard.
The most signiﬁcant change under the new standard is that
goodwill is no longer amortized over its estimated useful life
but instead tested annually for impairment. Accordingly, no
amortization  expense  has  been  recognized  for  goodwill  of
CHF 631 million recognized on the balance sheet related to
business  combinations  entered  into  after  31  March  2004.
Intangible assets may be assigned an indeﬁnite useful life if
supportable based on facts and circumstances. These intan-
gibles are not amortized but tested periodically for impair-
ment. 

In  a  step  acquisition,  where  control  over  a  subsidiary  is
achieved in stages, all assets and liabilities of that entity, ex-
cluding goodwill, are re-measured to fair value as of the ac-
quisition date of the latest share transaction. The revaluation
difference on the existing ownership interest from the carry-
ing value to the newly established fair value is recorded di-
rectly in Equity attributable to UBS shareholders. As a conse-
quence of re-measuring all assets and liabilities to fair value,
minority interests are also carried at fair value of net assets ex-
cluding  goodwill.  Previously,  only  the  percentage  of  assets
and liabilities was increased to fair value by which the own-
ership  interest  was  increased.  Existing  ownership  interests
were kept at their carryover basis. Other relevant changes in
accounting for business combinations are that liabilities in-
curred  for  restructuring  and  integration  of  newly  acquired
businesses must be expensed as incurred, unless they were a
pre-acquisition  contingency  of  the  acquired  business.
Previously, liabilities incurred for restructuring and integration
could be recognized in purchase accounting if they met cer-
tain criteria, increasing goodwill recognized. Contingent lia-
bilities of an acquired business have to be recognized on the
balance sheet at their fair value in purchase accounting if fair
value is determinable. Previously, contingent liabilities were
not recognized.

ab) International Financial Reporting Standards 
to be adopted in 2006 and later
IAS 39 Amendment to the fair value option
In June 2005, The IASB issued amendments to IAS 39 Finan-
cial  Instruments:  Recognition  and  Measurement in  relation
to the fair value option. UBS will adopt the revised fair value
option  for  ﬁnancial  instruments  on  a  prospective  basis  at
1 January 2006. In the past, UBS applied the fair value option
predominantly  to  hybrid  debt  instruments  issued,  and  will
continue to make use of the fair value option for this class of
ﬁnancial instruments. It is planned to apply the fair value op-
tion also to certain new loans and loan commitments within
the Investment Bank’s Credit Exposure Management business

91

starting in second quarter 2006. These loans and loan com-
mitments will be hedged with credit derivatives and desig-
nated, at inception, as at fair value through proﬁt and loss to
achieve offset of the accounting mismatch with the credit de-
rivatives that currently exist. UBS will not apply the fair value
option to positions in the existing loan portfolio.

IFRS 7 Financial Instruments: Disclosures
In August 2005, the IASB issued IFRS 7. The new standard is
a pure disclosure standard and does not change the recogni-
tion and measurement of ﬁnancial instruments. Accordingly,
it will have no effect on Net proﬁt and Equity attributable to
UBS shareholders. The new standard requires entities to make
enhanced quantitative and qualitative risk disclosures for all
major  categories  of  ﬁnancial  instruments  in  their  ﬁnancial
statements. UBS will adopt the new standard on 1 January
2007.

Amendments to existing standards
Minor  amendments  have  been  made  to  three  existing
International Accounting Standards, which will be effective
and adopted by UBS at 1 January 2006. 

IAS 19 Employee Beneﬁts has been amended to allow a
choice of whether to recognize actuarial gains and losses in
a deﬁned post-retirement beneﬁt plan immediately in equity
or to apply the corridor approach. UBS decided to continue
to  apply  the  corridor  approach  as  described  in  section  x)
above. Other amendments made to IAS 19 have no impact
on UBS.

IAS 39 Financial Instruments: Measurement and Recogni-
tion and IFRS 4 Insurance Contracts have been amended in re-
lation to ﬁnancial guarantee contracts to clarify when a ﬁnan-
cial guarantee is within the scope of IAS 39 and when it is
considered an insurance contract within the scope of IFRS 4.
This amendment will not have a signiﬁcant impact on UBS’s
Financial Statements.

IAS 21 The Effects of Changes in Foreign Exchange Rates
has been amended to require that exchange differences aris-
ing in consolidation on loan ﬁnancings that form part of a net
investment in a foreign operation and are denominated in an-
other currency than the functional currencies of both the re-
porting entity and the foreign operation, are reclassiﬁed to
equity in the consolidated ﬁnancial statements of the report-
ing entity. This amendment has no signiﬁcant impact on UBS’s
Financial Statements.  

IFRIC 4 Leases: Determining Whether an Arrangement
Contains a Lease
IFRIC 4 was issued in December 2004 and provides guidance
on (a) how to determine whether an arrangement is, or con-
tains, a lease as deﬁned in IAS 17; (b) when the assessment
or a reassessment of whether an arrangement is, or contains,
a lease should be made; and (c) if an arrangement is, or con-
tains, a lease, how the payments for the lease should be sep-
arated from payments for any other elements in the arrange-
ment. If an arrangement contains a lease element, the inter-
pretation requires that the payments for the lease element are
accounted  for  in  accordance  with  IAS  17  Leases.  UBS  will
adopt the interpretation at 1 January 2006, its effective date.
The interpretation will not have a signiﬁcant effect on UBS’s
Financial Statements .

IFRIC 5 Provisions: Rights to Interests Arising from
Decommissioning, Restoration and Environmental
Rehabilitation Funds

IFRIC 5 was issued in December 2004 and provides guid-
ance on the accounting for contributions into a decommis-
sioning fund and rights to receive reimbursements from the
fund. The interpretation is effective from 1 January 2006 and
will be adopted by UBS’s subsidiary Motor-Columbus. It is not
expected  to  have  a  signiﬁcant  impact  on  UBS’s  Financial
Statements.

92

Note 2a Segment Reporting by Business Group

UBS’s ﬁnancial businesses are organized on a worldwide basis
into three Business Groups and the Corporate Center. Global
Wealth  Management  &  Business  Banking  consists  of  three
segments, Wealth Management International & Switzerland,
Wealth Management US and Business Banking Switzerland.
The Corporate Center consists of two segments, Corporate
Functions  and  Private  Banks  &  GAM,  which  was  sold  on 
2 December 2005. The Industrial Holdings segment holds all
industrial operations controlled by the Group. In total, UBS re-
ports eight business segments.

Global Wealth Management & Business Banking
Global Wealth Management & Business Banking comprises
three segments. Wealth Management International & Swit-
zerland offers a comprehensive range of products and serv-
ices individually tailored to afﬂuent international and Swiss
clients,  operating  from  ofﬁces  around  the  world.  Wealth
Management US is a US ﬁnancial services ﬁrm providing so-
phisticated wealth management services to afﬂuent US clients
through a highly trained ﬁnancial advisor network. Business
Banking Switzerland provides individual and corporate clients
in Switzerland with a complete portfolio of banking and se-
curities services, focused on customer service excellence, prof-
itability  and  growth,  by  using  a  multi-channel  distribution.
The  segments  share  technological  and  physical  infrastruc-
ture, and have joint departments supporting major functions
such as e-commerce, ﬁnancial planning and wealth manage-
ment, investment policy and strategy.

Global Asset Management
Global  Asset  Management  provides  investment  products
and services to institutional investors and wholesale interme-
diaries around the globe. Clients include corporate and pub-

lic pension plans, ﬁnancial institutions and advisors, central
banks  as  well  as  charities,  foundations  and  individual  in-
vestors.

Investment Bank
The Investment Bank operates globally as a client-driven in-
vestment  banking  and  securities  ﬁrm  providing  innovative
products, research, advice and complete access to the world’s
capital  markets  for  intermediaries,  governments,  corporate
and institutional clients and other parts of UBS. 

Corporate Center
Corporate  Center  comprises  two  segments.  Corporate
Functions ensures that the Business Groups operate as a co-
herent and effective whole with a common set of values and
principles in such areas as risk management and control, ﬁ-
nancial reporting, marketing and communications, funding,
capital and balance sheet management, management of for-
eign  exchange  earnings  and  information  technology  infra-
structure. Private Banks & GAM, the second segment, was
sold on 2 December 2005.

Industrial Holdings
The  Industrial  Holdings  segment  includes  the  non-ﬁnancial
businesses of UBS. The most signiﬁcant business in this seg-
ment is Motor-Columbus, a ﬁnancial holding company whose
only signiﬁcant asset is a 59.3% interest in the Atel Group.
Atel is a European energy provider focused on domestic and
international power generation, electricity transmission, en-
ergy services as well as electricity trading and marketing. The
private equity business investing UBS and third-party funds,
primarily  in  unlisted  companies,  is  reported  in  Industrial
Holdings.

93

Financial Statements
Notes to the Financial Statements

Note 2a Reporting by Business Group (continued)

For the year ended 31 December 2005

Internal charges and transfer pricing adjustments are reﬂected in the performance
of each business. Revenue-sharing agreements are used to allocate external cus-
tomer revenues to a Business Group on a reasonable basis. Transactions between
Business  Groups  are  conducted  at  internally  agreed  transfer  prices  or  at  arm’s
length.

Management reporting based on expected credit loss

For internal management reporting purposes, we measure credit loss using an ex-
pected loss concept. This table shows Business Group performance consistent with
the way in which our businesses are managed and the way Business Group per-
formance is measured. Expected credit loss reﬂects the average annual costs that
are expected to arise from positions in the current portfolio that become impaired.
The adjusted expected credit loss reported for each Business Group is the expected
credit loss on its portfolio plus the difference between credit loss expense and ex-
pected credit loss, amortized over a three year period. The difference between these
adjusted expected credit loss ﬁgures and the credit loss expense recorded at Group
level for reporting purposes is reported in Corporate Functions.

94

CHF million

Income 1

Credit loss (expense) / recovery

Total operating income

Personnel expenses

General and administrative expenses

Services to / from other business units

Depreciation of property and equipment

Amortization of other intangible assets 2

Goods and materials purchased

Total operating expenses

Business Group performance 
from continuing operations before tax

Business Group performance 
from discontinued operations before tax

Business Group performance before tax

Tax expense on continuing operations

Tax expense on discontinued operations

Net proﬁt

Additional information 3

Total assets

Total liabilities

Capital expenditure

Income 1

Adjusted expected credit loss

Total operating income

Personnel expenses

General and administrative expenses

Services to / from other business units

Depreciation of property and equipment

Amortization of other intangible assets 2

Goods and materials purchased

Total operating expenses

Business Group performance 
from continuing operations before tax

Business Group performance 
from discontinued operations before tax

Business Group performance before tax

Tax expense on continuing operations

Tax expense on discontinued operations

Net proﬁt

Global Wealth Management &
Business Banking

Global Asset
Management

Investment
Bank

Financial Businesses

Wealth Management
International & Switzerland

Wealth
Management US

Business Banking
Switzerland

Corporate Center

Private
Banks & GAM

Corporate
Functions

Industrial
Holdings

UBS

9,024

(8 )

9,016

2,579

804

1,371

89

7

4,850

4,166

5,158

0

5,158

3,460

1,047

223

65

49

4,844

314

4,949

231

5,180

2,450

994

(634 )

72

0

2,882

2,298

2,487

0

2,487

988

304

116

21

1

1,430

1,057

17,448

152

17,600

9,259

2,215

640

136

53

12,303

5,297

4,166

314

2,298

1,057

5,297

4,556

4,556

455

0

455

1,167

1,084

(1,730 )

857

17

1,395

(940)

8

(932)

223,719

219,069

81

64,896

59,567

84

176,713

170,544

58

40,782

39,191

16

1,768,391

1,750,762

138

(225,800 )

(242,640 )

1,264

25

9,024

(13 )

9,011

2,579

804

1,371

89

7

4,850

4,161

5,158

(2 )

5,156

3,460

1,047

223

65

49

4,844

312

4,949

122

5,071

2,450

994

(634 )

72

0

2,882

2,189

2,487

0

2,487

988

304

116

21

1

1,430

1,057

17,448

36

17,484

9,259

2,215

640

136

53

12,303

5,181

4,161

312

2,189

1,057

5,181

4,508

4,508

455

232

687

1,167

1,084

(1,730 )

857

17

1,395

(708)

56

(652)

11,079

0

11,079

1,146

599

14

253

207

8,003

10,222

857

124

981

11,549

11,814

299

11,079

0

11,079

1,146

599

14

253

207

8,003

10,222

857

124

981

50,600

375

50,975

21,049

7,047

0

1,493

334

8,003

37,926

13,049

4,688

17,737

2,549

498

14,690

2,060,250

2,008,307

1,965

50,600

375

50,975

21,049

7,047

0

1,493

334

8,003

37,926

13,049

4,688

17,737

2,549

498

14,690

1 Impairments of ﬁnancial investments for the year ended 31 December 2005 were as follows: Global Wealth Management & Business Banking CHF10 million; Global Asset Management CHF 0 million;
Investment Bank CHF 0 million; Corporate Center CHF 16 million and Industrial Holdings CHF 81 million.
2 For further information regarding goodwill and other intangible assets by Business Group,
please see Note 15: Goodwill and Other Intangible Assets.

3 The funding surplus or requirement is reﬂected in each Business Group and adjusted in Corporate Center.

95

Financial Statements
Notes to the Financial Statements

Note 2a Reporting by Business Group (continued)

For the year ended 31 December 2004

Internal charges and transfer pricing adjustments are reﬂected in the performance
of each business. Revenue-sharing agreements are used to allocate external cus-
tomer revenues to a Business Group on a reasonable basis. Transactions between
Business  Groups  are  conducted  at  internally  agreed  transfer  prices  or  at  arm’s
length.

Management reporting based on expected credit loss

For internal management reporting purposes, we measure credit loss using an ex-
pected loss concept. This table shows Business Group performance consistent with
the way in which our businesses are managed and the way Business Group per-
formance is measured. Expected credit loss reﬂects the average annual costs that
are expected to arise from positions in the current portfolio that become impaired.
The adjusted expected credit loss reported for each Business Group is the expected
credit loss on its portfolio plus the difference between credit loss expense and ex-
pected credit loss, amortized over a three year period. The difference between these
adjusted expected credit loss ﬁgures and the credit loss expense recorded at Group
level for reporting purposes is reported in Corporate Functions.

96

CHF million

Income 2

Credit loss (expense) / recovery

Total operating income

Personnel expenses

General and administrative expenses

Services to / from other business units

Depreciation of property and equipment

Amortization of goodwill 3

Amortization of other intangible assets 3

Goods and materials purchased

Total operating expenses

Business Group performance 
from continuing operations before tax

Business Group performance 
from discontinued operations before tax

Business Group performance before tax

Tax expense on continuing operations

Tax expense on discontinued operations

Net proﬁt

Additional information 4

Total assets

Total liabilities

Capital expenditure

Income 2

Adjusted expected credit loss

Total operating income

Personnel expenses

General and administrative expenses

Services to / from other business units

Depreciation of property and equipment

Amortization of goodwill 3

Amortization of other intangible assets 3

Goods and materials purchased

Total operating expenses

Business Group performance 
from continuing operations before tax

Business Group performance 
from discontinued operations before tax

Business Group performance before tax

Tax expense on continuing operations

Tax expense on discontinued operations

Net proﬁt

Global Wealth Management &
Business Banking

Global Asset
Management

Investment
Bank

Financial Businesses

Wealth Management
International & Switzerland

Wealth
Management US

Business Banking
Switzerland

Corporate Center

Private
Banks & GAM

Corporate
Functions

Industrial 1
Holdings

UBS

7,701

(1 )

7,700

2,119

642

1,395

66

67

8

4,297

3,403

3,403

4,741

3

4,744

3,320

767

275

67

171

107

4,707

37

37

5,064

92

5,156

2,426

1,064

(533 )

69

0

0

3,026

2,130

2,022

0

2,022

893

299

126

23

129

0

1,470

552

16,090

147

16,237

8,152

2,538

226

243

278

36

11,473

4,764

2,130

552

4,764

386

386

112

0

112

796

1,077

(1,509 )

794

1

17

1,176

(1,064)

10

(1,054)

164,716

161,042

304

48,026

43,847

48

210,133

204,479

212

29,698

28,311

8

1,477,275

1,463,469

415

8,043

7,480

19

(210,167 )

(220,843 )

599

7,701

(8 )

7,693

2,119

642

1,395

66

67

8

4,297

3,396

3,396

4,741

(5 )

4,736

3,320

767

275

67

171

107

4,707

29

29

5,064

(25 )

5,039

2,426

1,064

(533 )

69

0

0

3,026

2,013

2,022

0

2,022

893

299

126

23

129

0

1,470

552

16,090

(7 )

16,083

8,152

2,538

226

243

278

36

11,473

4,610

2,013

552

4,610

438

438

112

286

398

796

1,077

(1,509 )

794

1

17

1,176

(778)

(42 )

(820)

6,440

0

6,440

906

773

20

215

7

169

3,885

5,975

465

140

605

9,394

9,966

1,484

6,440

0

6,440

906

773

20

215

7

169

3,885

5,975

465

140

605

42,170

241

42,411

18,612

7,160

0

1,477

653

337

3,885

32,124

10,287

536

10,823

2,224

129

8,470

1,737,118

1,697,751

3,089

42,170

241

42,411

18,612

7,160

0

1,477

653

337

3,885

32,124

10,287

536

10,823

2,224

129

8,470

1 Results for Motor-Columbus include the six month period beginning on 1 July 2004.
2 Impairments of ﬁnancial investments for the year ended 31 December 2004 were as follows: Global Wealth
Management & Business Banking CHF 47 million; Global Asset Management CHF 4 million; Investment Bank CHF (17) million; Corporate Center CHF 0 million and Industrial Holdings CHF 57 million.
3 For further information regarding goodwill and other intangible assets by Business Group, please see Note 15: Goodwill and Other Intangible Assets.
4 The funding surplus or requirement is reﬂected
in each Business Group and adjusted in Corporate Center.

97

Financial Statements
Notes to the Financial Statements

Note 2a Reporting by Business Group (continued)

For the year ended 31 December 2003

Internal charges and transfer pricing adjustments are reﬂected in the performance
of each business. Revenue-sharing agreements are used to allocate external cus-
tomer revenues to a Business Group on a reasonable basis. Transactions between
Business  Groups  are  conducted  at  internally  agreed  transfer  prices  or  at  arm’s
length.

Management reporting based on expected credit loss

For internal management reporting purposes, we measure credit loss using an ex-
pected loss concept. This table shows Business Group performance consistent with
the way in which our businesses are managed and the way Business Group per-
formance is measured. Expected credit loss reﬂects the average annual costs that
are expected to arise from positions in the current portfolio that become impaired.
The adjusted expected credit loss reported for each Business Group is the expected
credit loss on its portfolio plus the difference between credit loss expense and ex-
pected credit loss, amortized over a three year period. The difference between these
adjusted expected credit loss ﬁgures and the credit loss expense recorded at Group
level for reporting purposes is reported in Corporate Functions.

98

CHF million

Income 1

Credit loss (expense) / recovery

Total operating income

Personnel expenses

General and administrative expenses

Services to / from other business units

Depreciation of property and equipment

Amortization of goodwill 2

Amortization of other intangible assets 2

Goods and materials purchased

Total operating expenses

Business Group performance 
from continuing operations before tax

Business Group performance 
from discontinued operations before tax

Business Group performance before tax

Tax expense on continuing operations

Tax expense on discontinued operations

Net proﬁt

Additional information 3

Total assets

Total liabilities

Capital expenditure

Income 1

Adjusted expected credit loss

Total operating income

Personnel expenses

General and administrative expenses

Services to / from other business units

Depreciation of property and equipment

Amortization of goodwill 2

Amortization of other intangible assets 2

Goods and materials purchased

Total operating expenses

Business Group performance 
from continuing operations before tax

Business Group performance 
from discontinued operations before tax

Business Group performance before tax

Tax expense on continuing operations

Tax expense on discontinued operations

Net proﬁt

Global Wealth Management &
Business Banking

Global Asset
Management

Investment
Bank

Financial Businesses

Wealth Management
International & Switzerland

Wealth
Management US

Business Banking
Switzerland

Corporate Center

Private
Banks & GAM

Corporate
Functions

Industrial
Holdings

UBS

6,797

4

6,801

1,996

604

1,479

82

54

21

4,236

2,565

4,748

(3 )

4,745

3,555

689

415

66

192

116

5,033

(288)

5,247

(71 )

5,176

2,448

1,090

(609 )

88

0

0

3,017

2,159

1,737

0

1,737

835

265

156

25

152

1

1,434

303

14,510

(32 )

14,478

7,737

2,068

175

248

279

27

10,534

3,944

2,565

(288)

2,159

303

3,944

20

0

20

785

1,166

(1,639 )

811

0

20

1,143

2,670

0

2,670

862

748

23

178

26

8

1,113

2,958

(1,123)

(288)

209

209

11

(1,112)

259

(29)

150,282

147,476

173

44,972

40,346

68

192,517

186,185

261

22,584

20,912

18

1,318,752

1,305,025

500

9,084

8,406

17

(186,867 )

(197,442 )

420

6,797

(4 )

6,793

1,996

604

1,479

82

54

21

4,236

2,557

4,748

(8 )

4,740

3,555

689

415

66

192

116

5,033

(293)

5,247

(127 )

5,120

2,448

1,090

(609 )

88

0

0

3,017

2,103

1,737

0

1,737

835

265

156

25

152

1

1,434

303

14,510

(55 )

14,455

7,737

2,068

175

248

279

27

10,534

3,921

2,557

(293)

2,103

303

3,921

2,655

5,533

371

2,670

0

2,670

862

748

23

178

26

8

1,113

2,958

20

92

112

785

1,166

(1,639 )

811

0

20

1,143

(1,031)

(288)

205

205

15

(1,016)

259

(29)

1 Impairments of ﬁnancial investments for the year ended 31 December 2003 were as follows: Global Wealth Management & Business Banking CHF 19 million; Global Asset Management CHF 2 million;
Investment Bank CHF14 million; Corporate Center CHF 149 million and Industrial Holdings CHF178 million.
2 For further information regarding goodwill and other intangible assets by Business Group,
please see Note 15: Goodwill and Other Intangible Assets.

3 The funding surplus or requirement is reﬂected in each Business Group and adjusted in Corporate Center.

99

35,729

(102 )

35,627

18,218

6,630

0

1,498

703

193

1,113

28,355

7,272

479

7,751

1,419

79

6,253

1,553,979

1,516,441

1,828

35,729

(102 )

35,627

18,218

6,630

0

1,498

703

193

1,113

28,355

7,272

479

7,751

1,419

79

6,253

Financial Statements
Notes to the Financial Statements

Note 2b Segment Reporting by Geographic Location

The geographic analysis of total assets is based on customer
domicile, whereas operating income and capital expenditure
are based on the location of the ofﬁce in which the transac-
tions and assets are recorded. Because of the global nature
of ﬁnancial markets, the Group’s business is managed on an
integrated  basis  worldwide,  with  a  view  to  proﬁtability  by
product line. The geographical analysis of operating income,

total  assets  and  capital  expenditure  is  provided  in  order  to
comply with IFRS and does not reﬂect the way the Group is
managed.  Management  believes  that  analysis  by  Business
Group, as shown in Note 2a to these Financial Statements, is
a more meaningful representation of the way in which the
Group is managed.

For the year ended 31 December 2005

Switzerland

Rest of Europe / Middle East / Africa

Americas

Asia Paciﬁc

Total

For the year ended 31 December 2004

Switzerland

Rest of Europe / Middle East / Africa

Americas

Asia Paciﬁc

Total

For the year ended 31 December 2003

Switzerland

Rest of Europe / Middle East / Africa

Americas

Asia Paciﬁc

Total

Total operating income

Total assets

Capital expenditure

CHF million

Share % CHF million

Share % CHF million

Share %

15,042

17,680

15,293

2,960

50,975

29

35

30

6

203,854

687,963

1,006,185

162,248

10

33

49

8

973

467

386

139

49

24

20

7

100

2,060,250

100

1,965

100

Total operating income

Total assets

Capital expenditure

CHF million

Share % CHF million

Share % CHF million

Share %

13,863

12,240

14,048

2,260

42,411

33

29

33

5

193,411

561,390

830,350

151,967

11

32

48

9

1,993

556

376

164

65

18

12

5

100

1,737,118

100

3,089

100

Total operating income

Total assets

Capital expenditure

CHF million

Share % CHF million

Share % CHF million

Share %

12,294

8,373

13,160

1,800

35,627

35

23

37

5

182,225

538,305

739,021

94,428

12

35

47

6

683

562

530

53

37

31

29

3

100

1,553,979

100

1,828

100

100

Income Statement

Note 3 Net Interest and Trading Income

Accounting standards require separate disclosure of net inter-
est income and net trading income (see the second and the
third table). This required disclosure, however, does not take
into account that net interest and trading income are gener-
ated by a range of different business activities. In many cases,
a particular business activity can generate both net interest
and trading income. Fixed income trading activity, for exam-
ple, generates both trading proﬁts and coupon income. UBS
management therefore analyzes net interest and trading in-

come  according  to  the  business  activity  generating  it.  The
table below (labeled Breakdown by business activity) provides
information that corresponds to this management view. For
example, net income from trading activities is further broken
down  into  the  four  sub-components  of  Equities,  Fixed  in-
come, Foreign exchange and Other. These activities generate
both  types  of  income  (interest  and  trading  revenue)  and
therefore this analysis is not comparable to the breakdown
provided in the table on the next page (Net trading income).

Net interest and trading income

CHF million

Net interest income

Net trading income

Total net interest and trading income

Breakdown by business activity

CHF million

Equities

Fixed income

Foreign exchange

Other

Net income from trading activities

Net income from interest margin products

Net income from treasury and other activities

Total net interest and trading income

Net interest income

CHF million

Interest income

For the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

9,528

7,996

17,524

11,744

4,902

16,646

12,261

3,670

15,931

(19 )

63

5

For the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

3,928

5,741

1,458

292

11,419

5,355

750

17,524

3,098

6,264

1,467

203

11,032

5,070

544

16,646

2,445

6,474

1,436

258

10,613

5,000

318

15,931

27

(8 )

(1 )

44

4

6

38

5

For the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

Interest earned on loans and advances

Interest earned on securities borrowed and reverse repurchase agreements

Interest and dividend income from ﬁnancial investments

Interest and dividend income from trading portfolio

Total

Interest expense

Interest on amounts due to banks and customers

Interest on securities lent and repurchase agreements

Interest and dividend expense from trading portfolio

Interest on ﬁnancial liabilities designated at fair value

Interest on debt issued

Total

Net interest income

11,414

23,641

86

24,145

59,286

11,080

20,626

10,736

2,390

4,926

49,758

9,528

8,907

11,006

38

19,277

39,228

5,475

10,014

7,993

1,168

2,834

27,484

11,744

10,449

11,148

57

18,391

40,045

4,996

9,623

9,925

751

2,489

27,784

12,261

28

115

126

25

51

102

106

34

105

74

81

(19 )

101

Financial Statements
Notes to the Financial Statements

Note 3 Net Interest and Trading Income (continued)

Interest includes forward points on foreign exchange swaps used to manage short-term interest rate risk on foreign currency
loans and deposits.

Net trading income 1

CHF million

Equities

Fixed income 2

Foreign exchange and other

Net trading income

For the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

3,900

1,256

2,840

7,996

2,254

131

2,517

4,902

1,660

369

1,614

3,670

73

859

13

63

1 Please refer to the table “Net Interest and Trading Income” on the previous page for the Equities, Fixed income, Foreign exchange and Other business results (for an explanation, read the corresponding
introductory comment).

2 Includes commodities trading income.

Included  in  the  Net  trading  income  table  are  fair  value
changes of CHF (4,024) million for the year ended 31 Decem-
ber 2005, CHF (1,203) million for the year ended 31 December
2004, and CHF (115) million for the year ended 31 December
2003 related to ﬁnancial liabilities designated as held at fair
value through proﬁt and loss. For 2005, CHF (4,277) million
of the total fair value change was attributable to changes in
fair value of embedded derivatives, while CHF 253 million was

attributable to changes in LIBOR. For 2004, CHF (801) million
of the total fair value change was attributable to changes in
fair value of embedded derivatives, while CHF (402) million
was attributable to changes in LIBOR. The exposure from em-
bedded derivatives is economically hedged with derivatives
whose  change  in  fair  value  is  also  reported  in  Net  trading
income, offsetting the fair value changes related to ﬁnancial
liabilities designated as held at fair value.

For the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

1,341

1,516

2,857

1,460

6,718

4,750

212

1,176

5,310

372

22,855

306

1,027

24,188

1,631

1,121

2,752

21,436

1,417

1,114

2,531

1,078

5,794

3,948

197

1,143

4,488

343

19,522

264

977

20,763

1,387

870

2,257

18,506

1,267

1,084

2,351

761

5,477

3,500

216

1,097

3,718

356

17,476

244

1,082

18,802

1,473

656

2,129

16,673

(5 )

36

13

35

16

20

8

3

18

8

17

16

5

16

18

29

22

16

Note 4 Net Fee and Commission Income

CHF million

Equity underwriting fees

Bond underwriting fees

Total underwriting fees

Corporate ﬁnance fees

Brokerage fees

Investment fund fees

Fiduciary fees

Custodian fees

Portfolio and other management and advisory fees

Insurance-related and other fees

Total securities trading and investment activity fees

Credit-related fees and commissions

Commission income from other services

Total fee and commission income

Brokerage fees paid

Other

Total fee and commission expense

Net fee and commission income

102

Note 5 Other Income

CHF million

Associates and subsidiaries

Net gains from disposals of consolidated subsidiaries

Net gains from disposals of investments in associates

Total

Financial investments available-for-sale

Net gains from disposals

Impairment charges

Total

Net income from investments in property 1

Equity in income of associates

Net gains / (losses) from investment properties 2

Other

Total other income from Financial Businesses

Other income from Industrial Holdings

Total other income

For the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

1

26

27

231

(26)

205

42

57

12

218

561

564

1,125

83

1

84

132

(34 )

98

65

43

11

277

578

354

932

168

2

170

90

(184 )

(94 )

75

123

(42 )

223

455

(230 )

225

(99 )

(68 )

75

24

109

(35 )

33

9

(21 )

(3 )

59

21

1 Includes net rent received from third parties and net operating expenses.

2 Includes unrealized and realized gains/(losses) from investment properties at fair value.

Note 6 Personnel Expenses

CHF million

Salaries and bonuses

Contractors

Insurance and social security contributions

Contribution to retirement plans

Other personnel expenses

Total personnel expenses

Note 7 General and Administrative Expenses

CHF million

Occupancy

Rent and maintenance of IT and other equipment

Telecommunications and postage

Administration

Marketing and public relations

Travel and entertainment

Professional fees

Outsourcing of IT and other services

Other

31.12.05

16,646

834

1,351

736

1,482

21,049

31.12.05

1,276

675

853

998

609

777

689

872

298

For the year ended

31.12.04

14,807

580

1,069

670

1,486

18,612

31.12.03

14,206

539

960

685

1,828

18,218

% change from

31.12.04

12

44

26

10

0

13

For the year ended

% change from

31.12.04

31.12.03

31.12.04

1,259

722

822

1,036

527

639

718

924

513

1,300

748

847

1,048

459

522

599

826

281

Total general and administrative expenses

7,047

7,160

6,630

1

(7 )

4

(4 )

16

22

(4 )

(6 )

(42 )

(2 )

103

Financial Statements
Notes to the Financial Statements

Note 8 Earnings per Share (EPS) and Shares Outstanding

For the year ended

% change from

31.12.05

31.12.04

31.12.03

31.12.04

Basic earnings (CHF million)

Net proﬁt attributable to UBS shareholders

from continuing operations

from discontinued operations

Diluted earnings (CHF million)

Net proﬁt attributable to UBS shareholders

Less: (Proﬁt) / loss on equity derivative contracts

Net proﬁt attributable to UBS shareholders for diluted EPS

from continuing operations

from discontinued operations

Weighted average shares outstanding

Weighted average shares outstanding

14,029

9,844

4,185

14,029

(22)

14,007

9,845

4,162

8,016

7,609

407

8,016

(5 )

8,011

7,612

399

5,904

5,510

394

5,904

1

5,905

5,511

394

1,006,993,877

1,029,918,463

1,086,161,476

Potentially dilutive ordinary shares resulting from options and warrants outstanding 1

41,601,893

52,042,897

52,639,149

Weighted average shares outstanding for diluted EPS

1,048,595,770

1,081,961,360

1,138,800,625

Earnings per share (CHF)

Basic

from continuing operations

from discontinued operations

Diluted

from continuing operations

from discontinued operations

13.93

9.78

4.15

13.36

9.39

3.97

7.78

7.39

0.39

7.40

7.04

0.36

5.44

5.07

0.37

5.19

4.84

0.35

75

29

928

75

(340 )

75

29

943

(2 )

(20 )

(3 )

79

32

964

81

33

1 Total  equivalent  shares  outstanding  on  options  that  were  not  dilutive  for  the  respective  periods  but  could  potentially  dilute  earnings  per  share  in  the  future  were  14,558,875, 18,978,199  and
37,234,538 for the years ended 31 December 2005, 31 December 2004 and 31 December 2003, respectively.

31.12.05

As at

31.12.04

% change from

31.12.03

31.12.04

1,088,632,522

1,126,858,177

1,183,046,764

(3 )

56,707,000

39,935,094

84,728,216

80,034,227

33,885,000

70,374,874

104,259,874

124,663,310

136,741,227

984,372,648

1,002,194,867

1,046,305,537

(17 )

(16 )

(2 )

Shares outstanding

Total ordinary shares issued

Second trading line treasury shares

2003 program

2004 program

2005 program

Other treasury shares

Total treasury shares

Shares outstanding

104

Balance Sheet: Assets

Note 9a Due from Banks and Loans

By type of exposure

CHF million

Banks 1

Allowance for credit losses

Net due from banks

Loans 1

Residential mortgages

Commercial mortgages

Other loans

Subtotal

Allowance for credit losses

Net loans

Net due from banks and loans

1 Includes Due from banks and loans from Industrial Holdings in the amount of CHF 728 million and 909 million for 2005 and 2004, respectively.

By geographical region (based on the location of the borrower)

CHF million

Switzerland

Rest of Europe / Middle East /Africa

Americas

Asia Paciﬁc

Subtotal

Allowance for credit losses

Net due from banks and loans

By type of collateral

CHF million

Secured by real estate

Collateralized by securities

Guarantees and other collateral

Unsecured

Subtotal

Allowance for credit losses

Net due from banks and loans

31.12.05

33,689

(45)

33,644

127,990

18,509

125,081

271,580

(1,611)

269,969

303,613

31.12.05

158,465

50,669

83,514

12,621

305,269

(1,656)

303,613

31.12.05

148,412

45,393

24,338

87,126

305,269

(1,656)

303,613

31.12.04

35,675

(256 )

35,419

117,731

18,950

97,777

234,458

(2,291 )

232,167

267,586

31.12.04

152,130

45,840

61,751

10,412

270,133

(2,547 )

267,586

31.12.04

138,692

38,872

18,973

73,596

270,133

(2,547 )

267,586

105

Financial Statements
Notes to the Financial Statements

Note 9b Allowances and Provisions for Credit Losses

CHF million

Balance at the beginning of the year

Write-offs

Recoveries

Increase / (decrease) in credit loss allowance and provision

Disposal of subsidiaries

Foreign currency translation and other adjustments

Balance at the end of the year 1

CHF million

As a reduction of Due from banks

As a reduction of Loans

As a reduction of other balance sheet positions

Subtotal

Included in Other liabilities related to provisions for contingent claims

Total allowances and provisions for credit losses

Speciﬁc allowances
and provisions

Collective loan
loss provision

Total
31.12.05

Total
31.12.04

2,641

(647)

63

(298)

(61)

(8)

1,690

161

(4)

0

(76)

0

5

86

2,802

(651)

63

(374)2

(61)

(3)

1,776

3,775

(856 )

59

(241 )

0

65

2,802

31.12.05

31.12.04

45

1,611

11

1,667

109

1,776

256

2,291

41

2,588

214

2,802

1 Includes country provisions of CHF 65 million and CHF183 million at 31 December 2005 and 31 December 2004, respectively.

2 Credit loss expense of CHF1 million relates to discontinued operations.

Note 9c Impaired Due from Banks and Loans

CHF million

Total gross impaired due from banks and loans 1, 2

Allowance for impaired due from banks

Allowance for impaired loans

Total allowances for credit losses related to impaired due from banks and loans

Average total gross impaired due from banks and loans 3

31.12.05

31.12.04

3,434

32

1,561

1,593

4,089

4,699

239

2,185

2,424

5,858

1 All impaired due from banks and loans have a speciﬁc allowance for credit losses.
and CHF 279 million for 2003.

3 Average balances were calculated from quarterly data.

2 Interest income on impaired due from banks and loans was CHF 123 million for 2005, CHF 172 million for 2004

CHF million

Total gross impaired due from banks and loans

Estimated liquidation proceeds of collateral

Net impaired due from banks and loans

Total allowances for credit losses related to impaired due from banks and loans

31.12.05

31.12.04

3,434

(1,366)

2,068

1,593

4,699

(1,758 )

2,941

2,424

Note 9d Non-Performing Due from Banks and Loans

A loan (included in Due from banks or Loans) is classiﬁed as
non-performing: 1) when the payment of interest, principal
or fees is overdue by more than 90 days and there is no ﬁrm
evidence that they will be made good by later payments or

the liquidation of collateral; 2) when insolvency proceedings
have commenced; or 3) when obligations have been restruc-
tured on concessionary terms.

106

Note 9d Non-Performing Due from Banks and Loans (continued)

CHF million

Total gross non-performing due from banks and loans

Total allowances for credit losses related to non-performing due from banks and loans

Average total gross non-performing due from banks and loans 1

1 Average balances are calculated from quarterly data.

CHF million

Non-performing due from banks and loans at the beginning of the year

Net additions/(reductions)

Write-offs and disposals

Non-performing due from banks and loans at the end of the year

By type of exposure

CHF million

Banks

Loans

Mortgages

Other

Total loans

Total non-performing due from banks and loans

By geographical region (based on the location of borrower)

CHF million

Switzerland

Rest of Europe/Middle East/Africa

Americas

Asia Paciﬁc

Total non-performing due from banks and loans

31.12.05

31.12.04

2,363

1,393

3,082

3,555

2,183

4,197

31.12.05

31.12.04

3,555

(515)

(677)

2,363

4,758

(496 )

(707 )

3,555

31.12.05

27

31.12.04

242

621

1,715

2,336

2,363

31.12.05

2,106

155

94

8

2,363

1,011

2,302

3,313

3,555

31.12.04

2,772

466

220

97

3,555

Note 10 Securities Borrowing, Securities Lending, Repurchase and Reverse Repurchase Agreements

The Group enters into collateralized reverse repurchase and
repurchase agreements and securities borrowing and securi-
ties lending transactions that may result in credit exposure in
the event that the counterparty to the transaction is unable
to fulﬁll its contractual obligations. The Group controls credit

risk associated with these activities by monitoring counter-
party credit exposure and collateral values on a daily basis and
requiring  additional  collateral  to  be  deposited  with  or  re-
turned to the Group when deemed necessary.

Balance sheet assets

CHF million

By counterparty

Banks

Customers

Total

Balance sheet liabilities

CHF million

By counterparty

Banks

Customers

Total

Cash collateral on
securities borrowed
31.12.05

Reverse repurchase
agreements
31.12.05

Cash collateral on
securities borrowed
31.12.04

Reverse repurchase
agreements
31.12.04

236,286

64,045

300,331

259,608

144,824

404,432

167,567

52,675

220,242

Cash collateral on
securities lent
31.12.05

Repurchase
agreements
31.12.05

Cash collateral on
securities lent
31.12.04

46,766

30,501

77,267

278,287

200,221

478,508

40,580

20,965

61,545

243,890

113,274

357,164

Repurchase
agreements
31.12.04

252,151

170,436

422,587

107

Financial Statements
Notes to the Financial Statements

Note 11 Trading Portfolio

The Group trades in debt instruments (including money mar-
ket paper and tradeable loans), equity instruments, precious
metals,  commodities  and  derivatives  to  meet  the  ﬁnancial

needs of its customers and to generate revenue.  Note 22 pro-
vides  a  description  of  the  various  classes  of  derivatives  to-
gether with the related notional amounts.

31.12.05

31.12.04

57,685

11,717

16,307

11,563

589

77,569

64,823

169,841

74,253

387,075

146,035

110,857

139,101

20,958

160,059

33,559

32,339

36,212

13,025

654,056

407

74,758

52,833

19,885

1,224

149,107

39,524

188,631

44,956

4,706

17,869

12,580

776

92,330

80,539

144,684

35,650

353,979

147,525

120,317

103,924

18,516

122,440

27,140

26,218

16,077

11,150

548,602

511

54,848

49,512

27,413

2,600

134,884

36,149

171,033

CHF million

Trading portfolio assets

Money market paper

thereof pledged as collateral with central banks

thereof pledged as collateral (excluding central banks)

thereof pledged as collateral and can be repledged or resold by counterparty

Debt instruments

Swiss government and government agencies

US Treasury and government agencies

Other government agencies

Corporate listed

Other unlisted

Total

thereof pledged as collateral

thereof can be repledged or resold by counterparty

Equity instruments

Listed

Unlisted

Total

thereof pledged as collateral

thereof can be repledged or resold by counterparty

Traded loans

Precious metals, commodities 1

Total trading portfolio assets

Trading portfolio liabilities

Debt instruments

Swiss government and government agencies

US Treasury and government agencies

Other government agencies

Corporate listed

Other unlisted

Total

Equity instruments

Total trading portfolio liabilities

1 Commodities predominantly consist of energy.

108

Note 12 Financial Investments (available-for-sale)

CHF million

Money market paper

Other debt instruments

Listed

Unlisted

Total

Equity instruments

Listed

Unlisted

Total

Private equity investments

Total ﬁnancial investments

thereof eligible for discount at central banks

31.12.05

31.12.04

141

587

91

678

2,548

1,738

4,286

1,446

6,551

40

567

261

28

289

504

689

1,193

2,139

4,188

86

The following tables show the unrealized gains and losses not recognized in the income statement for the years ended 2005
and 2004:

CHF million

31 December 2005

Money market paper

Debt securities issued by Swiss national government and agencies

Debt securities issued by Swiss local governments

Debt securities issued by US Treasury and agencies

Debt securities issued by foreign governments and ofﬁcial institutions

Corporate debt securities

Mortgage-backed securities

Other debt securities

Equity investments

Private equity investments

Total

CHF million

31 December 2004

Money market paper

Debt securities issued by Swiss national government and agencies

Debt securities issued by Swiss local governments

Debt securities issued by US Treasury and agencies

Debt securities issued by foreign governments and ofﬁcial institutions

Corporate debt securities

Mortgage-backed securities

Other debt securities

Equity investments

Private equity investments

Total

Unrealized gains / losses not recognized in the income statement

Fair value

Gross gains

Gross losses Net, before tax

Tax effect

Net, after tax

141

3

0

64

47

421

143

0

4,286

1,446

6,551

0

0

0

0

0

7

0

0

738

405

1,150

0

0

0

(1 )

0

(11 )

(3 )

0

(16 )

(15 )

(46)

0

0

0

(1 )

0

(4 )

(3 )

0

0

0

0

0

0

0

0

0

722

390

1,104

(133 )

(31 )

(164)

0

0

0

(1 )

0

(4 )

(3 )

0

589

359

940

Unrealized gains / losses not recognized in the income statement

Fair value

Gross gains

Gross losses Net, before tax

Tax effect

Net, after tax

567

10

20

0

40

147

72

0

1,193

2,139

4,188

0

1

1

0

0

7

0

0

455

577

1,041

0

0

0

0

0

(4 )

0

0

(5 )

(22 )

(31)

0

1

1

0

0

3

0

0

0

0

0

0

0

0

0

0

450

555

1,010

(83 )

(88 )

(171)

0

1

1

0

0

3

0

0

367

467

839

109

Financial Statements
Notes to the Financial Statements

Note 12 Financial Investments (available-for-sale) (continued)

The unrealized losses not recognized in the income statement
are considered to be temporary on the basis that the invest-
ments are intended to be held for a period of time sufﬁcient
to recover their cost, and UBS believes that the evidence in-
dicating that the cost of the investments should be recover-
able within a reasonable period of time outweighs the evi-
dence to the contrary. This includes the nature of the invest-

ments, valuations and research undertaken by UBS, the cur-
rent outlook for each investment, offers under negotiation at
favourable prices and the duration of the unrealized losses.
The  following  table  shows  the  duration  of  unrealized
losses not recognized in the income statement for the year
ended 2005:

Fair value

Unrealized losses

CHF million

31 December 2005

Money market paper

Debt securities issued by the Swiss national government and agencies

Debt securities issued by Swiss local governments

Debt securities issued by US Treasury and agencies

Debt securities issued by foreign governments and ofﬁcial institutions

Corporate debt securities

Mortgage-backed securities

Other debt securities

Equity investments

Private equity investments

Total

Investments

Investments
with unrealized with unrealized
loss more than
12 months

loss less than
12 months

0

0

0

55

0

272

0

0

2,032

117

2,476

0

0

0

0

0

0

143

0

16

34

193

Investments

Investments
with unrealized with unrealized
loss more than
12 months

loss less than
12 months

0

0

0

(1 )

0

(11 )

0

0

(13 )

(10 )

(35)

0

0

0

0

0

0

(3 )

0

(3 )

(5 )

(11)

Total

0

0

0

55

0

272

143

0

2,048

151

2,669

Total

0

0

0

(1 )

0

(11 )

(3 )

0

(16 )

(15 )

(46)

Contractual maturities of the investments in debt instruments1

CHF million, except percentages

Amount

Yield (%)

Amount

Yield (%)

Amount

Yield (%)

Amount

Yield (%)

Within 1 year

1–5 years

5–10 years

Over 10 years

31 December 2005

Swiss national government and agencies

Swiss local governments

US Treasury and agencies

Foreign governments and ofﬁcial institutions

Corporate debt securities

Mortgage-backed securities

Other debt securities

Total fair value

0

0

0

38

13

0

0

51

0.00

0.00

0.00

1.91

3.20

0.00

0.00

2

0

42

2

239

0

0

285

4.36

0.00

5.51

1.90

4.25

0.00

0.00

0

0

10

5

66

14

0

95

0.00

0.00

5.77

5.64

5.38

3.92

0.00

1

0

12

2

103

129

0

247

4.00

0.00

6.03

6.17

5.66

4.80

0.00

1 Money market paper has a contractual maturity of less than one year.

Proceeds from sales and maturities of investment securities available-for-sale, excluding private equity, were as follows:

CHF million

Proceeds

Gross realized gains

Gross realized losses

110

31.12.05

31.12.04

298

60

1

277

58

45

Note 13 Investments in Associates

CHF million

Carrying amount at the beginning of the year

Additions

Disposals

Transfers

Income 2

Dividend paid

Foreign currency translation

Carrying amount at the end of the year

31.12.05

2,675

938

(935)

(13)

152

(59)

198

2,956

31.12.04

2,009

1,919 1

(823 )

(378 )

67

(42 )

(77 )

2,675

1 Additions of CHF 1,022 million due to the consolidation of Motor-Columbus.

2 Income of CHF 95 million and CHF 24 million is related to Industrial Holdings for 2005 and 2004, respectively.

Note 14 Property and Equipment

At historical cost less accumulated depreciation

CHF million

Historical cost

Own-used
properties

Leasehold IT, software
and com-
improve-
ments munication

Other
machines
and
equipment

Plant and
manu-
facturing
equipment

Projects in
progress

31.12.05

31.12.04

Balance at the beginning of the year

9,752

2,592

3,979

1,835

3,031

Additions

Additions from acquired companies

Disposals / write-offs1

Reclassiﬁcations

Foreign currency translation

Balance at the end of the year

Accumulated depreciation

178

3

(490 )

(26 )

29

132

1

(98 )

232

191

841

2

(880 )

108

211

194

0

(393 )

(118 )

78

127

110

(494 )

71

59

9,446

3,050

4,261

1,596

2,904

Balance at the beginning of the year

4,701

1,659

3,375

1,503

Depreciation2

Disposals / write-offs1

Reclassiﬁcations

Foreign currency translation

Balance at the end of the year

Net book value at the end of the year3

276

(158 )

(42 )

4

4,781

4,665

216

(61 )

71

114

1,999

1,051

716

(811 )

0

194

3,474

787

115

(318 )

3

46

1,349

247

760

233

(354 )

0

33

672

2,232

239

393

0

(8 )

(217 )

6

413

0

0

0

0

0

0

413

21,428

20,346

1,865

116

1,462

2,093

(2,363)

(2,020 )

50

574

(186 )

(267 )

21,670

21,428

11,998

1,556

11,867

1,576

(1,702)

(1,182 )

32

391

12,275

9,395

(43 )

(220 )

11,998

9,430

1 Includes write-offs of fully depreciated assets.
value of property and equipment is CHF 16,050 million (2004: CHF 16,031 million).

2 Depreciation expense of CHF 63 million and CHF 99 millon is related to Discontinued operations for 2005 and 2004 respectively.

3 Fire insurance

At fair value

CHF million

Balance at the beginning of the year

Additions

Additions from acquired companies

Sales

Reclassiﬁcations

Foreign currency translation

Balance at the end of the year

Investment
properties

Projects
in progress

31.12.05

31.12.04

41

26

0

(25 )

(16 )

2

28

39

0

0

0

(39 )

0

0

80

26

0

(25)

(55)

2

28

236

91

1

(241 )

0

(7 )

80

111

Financial Statements
Notes to the Financial Statements

Note 15 Goodwill and Other Intangible Assets

Six out of eight segments carry goodwill, of which Industrial
Holdings and Private Banks & GAM (at 31 December 2004
only) each have less than 5% of the total balance. Business
Banking Switzerland and Corporate Functions carry no good-
will. For the purpose of testing goodwill for impairment, UBS
determines the recoverable amount of its segments on the
basis of value in use. The recoverable amount is determined
using  a  proprietary  model  based  on  the  discounted  cash
ﬂow method, which has been adapted to give effect to the
special features of the banking business and its regulatory
environment. The recoverable amount is determined by es-
timating streams of earnings available to shareholders in the
next four quarters based on a rolling forecast process, dis-
counted to their presented values. The terminal value reﬂect-
ing the second and subsequent years is calculated using the
ﬁrst-year  proﬁt  multiplied  by  the  individual  price-earnings
multiple per segment, and discounted to present value. The
recoverable amount of the segments is the sum of earnings

available to shareholders in the ﬁrst year and the terminal
value.

The model is most sensitive to changes in the estimated
earnings  available  to  shareholders in  year  one  and  to  the
price-earnings multiple. Earnings available to shareholders are
estimated based on forecast results, business initiatives and
planned  capital  investments  and  returns  to  shareholders.
Price-earnings multiples are determined internally, taking into
account the forecast return on equity, the cost of equity and
the long-term growth rate. Applied values are also validated
against UBS's most recent share price development to ensure
that the applied values are reasonably in line with market de-
velopment.  Discount  rates  applied  range  from  8.5%  for
Wealth Management International & Switzerland and Wealth
Management US to 10.5% for Investment Bank.

Management believes that reasonable changes in key as-
sumptions  used  to  determine  the  recoverable  amounts  of
segments will not result in an impairment situation.

CHF million

Historical cost

Balance at the beginning of the year

Additions and reallocations

Disposals

Write-offs 1

Foreign currency translation

Balance at the end of the year

Accumulated amortization 2

Balance at the beginning of the year

Amortization 3

Reallocations

Disposals

Write-offs 1

Foreign currency translation

Balance at the end of the year

Goodwill

Other intangible assets

Total

Infrastructure

Customer
relationships,
contractual
rights and other

Total

31.12.05

31.12.04

8,865

1,518

(354 )

0

1,284

11,313

880

0

0

0

136

1,016

184

49

0

0

0

30

263

753

3,351

(1,426 )

(41 )

(112 )

284

2,056

711

291

(307 )

(30 )

(112 )

83

636

4,231

(1,426 )

(41 )

(112 )

420

3,072

895

340

(307 )

(30 )

(112 )

113

899

13,096

92

(395)

(112)

1,704

14,385

895

340

(307)

(30)

(112)

113

899

1,420

2,173

13,486

15,741

2,503

(407 )

(524 )

(1,203 )

16,110

3,872

1,066

0

(188 )

(524 )

(317 )

3,909

12,201

Net book value at the end of the year

11,313

1 Represents write-offs of fully amortized other intangible assets.
requires that accumulated goodwill amortization be netted against the historical cost.
in 2004, amortization expense of CHF 69 million for goodwill and CHF 7 million for other intangible assets is related to discontinued operations.

2 Goodwill amortization ceased to be recorded on 1 January 2005 due to the adoption of IFRS 3, Business Combinations. The standard
3 In 2005, amortization expense of CHF 6 million for other intangible assets relates to discontinued operations,

112

Note 15 Goodwill and Other Intangible Assets (continued)

The following table presents the disclosure of goodwill and other intangible assets by business segment for the year ended 
31 December 2005.

CHF million

Goodwill

Wealth Management International & Switzerland

Wealth Management US

Business Banking Switzerland

Global Asset Management

Investment Bank

Private Banks & GAM

Corporate Functions

Industrial Holdings

UBS

Other intangible assets

Wealth Management International & Switzerland

Wealth Management US

Business Banking Switzerland

Global Asset Management

Investment Bank

Private Banks & GAM

Corporate Functions

Industrial Holdings

UBS

Balance at
the beginning
of the year

Additions and
reallocations

Disposals

Amortization

Foreign currency
translation

Balance at
the end
of the year

1,176

2,472

0

1,189

3,579

311

0

138

8,865

159

1,560

0

0

418

14

24

1,161

3,336

263

996

0

57

184

0

0

18

1,518

(15 )

(996 )

0

10

(132 )

0

0

14

(1,119)

0

0

0

0

0

(353 )

0

(1 )

(354)

0

0

0

0

0

(9 )

0

(2 )

(11)

0

0

0

0

0

0

0

0

0

(7 )

(49 )

0

(1 )

(53 )

(5 )

(18 )

(207 )

(340)

127

373

0

192

546

42

0

4

1,284

4

238

0

(1 )

63

0

3

0

307

1,566

3,841

0

1,438

4,309

0

0

159

11,313

141

753

0

8

296

0

9

966

2,173

For further information about disclosure by Business Group, including the amortization of goodwill and other intangible

assets of previous years, please see Note 2a: Segment Reporting by Business Group.

The estimated, aggregated amortization expenses for other intangible assets are as follows:

CHF million

Estimated, aggregated amortization expenses for:

2006

2007

2008

2009

2010

2011 and thereafter

Total

Other intangible
assets

297

283

269

238

219

867

2,173

Due to the issuance of IFRS 3 Business Combinations, goodwill amortization ceased from 1January 2005. In addition, cer-
tain intangible assets were reclassiﬁed to Goodwill at 1 January 2005 and have been excluded for the purpose of calculating
estimated (aggregated) amortization expenses for Other intangible assets. See Note 1aa) for further details.

113

Financial Statements
Notes to the Financial Statements

Note 16 Other Assets

CHF million

Deferred tax assets

Settlement and clearing accounts

VAT and other tax receivables

Prepaid pension costs

Properties held for resale

Accounts receivable trade

Inventory – Industrial Holdings

Other receivables

Total other assets

Note

21

31.12.05

31.12.04

2,758

3,528

312

832

578

364

2,007

5,811

16,190

2,554

4,747

358

804

535

387

2,045

5,945

17,375

114

Balance Sheet: Liabilities

Note 17 Due to Banks and Customers

CHF million

Due to banks

Due to customers in savings and investment accounts

Other amounts due to customers

Total due to customers

Total due to banks and customers

31.12.05

124,328

113,889

337,644

451,533

575,861

31.12.04

120,026

101,081

274,995

376,076

496,102

Note 18 Financial Liabilities Designated at Fair Value and Debt Issued

The Group issues both CHF and non-CHF denominated ﬁxed-
rate and ﬂoating-rate debt. Floating-rate debt generally pays
interest  based  on  the  three-month  or  six-month  London
Interbank Offered Rate (LIBOR).

Subordinated  debt  securities  are  unsecured  obligations
of the Group and are subordinated in right of payment to
all present and future senior indebtedness and certain other
obligations  of  the  Group.  At  31  December  2005  and
31 December 2004, the Group had CHF 10,001 million and
CHF 8,605 million, respectively, in subordinated debt. Sub-
ordinated debt usually pays interest annually and provides for
single principal payments upon maturity.

At 31 December 2005 and 31 December 2004, the Group
had CHF 157,771 million and CHF 91,455 million, respectively,
in  unsubordinated  debt  (excluding  money  market  paper).
Equity Linked Notes, a class of compound instruments issued
by UBS totalling approximately CHF 39 billion, had to be re-
classiﬁed in the balance sheet from negative replacement val-
ues to ﬁnancial liabilities designated at fair value during 2005. 
The Group issues debt with returns linked to equity, inter-
est rates, foreign exchange and credit instruments or indices.

As described in Note 1n), most of these debt instruments
have been designated as held at fair value through profit
and loss and are presented in a separate line in the balance
sheet. At 31 December 2005 and 31 December 2004, the
Group had CHF 0 million and CHF 148 million, respectively,
in bonds with attached warrants on UBS shares outstand-
ing. All warrants related to those bonds issued in prior years
have expired.

In addition, the Group uses interest rate and foreign ex-
change  derivatives  to  manage  the  risks  inherent  in  certain
debt issues (held at amortized cost). In the case of interest rate
risk management, the Group applies hedge accounting as dis-
cussed in Note 1o) and Note 22 – Derivative Instruments. As
a result of applying hedge accounting, at 31 December 2005
and 31December 2004, the carrying value of debt issued was
CHF 294 million higher and CHF 349 million higher, respec-
tively,  reﬂecting  changes  in  fair  value  due  to  interest  rate
movements. 

The contractual redemption amount at maturity of ﬁnan-
cial liabilities designated at fair value approximates the carry-
ing  value  at  31  December  2005  and  31  December  2004. 

115

Financial Statements
Notes to the Financial Statements

Note 18 Financial Liabilities Designated at Fair Value and Debt Issued (continued)

Financial liabilities designated at fair value

CHF million

Bonds and compound debt instruments issued

Compound debt instruments – OTC

Total

Debt issued (held at amortized cost)

CHF million

Short-term debt: Money market paper issued

Long-term debt:

Bonds

Senior

Subordinated

Shares in bond issues of the Swiss regional or cantonal banks’ central bond institutions

Medium-term notes

Subtotal long-term debt

Total 

31.12.05

109,724

7,677

117,401

31.12.05

102,662

46,545

10,001

38

1,464

58,048

160,710

31.12.04

61,646

4,110

65,756

31.12.04

79,442

28,063

8,605

60

1,686

38,414

117,856

The following table shows the split between ﬁxed-rate and
ﬂoating-rate  debt  issues  based  on  the  contractual  terms.
However, it should be noted that the Group uses interest rate

swaps  to  hedge  many  of  the  ﬁxed-rate  debt  issues,  which
changes their re-pricing characteristics into those of ﬂoating-
rate debt.

Contractual maturity dates

CHF million, except where indicated

2006

2007

2008

2009

2010 2011–2015

Thereafter

Total
31.12.05

Total
31.12.04

UBS AG (Parent Bank)

Senior debt

Fixed rate

Interest rates (range in %)

Floating rate

Subordinated debt

Fixed rate

Interest rates (range in %)

Floating rate

Subtotal

Subsidiaries

Senior debt

Fixed rate

Interest rates (range in %)

Floating rate

Subordinated debt

Fixed rate

Interest rates (range in %)

Floating rate

90,714

0–16.5

9,296

1,637

4.25–7.25

0

8,597

0–12.25

560

1,385

5.75–8

0

5,982

0–20

32

0

0

0

101,647

10,542

6,014

53,878

0–10

263

0

0

960

0–10

678

0

0

5,955

0–10

1,499

0

0

7,988

0–13.5

226

518

5.875

0

8,732

7,688

0–18.5

1,367

0

0

6,754

0–19.4

386

7,687

0–12

1,176

128,504

69,413

782

0–10

13,624

25,300

22,585

0

3,112

1,006

7,658

8,247

0 2.375–7.375 7.247–8.75

0

7,140

1,931

13,906

395

2,326

342

15,807

163,788

100,587

3,420

0–10

1,182

0

0

4,180

0–35

3,804

0

0

17,251

93,332

71,018

0–35

4,504

17

9

0

13,297

7,881

17

0

16

0

Subtotal

Total 

54,141

155,788

1,638

12,180

7,454

13,468

9,055

17,787

4,602

11,742

7,984

21,890

21,772

37,579

106,646

270,434

78,915

179,502

The table above indicates ﬁxed interest rate coupons ranging
from 0 up to 35% on the Group's bonds. These high or low
coupons generally relate to structured debt issues prior to the
separation of embedded derivatives. As a result, the stated in-

terest rate on such debt issues generally does not reﬂect the
effective interest rate the Group is paying to service its debt
after  the  embedded  derivative  has  been  separated  and,
where applicable, the application of hedge accounting.

116

Note 19 Other Liabilities

CHF million

Provisions

Provisions for contingent claims

Current tax liabilities

Deferred tax liabilities

VAT and other tax payables

Settlement and clearing accounts

Amounts due under unit-linked investment contracts

Accounts payable

Other payables

Total other liabilities

Note 20 Provisions

CHF million

Balance at the beginning of the year

Additions from acquired companies

New provisions charged to income

Capitalized reinstatement costs

Recoveries

Provisions applied

Disposal of subsidaries

Foreign currency translation

Balance at the end of the year

Note

31.12.05

31.12.04

20

9b

21

Other 1

1,236

1

86

3

5

(217 )

0

32

1,146

2,072

109

3,592

2,633

712

2,707

30,224

1,425

10,400

53,874

2,020

214

2,318

3,146

520

2,185

22,057

1,597

10,063

44,120

Total
31.12.05

2,020

Total
31.12.04

1,490

1

520

3

25

(588)

(11)

102

2,072

700

587

66

34

(772 )

(11 )

(74 )

2,020

Operational

Litigation

299

0

117

0

3

(102 )

(4 )

21

334

485

0

317

0

17

(269 )

(7 )

49

592

1 Comprises provisions for: contract risk related to international electricity trading business; annual cost liabilities related to power purchases from joint venture companies where production costs exceed
market prices; reinstatement costs; subleases.

Note 21 Income Taxes

CHF million

Tax expense from continuing operations

Domestic

Current

Deferred

Foreign

Current

Deferred

Total income tax expense from continuing operations

Tax expense from discontinued operations

Domestic

Foreign

Total income tax expense from discontinued operations

Total income tax expense

For the year ended

31.12.05

31.12.04

31.12.03

1,490

64

1,441

(446)

2,549

489

9

498

3,047

1,225

13

828

158

2,224

108

21

129

2,353

795

99

264

261

1,419

66

13

79

1,498

The  Group  made  net  tax  payments,  including  domestic  and  foreign  taxes,  of  CHF 2,394  million,  CHF 1,345  million  and
CHF 1,117 million for the full years of 2005, 2004 and 2003 respectively.

117

Financial Statements
Notes to the Financial Statements

Note 21 Income Taxes (continued)

The components of operating proﬁt before tax, as well as the differences between income tax expense reﬂected in the Financial
Statements and the amounts calculated at the Swiss statutory rate, are as follows:

CHF million

Operating proﬁt from continuing operations before tax

Domestic

Foreign

Income taxes at Swiss statutory rate of 22% for 2005 and 24% for 2004 and 2003

Increase / (decrease) resulting from:

Applicable tax rates differing from Swiss statutory rate

Tax losses not recognized

Previously unrecorded tax losses now recognized

Lower taxed income

Non-deductible goodwill and other intangible asset amortization

Other non-deductible expenses

Adjustments related to prior years and other

Change in deferred tax valuation allowance

31.12.05

13,049

6,241

6,808

2,871

For the year ended

31.12.04

10,287

5,882

4,405

2,469

31.12.03

7,272

4,996

2,276

1,745

436

75

(100)

(603)

22

223

(219)

(156)

137

103

(249 )

(660 )

262

219

(296 )

239

(233 )

85

(291 )

(366 )

386

186

(191 )

98

Income tax expense from continuing operations

2,549

2,224

1,419

Signiﬁcant components of the Group’s gross deferred income tax assets and liabilities are as follows:

CHF million

Deferred tax assets

Compensation and beneﬁts

Net operating loss carry-forwards

Trading assets

Other

Total

Valuation allowance

Net deferred tax assets

Deferred tax liabilities

Compensation and beneﬁts

Property and equipment

Investments

Provisions

Trading assets

Intangible assets

Other

Total deferred tax liabilities

31.12.05

31.12.04

1,851

2,235

586

804

5,476

(2,718)

2,758

55

515

468

0

448

264

883

2,633

1,582

2,251

483

906

5,222

(2,668 )

2,554

119

542

343

313

408

272

1,149

3,146

The change in the balance of net deferred tax assets and deferred tax liabilities does not equal the deferred tax expense in
those years. This is mainly due to the impact of the effects of foreign currency rate changes on tax assets and liabilities de-
nominated in currencies other than CHF, as well as the booking of some of the tax beneﬁts related to deferred compensa-
tion through Equity. In 2004, the acquisition of Motor-Columbus also had a signiﬁcant impact.

118

Note 21 Income Taxes (continued)

Certain foreign branches and subsidiaries of the Group have
deferred tax assets related to net operating loss carry-forwards
and other items. Because realization of these assets is uncer-
tain, the Group has established valuation allowances of CHF
2,718 million (CHF 2,668 million at 31 December 2004). For
companies that suffered tax losses in either the current or pre-
ceding year, an amount of CHF 442 million (CHF 436 million at
31 December 2004) has been recognized as deferred tax assets
based on expectations that sufﬁcient taxable income will be
generated in future years to utilize the tax loss carry-forwards.

The Group provides deferred income taxes on undistributed
earnings  of  non-Swiss  subsidiaries  except  to  the  extent  that
such earnings are indeﬁnitely invested. In the event these earn-
ings were distributed, additional taxes of approximately CHF 20
million would be due.

At 31 December 2005 net operating loss carry-forwards to-
taling  CHF  5,553  million  (not  recognized  as  a  deferred  tax
asset)  are  available  to  reduce  taxable  income  of  certain
branches and subsidiaries.

The carry forwards expire as follows:

Within 1 year

From 2 to 4 years

After 4 years

Total

31.12.05

8

211

5,334

5,553

Note 22 Derivative Instruments

A derivative is a ﬁnancial instrument, the value of which is de-
rived from the value of another (“underlying”) ﬁnancial in-
strument, an index or some other variable. Typically, the un-
derlying is a share, commodity or bond price, an index value
or an exchange or interest rate.

The majority of derivative contracts are negotiated as to
amount (“notional”), tenor and price between UBS and its
counterparties,  whether  other  professionals  or  customers
(over-the-counter or OTC contracts). The rest are standardized
in  terms  of  their  amounts  and  settlement  dates  and  are
bought  and  sold  on  organized  markets  (exchange-traded
contracts).

The notional amount of a derivative is generally the quan-
tity of the underlying instrument on which the derivative con-
tract is based and is the basis upon which changes in the value
of the contract are measured. It provides an indication of the
underlying volume of business transacted by the Group but
does not provide any measure of risk.

Derivative instruments are carried at fair value, shown in
the balance sheet as separate totals of Positive replacement
values (assets) and Negative replacement values (liabilities).
Positive replacement values represent the cost to the Group
of replacing all transactions with a fair value in the Group’s
favor if all the relevant counterparties of the Group were to
default at the same time, assuming transactions could be re-
placed instantaneously. Negative replacement values repre-
sent the cost to the Group’s counterparties of replacing all
their transactions with the Group with a fair value in their
favor if the Group were to default. Positive and negative re-
placement values on different transactions are only netted if
the transactions are with the same counterparty and the cash

ﬂows will be settled on a net basis. Changes in replacement
values of derivative instruments are recognized in trading in-
come unless they qualify as hedges for accounting purposes,
as explained in Note 1 Summary of Signiﬁcant Accounting
Policies, section o) Derivative instruments and hedging.

Types of derivative instruments
The Group uses the following derivative ﬁnancial instruments
for both trading and hedging purposes:

Forwards and futures are contractual obligations to buy or
sell ﬁnancial instruments or commodities on a future date at
a  speciﬁed  price.  Forward  contracts  are  tailor-made  agree-
ments  that  are  transacted  between  counterparties  on  the
OTC  market,  whereas  futures  are  standardized  contracts
transacted on regulated exchanges.

Swaps are  transactions  in  which  two  parties  exchange
cash  ﬂows  on  a  speciﬁed  notional  amount  for  a  predeter-
mined period. Most swaps are traded OTC. The major types
of swap transactions undertaken by the Group are as follows:
– Interest rate swap contracts generally entail the contrac-
tual exchange of ﬁxed-rate and ﬂoating-rate interest pay-
ments in a single currency, based on a notional amount
and a reference interest rate, e.g. LIBOR.

– Cross currency swaps involve the exchange of interest pay-
ments based on two different currency principal balances
and reference interest rates and generally also entail ex-
change of principal amounts at the start and / or end of the
contract.

– Credit default swaps (CDSs) are the most common form
of credit derivative, under which the party buying protec-
tion makes one or more payments to the party selling pro-

119

Financial Statements
Notes to the Financial Statements

Note 22 Derivative Instruments (continued)

tection  in  exchange  for  an  undertaking  by  the  seller  to
make a payment to the buyer following a credit event (as
deﬁned in the contract) with respect to a third-party credit
entity (as deﬁned in the contract). Settlement following a
credit event may be a net cash amount or cash in return
for  physical  delivery  of  one  or  more  obligations  of  the
credit entity and is made regardless of whether the protec-
tion buyer has actually suffered a loss. After a credit event
and settlement, the contract is terminated.

– Total rate of return swaps give the total return receiver ex-
posure to all of the cash ﬂows and economic beneﬁts and
risks of an underlying asset, without having to own the
asset, in exchange for a series of payments, often based
on a reference interest rate, e.g. LIBOR. The total return
payer has an equal and opposite position.
Options are contractual agreements under which, typically,
the seller (writer) grants the purchaser the right, but not the
obligation, either to buy (call option) or to sell (put option) by
or at a set date, a speciﬁed quantity of a ﬁnancial instrument
or commodity at a predetermined price. The purchaser pays
a premium to the seller for this right. Options involving more
complex payment structures are also transacted. Options may
be traded OTC or on a regulated exchange and may be traded
in the form of a security (warrant).

Derivatives transacted for trading purposes
Most of the Group’s derivative transactions relate to sales and
trading activities. Sales activities include the structuring and
marketing of derivative products to customers to enable them
to take, transfer, modify or reduce current or expected risks.
Trading  includes  market  making,  positioning  and  arbitrage
activities. Market making involves quoting bid and offer prices
to other market participants with the intention of generating
revenues  based  on  spread  and  volume.  Positioning  means
managing market risk positions with the expectation of prof-
iting  from  favorable  movements  in  prices,  rates  or  indices.
Arbitrage activities involve identifying and proﬁting from price
differentials between the same product in different markets
or the same economic factor in different products.

Derivatives transacted for hedging purposes
The Group enters into derivative transactions for the purposes
of hedging assets, liabilities, forecast transactions, cash ﬂows
and  credit  exposures.  The  accounting  treatment  of  hedge
transactions varies according to the nature of the instrument
hedged and whether the hedge qualiﬁes as such for account-
ing purposes.

Derivative transactions may qualify as hedges for account-
ing purposes if they are fair value hedges or cash ﬂow hedges.
These are described under the corresponding headings be-
low.  The  Group’s  accounting  policies  for  derivatives  desig-
nated  and  accounted  for  as  hedging  instruments  are  ex-

120

plained  in  Note  1o),  Derivative  instruments  and  hedging,
where  terms  used  in  the  following  sections  are  explained.
The Group also enters into CDSs that provide economic
hedges for credit risk exposures in the loan and traded prod-
uct portfolios but do not meet the requirements for hedge ac-
counting treatment.

Starting in fourth quarter 2005, the Group also entered
into interest rate swaps for day-to-day economic interest rate
risk management purposes, but without applying hedge ac-
counting. The fair value changes of such swaps are booked
to Net trading income. The Group is limiting the resultant in-
come volatility by selecting short-term to medium term swaps
only. Longer term swaps continue to be supported by the cash
ﬂow hedging model explained below.

Fair value hedges
The Group’s fair value hedges principally consist of interest
rate swaps that are used to protect against changes in the fair
value of ﬁxed-rate instruments due to movements in market
interest  rates.  For  the  year  ended  31  December  2005,  the
Group recognized a net loss of CHF 22 million and in 2004
a net  gain  of  CHF  22  million,  representing  the  ineffective
portions, as deﬁned in Note 1o), of fair value hedges. The fair
values  of  outstanding  derivatives  designated  as  fair  value
hedges  were  a  CHF  380  million  net  positive  replacement
value at 31 December 2005 and a CHF 438 million net posi-
tive replacement value at 31 December 2004. 

Fair value hedge of portfolio of interest rate risk
The  Group  has  decided  to  apply  the  new  hedge  method
introduced by IFRS to a speciﬁc portfolio of mortgage loans
from  the  end  of  September  2005.  In  the  months  of
November and December, the hedge relations were ineffec-
tive, and the hedges have therefore been de-designated. The
Group recognized a net loss of CHF 1 million as hedge inef-
fectiveness  on  the  hedges  in  fourth  quarter  2005.  The
change in fair value of the hedged items up to the point of
de-designation of the hedges is recorded separately from the
hedged  item  on  the  balance  sheet  and  is  amortized  to
Interest income or expense as applicable over the remaining
life of the de-designated hedge contracts. A CHF 0.4 million
gain  was  recorded  in  Interest  income  as  a  result  of  such
amortization in fourth quarter 2005. There were no deriva-
tive  contracts  designated  as  hedges  under  this  hedge
method at 31 December 2005.

Cash ﬂow hedges of forecast transactions
The  Group  is  exposed  to  variability  in  future  interest  cash
ﬂows on non-trading assets and liabilities that bear interest
at variable rates or are expected to be refunded or reinvested
in the future. The amounts and timing of future cash ﬂows,
representing both principal and interest ﬂows, are projected

Note 22 Derivative Instruments (continued)

for each portfolio of ﬁnancial assets and liabilities, based on
contractual terms and other relevant factors including esti-
mates of prepayments and defaults. The aggregate principal
balances and interest cash ﬂows across all portfolios over time
form the basis for identifying the non-trading interest rate risk

of the Group, which is hedged with interest rate swaps, the
maximum maturity of which is 22 years.

The schedule of forecast principal balances on which the
expected interest cash ﬂows arise as at 31 December 2005 is
shown below.

CHF billion

Cash inﬂows (assets)

Cash outﬂows (liabilities)

Net cash ﬂows

< 1 year

1–3 years

3–5 years

5–10 years

over 10 years

212

93

119

391

117

274

270

28

242

263

182

81

8

60

(52)

Gains and losses on the effective portions of derivatives
designated as cash ﬂow hedges of forecast transactions are
initially recorded in Shareholders’ equity as gains / losses not
recognized in the income statement and are transferred to
current period earnings when the forecast cash ﬂows affect
net proﬁt or loss. The gains and losses on ineffective portions
of such derivatives are recognized immediately in the income
statement. A CHF 35 million gain and a CHF 13 million gain
were  recognized  in  2005  and  2004,  respectively,  due  to
hedge ineffectiveness.

As at 31 December 2005 and 2004, the fair values of out-
standing derivatives designated as cash ﬂow hedges of fore-
cast transactions were a CHF 1,124 million net negative re-
placement value and a CHF 818 million net negative replace-
ment  value,  respectively.  Swiss  franc  hedging  interest  rate
swaps terminated during 2005 had a positive replacement
value of CHF 80 million, but no interest rate swaps designated
as cash ﬂow hedges were terminated during 2004. At the end
of 2005, unrecognized income of CHF 346 million associated
with these swaps has remained deferred in Equity. It will be
removed from equity when the hedged cash ﬂows have an
impact  on  net  proﬁt  or  loss.  Amounts  reclassiﬁed  from
Realized gains / losses not recognized in the income statement
to current period earnings due to discontinuation of hedge
accounting were a CHF 243 million net gain in 2005 and a
CHF  304  million  net  gain  in  2004.  These  amounts  were
recorded in Net interest income. 

Risks of derivative instruments
Derivative instruments are transacted in many trading portfo-
lios, which generally include several types of instruments, not
just derivatives. The market risk of derivatives is managed and
controlled as an integral part of the market risk of these port-

folios. The Group’s approach to market risk is described in
Note 28, Financial Instruments Risk Position, part a) Market
risk.

Derivative instruments are transacted with many different
counterparties,  most  of  whom  are  also  counterparties  for
other types of business. The credit risk of derivatives is man-
aged  and  controlled  in  the  context  of  the  Group’s  overall
credit exposure to each counterparty. The Group’s approach
to credit risk is described in Note 28, Financial Instruments
Risk Position, part b) Credit risk. It should be noted that, al-
though the positive replacement values shown on the balance
sheet can be an important component of the Group’s credit
exposure, the positive replacement values for any one coun-
terparty are rarely an adequate reﬂection of the Group’s credit
exposure on its derivatives business with that counterparty.
This is because, on the one hand, replacement values can in-
crease over time (“potential future exposure”), while on the
other hand, exposure may be mitigated by entering into mas-
ter netting agreements and bilateral collateral arrangements
with counterparties. Both the exposure measures used by the
Group internally to control credit risk and the capital require-
ments imposed by regulators reﬂect these additional factors.
In Note 28, part b) Credit risk, the Derivatives positive replace-
ment values shown under Traded products, and in Note 28
part  d)  Capital  adequacy,  the  Positive  replacement  values
shown  under  Balance  sheet  assets  are  lower  than  those
shown in the balance sheet and in the tables on the next two
pages because they reﬂect legally enforceable close-out net-
ting arrangements. Conversely, there are additional capital re-
quirements shown in Note 28 part d) Capital adequacy under
Off-balance sheet and other positions as Forward and swap
contracts and Purchased options, which reﬂect the additional
potential future exposure.

121

Financial Statements
Notes to the Financial Statements

Note 22 Derivative Instruments (continued)
As at 31 December 2005

Term to maturity

CHF million

Interest rate contracts

Over-the-counter (OTC) contracts

Forward contracts

Swaps

Options

Exchange-traded contracts 3

Futures

Options

Total

Credit derivative contracts

Over-the-counter (OTC) contracts

Credit default swaps

Total rate of return swaps

Total

Foreign exchange contracts

Over-the-counter (OTC) contracts

Forward contracts

Interest and currency swaps

Options

Exchange-traded contracts 3

Futures

Options

Total

Precious metals contracts

Over-the-counter (OTC) contracts

Forward contracts

Options

Exchange-traded contracts 3

Futures

Options

Total

Equity / index contracts

Over-the-counter (OTC) contracts

Forward contracts

Options

Exchange-traded contracts 3

Futures

Options

Total

Commodity contracts

Over-the-counter (OTC) contracts

Forward contracts

Options

Exchange-traded contracts 3

Futures

Options

Total

Within 3 months

3–12 months

1–5 years

Over 5 years

PRV 1

NRV 2

PRV

NRV

PRV

NRV

PRV

NRV

Total
PRV

Total
NRV

Total 
notional
amount
CHF bn

652

5,953

832

607

154

96

97

32

86

179

989

914

1,345.7

4,701

12,630

13,156

77,445

75,523

105,029

101,256 201,057 194,636 15,680.4

690

1,750

2,163

9,600

10,701

6,738

9,247

18,920

22,801

1,273.1

59

55

118

123

6

6

183

184

26.6

7,496

6,053

14,652

15,538

87,148

86,262 111,853 110,682 221,149 218,535 20,744.1

2,418.3

13

50

63

21

74

95

290

30

320

195

143

338

7,911

10,691

757

778

4,247

713

2,472

12,461

13,379

1,481.0

820

1,550

1,815

44.4

8,668

11,469

4,960

3,292

14,011

15,194 1,525.4

2,905

2,470

962

20,162

22,092

10,239

1,910

1,800

1,855

806

9,256

1,600

643

499

54

96

4,564

3,871

502.9

12,102

12,252

5,875

6,242

48,378

49,842

3,592.6

386

637

5

2

4,156

4,039

659.6

6

6

1

1

7

7

4.7

0.1

24,983

26,368

13,057

11,663

13,131

13,388

5,934

6,340

57,105

57,759 4,759.9

444

276

365

431

407

607

366

521

558

1,128

284

1,050

85

99

91

55

1,494

2,110

1,106

2,057

1,179

1,899

1,143

1,939

1,498

2,512

1,512

2,399

1,288

2,974

1,312

2,646

184

146

3,965

7,569

3,967

7,130

859

270

627

1,058

747

3,017

769

4,621

1,410

7,154

499

8,635

2

13

3,018

1,908

2,237

4,487

12,678

18,801

1,997

3,126

1,827

3,512

2,396

6,160

2,473

3,787

4,277

178

206

8,358

8,783

7,863

12,351

13,411

2,417

4,706

24,054

29,492

17.4

56.9

1.6

4.4

80.3

101.8

204.7

59.5

345.3

711.3

2,146

164

2,099

185

4,208

354

3,908

300

2,301

599

2,488

457

28

42

64

47

26

23

2,338

2,326

4,626

4,255

2,926

2,968

3

1

4

8,658

1,118

8,495

946

4

70.7

6.8

118

112

4

9,894

9,553

105.4

12.2

195.1

Total derivative instruments

39,905

40,293

41,327

42,056 127,198 130,144 125,352 125,170 333,782 337,663

1 PRV: positive replacement value.

2 NRV: negative replacement value.

3 Exchange-traded products include own account trades only.

122

Note 22 Derivative Instruments (continued)
As at 31 December 2004

Term to maturity

Within 3 months

3–12 months

1–5 years

Over 5 years

PRV 1

NRV 2

PRV

NRV

PRV

NRV

PRV

NRV

Total
PRV

Total
NRV

Total 
notional
amount
CHF bn

Forward contracts

3,496

4,585

807

1,316

186

449

68

240

4,557

6,590

355.6

Interest and currency swaps

27,587

28,094

15,101

14,907

20,897

15,484

7,189

7,240

70,774

65,725

2,811.4

CHF million

Interest rate contracts

Over-the-counter (OTC) contracts

Forward contracts

Swaps

Options

Exchange-traded contracts 3

Futures

Options

Total

Credit derivative contracts

Over-the-counter (OTC) contracts

Credit default swaps

Total rate of return swaps

Total

Foreign exchange contracts

Over-the-counter (OTC) contracts

Options

Exchange-traded contracts 3

Futures

Options

Total

Precious metals contracts

Over-the-counter (OTC) contracts

Forward contracts

Options

Exchange-traded contracts 3

Futures

Options

Total

Equity / index contracts

Over-the-counter (OTC) contracts

Forward contracts

Options

Exchange-traded contracts 3

Futures

Options

Total

Commodity contracts

Over-the-counter (OTC) contracts

Forward contracts

Options

Exchange-traded contracts 3

Futures

Options

Total

440

4,305

806

495

112

144

58

34

90

166

700

839

843.6

4,002

11,015

11,921

65,419

64,487

76,470

75,287 157,209 155,697

9,871.0

722

1,845

2,239

6,553

8,292

5,942

6,479

15,146

17,732

1,181.4

86

87

133

103

5

5

224

195

817.9

5,637

5,306

13,105

14,407

72,035

72,818

82,502

81,932 173,279 174,463 14,786.9

2,073.0

7

31

38

10

15

25

51

57

108

99

69

3,819

433

168

4,252

5,409

1,076

6,485

2,401

376

1,501

6,278

272

897

2,777

1,773

7,175

7,019

1,432

8,451

639.2

27.1

666.3

2,224

2,202

2,809

2,553

508

503

4

4

5,545

5,262

559.2

9

9

81

79

11

10

101

98

2.9

5.9

33,316

34,890

18,798

18,855

21,602

16,446

7,261

7,484

80,977

77,675 3,735.0

130

156

215

501

113

115

237

465

150

281

195

626

201

251

447

683

259

711

18

1,148

192

615

33

840

9

34

24

28

736

530

1,154

1,009

428

529

13.5

43.4

0.8

2.5

43

52

2,318

2,068

60.2

795

2,017

506

7,807

572

2,057

419

7,245

1,912

7,367

928

16,290

1,212

4,024

1,040

9,353

947

1,142

1,711

1,979

3,576

8,806

10,990

19,197

129

455

98

682

24

3,408

1,877

2,144

11,896

33,486

109

3,968

4,270

2,277

19,272

39,633

338

74

2

414

343

67

6

416

519

85

604

491

77

2

570

420

118

379

57

1,277

1,213

277

201

2

8

538

436

0

0

1,556

1,422

41.2

103.6

223.6

8.1

401.6

736.9

35.4

3.6

1.0

1.2

Total derivative instruments

43,930

50,455

36,817

43,517 110,565 116,222

93,265

93,518 284,577 303,712

1 PRV: positive replacement value.

2 NRV: negative replacement value.

3 Exchange-traded products include own account trades only.

123

Financial Statements
Notes to the Financial Statements

Off-Balance Sheet Information

Note 23 Fiduciary Transactions

Fiduciary placement represents funds customers have instructed the Group to place in foreign banks. The Group is not liable
to the customer for any default by the foreign bank, nor do creditors of the Group have a claim on the assets placed.

CHF million

Placements with third parties

Fiduciary credits and other ﬁduciary ﬁnancial transactions

Total ﬁduciary transactions

31.12.05

40,603

0

40,603

31.12.04

39,588

57

39,645

The Group also acts in its own name as trustee or in ﬁduciary
capacities for the account of third parties. The assets man-
aged in such capacities are not reported on the balance sheet
unless they are invested with UBS. UBS earns commission and
fee income from such transactions and assets. These activi-

ties potentially expose UBS to liability risks in cases of gross
negligence with regard to non-compliance with its ﬁduciary
and  contractual  duties. UBS  has  policies  and  processes  in
place to control these risks.

Note 24 Commitments and Contingent Liabilities

The  Group  utilizes  various  lending-related  ﬁnancial  instru-
ments in order to meet the ﬁnancial needs of its customers.
The Group issues commitments to extend credit, standby and
other letters of credit, guarantees, commitments to enter into
repurchase agreements, note issuance facilities and revolving
underwriting facilities. Guarantees represent irrevocable as-
surances, subject to the satisfaction of certain conditions, that
the Group will make payment in the event that the customer
fails to fulﬁll its obligation to third parties. The Group also en-
ters into commitments to extend credit in the form of credit
lines that are available to secure the liquidity needs of cus-
tomers but have not yet been drawn on by them, the major-
ity of which range in maturity from one month to ﬁve years.
The contractual amount of these instruments is the maxi-
mum amount at risk for the Group if the customer fails to
meet  its  obligations.  The  risk  is  similar  to  the  risk  involved

in extending  loan  facilities  and  is  subject  to  the  same  risk
management  and  control  framework.  For  the  years  ended
31 December 2005, 2004 and 2003 the Group recognized
credit loss recoveries of CHF 39 million, CHF 31 million and
CHF 23 million respectively, related to obligations incurred for
contingencies and commitments.

The Group generally enters into sub-participations to mit-
igate the risks from commitments and contingencies. A sub-
participation is an agreement by another party to take a share
of the loss in the event that the borrower fails to fulﬁll its ob-
ligations and, where applicable, to fund a part of the credit
facility. The Group retains the contractual relationship with
the borrower, and the sub-participant has only an indirect re-
lationship with the borrower. The Group will only enter into
sub-participation  agreements  with  banks  whose  rating  is
equal to or better than that of the borrower.

124

Note 24 Commitments and Contingent Liabilities (continued)

CHF million

Contingent liabilities

Credit guarantees and similar instruments 1

Sub-participations

Total

Performance guarantees and similar instruments 2

Sub-participations

Total

Documentary credits

Sub-participations

Total

Gross contingent liabilities

Sub-participations

Net contingent liabilities

Irrevocable commitments

Undrawn irrevocable credit facilities

Sub-participations

Total

Liabilities for calls on shares and other equities

Gross irrevocable commitments

Sub-participations

Net irrevocable commitments

Gross commitments and contingent liabilities

Sub-participations

Net commitments and contingent liabilities

Market value guarantees in form of written put options

31.12.05

31.12.04

11,526

(719)

10,807

2,805

(335)

2,470

2,235

(207)

2,028

16,566

(1,261)

15,305

72,905

(2)

72,903

20

72,925

(2)

72,923

89,491

(1,263)

88,228

317,973

10,252

(621 )

9,631

2,536

(415 )

2,121

2,106

(272 )

1,834

14,894

(1,308 )

13,586

53,168

(7 )

53,161

19

53,187

(7 )

53,180

68,081

(1,315 )

66,766

352,509

1 Credit guarantees in the form of bills of exchange and other guarantees, including guarantees in the form of irrevocable letters of credit, endorsement liabilities from bills rediscounted, advance
payment guarantees and similar facilities.
2 Bid bonds, performance bonds, builders’ guarantees, letters of indemnity, other performance guarantees in the form of irrevocable letters of credit and
similar facilities.

As part of its trading and market making activities, UBS writes
put options on a broad range of underlyings. For writing put
options, UBS receives a premium, which is recognized as neg-
ative replacement value on the balance sheet. The contract
volume of a written put option, which is the number of units
of the underlying multiplied by the exercise price per unit, is
considered a market price guarantee issued, because the op-
tion holder is entitled to make UBS purchase the underlying
at the stated exercise price. The fair value of all written put

options is recognized on the balance sheet as negative re-
placement value, which is signiﬁcantly lower than the under-
lying  total  contract  volume  that  represents  the  maximum
potential  payment  UBS  could  be  required  to  make  upon
exercise of the puts. The exposure from writing put options is
subject  to  UBS’s  risk  management  and  control  framework.
Accordingly, neither the underlying total contract volume nor
the negative replacement value are indicative of the actual
risk exposure arising from written put options.

125

Financial Statements
Notes to the Financial Statements

Note 24 Commitments and Contingent Liabilities (continued)

CHF million

Overview of collateral

Gross contingent liabilities

Gross irrevocable commitments

Liabilities for calls on shares and other equities

Total 31.12.05

Total 31.12.04

Mortgage collateral

Other collateral

Unsecured

Total

355

3,333

3,688

3,599

9,558

33,722

43,280

30,045

6,653

35,850

20

42,523

34,437

16,566

72,905

20

89,491

68,081

Other commitments
The Group enters into commitments to fund external private
equity funds and investments, which typically expire within
ﬁve years. The commitments themselves do not involve credit
or market risk as the funds purchase investments at market

value at the time the commitments are drawn. The maximum
amount available to fund these investments at 31 December
2005 and 31 December 2004 was CHF 933 million and CHF
1,019 million respectively.

Note 25 Operating Lease Commitments

At 31 December 2005, UBS was obligated under a number of
non-cancellable operating leases for premises and equipment
used primarily for banking purposes. The signiﬁcant premises
leases usually include renewal options and escalation clauses
in line with general ofﬁce rental market conditions as well as
rent adjustments based on price indices. However, the lease

agreements do not contain contingent rent payment clauses
and purchase options. The leases also do not impose any re-
strictions on UBS’s ability to pay dividends, engage in debt ﬁ-
nancing transactions or enter into further lease agreements.
The minimum commitments for non-cancellable leases of

premises and equipment are presented as follows:

31.12.05

963

908

844

783

672

3,973

8,143

821

7,322

31.12.05

31.12.04

31.12.03

1,232

1,157

75

51

1,181

1,106

75

1,309

1,236

73

43

1,266

1,193

73

1,354

1,263

91

43

1,311

1,220

91

CHF million

Operating leases due

2006

2007

2008

2009

2010

2011 and thereafter

Subtotal commitments for minimum payments under operating leases

Less: Sublease rentals under non-cancellable leases

Net commitments for minimum payments under operating leases

CHF million

Gross operating lease expense

from continuing operations

from discontinued operations

Sublease rental income from continuing operations

Net operating lease expense

from continuing operations

from discontinued operations

126

Additional Information

Note 26 Pledged Assets and Pledgeable Off-Balance Sheet Securities

Assets are pledged from the Group’s balance sheet as collateral or for other purposes. Additionally, the Group receives pledge-
able securities in various types of transactions. These securities are not recognized on the balance sheet.

Pledged Assets

Assets are pledged as collateral for collateralized credit lines with central banks, loans from central mortgage institutions, de-
posit guarantees for savings banks, security deposits relating to stock exchange membership and mortgages on the Group’s
property. No ﬁnancial assets are pledged for contingent liabilities. The following table shows additional information about as-
sets pledged or assigned as security for liabilities and assets subject to reservation of title for the years ended 31 December
2005 and 31 December 2004.

CHF million

Mortgage loans

Securities

Property and equipment

Other

Total pledged assets

Pledgeable Off-Balance Sheet Securities

Carrying amount Related liability
31.12.05

31.12.05

Carrying amount
31.12.04

Related liability
31.12.04

64

115,580

520

474

38

88,596

683

0

116,638

89,317

175

92,440

320

0

92,935

60

87,113

0

0

87,173

The Group also obtains off-balance sheet securities with the right to sell or repledge them as shown in the table below.

CHF million

Fair value of securities received which can be sold or repledged

as collateral under reverse repurchase, securities borrowing and lending arrangements, 
derivative transactions and other transactions

in unsecured borrowings which can be sold or repledged

thereof sold or repledged

in connection with ﬁnancing activities

to satisfy commitments under short sale transactions

in connection with derivative transactions

in connection with other transactions

Note 27 Litigation

31.12.05

1,255,176

1,183,238

71,938

1,002,423

918,802

70,174

9,205

4,242

31.12.04

968,737

921,067

47,670

818,151

737,805

57,903

6,714

15,729

Due to the nature of their business, the bank and other com-
panies within the UBS Group are involved in various claims, dis-
putes and legal proceedings, arising in the ordinary course of
business. The Group makes provisions for such matters when,
in the opinion of management and its professional advisors, it
is probable that a payment will be made by the Group, and
the amount can be reasonably estimated (see Note 20).

In respect of the further claims asserted against the Group
of which management is aware (and which, according to the
principles outlined above, have not been provided for), it is
the opinion of management that such claims are either with-
out merit, can be successfully defended or will not have a ma-
terial adverse effect on the Group’s ﬁnancial condition, results
of operations or liquidity.

127

Financial Statements
Notes to the Financial Statements

Note 28 Financial Instruments Risk Position

This  section  presents  information  about  UBS’s  exposure  to
and its management and control of risks, in particular the pri-
mary  risks  associated  with  its  use  of  ﬁnancial  instruments:
– market risk (part a) is exposure to market variables such as

interest rates, exchange rates and equity markets

– credit risk (part b) is the risk of loss resulting from client or
counterparty default and arises on credit exposure in all
forms, including settlement risk

– liquidity risk (part c) is the risk that UBS is unable to meet

its payment obligations when due.
Part d) presents and explains the Group’s regulatory capi-

tal position.

Part e) covers the ﬁnancial instruments risk position of the
industrial  holding  Motor-Columbus  through  its  operating
subsidiary Atel.

Sections a) to d) generally refer only to UBS’s ﬁnancial busi-
nesses, and the tables in this note which are based on risk in-
formation include only the ﬁnancial businesses of the Group.
Those which present an analysis of the whole balance sheet
include the positions of the Industrial Holdings segment, in-
cluding Motor-Columbus.

Any representation of risk at a speciﬁc date offers only a
snapshot of the risks taken, since both trading and non-trad-
ing positions can vary signiﬁcantly on a daily basis, because
they are actively managed. As such, it may not be represen-
tative of the level of risk at other times.

a) Market Risk

(i) Overview
Market risk is the risk of loss arising from movements in mar-
ket variables including observable variables such as interest
rates, exchange rates and equity indices, and others which
may be only indirectly observable such as volatilities and cor-
relations. The risk of price movements on securities and other
obligations in tradable form resulting from general credit and
country risk factors and events speciﬁc to individual issuers is
also considered market risk.

Market risk is incurred in UBS primarily through trading ac-

tivities, but also arises in some non-trading businesses.

Trading activities are centered in the Investment Bank and
include  market  making,  facilitation  of  client  business  and
proprietary position taking. UBS is active in the cash and de-
rivative markets for equities, ﬁxed income and interest rate
products, foreign exchange and, to a lesser extent, precious
metals and energy. In 2005, trading in derivatives on commodi-
ties (base metals and soft commodities) commenced, but the
market risk from this business is not currently material.

Non-trading market risk arises primarily in Treasury (part of
the Corporate Center) as a result of its balance sheet and cap-
ital management responsibilities. Interest rate risk arises from
the funding of non-business items such as property and in-
vestments, from the investment of equity, and from long-term
interest  rate  risk  transferred  from  other  Business  Groups.
Other market risks from non-trading activities, predomi-
nantly interest rate risk, arise in all Business Groups but they
are not signiﬁcant.

There is a Chief Risk Ofﬁcer (CRO) in each Business Group
and a designated CRO for Treasury. The CROs report function-
ally to the Group CRO and are responsible for the independ-
ent control of market risk. The CROs and their teams ensure
that  all  market  risks  are  identiﬁed,  establish  the  necessary
controls and limits, monitor positions and exposures, and en-

sure the complete capture of market risk in risk measurement
and reporting systems. An important element of the CRO’s
role is the assessment of market risk in new businesses and
products and in structured transactions. 

Market risk authority is vested in the Chairman’s Ofﬁce and
the GEB and is delegated ad personam to the Group CRO and
market risk ofﬁcers in the Business Groups.

Market risk measures and controls are applied at the port-
folio level, and concentration limits and other controls are ap-
plied where necessary to individual risk types, to particular
books and to speciﬁc exposures. Portfolio risk measures are
common  to  all  market  risks,  but  concentration  limits  and
other controls are tailored to the nature of the activities and
the risks they create.

The principal portfolio risk measures and limits on market

risk are Value at Risk (VaR) and stress loss. 

VaR is a statistically based estimate of the potential loss on
the current portfolio from adverse market movements. It ex-
presses maximum potential loss, but only to a certain level of
conﬁdence (99%), and there is therefore a speciﬁed statistical
probability (1%) that actual loss could be greater than the VaR
estimate. UBS’s VaR model assumes a certain holding period
until positions can be closed (10 days) and it assumes that mar-
ket moves occurring over this holding period will follow a sim-
ilar pattern to those that have occurred over 10-day periods in
the past. The assessment of past movements is based on data
for the past ﬁve years, and these are applied directly to current
positions, a method known as historical simulation.

The VaR measure captures both ‘general’ and ’residual’ mar-
ket risk. General market risk includes movements in interest rates,
changes in credit spreads by rating class, directional movements
in equity market indices, exchange rates, and precious metal and
energy prices and associated option volatilities. Residual risks are
risks that cannot be explained by general market moves – broadly

128

Note 28 Financial Instruments Risk Position (contimued)
a) Market Risk (continued)

changes in the prices of individual debt and equity securities
resulting from factors speciﬁc to individual issuers.

Stress  loss  measures  quantify  exposure  to  more  extreme
market movements than are normally reﬂected in VaR, under
a variety of scenarios, and are an essential complement to VaR.
Controls are also applied to prevent any undue risk con-
centrations in trading books, taking into account variations in
price volatility and market depth and liquidity. They include
controls on exposure to individual market risk variables, such
as individual interest or exchange rates (’risk factors’), and on
positions in the securities of individual issuers (’issuer risk’) –
see (a)(v) below.

(ii) Interest Rate Risk
Interest rate risk is the risk of loss resulting from changes in
interest rates, including changes in the shape of yield curves. It
is controlled primarily through the limit structure described in
(a)(i). Exposure to interest rate movements can be expressed for

all interest rate sensitive positions, whether marked to market
or subject to amortized cost accounting, as the impact on their
fair values of a one basis point (0.01%) change in interest rates.
This sensitivity, analyzed by time band, is set out below. Interest
rate sensitivity is one of the inputs to the VaR model.

The table sets out the extent to which UBS was exposed
to interest rate risk at 31 December 2005 and 2004. It shows
the net impact of a one basis point (0.01%) increase in mar-
ket interest rates across all time bands on the fair values of in-
terest rate sensitive positions, both on- and off-balance sheet.
The impact of such an increase in interest rates depends on
UBS’s net asset or net liability position in each category, cur-
rency and time band in the table. A negative amount in the
table reﬂects a potential reduction in fair value, while a posi-
tive amount reﬂects a potential increase in fair value.

Positions shown as ’trading’ are those which contribute to
market risk regulatory capital, i.e. those considered ’trading
book’ for regulatory capital purposes (see section d). ’Non-

Interest rate sensitivity position 1

Interest rate sensitivity by time bands at 31.12.05

CHF thousand gain / (loss) per basis point increase

Within 1
month

1 to 3
months

3 to 12
months

CHF

USD

EUR

GBP

JPY

Other

Trading

Non-trading

Trading

Non-trading

Trading

Non-trading

Trading

Non-trading

Trading

Non-trading

Trading

Non-trading

167

(258 )

(306 )

70

536

(2 )

169

(1 )

194

(0 )

2

(3 )

(526 )

(57 )

(103 )

(159 )

(344 )

(33 )

(652 )

(8 )

367

(0 )

(48 )

(1 )

120

(883 )

122

(546 )

(302 )

(18 )

131

(78 )

(435 )

(3 )

69

(0 )

1 to 5
years

213

(6,514 )

(3,238 )

(7,847 )

(2,792 )

(271 )

(310 )

(437 )

406

(4 )

(125 )

(1 )

Over 5
years

(322 )

(287 )

3,329

35

2,725

1,174

(9 )

536

(704 )

0

(371 )

(3 )

Interest rate sensitivity by time bands at 31.12.04

CHF thousand gain / (loss) per basis point increase

Within 1
month

1 to 3
months

CHF

USD

EUR

GBP

JPY

Other

Trading

Non-trading

Trading

Non-trading

Trading

Non-trading

Trading

Non-trading

Trading

Non-trading

Trading

Non-trading

1 Positions in Industrial Holdings are excluded.

65

(203 )

49

30

192

(8 )

(19 )

(1 )

(17 )

(1 )

75

(1 )

69

(13 )

(236 )

(158 )

(276 )

1

52

(7 )

630

1

(121 )

1

3 to 12
months

(83 )

(313 )

(1,184 )

(121 )

342

(22 )

60

(34 )

1 to 5
years

24

(3,575 )

886

(2,010 )

(366 )

(180 )

(380 )

(290 )

(562 )

(1,804 )

(1 )

(8 )

1

(4 )

5

(1 )

Over 5
years

120

(2,641 )

127

(2,472 )

(814 )

(200 )

(32 )

270

781

(1 )

145

(2 )

Total

(349)

(7,998)

(196)

(8,447)

(178)

850

(672)

12

(172)

(7)

(473)

(8)

Total

195

(6,745)

(358)

(4,731)

(922)

(409)

(319)

(62)

(972)

(6)

96

(2)

129

Financial Statements
Notes to the Financial Statements

Note 28 Financial Instruments Risk Position (continued)
a) Market Risk (continued)

trading’  includes  all  other  interest  rate  sensitive  assets  and
liabilities including derivatives designated as hedges for ac-
counting purposes (as explained in Note 22) and off-balance
sheet commitments on which an interest rate has been ﬁxed.
This distinction differs somewhat from the accounting classi-
ﬁcation of trading and non-trading assets and liabilities.

Details of money market paper and debt instruments de-
ﬁned  as  trading  portfolio  for  accounting  purposes  are  in-
cluded in Note 11 and of debt instruments deﬁned as ﬁnan-
cial investments for accounting purposes in Note 12. Details
of derivatives are shown in Note 22. It should be noted that
interest rate risk arises not only on interest rate contracts but
also on other forwards, swaps and options, in particular on
forward foreign exchange contracts. Off-balance sheet com-
mitments on which an interest rate has been ﬁxed are primar-
ily forward starting ﬁxed-term loans.

Trading
The major part of this risk arises in the Investment Bank busi-
ness area Fixed Income, Rates and Currencies, which includes
the Cash and Collateral Trading unit.

Non-trading
Interest rate risk is inherent in many of UBS’s businesses and
arises  from  factors  such  as  differences  in  timing  between
contractual maturity or re-pricing of assets, liabilities and de-
rivative instruments. Most material non-trading interest rate
risks,  the  largest  items  being  those  arising  in  the  Global
Wealth Management & Business Banking Business Group, are
transferred from the originating business units to one of the
two centralized interest rate risk management units, Treasury,
which is part of Corporate Center, and the Investment Bank’s
Cash and Collateral Trading unit. The risks are then managed
within the market risk limits and controls described in (a)(i).
The margin risks embedded in retail products remain with,
and are subject to additional analysis and control by, the orig-
inating business units.

Many client products have no contractual maturity date or
directly  market-linked  rate.  Their  interest  rate  risk  is  trans-
ferred  on  a  pooled  basis  through  ’replication’  portfolios  –
portfolios of revolving transactions between the originating
business unit and Treasury at market rates designed to ap-
proximate  their  average  cash  ﬂow  and  re-pricing  behavior.
The structure and parameters of the replication portfolios are
based on long-term market observations and client behavior,
and are reviewed periodically.

Interest  rate  risk  also  arises  from  non-business  related
balance sheet items such as the ﬁnancing of bank property and
equity investments in associated companies. The risk on these
items is also transferred to Treasury, through replicating port-
folios designed to approximate the mandated funding proﬁle.

130

The Group’s equity is represented in the Treasury book in
the  form  of  equity  replicating  portfolios  which  reﬂect  the
strategic investment targets set by senior management. Based
on these portfolios, the Group’s equity is invested at longer-
term ﬁxed interest rates in CHF, USD, EUR and GBP with an
average duration of between three and four years. These in-
vestments account for CHF 16.9 million of the non-trading in-
terest rate sensitivity shown in the table on the previous page,
with CHF 7.5 million arising in CHF, CHF 8.3 million in USD
and the remainder in EUR and GBP. The interest rate sensitiv-
ity of these investments is directly related to the chosen in-
vestment  duration,  and  although  investing  in  signiﬁcantly
shorter maturities would lead to a reduction in apparent in-
terest rate sensitivity, it would lead to higher volatility in inter-
est earnings.

(iii) Currency Risk
Currency risk is the risk of loss resulting from changes in ex-
change rates.

Trading
UBS is an active participant in currency markets and carries
currency risk from these trading activities, conducted primar-
ily in the Investment Bank. These trading exposures are sub-
ject to the VaR, stress and concentration limits described in
(a)(i). Details of foreign exchange contracts, most of which
arise from trading activities and contribute to currency risk,
are shown in Note 22.

Non-Trading
UBS’s reporting currency is the Swiss franc, but its assets, lia-
bilities, income and expense are denominated in many cur-
rencies, with signiﬁcant amounts in USD, EUR and GBP, as
well as CHF.

Reported proﬁts or losses are exchanged monthly into CHF,
reducing  volatility  in  the  Group’s  earnings  from  subsequent
changes in exchange rates. Treasury also, from time to time,
proactively hedges signiﬁcant expected foreign currency earn-
ings / costs (mainly USD, EUR and GBP) within a time horizon up
to one year, in accordance with the instructions of the GEB and
subject to its VaR limit. Economic hedging strategies employed
include a cost-efﬁcient options purchase program, which pro-
vides  a  safety  net  against  unfavorable  currency  ﬂuctuations
while preserving some upside potential. Within clearly deﬁned
tolerances, a certain volatility in ﬁnancial results due to currency
ﬂuctuations is accepted. The hedge program has a time horizon
of up to twelve months and is not restricted to the current ﬁ-
nancial year. Although intended to economically hedge future
earnings, these transactions are considered open currency po-
sitions and are included in VaR for internal and regulatory cap-
ital purposes.

Note 28 Financial Instruments Risk Position (continued)
a) Market Risk (continued)

The  Group’s  equity  is  invested  in  a  diversiﬁed  portfolio
broadly  reﬂecting  the  currency  distribution  of  its  risk-
weighted assets in CHF, USD, EUR and GBP. This creates struc-
tural foreign currency exposures, the gains or losses on which
are recorded through equity, leading to ﬂuctuations in UBS’s
capital base in line with the ﬂuctuations in risk-weighted as-
sets, thereby protecting the BIS Tier 1 capital ratio.

At 31 December 2005, the largest combined trading and
non-trading currency exposures against the Swiss franc were
in USD (short USD 695 million), EUR (short EUR 36 million)
and  GBP  (long  GBP  6  million).  At  31  December  2004,  the
largest exposures were in USD (short USD 224 million), EUR
(short EUR 664 million) and GBP (long GBP 221 million).

(iv) Equity Risk
Equity risk is the risk of loss resulting from changes in the lev-
els of equity indices and values of individual stocks.

The Investment Bank is a signiﬁcant player in major equity
markets and carries equity risk from these activities. These ex-
posures are subject to the VaR, stress and concentration lim-
its described in (a)(i) and, in the case of individual stocks, to
the issuer risk controls described in (a)(v).

Details of equities deﬁned as trading portfolio for account-
ing purposes are given in Note 11. Details of equity deriva-
tives contracts (on indices and individual equities), which arise
primarily  from  the  Investment  Bank’s  trading  activities,  are
shown in Note 22.

related and other events and, ultimately, default and insol-
vency of the issuer or obligor. 

As an active trader and market maker in equities, bonds
and other securities, the Investment Bank holds positions in
these  instruments,  which  are  included  in  VaR  and  are  also
subject to concentration limits on exposure to individual is-
suers. This includes not only exposures arising from physical
holdings, but also exposures from derivatives based on such
assets.

Exposures  arising  from  security  underwriting  commit-
ments are, additionally, subject to control processes and spe-
ciﬁc approvals prior to commitment, generally including re-
view by both origination and sales units within the business,
and by risk control and other relevant functions.

(vi) Financial Investments
UBS  holds  ﬁnancial  investments  for  a  variety  of  purposes.
Some are held for revenue generation, while others are held
in support of other businesses (for example exchange seats
and clearing house memberships). The majority of holdings
are unlisted and fair values tend to be driven predominantly
by  factors  speciﬁc  to  the  individual  companies  rather  than
movements in equity markets, which have only a limited im-
pact. For this reason and because they are not generally liq-
uid, they are controlled outside the market risk measures and
controls described in (a)(i) to (v). Private equity positions make
up the largest portfolio, which is subject to a comprehensive
control and reporting process, but is being run down.

(v) Issuer Risk
Issuer risk is the risk of loss on securities and other obligations
in tradable form (including traded loans), arising from credit-

Debt ﬁnancial investments, including money market paper,
are included in the measures of interest rate risk described
in (a)(ii).

b) Credit Risk

Credit risk is the risk of loss to UBS as a result of failure by a
client or counterparty to meet its contractual obligations. It is
inherent  in  traditional  banking  products  –  loans,  commit-
ments  to  lend  and  contingent  liabilities,  such  as  letters  of
credit – and in traded products – derivative contracts such as
forwards, swaps and options, repurchase agreements (repos
and  reverse  repos)  and  securities  borrowing  and  lending
transactions. Some of these products are accounted for on an
amortized cost basis, while others are recorded in the ﬁnan-
cial statements at fair value. Banking products are generally
carried at amortized cost, but loans which have been origi-
nated by the Group for subsequent syndication or distribution
through  the  cash  markets  are  carried  at  fair  value.  Within
traded  products,  OTC  derivatives  are  carried  at  fair  value,
while repos and securities borrowing and lending transactions

are accounted for on an amortized cost basis. Regardless of
the accounting treatment, all banking and traded products
are governed by the same credit risk management and con-
trol framework.

Global Wealth Management & Business Banking and the
Investment Bank, which take material credit risk, have inde-
pendent  credit  risk  control  units,  headed  by  Chief  Credit
Ofﬁcers  (CCOs)  reporting  functionally  to  the  Group  CCO.
They are responsible for counterparty ratings, credit risk as-
sessment and the continuous monitoring of counterparty and
portfolio credit exposures. Credit risk authority, including au-
thority to establish allowances, provisions and credit valuation
adjustments for impaired claims, is vested in the Chairman’s
Ofﬁce  and  the  GEB  and  is  delegated  ad  personam to  the
Group CCO and to credit ofﬁcers within the Business Groups.

131

Note 28 Financial Instruments Risk Position
b) Credit Risk (continued)

For credit control purposes, credit exposure is measured for
banking products as the face value amount. For traded prod-
ucts, credit exposure is measured as the current replacement
value of contracts plus potential future changes in replacement
value, taking account of master netting agreements with indi-
vidual counterparties where they are considered enforceable
in  insolvency.  UBS  is  an  active  user  of  credit  derivatives  to
hedge credit risk on individual names and on a portfolio basis
in banking and traded products. In line with general market
trends,  UBS  has  also  entered  into  bilateral  collateral  agree-
ments with market participants to mitigate credit risk on OTC
derivatives. Individual hedges and collateral arrangements are
reﬂected in our internal credit risk measurement, and credit
limits are applied on this basis. Loans to private individuals are
typically  secured  by  portfolios  of  marketable  securities,  and
property ﬁnancing to individuals or for income producing real
estate  is  secured  by  a  mortgage  over  the  relevant  property.
In the table, the amounts shown as credit exposure differ
somewhat from the internal credit view. For banking prod-
ucts, they are based on the accounting view, which, for ex-
ample, does not reﬂect risk reduction resulting from credit
hedges and collateral received, but does include cash collat-
eral posted by UBS against negative replacement values on
derivatives.  For  traded  products,  positive  and  negative  re-
placement values are shown net where permitted for regula-
tory  capital  purposes  (consistent  with  the  table  in  part  d)
Capital Adequacy), and potential future exposure is not in-
cluded. This in turn differs from the accounting treatment of
traded products in several respects. OTC derivatives are rep-
resented on the balance sheet by positive and negative re-
placement values, which are netted only if the cash ﬂows will
actually be settled net, which is not generally the case – for

Breakdown of credit exposure 1

details see Note 22. Securities borrowing and lending trans-
actions are represented on the balance sheet by the gross val-
ues of cash collateral placed with or received from counter-
parties while repos / reverse repos are represented by the gross
amounts of the forward commitments – for details see Note
10 – but the credit exposure is generally only a small percent-
age of these balance sheet amounts.

UBS manages, limits and controls concentrations of credit
risk wherever they are identiﬁed, in particular to individual
counterparties and groups, and to industries and countries
where appropriate. Concentrations of credit risk exist if clients
are engaged in similar activities, or are located in the same ge-
ographic region or have comparable economic characteristics
such that their ability to meet contractual obligations would
be  similarly  affected  by  changes  in  economic,  political  or
other conditions. UBS sets limits on its credit exposure to both
individual counterparties and counterparty groups. Limits are
also  applied  in  a  variety  of  forms  to  portfolios  or  sectors
where UBS considers it appropriate to restrict credit risk con-
centrations or areas of higher risk, or to control the rate of
portfolio growth.

Stress measures are applied to assess the impact of varia-
tions in default rates and asset values, taking into account risk
concentrations in each portfolio. Stress loss limits are applied
where considered necessary, including limits on credit expo-
sure to all but the best-rated countries. With the exceptions
of Private households (CHF 149,829 million), Banks and ﬁnan-
cial  institutions  (CHF  90,267 million)  and  Real  estate  and
rentals in Switzerland (CHF 11,792 million), there are no ma-
terial concentrations of loans at 31 December 2005, and the
vast majority of those to Private households and to Real es-
tate and rentals are secured. Derivatives exposure is predom-

Amounts for each product type are shown gross before allowances and provisions.

CHF million

Banking products

Due from banks and loans 2

Contingent liabilities (gross – before participations) 3

Undrawn irrevocable credit facilities (gross – before participations) 3

Traded products 4

Derivatives positive replacement values (before collateral but after netting) 5

Securities borrowing and lending, repos and reverse repos 6, 7

Allowances and provisions 8

Total credit exposure net of allowances and provisions

31.12.05

31.12.04

304,541

16,566

72,905

86,950

40,765

(1,776)

519,951

269,224

14,894

53,168

78,317

24,768

(2,802 )

437,569

1 Positions in Industrial Holdings are excluded.
3 See Note 24 – Commitments and Contingent Liabilities for further information.
4 Does not include potential future credit exposure arising from changes in value of products with variable value. Potential future credit exposure is, however, included in internal measures of credit
exposure for risk management and control purposes.
6 This
ﬁgure represents the difference in value between the cash or securities lent or given as collateral to counterparties, and the value of cash or securities borrowed or taken as collateral from the same
counterparties under stock borrow / lend and repo / reverse repo transactions.
7 See Note 10 – Securities Borrowing, Securities Lending, Repurchase and Reverse Repurchase Agreements for further
information about these types of transactions.

5 Replacement values are shown net where netting is permitted for regulatory capital purposes. See also Note 28 d) – Capital Adequacy.

8 See Note 9b – Allowances and Provisons for Credit Losses for further informaion.

2 See Note 9a – Due from Banks and Loans for further information.

132

Note 28 Financial Instruments Risk Position (continued)
b) Credit Risk (continued)

inantly to investment grade banks and ﬁnancial institutions,
and much of it is collateralized.

Impaired claims
UBS classiﬁes a claim as impaired if it considers it likely that it
will suffer a loss on that claim as a result of the obligor’s inabil-
ity to meet its commitments (including interest payments, prin-
cipal repayments or other payments due, for example on a de-
rivative product or under a guarantee) according to the con-
tractual terms, and after realization of any available collateral.
Loans carried at amortized cost are classiﬁed as non-perform-
ing where payment of interest, principal or fees is overdue by
more than 90 days and there is no ﬁrm evidence that they will
be made good by later payments or the liquidation of collat-
eral, or where insolvency proceedings have commenced or ob-
ligations have been restructured on concessionary terms.

The recognition of impairment in the ﬁnancial statements
depends on the accounting treatment of the claim. For prod-
ucts accounted for on an amortized cost basis, impairment is
recognized through the creation of a provision or allowance,
which is charged to the income statement as credit loss ex-
pense. Allowances or provisions are determined such that the
carrying  values  of  impaired  claims  are  consistent  with  the
principles of IAS 39. For products recorded at fair value, im-
pairment is recognized through a credit valuation adjustment,
which is charged to the income statement through the net
trading income line.

UBS also assesses portfolios of claims with similar credit
risk  characteristics  for  collective  impairment  in  accordance
with IAS 39 (amortized cost products only). A portfolio is con-
sidered impaired on a collective basis if there is objective evi-
dence to suggest that it contains impaired obligations but the
individual impaired items cannot yet be identiﬁed.

c) Liquidity Risk

For  further  information  about  accounting  policy  for  al-
lowances and provisions for credit losses, see Note 1q). For
the amounts  of  allowance  and  provision  for  credit  losses
and amounts  of  impaired  and  non-performing  loans,  see
Note 9 b), c) and d). It should be noted that allowances and
provisions for collective impairment are included in the total
of  allowances  and  provisions  in  the  table  on  the  previous
page, and in Notes 9 a) and 9 b), but that portfolios against
which collective loan loss provisions have been established are
not included in the totals of impaired loans in Note 9 c).

The occurrence of credit losses is erratic in both timing and
amount and those that arise usually relate to transactions en-
tered into in previous accounting periods. In order to reﬂect
the  fact  that  future  credit  losses  are  implicit  in  the  current
portfolio, and to encourage risk-adjusted pricing for products
carried at amortized cost, UBS uses the concept of ’expected
credit loss’ for management purposes. Expected credit loss is
a forward-looking, statistically based concept which is used
to estimate the annual costs that will arise, on average over
time, from positions in the current portfolio that become im-
paired. It is derived from the probability of default (given by
the counterparty rating), current and likely future exposure to
the  counterparty  and  the  likely  severity  of  the  loss  should
default occur. Note 2 a) includes two tables: the ﬁrst shows
Credit loss expense, as recorded in the Financial Statements,
for each Business Group; the second reﬂects an ’Adjusted ex-
pected credit loss’ for each Business Group, which is the ex-
pected credit loss on its portfolio, plus the difference between
Credit loss expense and expected credit loss, amortized over
a three-year period. The difference between the total of these
Adjusted expected credit loss ﬁgures and the Credit loss ex-
pense recorded at Group level for ﬁnancial reporting is re-
ported in Corporate Center.

UBS’s approach to liquidity management is to ensure, as far
as possible, that it will always have sufﬁcient liquidity to meet
its  liabilities  when  due,  under  both  normal  and  stressed
conditions without incurring unacceptable losses or risking
sustained  damage  to  business  franchises.  A  centralized
approach  is  adopted,  based  on  an  integrated  framework
incorporating an assessment of all material known and ex-
pected cash ﬂows and the availability of high-grade collateral
which could be used to secure additional funding if required.
The framework entails careful monitoring and control of the

daily  liquidity  position,  and  regular  liquidity  stress  testing
under a variety of scenarios. Scenarios encompass both nor-
mal and stressed market conditions, including general mar-
ket crises and the possibility that access to markets could be
impacted by a stress event affecting some part of UBS’s busi-
ness or, in the extreme case, if UBS suffered a severe rating
downgrade.

The breakdown by contractual maturity of assets and lia-
bilities at 31 December 2005, which is the starting point for
the liquidity analyses, is shown in the table on the next page. 

133

Financial Statements
Notes to the Financial Statements

Note 28 Financial Instruments Risk Position (continued)
c) Liquidity Risk (continued)

Maturity analysis of assets and liabilities

CHF billion

Assets

Cash and balances with central banks

Due from banks

Cash collateral on securities borrowed

Reverse repurchase agreements

Trading portfolio assets 2

Trading portfolio assets pledged as collateral 2

Positive replacement values 2

Financial assets designated at fair value

Loans

Financial investments

Accrued income and prepaid expenses

Investments in associates

Property and equipment

Goodwill and other intangible assets

Other assets

Total 31.12.05

Total 31.12.04

Liabilities

Due to banks

Cash collateral on securities lent

Repurchase agreements

Trading portfolio liabilities 2

Negative replacement values 2

Financial liabilities designated at fair value

Due to customers

Accrued expenses and deferred income

Debt issued

Other liabilities

Total 31.12.05

Total 31.12.04

On
demand

Subject
to notice 1

Due
within
3 months

Due
between
3 and
12 months

Due
between
1 and
5 years

Due after
5 years

5.4

21.9

0.0

0.0

499.3

154.7

333.8

1.2

27.1

5.7

8.9

0.0

0.0

0.0

16.2

1,074.2

910.0

32.0

0.0

0.0

188.6

337.7

0.0

132.0

18.4

0.0

23.7

732.4

662.8

0.1

202.6

59.3

0.0

0.0

0.0

0.0

39.7

0.0

0.0

0.0

0.0

0.0

0.0

301.7

271.8

5.6

66.2

21.5

0.0

0.0

0.0

123.1

0.0

0.0

30.2

246.6

212.5

6.0

90.4

281.0

0.0

0.0

0.0

0.0

73.6

0.1

0.0

0.0

0.0

0.0

0.0

451.1

345.2

83.5

10.5

406.2

0.0

0.0

6.7

189.1

0.0

95.5

0.0

791.5

663.4

2.1

7.3

57.3

0.0

0.0

0.0

0.0

31.5

0.1

0.0

0.0

0.0

0.0

0.0

98.3

79.4

2.7

0.6

50.8

0.0

0.0

18.2

6.8

0.0

11.0

0.0

90.1

65.6

1.8

0.0

5.7

0.0

0.0

0.0

0.0

80.1

0.3

0.0

0.0

0.0

0.0

0.0

87.9

87.3

0.1

0.0

0.0

0.0

0.0

66.3

0.4

0.0

8.0

0.0

74.8

56.1

1.7

0.0

1.1

0.0

0.0

0.0

0.0

18.0

0.4

0.0

3.0

9.4

13.5

0.0

47.1

43.4

0.4

0.0

0.0

0.0

0.0

26.2

0.1

0.0

46.2

0.0

72.9

37.4

Total

5.4

33.6

300.3

404.4

499.3

154.7

333.8

1.2

270.0

6.6

8.9

3.0

9.4

13.5

16.2

2,060.3

1,737.1

124.3

77.3

478.5

188.6

337.7

117.4

451.5

18.4

160.7

53.9

2,008.3

1,697.8

1 Deposits without a ﬁxed term, on which notice of withdrawal or termination has not been given (such funds may be withdrawn by the depositor or repaid by the borrower subject to an agreed period
2 Trading and derivative positions are shown within ’on demand’ which management believes most accurately reﬂects the short-term nature of trading activities. The contractual maturity of
of notice).
the instruments may, however, extend over signiﬁcantly longer periods.

134

Note 28 Financial Instruments Risk Position (continued)
d) Capital Adequacy

The  adequacy  of  UBS’s  capital  is  monitored  using,  among
other measures, the rules and ratios established by the Basel
Committee on Banking Supervision (’BIS rules / ratios’). The
BIS ratios compare the amount of eligible capital (in total and
Tier 1) with the total of risk-weighted assets (RWAs).

While UBS monitors and reports its capital ratios under BIS
rules,  it  is  the  rules  established  by  the  Swiss  regulator,  the
Swiss Federal Banking Commission (SFBC), which ultimately
determine the regulatory capital required to underpin its busi-
ness, and these rules, on balance, result in higher RWAs than
the BIS rules. As a result, UBS’s ratios are lower when calcu-
lated under the SFBC regulations than under the BIS rules.

BIS eligible capital
BIS eligible capital consists of two parts. Tier 1 capital com-
prises  share  capital,  share  premium,  retained  earnings  in-
cluding  current-year  proﬁt,  foreign  currency  translation
and minority interests less accrued dividends, net long posi-
tions in own shares and goodwill. Certain adjustments are
made to IFRS-based proﬁt and reserves, in line with BIS rec-
ommendations, as prescribed by the SFBC. Tier 2 capital in-
cludes subordinated long-term debt. Tier 1 capital is required
to  be  at  least  4%  and  Total  eligible  capital  at  least  8%  of
RWAs.

BIS risk-weighted assets (RWAs)
Total RWAs are made up of three elements – credit risk, other
assets  and  market  risk,  each  of  which  is  described  below.
The credit risk component consists of on- and off-balance
sheet claims, measured according to regulatory formulas out-
lined below, and weighted according to type of counterparty
and collateral at 0%, 20%, 50% or 100%. The least risky
claims, such as claims on OECD governments and claims col-
lateralized  by  cash,  are  weighted  at  0%,  meaning  that  no
capital  support  is  required,  while  the  claims  deemed  most
risky, including unsecured claims on corporates and private
customers, are weighted at 100%, meaning that 8% capital
support is required.

Securities not held for trading are included as claims, based
on the net long position in the securities of each issuer, includ-
ing both physical holdings and positions derived from other
transactions  such  as  options.  UBS’s  investments  in  Motor-

Columbus  and  other  consolidated  industrial  holdings  are
treated for regulatory capital purposes as a position in a se-
curity not held for trading.

Claims  arising  from  derivatives  transactions  include  two
components:  the  current  positive  replacement  values  and
’add-ons’  to  reﬂect  their  potential  future  exposure.  Where
UBS has entered into a master netting agreement which is ac-
cepted by the SFBC as being legally enforceable in insolvency,
positive  and  negative  replacement  values  with  individual
counterparties can be netted and therefore the on-balance
sheet component of RWAs for derivatives transactions shown
in the table on the next page (Positive replacement values) is
less than the balance sheet value of Positive replacement val-
ues. The add-ons component of the RWAs is shown in the
table on the next page under Off-balance sheet exposures
and  other  positions  –  Forward  and  swap  contracts,  and
Purchased options.

Claims arising from contingent commitments and irrevo-
cable  facilities  granted  are  converted  to  credit  equivalent
amounts based on speciﬁed percentages of nominal value.
There are other types of asset, most notably property and
equipment and intangibles, which, while not subject to credit
risk, represent a risk to the Group in respect of their potential
for write-down and impairment and which therefore require
capital underpinning.

Capital is required to support market risk arising in all for-
eign exchange, precious metals and commodity (including en-
ergy) positions, and all positions held for trading in interest
rate instruments and equities, including risks on individual eq-
uities and traded debt obligations such as bonds. UBS com-
putes this risk using a Value at Risk (VaR) model approved by
the SFBC, from which the market risk capital requirement is
derived for most of its market risk positions and under the
standardized method for its base metals and soft commodi-
ties  derivative  trading  positions.  Unlike  the  calculations  for
credit risk and other assets, this produces the capital require-
ment itself rather than the RWA amount. In order to compute
a total capital ratio, the market risk capital requirement is con-
verted to an ‘RWA equivalent’ (shown in the table as Market
risk positions) such that the capital requirement is 8% of this
RWA equivalent, i.e. the market risk capital requirement de-
rived from VaR is multiplied by 12.5.

135

Financial Statements
Notes to the Financial Statements

Note 28 Financial Instruments Risk Position (continued)
d) Capital Adequacy (continued)

Risk-weighted assets (BIS)

CHF million

Balance sheet exposures

Due from banks and other collateralized lendings 1

Net positions in securities 2, 3

Positive replacement values 4

Loans, net of allowances for credit losses and other collateralized lendings 1

Accrued income and prepaid expenses

Property and equipment

Other assets

Off-balance sheet exposures

Contingent liabilities

Irrevocable commitments

Forward and swap contracts 5

Purchased options 5

Market risk positions 6

Total risk-weighted assets

Exposure
31.12.05

Risk-weighted
amount
31.12.05

665,932

8,079

86,950

540,051

9,081

7,957

13,292

16,595

73,220

22,365,432

1,629,260

6,991

6,849

20,546

196,091

4,815

7,957

9,115

7,474

18,487

10,738

311

21,035

310,409

Exposure
31.12.04

556,947

8,227

78,317

429,186

5,790

8,772

33,432

14,894

53,187

14,419,106

2,306,605

Risk-weighted
amount
31.12.04

7,820

6,914

17,121

164,620

3,573

8,772

9,656

7,569

11,764

8,486

386

18,151

264,832

1 Includes gross securities borrowing and reverse repo exposures, and those traded loans in trading portfolio assets originated by the Group for syndication or distribution. These ﬁnancial instruments are
excluded from Market risk positions.
2 Security positions which are not in the trading book, including Motor-Colombus and other industrial holdings, which are not consolidated for capital adequacy.
4 Represents the mark to market values of Forward and swap contracts and Purchased options, where positive
3 Excluding positions in the trading book, which are included in Market risk positions.
but after netting, where applicable.
6 Regulatory capital adequacy requirements for market risk, calculated using the approved Value at Risk model, or
the standardized method, multiplied by 12.5. This results in the risk-weighted asset equivalent.

5 Represents the add-ons for these contracts.

BIS capital ratios

Tier1

of which hybrid Tier1

Tier 2

Total BIS

Capital
CHF million
31.12.05

39,943

4,975

3,974

43,917

Ratio
%
31.12.05

12.9

1.6

1.3

14.1

Capital
CHF million
31.12.04

31,629

2,963

4,815

36,444

Ratio
%
31.12.04

11.9

1.1

1.8

13.8

The Tier 1 capital includes preferred securities of CHF 4,975 million (USD 2,600 million and EUR 1,000 million) at 31 Decem-
ber 2005 and CHF 2,963 million (USD 2,600 million) at 31 December 2004.

136

Note 28 Financial Instruments Risk Position (continued)
e) Financial Instruments Risk Position in Motor-Columbus

The Atel Group, the operating arm of Motor-Columbus, is ex-
posed to electricity price risk, interest rate risk, currency risk,
credit risk, and other business risks.

Risk limits are allocated to individual risk categories, and
compliance with these limits is continuously monitored, the
limits being periodically adjusted in the broad context of the
company’s overall risk capacity.

A risk policy has been established and is monitored by a
risk committee composed of executive management. It was
approved by the Board of Directors of Atel and is reviewed
and ratiﬁed by them annually. The policy sets out the princi-
ples for Atel’s business. It speciﬁes requirements for entering
into, measuring, managing and limiting risk in its business and
the  organization  and  responsibilities  of  risk  management.
The objective of the policy is to provide a reasonable balance
between the business risks entered into and Atel’s earnings
and risk-bearing shareholders’ equity.

A ﬁnancial risk policy sets out the context of ﬁnancial risk
management in terms of content, organization and systems,
with  the  objective  of  reducing  ﬁnancial  risk,  balancing  the
costs of hedging and the risks assumed. The responsible units
manage their ﬁnancial risks within the framework of this pol-
icy and limits deﬁned for their area.

Energy price risk
Price risks in the energy business arise from, among others,
price volatility, changing market prices and changing correla-
tions between markets and products. Derivative ﬁnancial in-
struments  are  used  to  hedge  underlying  physical  transac-
tions, subject to the risk policy.

Interest rate risk
Interest rate swaps are permitted to hedge capital markets in-
terest  rate  exposure,  with  changes  in  fair  value  being  re-
ported in the income statement.

Currency risks
To minimize currency risk, Atel tries to offset operating in-
come  and  expenses  in  foreign  currencies.  Any  surplus  is
hedged  through  currency  forwards  and  options  within  the
framework of the ﬁnancial risk policy. Net investment in for-
eign subsidiaries is also subject to exchange rate movements,
but  differences  in  inﬂation  rates  tend  to  cancel  out  these
changes over the longer term, and for this reason Atel does
not hedge investment in foreign subsidiaries.

Credit risk
Credit risk management is based on assessment of the cred-
itworthiness of new contracting parties before entering into
any transaction giving rise to credit exposure, and continuous
monitoring of creditworthiness and exposures thereafter. In
the energy business, Atel only enters into transactions lead-
ing to credit exposure with counterparties that fulﬁll the cri-
teria laid out in the risk policy. Concentration risk is minimized
by the number of customers and their geographical distribu-
tion. 

Financial assets reported in the balance sheet represent the
maximum loss to Atel in the event of counterparty default at
the balance sheet date.

137

Financial Statements
Notes to the Financial Statements

Note 29 Fair Value of Financial Instruments
29a Fair Value of Financial Instruments

The following table presents the fair value of ﬁnancial instruments, including those not reﬂected in the ﬁnancial statements
at fair value. It is accompanied by a discussion of the methods used to determine fair value for ﬁnancial instruments.

CHF billion

Assets

Cash and balances with central banks

Due from banks

Cash collateral on securities borrowed

Reverse repurchase agreements

Trading portfolio assets

Trading portfolio assets pledged as collateral

Positive replacement values

Financial assets designated at fair value

Loans

Financial investments

Liabilities

Due to banks

Cash collateral on securities lent

Repurchase agreements

Trading portfolio liabilities

Negative replacement values

Financial liabilities designated at fair value

Due to customers

Debt issued

Subtotal

Unrealized gains and losses recorded in equity before tax on:

Financial investments

Derivative instruments designated as cash ﬂow hedges

Net unrealized gains and losses not recognized in the income statement

Carrying
value
31.12.05

Fair
value
31.12.05

Unrealized
gain / (loss)
31.12.05

Carrying
value
31.12.04

Fair
value
31.12.04

Unrealized
gain / (loss)
31.12.04

5.4

33.6

300.3

404.4

499.3

154.8

333.8

1.2

270.0

6.6

124.3

77.3

478.5

188.6

337.7

117.4

451.5

160.7

5.4

33.6

300.2

404.5

499.3

154.8

333.8

1.2

270.6

6.6

124.3

77.3

478.5

188.6

337.7

117.4

451.5

162.0

6.0

35.4

220.2

357.1

389.5

159.1

284.6

0.7

232.2

4.2

120.0

61.5

422.6

171.0

303.7

65.8

376.1

117.8

6.0

35.4

220.2

357.1

389.5

159.1

284.6

0.7

233.6

4.2

120.0

61.5

422.6

171.0

303.7

65.8

376.1

118.9

0.0

0.0

(0.1)

0.1

0.0

0.0

0.0

0.0

0.6

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

(1.3)

(0.7)

1.1

(0.9)

(0.5)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

1.4

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

(1.1 )

0.3

1.0

(0.4 )

0.9

Fair value is the amount for which an asset could be ex-
changed, or a liability settled, between knowledgeable, will-
ing parties in an arm’s length transaction. For ﬁnancial instru-
ments carried at fair value, market prices or rates are used to
determine fair value where an active market exists (such as a
recognized stock exchange), as it is the best evidence of the
fair value of a ﬁnancial instrument.

Market prices and rates are not, however, available for cer-
tain ﬁnancial assets and liabilities held and issued by UBS. In
these cases, fair values are estimated using present value or
other  valuation  techniques,  using  inputs  based  on  market
conditions existing at the balance sheet dates.

Valuation techniques are generally applied to OTC deriva-
tives, unlisted trading portfolio assets and liabilities, and un-
listed ﬁnancial investments. The most frequently applied pric-
ing models and valuation techniques include forward pricing
and  swap  models  using  present  value  calculations,  option

models such as the Black-Scholes model or generalizations of
it,  and  credit  models  such  as  default  rate  models  or  credit
spread models.

The values derived from applying these techniques are sig-
niﬁcantly affected by the choice of valuation model used and
the underlying assumptions made concerning factors such as
the amounts and timing of future cash ﬂows, discount rates,
volatility, and credit risk.

The following methods and signiﬁcant assumptions have
been applied in determining the fair values of ﬁnancial instru-
ments presented in the above table for both ﬁnancial instru-
ments carried at fair value and those carried at cost (for which
fair values are provided as a comparison): 
(a) trading portfolio assets and liabilities, trading portfolio as-
sets  pledged  as  collateral,  ﬁnancial  assets  and  liabilities
designated at fair value, derivatives, and other transactions
undertaken for trading purposes are measured at fair value

138

Note 29 Fair Value of Financial Instruments (continued)
29a Fair Value of Financial Instruments (continued)

by reference to quoted market prices when available. If
quoted market prices are not available, then fair values are
estimated on the basis of pricing models, or other recog-
nized valuation techniques. Fair value is equal to the car-
rying amount for these items;

(b) ﬁnancial  investments  classiﬁed  as  available-for-sale  are
measured  at  fair  value  by  reference  to  quoted  market
prices  when  available.  If  quoted  market  prices  are  not
available,  then  fair  values  are  estimated  on  the  basis  of
pricing models or other recognized valuation techniques.
Fair value is equal to the carrying amount for these items,
and  unrealized  gains  and  losses,  excluding  impairment
writedowns, are recorded in Equity until an asset is sold,
collected or otherwise disposed of;

(c) the fair value of demand deposits and savings accounts
with  no  speciﬁc  maturity  is  assumed  to  be  the  amount
payable on demand at the balance sheet date;

(d) the fair value of variable rate ﬁnancial instruments is as-
sumed to be approximated by their carrying amounts and,
in the case of loans, does not, therefore, reﬂect changes in
their credit quality, as the impact of impairment is recog-
nized separately by deducting the amount of the allowance
for credit losses from both carrying and fair values;

(e) the fair value of ﬁxed rate loans and mortgages carried at
amortized cost is estimated by comparing market interest
rates when the loans were granted with current market
rates offered on similar loans. Changes in the credit qual-
ity of loans within the portfolio are not taken into account
in determining gross fair values, as the impact of impair-
ment is recognized separately by deducting the amount of
the allowance for credit losses from both carrying and fair
values.
Where applicable, for the purposes of the fair value disclo-
sure on the previous page, the interest accrued to date on ﬁ-
nancial instruments is included in the carrying value of the ﬁ-
nancial instruments.

These  valuation  techniques  and  assumptions  provide  a
consistent measurement of fair value for UBS’s assets and li-
abilities as shown in the table. However, because other insti-
tutions may use different methods and assumptions when es-
timating fair value using a valuation technique, and when es-
timating the fair value of ﬁnancial instruments not carried at
fair  value,  such  fair  value  disclosures  cannot  necessarily  be
compared from one ﬁnancial institution to another.

The table does not reﬂect the fair values of non-ﬁnancial
assets and liabilities such as property, equipment, goodwill,
prepayments and non-interest accruals.

Substantially all of UBS’s commitments to extend credit are
at variable rates. Accordingly, UBS has no signiﬁcant exposure
to fair value ﬂuctuations resulting from interest rate move-
ments related to these commitments.

The  fair  values  of  UBS’s  ﬁxed-rate  loans,  long-  and
medium-term  notes  and  bonds  issued  are  predominantly
hedged by derivative instruments, mainly interest rate swaps,
as explained in Note 22. The interest rate risk inherent in bal-
ance sheet positions with no speciﬁc maturity is also hedged
with derivative instruments based on management’s view on
their average cash ﬂow and re-pricing behavior.

Derivative instruments used for hedging are carried on the
balance sheet at fair values, which are included in the Positive
or Negative replacement values in the table. When the inter-
est rate risk on a ﬁxed rate ﬁnancial instrument is hedged with
a derivative in a fair value hedge, the ﬁxed rate ﬁnancial in-
strument (or hedged portion thereof) is reﬂected in the table
at fair value only in relation to the interest rate risk, not the
credit risk, as explained in (e). Fair value changes are recorded
in net proﬁt. The treatment of derivatives designated as cash
ﬂow hedges is explained in Note 1 o). The amount shown in
the table as ‘Derivative instruments designated as cash ﬂow
hedges’ is the net change in fair values on such derivatives
that is recorded in Equity and not yet transferred to income
or expense.

139

Financial Statements
Notes to the Financial Statements

Note 29 Fair Value of Financial Instruments (continued)
29b Determination of Fair Values from Quoted Market Prices or Valuation Techniques

For  trading  portfolio  securities  and  ﬁnancial  investments
which are listed or otherwise traded in an active market, for
exchange traded derivatives, and for other ﬁnancial instru-
ments for which quoted prices in an active market are avail-
able, fair value is determined directly from those quoted mar-
ket prices.

For ﬁnancial instruments which do not have directly avail-
able quoted market prices, fair values are estimated using val-
uation techniques or models, based wherever possible on as-
sumptions supported by observable market prices or rates ex-
isting at the balance sheet date. This is the case for the ma-
jority of OTC derivatives, and for many unlisted instruments
and other items which are not traded in active markets.

For a small portion of ﬁnancial instruments, fair values can-
not be obtained directly from quoted market prices, or indi-
rectly using valuation techniques or models supported by ob-
servable market prices or rates. This is generally the case for
private equity investments in unlisted securities, and for cer-
tain  complex  or  structured  ﬁnancial  instruments.  In  these
cases fair value is estimated indirectly using valuation tech-
niques or models for which the inputs are reasonable assump-
tions, based on market conditions.

The following table presents the valuation methods used
to determine fair values of ﬁnancial instruments carried at fair
value:

31.12.05

Valuation
technique –

Valuation
technique –
market  non-market 
observable 
inputs

Quoted 
market observable 
inputs

price

273.2

147.6

13.6

0.2

3.0

437.6

171.2

15.9

0.0

187.1

225.2

7.2

313.4

1.0

1.1

547.9

17.4

311.1

92.5

421.0

0.9

0.0

6.8

0.0

2.5

10.2

0.0

10.7

24.9

35.6

31.12.04

Valuation
technique –
market 
observable
inputs

Valuation
technique –
non-market 
observable
inputs

160.1

3.1

265.2

0.0

0.4

428.8

9.7

270.1

65.8

345.6

1.0

0.0

13.2

0.0

2.7

16.9

0.0

23.8

0.0

23.8

Quoted 
market
price

228.4

156.0

6.2

0.7

1.1

392.4

161.3

9.8

0.0

171.1

Total

499.3

154.8

333.8

1.2

6.6

995.7

188.6

337.7

117.4

643.7

Total

389.5

159.1

284.6

0.7

4.2

838.1

171.0

303.7

65.8

540.5

CHF billion

Trading portfolio assets

Trading portfolio assets pledged as collateral

Positive replacement values

Financial assets designated at fair value

Financial investments

Total assets

Trading portfolio liabilities

Negative replacement values

Financial liabilities designated at fair value

Total liabilities

140

Note 29 Fair Value of Financial Instruments (continued)

29c Sensitivity of Fair Values to Changing Signiﬁcant Assumptions to Reasonably Possible Alternatives

Included in the fair value of ﬁnancial instruments carried at
fair value on the balance sheet are those estimated in full or
in part using valuation techniques based on assumptions that
are  not  supported  by  market  observable  prices  or  rates.
Models used in these situations undergo an internal valida-
tion process before they are certiﬁed for use. 

There may be uncertainty about a valuation, resulting from
the choice of model used, the deep in the model parameters
it employs, and the extent to which inputs are not market ob-
servable, or as a result of other elements affecting the valua-
tion, for example liquidity. Valuation adjustments are made to
reﬂect  such  uncertainty  and  deducted  from  the  fair  values
produced by the models or other valuation techniques. 

Based  on  the  controls  and  procedural  safeguards  the
Group employs, management believes the resulting estimated
fair values recorded in the balance sheet and the changes in
fair values recorded in the income statement are reasonable
and are the most appropriate at the balance sheet date.

The potential effect of using reasonably possible alterna-
tive  assumptions  as  inputs  to  valuation  techniques  from

which the fair values of these ﬁnancial instruments are deter-
mined has been quantiﬁed as a reduction of approximately
CHF 1,094 million using less favorable assumptions and an in-
crease of approximately CHF 1,176 million using more favor-
able assumptions at 31 December 2005; and approximately
CHF 579 million using less favorable assumptions and an in-
crease of approximately CHF 927 million using more favorable
assumptions at 31 December 2004.

The  determination  of  reasonably  possible  alternative  as-
sumptions is itself subject to considerable judgment. For valu-
ations based on models, reasonably possible alternatives have
been estimated using the same techniques as are used to de-
termine model valuation adjustments, by increasing (for less
favorable assumptions) and decreasing (for more favorable as-
sumptions) the conﬁdence level applied. In changing the as-
sumptions it was assumed that the impact of correlation be-
tween different ﬁnancial instruments and models is minimal. A
similar approach was used for valuation techniques other than
those based on models at 31 December 2005, but the assess-
ment applied at 31 December 2004 was based on estimates.

29d Changes in Fair Value Recognized in Proﬁt or Loss during the Period which were Estimated using 
Valuation Techniques

Total Net trading income for the years ended 31 December
2005 and 31 December 2004 was CHF 7,996 million and CHF
4,902 million,  respectively, which  represents  the  net  result
from a range of products traded across different business ac-
tivities, including the effect of foreign currency translation and
including both realized and unrealized income. Unrealized in-
come is determined from changes in fair values, using quoted
prices in active markets when available, and is otherwise es-
timated using valuation techniques.

Included in the unrealized portion of Net trading income are
net losses from changes in fair values of CHF 2,286 million for
the year ended 31 December 2005 on ﬁnancial instruments for
which fair values were estimated using valuation techniques.
These  valuation  techniques  included  models  such as  those
described in the previous section, which range from relatively
simple models with market observable inputs, to those which
are more complex and require the use of assumptions or esti-
mates based on market conditions. 

Net losses from changes in fair values on financial ins-
truments for  which  fair  values  were  estimated  using  valua-
tion techniques  were  CHF  7,123  million  for  the  year  ended
31 December  2004.  This  amount  was  determined  using
methods which  have  been  subsequently  reﬁned  for  the
year ended 31 December 2005. The amount for the year ended

31 December 2004 has not been restated to conform to pre-
sentation in the current year.

Net trading income is often generated in transactions involv-
ing several ﬁnancial instruments or subject to hedging or other
risk management techniques, which may result in different por-
tions of the transaction being priced using different methods.
Consequently,  the  changes  in  fair  value  recognized  in
proﬁt or loss during the period which were estimated using
valuation techniques represent only a portion of Net trading
income. In many cases these amounts were offset by changes
in  fair  value  of  other  ﬁnancial  instruments  or  transactions,
which  were  priced  in  active  markets  using  quoted  market
prices or rates, or which have been realized. The amount of
such income, including the effect of foreign currency transla-
tion on unrealized transactions, was a gain of CHF 10,282
million  for  the  year  ended  31  December  2005  and  CHF
12,025 million for the year ended 31 December 2004.

Changes in fair value estimated using valuation techniques
are also recognized in net proﬁt in situations of unrealized im-
pairments  on  ﬁnancial  investments  available-for-sale.  The
total of such impairment amounts recognized in Net proﬁt
was CHF 3 million for the year ended 31 December 2005 and
CHF 218 million for the year ended 31 December 2004.

141

Financial Statements
Notes to the Financial Statements

Note 29 Fair Value of Financial Instruments (continued)
29e Continuing Involvement with Transferred Assets

The following table presents details of assets which have been sold or otherwise transferred, but which continue to be rec-
ognized, either in full or to the extent of UBS’s continuing involvement:

CHF billion

Nature of transaction

Securities lending agreements

Repurchase agreements

Property and equipment

Other collateralized securities trading

Total

31.12. 05
Continued asset 
recognition in full

Total 
assets

Associated 
liability

50.5

100.0

0.5

60.6

211.6

10.0

78.6

0.7

3.0

92.3

31.12.04
Continued asset
recognition in full

Total 
assets

37.3

121.8

0.4 1

35.6 1

195.1

Associated 
liability

13.8

117.6

0.0

2.1

133.5

1 Comparatives have been restated to conform to presentation in the current year.

The assets in the above table continue to be recognized to
the extent shown, because the transactions by which they
have been transferred do not meet the qualifying criteria for
derecognition  of  the  assets  from  the  balance  sheet.
Derecognition criteria are discussed in more detail in Note 1d).
In each situation of continued recognition, whether in full
or to the extent of continuing involvement, UBS retains the
risks of the relevant portions of the retained assets. These in-
clude credit risk, settlement risk, country risk, and market risk.
In  addition,  the  nature  of  an  associated  transaction  which
gives rise to the continued involvement may modify existing
risks, or introduce risks such as credit exposure to the coun-
terparty to the associated transaction.

The majority of retained assets relate to repurchase agree-
ments  and  securities  lending  agreements.  Nearly  all  repur-
chase agreements relate to debt instruments, such as bonds,
notes or money market paper; the majority of securities lend-
ing agreements involve shares, and the remainder typically re-
late to bonds and notes. Both types of transactions are con-
ducted  under  standard  agreements  employed  by  ﬁnancial
market participants and are undertaken with counterparties

subject to UBS’s normal credit risk control processes. The re-
sulting  credit  exposures  are  controlled  by  daily  monitoring
and collateralization of the positions. The amounts for repur-
chase  agreements  and  securities  lending  agreements  are
shown in the above table.

A portion of retained assets relate to transactions in which
UBS has transferred assets, but continues to have involvement
in  the  transferred  assets,  for  example  through  providing  a
guarantee, writing put options, acquiring call options, or en-
tering into a total return swap or other type of swap linked
to the performance of the asset. If control is retained through
these types of associated transactions, UBS continues to rec-
ognize the transferred asset in its entirety, otherwise to the
extent of its continuing involvement.

In particular, transactions involving the transfer of assets
in conjunction  with  entering  into  a  total  rate  of  return
swap are  accounted  for  as  secured  ﬁnancing  transactions,
instead  of  sales  of  trading  portfolio  assets  with  an  accom-
panying  swap  derivative.  The  securities  underlying  these
transactions are included in the above table within Other col-
lateralized securities trading.

142

Note 30 Pension and Other Post-Retirement Beneﬁt Plans

a) Deﬁned beneﬁt plans
The Group has established various pension plans inside and
outside  of  Switzerland.  The  major  plans  are  located  in
Switzerland, the UK, the US and Germany. Independent ac-
tuarial valuations are performed for the plans in these loca-
tions. The measurement date of these plans is 31 December
for each year presented.

The pension funds of Atel Ltd. and some of its group com-
panies in Switzerland and Germany are included in the dis-
closure as at 31 December 2005 and 31 December 2004.The
pension plans of the three private banks, Banco di Lugano,
Ehinger & Armand von Ernst and Ferrier Lullin are no longer
included in the disclosure as at 31 December 2005.

The overall investment policy and strategy for the Group’s
deﬁned  beneﬁt  pension  plans  is  guided  by  the  objective  of
achieving an investment return which, together with the con-
tributions paid, is sufﬁcient to maintain reasonable control over
the various funding risks of the plans. The investment advisors
appointed by plan trustees are responsible for determining the
mix of asset types and target allocations which are reviewed
by the plan trustees on an ongoing basis. Actual asset alloca-
tion is determined by a variety of current economic and mar-
ket conditions and in consideration of speciﬁc asset class risk.
The expected long-term rates of return on plan assets are
based  on  long-term  expected  inﬂation,  interest  rates,  risk
premiums  and  targeted  asset  class  allocations.  These  esti-
mates take into consideration historical asset class returns and
are determined together with the plans’ investment and ac-
tuarial advisors.

Swiss pension plans
The pension fund of UBS covers practically all UBS employees
in  Switzerland  and  exceeds  the  minimum  beneﬁt  require-
ments under Swiss law. Contributions to the pension fund of
UBS are paid for by employees and the employer. For the main
plan, the employee contributions are calculated as a percent-
age of insured annual salary and are deducted monthly. The
percentages deducted from salary for full beneﬁt coverage
(including risk beneﬁts) depend on age and vary between 7%
and  10%.  The  employer  pays  a  variable  contribution  that
ranges between 150% and 220% of the sum of employees’
contributions. The computation of the beneﬁts is based on
the ﬁnal covered salary. The beneﬁts covered include retire-
ment  beneﬁts,  disability,  death  and  survivor  pensions,  and
employment termination beneﬁts.

Additional  employee  and  employer  contributions  are
made to the other plans of the pension fund of UBS. These
plans provide beneﬁts which are based on annual contribu-
tions as a percentage of salary and accrue at a minimum in-
terest rate annually.

The employer contributions expected to be made in 2006
to the Swiss pension plans are CHF 416 million. The accu-
mulated beneﬁt obligation (which is the current value of ac-
crued beneﬁts without allowance for future salary increases)
for  these  pension  plans  was  CHF  18,863  million  as  at
31 December 2005 (2004: CHF 18,566 million, 2003: CHF
16,817 million).

Foreign pension plans
The foreign locations of UBS operate various pension plans in
accordance with local regulations and practices. Among these
plans are deﬁned contribution plans as well as deﬁned bene-
ﬁt plans. The locations with deﬁned beneﬁt plans of a mate-
rial nature are in the UK, the US and Germany. The UK and
the US deﬁned beneﬁt plans are closed to new entrants who
are  covered  by  deﬁned  contribution  plans.  The  amounts
shown for foreign plans reﬂect the net funded positions of the
major foreign plans.

The retirement plans provide beneﬁts in the event of re-
tirement, death, disability or employment termination. The
plans’ retirement beneﬁts depend on age, contributions and
level of compensation. The principal plans are ﬁnanced in full
by  the  Group. The  employer  contributions  expected  to  be
made in 2006 to these pension plans are CHF 75 million. The
funding policy for these plans is consistent with local govern-
ment and tax requirements.

The assumptions used in foreign plans take into account

local economic conditions.

The  accumulated  beneﬁt  obligation  for  these  pension
plans was CHF 4,992 million as at 31 December 2005 (2004:
CHF  4,118  million,  2003:  CHF  3,609  million).  For  pension
plans  with  an  accumulated  beneﬁt  obligation  in  excess  of
plan assets, the aggregate projected beneﬁt obligation and
accumulated beneﬁt obligation was CHF 4,521 million and
CHF 4,497 million as at 31 December 2005 (2004: CHF 3,755
million and CHF 3,735 million, 2003: CHF 944 million and
CHF 930 million). The fair value of plan assets for these plans
was CHF 3,789 million as at 31 December 2005 (2004: CHF
3,166 million, 2003: CHF 677 million).

143

Financial Statements
Notes to the Financial Statements

Note 30 Pension and Other Post-Retirement Beneﬁt Plans (continued)

a) Deﬁned beneﬁt plans

CHF million

31.12.05

31.12.04

31.12.03

31.12.05

31.12.04

31.12.03

Deﬁned beneﬁt obligation at the beginning of the year

(20,225)

(18,216 )

(19,204 )

(4,142)

(3,663 )

(3,436 )

Swiss

Foreign

(353)

(660)

(219)

(713)

866

(37)

369

(20,972)

18,575

925

1,284

468

219

(866)

(376)

20,229

(743)

2,334

(345 )

(672 )

(203 )

(362 )

(703 )

(202 )

(1,392 )

1,395

910

(35 )

(272 )

930

(70 )

(82)

(236)

(416)

(280)

144

(2)

(6)

(20,225 )

17,619

(18,216 )

16,566

(5,020)

3,580

263

247

253

89

878

102

411

203

(910 )

272

818

593

370

202

(930 )

(83 )

(212 )

(296 )

146

125

(159 )

(4,142 )

3,402

248

122

(132 )

65

(91 )

(197 )

(201 )

138

124

(3,663 )

2,382

178

251

(116 )

831

(144)

(125 )

(124 )

18,575

(1,650 )

3,006

17,619

(597 )

1,716

4,288

(732)

1,222

1

3,580

(562 )

1,046

1

(1,591)

(1,356 )

(1,119 )

0

0

0

491

485

(468)

468

(411 )

411

0

0

0

0

33

(403 )

370

0

0

485

(125)

89

(6)

48

491

832

(341)

491

710

(105 )

65

(159 )

(26 )

485

805

(320 )

485

3,402

(261 )

970

1

710

73

(168 )

831

(26 )

710

862

(152 )

710

Service cost

Interest cost

Plan participant contributions

Actuarial gain / (loss)

Foreign currency translation

Beneﬁts paid

Special termination beneﬁts

Acquisitions

Settlements

Deﬁned beneﬁt obligation at the end of the year

Fair value of plan assets at the beginning of the year

Expected return on plan assets

Actuarial gain / (loss)

Foreign currency translation

Employer contributions

Plan participant contributions

Beneﬁts paid

Acquisitions

Settlements

Fair value of plan assets at the end of the year

Funded status

Unrecognized net actuarial (gains) / losses

Unrecognized prior service cost

Unrecognized asset

(Accrued) / prepaid pension cost

Movement in the net (liability or) asset

(Accrued) / prepaid pension cost at the beginning of the year

Net periodic pension cost

Employer contributions

Acquisitions

Foreign currency translation

(Accrued) / prepaid pension cost

Amounts recognized in the Balance Sheet

Prepaid pension cost

Accrued pension liability

(Accrued) / prepaid pension cost

144

Note 30 Pension and Other Post-Retirement Beneﬁt Plans (continued)

a) Deﬁned beneﬁt plans (continued)

CHF million

For the year ended

Components of net periodic pension cost

Service cost

Interest cost

Expected return on plan assets

Amortization of unrecognized past service cost

Amortization of unrecognized net (gains) / losses

Special termination beneﬁts

Settlements

Increase / (decrease) of unrecognized asset

Net periodic pension cost

Funded and unfunded plans

CHF million

Swiss

Foreign

31.12.05

31.12.04

31.12.03

31.12.05

31.12.04

31.12.03

353

660

(925)

(3)

101

37

10

235

468

345

672

(878 )

35

237

411

362

703

(818 )

188

70

(102 )

403

Swiss

82

236

(263)

68

2

83

212

(248 )

91

197

(178 )

58

58

125

105

168

31.12.05

31.12.04

31.12.03

31.12.02

31.12.01

Deﬁned beneﬁt obligation from funded plans

(20,972)

(20,225 )

Plan assets

Surplus / (deﬁcit)

Experience gains / (losses) on plan liabilities

Experience gains / (losses) on plan assets

CHF million

Deﬁned beneﬁt obligation from funded plans

Deﬁned beneﬁt obligation from unfunded plans

Plan assets

Surplus / (deﬁcit)

Experience gains / (losses) on plan liabilities

Experience gains / (losses) on plan assets

(18,216 )

17,619

(597 )

(19,204 )

16,566

(2,638 )

(17,879 )

18,289

410

18,575

(1,650 )

20,229

(743)

(77)

1,284

31.12.05

31.12.04

31.12.03

31.12.02

31.12.01

Foreign

(3,815 )

(327 )

3,580

(562 )

(3,509 )

(154 )

3,402

(261 )

(3,295 )

(141 )

2,382

(1,054 )

(3,402 )

(151 )

2,887

(666 )

(4,635)

(385)

4,288

(732)

7

247

Swiss

Foreign

31.12.05

31.12.04

31.12.03

31.12.05

31.12.04

31.12.03

Principal weighted average actuarial assumptions used (%)

Assumptions used to determine deﬁned beneﬁt obligations 
at the end of the year

Discount rate

Expected rate of salary increase

Rate of pension increase

Assumptions used to determine net periodic pension cost 
for the year ended

Discount rate

Expected rate of return on plan assets

Expected rate of salary increase

Rate of pension increase

3.0

2.5

0.8

3.3

5.0

2.5

1.0

3.3

2.5

1.0

3.8

5.0

2.5

1.0

3.8

2.5

1.0

3.8

5.0

2.5

1.5

5.0

4.4

1.9

5.5

7.0

4.4

1.9

5.5

4.4

1.9

5.7

7.2

4.6

1.9

5.7

4.6

1.9

5.8

7.1

4.4

1.5

145

Financial Statements
Notes to the Financial Statements

Note 30 Pension and Other Post-Retirement Beneﬁt Plans (continued)

a) Deﬁned beneﬁt plans (continued)

CHF million, except where indicated

Expected future beneﬁt payments

2006

2007

2008

2009

2010

2011–2015

Plan assets (weighted average)

Actual plan asset allocation (%)

Equity instruments

Debt instruments

Real estate

Other

Total

Long-term target plan asset allocation (%)

Equity instruments

Debt instruments

Real estate

Other

Actual return on plan assets (%)

Additional details to fair value of plan assets

UBS ﬁnancial instruments and UBS bank accounts

UBS AG shares 1

Securities lent to UBS included in plan assets

Other assets used by UBS included in plan assets

Swiss

Foreign

31.12.05

31.12.04

31.12.03

31.12.05

31.12.04

31.12.03

150

147

158

168

180

1,272

52

39

4

5

100

52–55

44–45

0–3

1–2

13.6

54

41

2

3

100

49–55

44–47

1–2

0–6

10.8

52

30

1

17

100

17.8

922

931

949

965

968

5,063

43

43

12

2

100

34–46

30–53

11–19

0

12.0

613

225

2,222

69

43

41

12

4

100

34–49

30–53

12–19

0

5.5

1,239

238

3,778

73

39

43

12

6

100

8.6

1,005

246

2,930

84

1 The number of UBS AG shares was 1,794,576, 2,493,173 and 2,908,699 as at 31 December 2005, 31 December 2004 and 31 December 2003, respectively.

146

Note 30 Pension and Other Post-Retirement Beneﬁt Plans (continued)

b) Post-retirement medical and life plans
In the US and the UK, the Group offers retiree medical bene-
ﬁts that contribute to the health care coverage of employees
and beneﬁciaries after retirement. In addition to retiree med-
ical beneﬁts, the Group in the US also provides retiree life in-
surance beneﬁts.

The beneﬁt obligation in excess of fair value of plan assets
for  those  plans  amounts  to  CHF  216  million  as  at  31
December 2005 (2004: CHF 166 million, 2003: CHF 179 mil-
lion) and the total accrued post-retirement cost amounts to
CHF 168 million as at 31 December 2005 (2004: CHF 136 mil-

lion, 2003: CHF 137 million). The net periodic post-retirement
costs for the years ended 31 December 2005, 31 December
2004 and 31 December 2003 were CHF 21 million, CHF 16
million and CHF 22 million, respectively.

The employer contributions expected to be made in 2006
to the post-retirement medical and life plans are CHF 8 mil-
lion. The expected future beneﬁt payments are CHF 8 million
for the year 2006, CHF 9 million for each of the years 2007
and 2008, CHF 10 million for the year 2009, CHF 11 million
for the year 2010 and CHF 63 million in total for the years
2011–2015.

b) Post-retirement medical and life plans

CHF million

Post-retirement beneﬁt obligation at the beginning of the year

Service cost

Interest cost

Actuarial gain / (loss)

Foreign currency translation

Beneﬁts paid

Post-retirement beneﬁt obligation at the end of the year

Fair value of plan assets at the beginning of the year

Employer contributions

Beneﬁts paid

Fair value of plan assets at the end of the year

31.12.05

(166)

31.12.04

(179 )

31.12.03

(166 )

(8)

(11)

(17)

(22)

8

(216)

0

8

(8)

0

(6 )

(9 )

8

12

8

(166 )

0

8

(8 )

0

(11 )

(10 )

(14 )

16

6

(179 )

2

4

(6 )

0

Deﬁned beneﬁt obligation

Plan asset

Surplus / (deﬁcit)

Experience gains / (losses) on plan liabilities

(216)

0

(216)

(3)

(166 )

0

(166 )

(179 )

0

(179 )

(166 )

2

(164 )

(145 )

3

(142 )

31.12.05

31.12.04

31.12.03

31.12.02

31.12.01

The assumed average health care cost trend rate used in determining post-retirement beneﬁt expense is assumed to be 11%
for 2005 and to decrease to an ultimate trend rate of 5% in 2012. Assumed health care cost trend rates have a signiﬁcant
effect on the amounts reported for the health care plan. A one percentage point change in the assumed health care cost
trend rates would change the US post-retirement beneﬁt obligation and the service and interest cost components of the net
periodic post-retirement beneﬁt costs as follows:

CHF million

Effect on total service and interest cost

Effect on the post-retirement beneﬁt obligation

1% increase 1% decrease

4

28

(3)

(23)

147

Financial Statements
Notes to the Financial Statements

Note 30 Pension and Other Post-Retirement Beneﬁt Plans (continued)

c) Deﬁned contribution plans
The  Group  also  sponsors  a  number  of  deﬁned  contribution  plans  primarily  in  the  UK  and  the  US.  Certain  plans  permit
employees to make contributions and earn matching or other contributions from the Group. The contributions to these plans
recognized as expense for the years ended 31 December 2005, 31 December 2004 and 31 December 2003 were CHF 184
million, CHF 187 million and CHF 141 million, respectively.

d) Related party disclosure
UBS is the principal bank for the pension fund of UBS in Switzerland. In this function, UBS is engaged to execute most of the
pension fund’s banking activities. These activities also include, but are not limited to, trading and securities lending and bor-
rowing. All transactions have been executed at arm’s length conditions.

The following fees and interest have been received or paid by UBS related to these banking activities:

CHF million

Received by UBS

Fees

Paid by UBS

Interest

Dividends and capital repayments

For the year ended

31.12.05

31.12.04

31.12.03

48

4

7

42

4

7

33

3

7

The foreign UBS pension funds do not have a similar banking relationship with UBS, but they may hold and trade UBS

shares and / or securities.

The transaction volumes in UBS shares and other UBS securities are as follows (all pension funds):

Financial instruments bought by pension funds

UBS AG shares (in thousands of shares)

UBS ﬁnancial instruments (nominal values in CHF million)

Financial instruments sold by pension funds or matured

UBS AG shares (in thousands of shares)

UBS ﬁnancial instruments (nominal values in CHF million)

For the year ended

31.12.05

31.12.04

31.12.03

1,387

0

2,263

45

2,822

47

3,713

18

4,987

34

5,760

36

UBS has also leased buildings from the Swiss pension fund. The rent paid by UBS under these leases amounted to CHF 4

million in 2005, CHF 5 million in 2004 and CHF 5 million in 2003.

There  were  ﬁnancial  instruments  in  the  amount  of  CHF  163  million  due  from  UBS  pension  plans  outstanding  as  at
31 December 2005 (2004: CHF 0 million, 2003: CHF 0 million). The amounts due to UBS deﬁned beneﬁt pension plans are
contained in the additional details to the fair value of plan assets. Furthermore, UBS deﬁned contribution plans hold 7,064,279
UBS shares with a market value of CHF 885 million as at 31 December 2005 (2004: 7,230,314 shares with a market value of
CHF 691 million, 2003: 7,733,881 shares with a market value of CHF 652 million). 

148

Note 31 Equity Participation and Other Compensation Plans
a) Plans Offered

UBS has established several equity participation plans to fur-
ther  align  the  long-term  interests  of  executives,  managers,
staff and shareholders. The plans are offered to eligible em-
ployees in approximately 50 countries and are designed to
meet the complex legal, tax and regulatory requirements of
each  country  in  which  they  are  offered.  The  explanations
below describe the most signiﬁcant plans in general, but spe-
ciﬁc plan rules and investment offerings may vary by country.
Equity Plus (EP): This voluntary plan gives eligible employ-
ees  the  opportunity  to  purchase  UBS  shares  at  fair  market
value on the purchase date and receive at no additional cost
two UBS options for each share purchased, up to a maximum
annual limit. The options have a strike price equal to the fair
market value of the stock on the date the option is granted.
Share purchases can be made annually from bonus compen-
sation or quarterly based on regular deductions from salary.
Shares purchased under Equity Plus are restricted from sale for
two years from the time of purchase, and the options granted
have a two-year vesting requirement and generally expire from
ten years to ten and one-half years after the date of grant.
Discounted purchase plans: Up to and including 2005, se-
lected employees in Switzerland were entitled to purchase a
speciﬁed  number  of  UBS  shares  at  a  predetermined  dis-
counted price each year. The number of shares that could be
purchased  depended  on  rank.  Any  such  shares  purchased
must be held for a speciﬁed period of time. The discount is
recorded as compensation expense. No new awards will be
made under this plan.

Equity Ownership Plan (EOP): Selected personnel receive
between 10% and 45% of their performance-related com-
pensation  in  UBS  shares  or  notional  UBS  shares  instead  of
cash, on a mandatory basis. Up to and including 2004, par-
ticipants in certain countries were eligible to receive a portion
of their award in UBS shares (with a matching contribution in

UBS options) or in Alternative Investment Vehicles (AIVs) (gen-
erally money market funds, UBS and non-UBS mutual funds
and other UBS sponsored funds). In 2002 and 2003, certain
employees received UBS options instead of UBS shares for a
portion  of  their  EOP  award.  In  2005,  options  were  not
granted as part of EOP and awards were generally made in
UBS shares. EOP awards vest in one-third increments over a
three-year  vesting  period.  Under  certain  conditions,  these
awards are fully forfeitable by the employee.

Key employee option plans: Under these plans, key and
high  potential  employees  are  granted  UBS  options  with  a
strike price not less than the fair market value of the shares
on the date the option is granted. Option grants generally
vest in one-third increments over a three-year vesting period
and generally expire from ten years to ten and one-half years
after the grant date. One option gives the right to purchase
one registered UBS share at the option’s strike price.

Other plans: UBS sponsors a deferred compensation plan
for selected eligible employees. Generally, contributions are
made on a voluntary and tax deferred basis, and participants
are allowed to notionally invest in AIVs. No additional com-
pany  match  is  granted,  and  the  plan  is  generally  not  for-
feitable.  In  addition,  UBS  also  grants  other  compensation
awards to new recruits and key employees, generally in the
form of UBS shares or options.    

UBS  satisﬁes  share  delivery  obligations  under  its  option
based participation plans either by purchasing UBS shares in
the market on grant date or shortly thereafter or through the
issuance of new shares. At exercise, shares held in treasury are
delivered,  or  alternatively  newly  issued,  to  the  employee
against receipt of the strike price. As at 31 December 2005,
UBS was holding approximately 56 million shares in treasury
which is expected to be sufﬁcient for anticipated employee
exercises in the next year.

149

Financial Statements
Notes to the Financial Statements

Note 31 Equity Participation and Other Compensation Plans (continued)
b) UBS share awards

Movements in shares granted under various equity participation plans described in Note 31a) are as follows:

UBS share awards

Share compensation plans

Unvested, at the beginning of the year

Shares awarded during the year

Vested during the year

Forfeited during the year

Unvested, at the end of the year

Number of
shares
31.12.05

24,636,819

13,626,050

(10,995,880)

(404,396)

26,862,593

Weighted-
average 
grant date 
fair value
(CHF)

79

101

78

89

92

Number of
shares
31.12.04

31,383,890

11,713,406

(17,996,498 )

(463,979 )

24,636,819

Weighted-
average 
grant date 
fair value
(CHF)

75

95

79

77

79

Number of
shares
31.12.03

48,136,561

11,023,553

(26,915,860 )

(860,364 )

31,383,890

Weighted-
average 
grant date 
fair value
(CHF)

78

61

75

79

75

UBS estimates the grant date fair value of shares awarded during the year by using the average UBS share price on the

grant date as quoted on the virtX. 

The market value of shares vested was CHF 1,083 million, CHF 1,922 million and CHF 1,677 million for the years ended

31 December 2005, 31 December 2004 and and 31 December 2003, respectively. 

c) UBS option awards

Movements in options granted under various equity participation plans described in Note 31a) are as follows:

UBS option awards

Outstanding, at the beginning of the year

Granted during the year

Exercised during the year

Forfeited during the year

Expired unexercised

Outstanding, at the end of the year

Exercisable, at the end of the year

Number of
options
31.12.05

100,907,354

22,601,427

(30,651,709)

(1,905,053)

(69,474)

90,882,545

37,394,419

Weighted-
average
exercise
price 1
(CHF)

Weighted-
average
exercise
price 1
(CHF)

Number of
options
31.12.04

69

109

109,040,026

24,113,252

68

90

68

84

70

(29,396,959 )

(2,692,824 )

(156,141 )

100,907,354

37,941,280

63

91

58

66

76

69

65

Number of
options
31.12.03

88,164,227

38,969,319

(14,782,471 )

(2,721,970 )

(589,079 )

109,040,026

34,726,720

Weighted-
average
exercise
price 1
(CHF)

67

59

54

64

76

63

59

1 Some of the options in this table have exercise prices denominated in USD which have been converted into CHF at the year-end spot exchange rates for the purposes of this table.

The weighted average share price of options exercised during the year was CHF 106, CHF 93 and CHF 77 for the years

ended 31 December 2005, 31 December 2004 and 31 December 2003, respectively. 

The following table provides additional information about option awards: 

Intrinsic value of options exercised during the year (CHF million)

Weighted-average grant date fair value of options granted (CHF)

31.12.05

31.12.04

31.12.03

1,224

16

960

25

326

15

In addition, UBS received cash of CHF 2,018 million and an income tax beneﬁt of CHF 217 million from the exercise of

share options for the year ended 31 December 2005.

The intrinsic value of share-based liabilities (shares and options) paid for the years ended 31 December 2005, 31 December

2004 and 31 December 2003 was CHF 87 million, CHF 669 million and CHF 1,092 million, respectively. 

150

Note 31 Equity Participation and Other Compensation Plans (continued)
c) UBS option awards (continued)

The following tables summarize additional information about options outstanding and options exercisable at 31 December
2005:

as at 31.12.05

Range of exercise price per share

CHF

53.37–70.00

70.01–85.00

85.01–100.00

100.01–126.45

53.37–126.45

USD

9.48–35.00

35.01–45.00

45.01–55.00

55.01–80.00

80.01–96.52

9.48–96.52

d) Valuation

Number of
options
outstanding

11,419,873

9,663,720

12,146,701

14,458,375

47,688,669

1,610,614

7,739,569

12,192,501

10,127,640

11,523,552

43,193,876

Options outstanding

Weighted-
average
exercise 
price
(CHF / USD)

Aggregate
intrinsic 
value
(CHF million)

Weighted-
average
remaining
contractual
term (years)

Number of
options
exercisable

5,374,311

9,110,432

4,179,263

9,459

738

456

362

304

6.8

6.3

7.2

9.1

1,860

7.5 18,673,465

113

402

577

244

91

1.0

7.1

5.0

7.8

9.1

1,610,614

3,967,147

10,336,354

2,745,506

61,333

1,427

7.0 18,720,954

60.44

77.90

95.31

104.08

86.09

25.23

43.15

47.81

71.02

87.38

62.13

Options exercisable

Weighted-
average
exercise
price
(CHF / USD)

Aggregate
intrinsic 
value
(CHF million)

Weighted-
average
remaining
contractual
term (years)

59.77

77.82

96.83

102.93

76.89

25.23

42.92

47.75

66.61

83.58

47.67

351

431

118

0

900

113

207

490

78

1

889

6.4

6.3

5.6

9.3

6.2

1.0

7.1

4.6

6.3

9.0

5.1

Upon adoption of IFRS 2 and SFAS 123-R, both titled Share-
based Payment, on 1 January 2005, UBS conducted a review
of its option valuation inputs to ensure they were in line with
the guidance included in the two standards. As a result of that
review, UBS now uses a mix of implied and historic volatility
instead of solely historic volatility and speciﬁc employee exer-
cise behavior patterns based on statistical data instead of a
single expected life input to determine the fair value of the
options.  A  more  sophisticated  option  valuation  model  was
concurrently introduced to better model the UBS-speciﬁc em-
ployee exercise behavior patterns. The overall change in fair

value of the options in 2005 versus 2004 is primarily attribut-
able to using implied instead of historic volatility. The use of
market-implied volatility decreased the fair value of the option
by approximately CHF 7 or 29% compared to using historic
volatility.  The  remaining  reduction  in  fair  value  of  approxi-
mately CHF 2 is attributable to the introduction of the new val-
uation model which uses UBS-speciﬁc employee exercise be-
havior patterns rather than an expected life input, as well as
all other input changes based on observable market factors. 
The fair value of options granted during 2005 was deter-

mined using the following assumptions:

Expected volatility (%)

Risk-free interest rate (%)

Expected dividend (CHF/USD)

Strike price (CHF/USD)

Share price (CHF/USD)

31.12.05

CHF awards

range low

range high

USD awards

range low

range high

23.20

2.00

4.59

104.16

102.65

12.39

0.62

3.00

96.45

96.45

27.03

2.34

7.78

126.45

126.45

23.36

4.11

3.77

88.21

86.79

15.21

1.91

2.43

78.49

78.49

27.21

4.63

8.24

96.52

96.52

151

Financial Statements
Notes to the Financial Statements

Note 31 Equity Participation and Other Compensation Plans (continued)
d) Valuation (continued)

The valuation technique takes into account the speciﬁc terms and conditions under which the share options are granted such as the
vesting period, forced exercises during the lifetime, and gain- and time-dependent exercise behavior. The expected term of each op-
tion is calculated, by means of Monte Carlo simulation, as the probability-weighted average of the time of exercise.

The term structure of volatility is derived from the implied volatilities of traded UBS options in combination with the observed long-

term historic share price volatility. Dividends are assumed to grow at a 10% yearly rate over the term of the option. 

The fair value of options granted during 2004 and 2003 was determined using a proprietary option pricing model, similar to an

American-style binomial model, with the following assumptions: 

Expected volatility (%)

Risk-free interest rate (%)

Expected dividend rate (%)

Strike price (CHF/USD)

Share price (CHF/USD)

Expected life (years)

31.12.04

31.12.03

CHF awards

USD awards

CHF awards

USD awards

33.66

2.03

3.86

95.59

94.17

5.6

33.45

3.70

3.88

75.12

74.06

5.6

35.20

1.70

4.58

60.84

59.32

4.5

34.74

3.17

4.35

46.44

46.25

4.5

The expected life was estimated on the basis of observed employee option exercise patterns. Volatility was derived from the
observed long-term historic share price volatility aligned to the expected life of the option. Dividends were assumed to grow
at a 10% yearly rate over the expected life of the option.

e) Compensation expense 

Generally,  under  IFRS,  for  all  employee  share  and  option
awards for which the underlying is UBS shares, UBS recognizes
compensation expense over the requisite service period which
is  generally  equal  to  the  vesting  period.  Share  and  option
awards  typically  have  a  three-year  tiered  vesting  structure
which means awards vest in one-third increments over that pe-
riod. The total share-based compensation expense recognized
for the years ended 31 December 2005, 31 December 2004
and 31 December 2003 was CHF 1,662 million, CHF 1,406
million and CHF 1,474 million, respectively. The total income
taxes recognized in the Income statement in relation to these
expenses were a beneﬁt of CHF 431 million, CHF 64 million
and CHF 197 million for the years ended 31 December 2005,
31 December 2004 and 31 December 2003, respectively.

For the years ended 31 December 2005 and 31 December
2004, virtually all of the expense recorded for share-based
payments  was  related  to  equity  settled  plans.  For  the  year
ended 31 December 2003, the expense recorded for equity-
settled plans was CHF 1,247 million. At 31 December 2005
and 31 December 2004, the total liability related to vested
and  unvested  cash-settled  share-based  plans  was  insigniﬁ-
cant. 

At 31 December 2005, total compensation cost related to
non-vested awards not yet recognized in the Income state-
ment is CHF 1,252 million, which is expected to be recognized
in Personnel expenses over a weighted average period of 1.87
years.

152

Note 32 Related Parties

The  Group deﬁnes  related  parties  as  associated  companies,
post-employment beneﬁt plans for the beneﬁt of UBS employ-
ees, key management personnel, close family members of key
management personnel and enterprises which are, directly or in-
directly, controlled by, jointly controlled by or signiﬁcantly inﬂu-
enced by or in which signiﬁcant voting power resides with key
management  personnel  or  their  close  family  members.  Key
management personnel is deﬁned as members of the Board

of Directors (BoD) and Group Executive Board (GEB). This deﬁ-
nition is based on the requirements of revised IAS 24 Related
Party Disclosures adopted by UBS on 1 January 2005 and the
“Directive on Information Relating to Corporate Governance”
issued by the SWX Swiss Exchange and effective from 1 July
2002 for all listed companies in Switzerland. 

Where applicable, prior comparative periods have been re-

stated. 

a) Remuneration of key management personnel

The executive members of the BoD have top management employment contracts and receive pension beneﬁts upon retire-
ment. Total remuneration of the executive members of the BoD and GEB is as follows: 

CHF million

Base salaries and other cash payments

Incentive awards - cash

Employer’s contributions to retirement beneﬁt plans

Beneﬁts in kind, fringe beneﬁts (at market value)

Equity compensation beneﬁts 1

Total

For the year ended

31.12.05

31.12.04

31.12.03

15

90

1

3

114

223

15

70

1

2

103

191

14

65

1

1

77

158

1 Expense for shares and options granted is measured at grant date and allocated over the vesting period, generally 3 years for options and 5 years for shares.

Total compensation numbers exclude merger-related reten-
tion  payments  for  two  ex-PaineWebber  executives  of  CHF
21.1 million (USD 17.0 million) in 2003. These retention pay-
ments were committed to at the time of the merger in 2000
and fully disclosed at the time. 

The external members of the BoD do not have employ-
ment or service contracts with UBS, and thus are not entitled
to  beneﬁts  upon  termination  of  their  service  on  the  BoD.
Payments  to  these  individuals  for  their  services  as  external
board members amounted to CHF 6.1 million in 2005, CHF
5.7 million in 2004 and CHF 5.4 million in 2003.

b) Equity holdings

Number of stock options from equity participation plans held by executive members of the BoD and the GEB

Number of shares held by members of the BoD, GEB and parties closely linked to them

31.12.05

5,431,125

4,356,992

As at

31.12.04

6,004,997

3,506,610

31.12.03

6,218,011

3,150,217

Of the share totals above, at 31 December 2005, 3,269 shares
were held by close family members of key management per-
sonnel and 1,243,030 shares were held by enterprises which
are directly or indirectly controlled by, jointly controlled by or
signiﬁcantly  inﬂuenced  by  or  in  which  signiﬁcant  voting
power resides with key management personnel or their close
family members. 

In addition, at 31 December 2003, executive members of
the  BoD  and  GEB  held  120,264  warrants  (equal  to  7,214
shares)  from  equity  participation  plans.  Further  informa-
tion about  UBS’s  equity  participation  plans  can  be  found
in Note  31.  No  member  of  the  BoD  or  GEB  is  the  bene-
ﬁcial owner  of  more  than  1%  of  the  Group’s shares  at
31 December 2005.

153

Financial Statements
Notes to the Financial Statements

Note 32 Related Parties (continued)

c) Loans, advances and mortgages to key management personnel
Executive members of the BoD and GEB members have been granted loans, ﬁxed advances and mortgages on the same terms
and conditions that are available to other employees, based on terms and conditions granted to third parties adjusted for re-
duced credit risk. Non-executive BoD members are granted loans and mortgages at general market conditions.

Movements in the loan, advances and mortgage balances are as follows:

CHF million

Balance at the beginning of the year

Additions

Reductions

Balance at the end of the year

31.12.05

31.12.04

16

7

(2)

21

25

2

(11 )

16

No unsecured loans were granted to key management personnel as at 31 December 2005 and 31 December 2004.

d) Associated companies
Movements in loans to associated companies are as follows: 

CHF million

Balance at the beginning of the year

Additions

Reductions

Credit loss (expense) / recovery

Balance at the end of the year

31.12.05

31.12.04

83

267

(26)

(3)

321

81

38

(36 )

0

83

All loans to associated companies are transacted at arm’s length. Of the balances above, the amount of unsecured loans

amounted to CHF 82 million and CHF 61 million at 31 December 2005 and 31 December 2004, respectively.

Other transactions with associated companies transacted at arm's length are as follows:

CHF million

Payments to associates for goods and services received

Fees received for services provided to associates

Commitments and contingent liabilities to associates

For the year ended or as at

31.12.05

31.12.04

31.12.03

397

258

39

248

180

83

120

122

During 2003, UBS sold its VISA acquiring business to Telekurs Holding AG, an associated company. UBS realized a CHF 90

million gain from this divestment. Note 35 provides a list of signiﬁcant associates.

154

Note 32 Related Parties (continued)

e) Other related party transactions 
During 2005 and 2004, UBS entered into transactions at arm’s length with enterprises which are directly or indirectly con-
trolled by, jointly controlled by or signiﬁcantly inﬂuenced by or in which signiﬁcant voting power resides with key manage-
ment personnel or their close family members. In 2005 and 2004 these companies included Bertarelli Biotech SA (Switzerland,
previously Bertarelli & Cie.), BMW Group (Germany), Kedge Capital Funds Ltd. (Jersey), Serono Group (Switzerland), Stadler
Rail Group (Switzerland), Team Alinghi (Switzerland), and Unisys Corporation (USA). Related parties in 2005 also included
Löwenfeld AG (Switzerland) and Royal Dutch Shell plc (UK). In 2004, related parties also included J. Sainsbury plc. (UK).

Movements in loans to other related parties are as follows:

CHF million

Balance at the beginning of the year

Additions

Reductions

Loans at the end of the year 1

31.12.05

31.12.04

294

628

3

919

79

275

60

294

1 In 2005 includes loans, guarantees and contingent liabilities of CHF 116 million and unused committed facilities of CHF 804 million but excludes unused uncommitted working capital facilities and
unused  guarantees  of  CHF  52  million. In  2004  includes  loans, guarantees  and  contingent  liabilities  of  CHF  32  million  and  unused  committed  facilities  of  CHF  262  million  but  excludes  unused
uncommitted working capital facilities and unused guarantees of CHF 110 million.

No unsecured loans were entered into as at 31 December 2005 and 31 December 2004.

Other transactions with these related parties include:

CHF million

Goods sold and services provided to UBS

Fees received for services provided by UBS

For the year ended

31.12.05

31.12.04

31.12.03

15

1

34

10

43

7

As part of its sponsorship of Team Alinghi, defender for the “America’s Cup 2007”, UBS paid CHF 8.4 million (EUR 5.4 mil-

lion) as sponsoring fee for 2005. Team Alinghi’s controlling shareholder is UBS board member Ernesto Bertarelli.

f) Additional information
UBS also engages in trading and risk management activities (e.g. swaps, options, forwards) with various related parties men-
tioned in previous sections. These transactions may give rise to credit risk either for UBS or for a related party towards UBS.
As part of its normal course of business, UBS is also a market maker in equity and debt instruments and at times may hold
positions in instruments of related parties.

155

Note 33 Securitizations

During the years ended 31 December 2005, 2004 and 2003, UBS securitized (i.e. transformed owned ﬁnancial assets into se-
curities) residential mortgage loans and securities, commercial mortgage loans and other ﬁnancial assets, acting as lead or
co-manager. UBS’s continuing involvement in these transactions was primarily limited to the temporary retention of various
security interests.

Proceeds received at the time of securitization were as follows:

CHF billion

Residential mortgage securitizations 

Commercial mortgage securitizations 

Other ﬁnancial asset securitizations 

Proceeds received

31.12.05

31.12.04

31.12.03

66

5

9

91

3

9

131

4

2

Related pre-tax gains (losses) recognized, including unrealized gains (losses) on retained interests, at the time of securiti-

zation were as follows:

CHF million

Residential mortgage securitizations 

Commercial mortgage securitizations 

Other ﬁnancial asset securitizations 

Pre-tax gains / (losses) recognized

31.12.05

31.12.04

31.12.03

107

125

17

197

141

21

338

214

2

At 31 December 2005 and 2004, UBS retained CHF 1.7 billion and CHF 2.4 billion, respectively, in agency residential mort-
gage  securities,  backed  by  the  Government  National  Mortgage  Association  (GNMA),  the  Federal  National  Mortgage
Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). The fair value of retained interests in resi-
dential mortgage securities is generally determined using observable market prices. Retained non-investment grade interests
in other residential mortgage, commercial mortgage and other securities were not material at 31 December 2005 and 2004.

Note 34 Post-Balance Sheet Events

There have been no material post-balance sheet events which would require disclosure or adjustment to the 31 December
2005 Financial Statements.

On 2 March 2006, the Board of Directors reviewed the Financial Statements and authorized them for issue. These Financial

Statements will be submitted to the Annual General Meeting of Shareholders to be held on 19 April 2006 for approval.

156

Note 35 Signiﬁcant Subsidiaries and Associates

The legal entity group structure of UBS is designed to support the Group’s businesses within an efﬁcient legal, tax, regulatory
and  funding  framework.  Neither  the  Business  Groups  of  UBS  (namely  Investment  Bank,  Global  Wealth  Management  &
Business Banking and Global Asset Management) nor Corporate Center are replicated in their own individual legal entities,
but rather they generally operate out of UBS AG (Parent Bank) through its Swiss and foreign branches.

The parent bank structure allows UBS to capitalize on the advantages offered by the use of one legal platform by all the
Business Groups. It provides for the most cost efﬁcient and ﬂexible structure and facilitates efﬁcient allocation and use of cap-
ital, comprehensive risk management and control and straightforward funding processes.

Where, usually due to local legal, tax or regulatory rules or due to additional legal entities joining the UBS Group via ac-
quisition, it is either not possible or not efﬁcient to operate out of the parent bank, then local subsidiary companies host the
businesses. The signiﬁcant operating subsidiary companies in the Group are listed below:

Share
capital
in millions

Equity
interest
accumulated in %

Signiﬁcant subsidiaries

Company

Banco UBS SA

Crédit Industriel SA

Etra SIM SpA

Factors AG

Noriba Bank BSC

PaineWebber Capital Inc

PT UBS Securities Indonesia

Jurisdiction
of incorporation

Rio de Janeiro, Brazil

Zurich, Switzerland

Milan, Italy

Zurich, Switzerland

Manama, Bahrain

Delaware, USA

Jakarta, Indonesia

Thesaurus Continentale Effekten-Gesellschaft in Zürich

Zurich, Switzerland

UBS (Bahamas) Ltd

UBS (France) SA

Nassau, Bahamas

Paris, France

Business
Group 1

IB

Global WM&BB

Global WM&BB

Global WM&BB

Global WM&BB

IB

IB

Global WM&BB

Global WM&BB

Global WM&BB

UBS (Grand Cayman) Limited

George Town, Cayman Islands

IB

UBS (Italia) SpA

UBS (Luxembourg) SA

UBS (Monaco) SA

UBS (Trust and Banking) Limited

UBS Advisory and Capital Markets Australia Ltd

UBS Alternative and Quantitative Investments LLC

UBS Americas Inc

UBS Asesores SA

UBS Australia Limited

UBS Bank (Canada)

UBS Bank USA

UBS Belgium SA/NV

UBS Capital (Jersey) Ltd

UBS Capital AG

UBS Capital Americas Investments II LLC

UBS Capital Americas Investments III Ltd

UBS Capital Asia Paciﬁc Limited

UBS Capital BV

UBS Capital II LLC

Milan, Italy

Luxembourg, Luxembourg

Monte Carlo, Monaco

Tokyo, Japan

Sydney, Australia

Delaware, USA

Delaware, USA

Panama, Panama

Sydney, Australia

Toronto, Canada

Utah, USA

Brussels, Belgium

St. Helier, Jersey

Zurich, Switzerland

Delaware, USA

George Town, Cayman Islands

George Town, Cayman Islands

Amsterdam, the Netherlands

Delaware, USA

UBS Capital Latin America LDC

George Town, Cayman Islands

Global WM&BB

Global WM&BB

Global WM&BB

Global AM

IB

Global AM

IB

Global WM&BB

IB

Global WM&BB

Global WM&BB

Global WM&BB

IB

IB

IB

IB

IB

IB

IB

IB

IB

UBS Capital LLC

UBS Card Center AG

UBS Commodities Canada Ltd.

UBS Corporate Finance Italia SpA

UBS Derivatives Hong Kong Limited

UBS Deutschland AG

Delaware, USA

Glattbrugg, Switzerland

Global WM&BB

Toronto, Canada

Milan, Italy

Hong Kong, China

IB

IB

IB

Frankfurt am Main, Germany

Global WM&BB

BRL

CHF

EUR

CHF

USD

USD

IDR

CHF

USD

EUR

USD

EUR

CHF

EUR

JPY

AUD

USD

USD

USD

AUD

CAD

USD

EUR

GBP

CHF

USD

USD

USD

EUR

USD

USD

USD

CHF

USD

EUR

HKD

EUR

52.9

0.1

7.6

5.0

10.0

25.8

100,000.0

0.1

4.0

10.7

25.0

60.0

150.0

9.2

11,150.0

580.8 2

0.0

4,550.8

0.0

50.0

8.5

1,700.0

17.0

226.0

5.0

130.0 2

61.1 2

5.0

118.8 2

2.6 2

113.0 2

378.5 2

0.1

11.3

1.9

60.0

176.0

1 Global WM&BB: Global Wealth Management & Business Banking, Global AM: Global Asset Management, IB: Investment Bank, CC: Corporate Center.

2 Share capital and share premium.

100.0

100.0

100.0

100.0

100.0

100.0

98.4

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

157

Financial Statements
Notes to the Financial Statements

Note 35 Signiﬁcant Subsidiaries and Associates (continued)

Signiﬁcant subsidiaries (continued)

Company

UBS Employee Beneﬁts Trust Limited

UBS Energy LLC

UBS España SA

UBS Fiduciaria SpA

UBS Fiduciary Trust Company

UBS Finance (Cayman Islands) Ltd

UBS Finance (Curação) NV

UBS Finance (Delaware) LLC

UBS Financial Services Inc

Jurisdiction
of incorporation

St. Helier, Jersey

Delaware, USA

Madrid, Spain

Milan, Italy

New Jersey, USA

George Town, Cayman Islands

Willemstad, Netherlands Antilles

Delaware, USA

Delaware, USA

UBS Financial Services Incorporated of Puerto Rico

Hato Rey, Puerto Rico

UBS Fund Advisor LLC

UBS Fund Holding (Luxembourg) SA

UBS Fund Holding (Switzerland) AG

UBS Fund Management (Switzerland) AG

UBS Fund Services (Cayman) Ltd

UBS Fund Services (Ireland) Limited

UBS Fund Services (Luxembourg) SA

Delaware, USA

Luxembourg, Luxembourg

Basel, Switzerland

Basel, Switzerland

George Town, Cayman Islands

Dublin, Ireland

Luxembourg, Luxembourg

UBS Global Asset Management (Americas) Inc

UBS Global Asset Management (Australia) Ltd

UBS Global Asset Management (Canada) Co

Delaware, USA

Sydney, Australia

Toronto, Canada

UBS Global Asset Management (Deutschland) GmbH

Frankfurt am Main, Germany

Business
Group 1

CC

IB

Global WM&BB

Global WM&BB

Global WM&BB

CC

CC

IB

Global WM&BB

Global WM&BB

Global WM&BB

Global AM

Global AM

Global AM

Global AM

Global AM

Global AM

Global AM

Global AM

Global AM

Global AM

UBS Global Asset Management (France) SA

Paris, France

Global WM&BB

UBS Global Asset Management (Hong Kong) Limited

Hong Kong, China

UBS Global Asset Management (Italia) SIM SpA

UBS Global Asset Management (Japan) Ltd

Milan, Italy

Tokyo, Japan

UBS Global Asset Management (Singapore) Ltd

Singapore, Singapore

Global AM

Global AM

Global AM

Global AM

Global AM

Global AM

Global AM

Global WM&BB

Global WM&BB

Taipei, Taiwan

Delaware, USA

London, Great Britain

Vaduz, Liechtenstein

St. John, Canada

Amsterdam, the Netherlands

CC

New York, USA

Dublin, Ireland

Global WM&BB

Global WM&BB

UBS Global Asset Management (Taiwan) Ltd

UBS Global Asset Management (US) Inc

UBS Global Asset Management Holding Ltd

UBS Global Life AG

UBS Global Trust Corporation

UBS International Holdings BV

UBS International Inc

UBS International Life Limited

UBS Investment Bank Nederland BV

Amsterdam, the Netherlands

IB

UBS Investment Management Canada Inc

UBS Italia SIM SpA

UBS Leasing AG

UBS Life AG

UBS Life Insurance Company (USA)

UBS Limited

UBS Loan Finance LLC

UBS Mortgage Holdings LLC

UBS New Zealand Limited

UBS O’Connor LLC

UBS Portfolio LLC

UBS Preferred Funding Company LLC I

UBS Preferred Funding Company LLC II

Toronto, Canada

Milan, Italy

Zurich, Switzerland

Zurich, Switzerland

California, USA

London, Great Britain

Delaware, USA

Delaware, USA

Global WM&BB

IB

Global WM&BB

Global WM&BB

Global WM&BB

IB

IB

Global WM&BB

Auckland, New Zealand

IB

Delaware, USA

Delaware, USA

Delaware, USA

Delaware, USA

Global AM

IB

CC

CC

Share
capital
in millions

Equity
interest
accumulated in %

CHF

USD

EUR

EUR

USD

USD

USD

USD

USD

USD

USD

CHF

CHF

CHF

USD

EUR

CHF

USD

AUD

CAD

EUR

EUR

HKD

EUR

JPY

SGD

TWD

USD

GBP

CHF

CAD

EUR

USD

EUR

EUR

CAD

EUR

CHF

CHF

USD

GBP

USD

USD

NZD

USD

USD

USD

USD

0.0

0.0

62.2

0.2

4.4 2

0.5

0.1

37.3 2

1,672.3 2

31.0 2

0.0

42.0

18.0

1.0

5.6

1.3

2.5

0.0

8.0

117.0

7.7

2.1

25.0

2.0

2,200.0

4.0

340.0

35.2 2

33.0

5.0

0.1

6.8

34.3 2

1.0

10.8

0.0

15.1

10.0

25.0

39.3 2

29.4

16.7

0.0

7.5

1.0

0.1

0.0

0.0

100.0

100.0

100.0

100.0

99.6

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

1 Global WM&BB: Global Wealth Management & Business Banking, Global AM: Global Asset Management, IB: Investment Bank, CC: Corporate Center.

2 Share capital and share premium.

158

Note 35 Signiﬁcant Subsidiaries and Associates (continued)

Signiﬁcant subsidiaries (continued)

Company

UBS Preferred Funding Company LLC III

UBS Preferred Funding Company LLC IV

UBS Principal Finance LLC

UBS Private Clients Australia Ltd

UBS Real Estate Investments Inc

UBS Real Estate Kapitalanlagegesellschaft mbH

UBS Real Estate Securities Inc

UBS Realty Investors LLC

UBS Securities (Thailand) Ltd

UBS Securities Asia Limited

UBS Securities Australia Ltd

UBS Securities Canada Inc

UBS Securities España Sociedad de Valores SA

UBS Securities France SA

UBS Securities Hong Kong Limited

UBS Securities India Private Limited

UBS Securities International Limited

UBS Securities Japan Ltd

UBS Securities Limited

UBS Securities Limited Seoul Branch

UBS Securities LLC

UBS Securities Malaysia Sdn Bdn

UBS Securities Philippines Inc

UBS Securities Pte. Ltd.

UBS Services USA LLC

Jurisdiction
of incorporation

Delaware, USA

Delaware, USA

Delaware, USA

Business
Group 1

CC

CC

IB

Melbourne, Australia

Global WM&BB

Delaware, USA

Munich, Germany

Delaware, USA

Massachusetts, USA

Bangkok, Thailand

Hong Kong, China

Sydney, Australia

Toronto, Canada

Madrid, Spain

Paris, France

Hong Kong, China

Mumbai, India

London, Great Britain

George Town, Cayman Islands

London, Great Britain

Seoul, South Korea

Delaware, USA

Kuala Lumpur, Malaysia

Makati City, Philippines

Singapore, Singapore

Delaware, USA

IB

Global AM

IB

Global AM

IB

IB

IB

IB

IB

IB

IB

IB

IB

IB

IB

IB

IB

IB

IB

IB

Global WM&BB

UBS South Africa (Proprietary) Limited

Sandton, South Africa

IB

UBS Swiss Financial Advisers AG

UBS Trust Company National Association

UBS Trustees (Bahamas) Ltd

UBS Trustees (Cayman) Ltd

UBS Trustees (Jersey) Ltd

UBS Trustees (Singapore) Ltd

UBS UK Holding Limited

UBS UK Properties Limited

UBS Wealth Management (UK) Ltd

Motor-Columbus AG

Aare-Tessin AG für Elektrizität 3

Atel Energia S.r.l. 3

Atel Installationstechnik AG 3

Entrade GmbH 3

GAH Beteiligungs AG 3

Società Elettrica Sopracenerina SA 3

Zurich, Switzerland

New York, USA

Nassau, Bahamas

Global WM&BB

Global WM&BB

Global WM&BB

George Town, Cayman Islands

Global WM&BB

St. Helier, Jersey

Singapore, Singapore

London, Great Britain

London, Great Britain

London, Great Britain

Baden, Switzerland

Olten, Switzerland

Milan, Italy

Olten, Switzerland

Schaffhausen, Switzerland

Heidelberg, Germany

Locarno, Switzerland

Global WM&BB

Global WM&BB

IB

IB

Global WM&BB

CC

CC

CC

CC

CC

CC

CC

Share
capital
in millions

Equity
interest
accumulated in %

USD

USD

USD

AUD

USD

EUR

USD

USD

THB

HKD

AUD

CAD

EUR

EUR

HKD

INR

GBP

JPY

GBP

KRW

USD

MYR

PHP

SGD

USD

ZAR

CHF

USD

USD

USD

GBP

SGD

GBP

GBP

GBP

CHF

CHF

EUR

CHF

CHF

EUR

CHF

0.0

0.0

0.1

53.9

0.3

7.5

0.4

9.3

400.0

20.0

209.8 2

10.0

15.0

22.9

230.0

237.8

18.0

60,000.0

140.0

0.0

2,141.4 2

75.0

150.0

90.0

0.0

87.1 2

1.5

5.0 2

2.0

2.0

0.0

3.3

5.0

100.0

2.5

253.0

303.6

20.0

30.0

0.4

25.0

27.5

100.0

100.0

100.0

100.0

100.0

51.0

100.0

100.0

100.0

100.0

100.0

50.0

100.0

100.0

100.0

75.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

55.6

33.0

32.3

33.0

24.7

33.0

19.6

1 Global WM&BB: Global Wealth Management & Business Banking, Global AM: Global Asset Management, IB: Investment Bank, CC: Corporate Center.
wholly owned subsidiary controlled by Motor-Columbus which itself is only 55.6% owned by UBS.

2 Share capital and share premium.

3 Not

159

Financial Statements
Notes to the Financial Statements

Note 35 Signiﬁcant Subsidiaries and Associates (continued)

Consolidated companies: changes in 2005

Signiﬁcant new companies

Etra SIM SpA – Milan, Italy

UBS Real Estate Kapitalanlagegesellschaft mbH – Munich, Germany

UBS Swiss Financial Advisers AG – Zurich, Switzerland

Deconsolidated companies

Signiﬁcant deconsolidated companies

Ehinger & Armand von Ernst AG – Zurich, Switzerland

Ferrier Lullin & Cie SA – Geneva, Switzerland

BDL Banco di Lugano – Lugano, Switzerland

GAM Holding AG – Zurich, Switzerland

UBS Investment Bank AG – Frankfurt am Main, Germany

UBS Capital SpA – Milan, Italy

Cantrade Private Bank Switzerland (CI) Limited – St. Helier, Jersey

GAM Limited – Hamilton, Bermuda

BDL Banco di Lugano (Singapore) Ltd – Singapore, Singapore

SBC Wealth Management AG – Zug, Switzerland

Signiﬁcant associates

Company

Electricité d’Emosson SA - Martigny, Switzerland

Engadiner Kraftwerke AG - Zernez, Switzerland

Kernkraftwerk Gösgen-Däniken AG - Däniken, Switzerland

Kernkraftwerk Leibstadt AG - Leibstadt, Switzerland

SIS Swiss Financial Services Group AG - Zurich, Switzerland

Telekurs Holding AG - Zurich, Switzerland

UBS Alpha Select - George Town, Cayman Islands

UBS Alpha Hedge Fund - George Town, Cayman Islands

UBS Currency Portfolio Ltd - George Town, Cayman Islands

UBS Global Equity Arbitrage Ltd - George Town, Cayman Islands

Azienda Energetica Municipale S.p.A. - Milan, Italy

Chou Mitsui Private Equity Partners Investment Limited 
Partnership V - Tokyo, Japan

ATR Acquisition LLC - Texas, USA

Waterside Plaza Holdings LLC - Delaware, USA

Reason for deconsolidation

Sold

Sold

Sold

Sold

Merged

Sold

Sold

Sold

Sold

Merged

Industry

Electricity

Electricity

Electricity

Electricity

Financial

Financial

Private Investment Company

Private Investment Company

Private Investment Company

Private Investment Company

Electricity

Private Investment Company

Manufacturing

Real Estate

Equity interest
in %

Share capital
in millions

16

7

13

9

33

33

32

23

25

21

2

47

28

50

CHF

CHF

CHF

CHF

CHF

CHF

USD

USD

USD

USD

EUR

140

140

350 1

450

26

45

295 2

345 2

957 2

613 2

930

JPY

10,490

USD

USD

273

119

1 Thereof paid in CHF 290 million.

2 For hedge funds net asset value instead of share capital.

None of the above investments carries voting rights that are signiﬁcantly different from the proportion of shares held.

160

Note 36 Invested Assets and Net New Money

Invested  assets  include  all  client  assets  managed  by  or  de-
posited  with  UBS  for  investment  purposes  only.  Assets  in-
cluded are, for example, managed fund assets, managed in-
stitutional assets, discretionary and advisory wealth manage-
ment portfolios, ﬁduciary deposits, time deposits, savings ac-
counts and wealth management securities or brokerage ac-
counts. All assets held for purely transactional purposes and
custody-only including corporate client assets held for cash
management  and  transactional  purposes  are  excluded,  as
the bank only administers the assets and does not offer ad-
vice on how the assets should be invested. Also excluded are
non-bankable assets (e. g. art collections) and deposits from
third-party banks for funding or trading purposes.

Discretionary assets are deﬁned as those where the bank
decides on how a client’s assets are invested. Other invested
assets are those where the client decides on how the assets
are invested. When a single product is created in one Business
Group and sold in another, it is counted in both the Business
Group that does the investment management and the one
that distributes it. This results in double counting within UBS

total invested assets, as both Business Groups are providing
a service independently to their respective clients, and both
add value and generate revenue.

Net new money is the net amount of invested assets that
are acquired by the bank from new clients, invested assets
that  are  lost  when  clients  terminate  their  relationship  with
UBS and the inﬂows and outﬂows of invested assets from ex-
isting UBS clients. Net new money is calculated with the di-
rect method, which is based on transaction level in- and out-
ﬂows to/from invested assets at client level. Interest and div-
idend income from invested assets is not included in the net
new money result. Market and currency movements as well
as fees and commissions are also excluded, as are the effects
resulting from any acquisition or divestment of a UBS sub-
sidiary or business. Interest expense on loans to clients results
in  net  new  money  outﬂows.  Reclassiﬁcations  between  in-
vested assets and client assets as a result of a change in the
service  level  delivered  are  treated  as  net  new  money  ﬂow.
Private Banks & GAM was sold on 2 December 2005.

CHF billion

Fund assets managed by UBS

Discretionary assets

Other invested assets

Total invested assets

thereof double count

Net new money

31.12.05

31.12.04

390

716

1,546

2,652

332

148.5

354

570

1,293

2,217

294

89.9

161

Note 37 Business Combinations

During 2005, UBS completed several acquisitions that were ac-
counted for as business combinations. None of the acquisi-
tions was individually signiﬁcant to the ﬁnancial statements,
and  therefore  they  are  presented  in  aggregate  for  each  of
Financial Businesses and Industrial Holdings.

Financial Businesses
In 2005, Wealth Management completed the acquisitions of
Julius Baer North America, Etra SIM S.p.A. (Etra) and Dresdner
Bank Lateinamerika (DBLA).

Julius Baer North America
On  1  April  2005,  UBS  acquired  the  assets  of  Julius  Baer's
wealth management operations in North America, which also
include certain related assets in Switzerland, for an aggregate
consideration of approximately CHF 76 million. The business
manages over USD 4 billion of client assets, including custo-
dial assets, and employs approximately 50 staff in four loca-
tions.  These  operations  have  been  integrated  to  further
strengthen UBS’s wealth management operations. 

Etra
Effective 31 May 2005, UBS acquired Etra, an independent
Italian ﬁnancial intermediary ﬁrm, for an aggregate consider-
ation of approximately CHF 26 million. Etra serves wealthy pri-
vate  and  institutional  clients  in  Italy  and  manages  approxi-
mately EUR 400 million of client assets with 20 staff. The op-
erations have subsequently been integrated into UBS’s Italian
wealth management unit.

Dresdner Bank Lateinamerika
On 29 April 2005, UBS acquired wealth management opera-
tions  from  Dresdner  Bank  Lateinamerika  (DBLA)  located  in
Hamburg,  New York,  Miami,  Zurich  and  the  Bahamas.  The
Hamburg  activities  represent  approximately  two  thirds  of
DBLA's acquired business, while the remainder is spread over
the other four locations. The cost of the acquisition was ap-
proximately CHF 136 million, and resulted in the recognition

of goodwill of approximately CHF 133 million. The acquired
business managed invested assets from private clients of ap-
proximately EUR 3.7 billion. The acquired business covers all
important Latin American markets and strengthens UBS's po-
sition as a provider of wealth management services for clients
in that region.

Global Asset Management – Siemens Real Estate Funds
Effective 1 April 2005, UBS expanded its asset management
activities in Germany by acquiring a 51% stake in the real es-
tate  investment  management  business  of  Siemens  Kapital-
anlagegesellschaft mbH (SKAG), a subsidiary of Siemens AG,
the  German  engineering  conglomerate.  The  purchase  price
was CHF 67 million, allocated to identiﬁed net assets at fair
value of approximately CHF 10 million and goodwill of approx-
imately CHF 57 million. The business comprises three open-
end  real  estate  funds  with  a  total  fund  volume  of  approxi-
mately EUR 2 billion (as at 31 December 2004) and has been
integrated into the global real estate business, giving it access
to Global Asset Management's established distribution net-
work.  The  business  was  renamed  UBS  Real  Estate  Kapital-
anlagegesellschaft mbH.

Investment Bank – Prediction
On 11 November 2005, UBS acquired the remaining 68.3%
of Prediction LLC (Prediction), a ﬁnancial engineering and trad-
ing software company located in Santa Fe, New Mexico, USA.
UBS has owned a 31.7% minority stake in the company since
2000. The purchase is in line with UBS’s focus on technology
and  allows  continuous  operation  and  development  of
Prediction’s automated trading systems. Furthermore, UBS se-
cures the know-how available at Prediction and the opportu-
nity to leverage it across UBS. The purchase price of approxi-
mately CHF 84 million was primarily allocated to intangible as-
sets valued at approximately CHF 26 million and goodwill of
approximately CHF 51 million.

Details of assets and liabilities recognized from the acquisi-

tions above are as follows:

162

Note 37 Business Combinations (continued)

CHF million

Assets

Intangible assets

Property and equipment

Financial investments

Goodwill

All other assets

Total assets

Liabilities

Provisions

Deferred tax liabilities

All other liabilities

Total liabilities

Net assets

Total liabilities and equity

Book value

Step-up to
fair value

Fair value

2

2

35

0

1,092

1,131

18

0

1,022

1,040

91

1,131

43

0

0

327

0

370

0

6

2

8

362

370

45

2

35

327

1,092

1,501

18

6

1,024

1,048

453

1,501

Industrial Holdings
On 1 July 2005, Motor-Columbus acquired Elektroline a.s., a
service company active in the electricity business in the Czech
Republic. The operations are small and are an entry base in
the energy service market in that country.

On 20 December 2005, Motor-Columbus acquired Morav-
ske Teplarny a.s., a power generator in the Czech Republic,
for  a  consideration  of  approximately  CHF  108  million.  The

purchase price was predominantly allocated to the power sta-
tion and fair value of net assets acquired was equal to the pur-
chase price. No goodwill was recognized in this acquisition.
The  acquisition  is  a  further  step  in  expanding  Motor-
Columbus’s operations in Eastern Europe.

Details of assets and liabilities recognized from the two ac-

quisitions above are as follows:

CHF million

Assets

Property and equipment

Deferred tax assets

Goodwill

All other assets

Total assets

Liabilities

Provisions

Deferred tax liabilities

All other liabilities

Total liabilities

Net assets

Total liabilities and equity

Book value

Step-up to
fair value

Fair value

97

0

0

15

112

1

6

6

13

99

112

14

2

4

0

20

0

5

(4 )

1

19

20

111

2

4

15

132

1

11

2

14

118

132

163

Financial Statements
Notes to the Financial Statements

Note 37 Business Combinations (continued)

Business combinations completed in 2004
During 2004, UBS completed several acquisitions that were
accounted  for  as  business  combinations.  Except  Motor-
Columbus, which is discussed separately, none of the acqui-
sitions was individually signiﬁcant to the ﬁnancial statements,
and therefore, they are presented in aggregate per business
group.

Wealth Management
In the ﬁrst quarter of 2004, UBS acquired the private banking
operations of Lloyds Bank S.A., France, and the private client
business of Merrill Lynch in Germany and Austria. The two
businesses together had invested assets of approximately CHF
3.3 billion at the date of acquisition. Both businesses have
been integrated into the local UBS Wealth Management op-
erations and have helped to signiﬁcantly increase the client
base in France and Germany.

In  the  second  quarter  of  2004,  UBS  acquired  Laing  &
Cruickshank and Scott Goodman Harris, both British ﬁrms.
Laing & Cruickshank, acquired for a consideration of approx-
imately  CHF  363  million,  provides  comprehensive  wealth
management services to high net worth investors and chari-
ties. 75 client advisors looked after invested assets of approx-
imately  CHF  11.4  billion,  which  doubled  the  size  of  UBS’s

wealth management operations in the United Kingdom. Scott
Goodman Harris, with 28 employees, provides advice on pen-
sion and retirement beneﬁt products, serving primarily exec-
utives and company directors. Subsequent to the acquisition
both ﬁrms have been integrated into the UBS wealth man-
agement operations in the UK.

In fourth quarter 2004, UBS acquired Sauerborn Trust AG
(Sauerborn), an independent German ﬁrm providing ﬁnancial
advisory services to individuals in the ultra-high net worth seg-
ment. Sauerborn has approximately CHF 9.4 billion of assets
under management. UBS has merged its ultra-high net worth
segment within the German wealth management business
with  the  operations  of  Sauerborn  to  provide  an  expanded
range of services and products to its clients and reap the ben-
eﬁts of synergies. UBS paid a cash consideration of approxi-
mately CHF 140 million (EUR 91 million) at closing, and will
pay a further CHF 65 million (EUR 42 million) in three equal
installments over two years.

The aggregate purchase price for the ﬁve acquisitions is
approximately CHF 696 million and has been allocated to ac-
quired net assets at fair value of CHF 175 million. The differ-
ence of CHF 521 million from the purchase price has been rec-
ognized as goodwill. 

Details of assets and liabilities recognized are as follows:

CHF million

Assets

Intangible assets

Property and equipment

Financial investments

Goodwill

All other assets

Total assets

Liabilities

Provisions

Deferred tax liabilities

All other liabilities

Total liabilities

Net assets

Total liabilities and equity

Book value

Step-up to
fair value

Fair value

0

3

5

0

260

268

5

0

178

183

85

268

162

(1 )

0

521

2

684

19

54

0

73

611

684

162

2

5

521

262

952

24

54

178

256

696

952

Intangible assets recognized relate to the existing customer relationships of the businesses and have been assigned useful lives
of twenty years, over which they will be amortized.

164

Note 37 Business Combinations (continued)

Investment Bank
In  fourth  quarter  2004,  UBS  acquired  Charles  Schwab
SoundView Capital Markets, the Capital Markets Division of
Charles Schwab Corp. (Schwab), for an aggregate cash con-
sideration  of  approximately  CHF  304  million.  The  business
comprises equities trading and sales, including a third-party
execution  business,  along  with  Schwab’s  NASDAQ  trading
system. This business handles over 200 million shares a day
in trade volume and makes a market in over 11,000 stocks.
As part  of  the  acquisition,  UBS  and  Schwab  have  entered
into multi-year  execution  service  agreements  for  the  hand-
ling of Schwab’s equities and listed options orders. The busi-
ness was integrated in the Equities business of the Investment
Bank.

Also in fourth quarter 2004, UBS acquired from Brunswick
Capital their 50% stake in the equal partnership joint venture
Brunswick UBS, an equity brokerage and trading, investment
banking  and  custody  joint  venture  in  Russia.  The  total  pur-
chase price has been estimated at approximately CHF 203 mil-

lion, of which UBS paid at closing a cash consideration to the
sellers of CHF 113 million (USD 99 million), while the balance,
which includes 20% of Brunswick UBS’s net proﬁts for 2005,
is payable in 2005 and 2006. Formed in 1997, Brunswick UBS
has developed a signiﬁcant franchise in the Russian securities
market, employing 120 people in Moscow. UBS already con-
solidated Brunswick, so that the effects of this acquisition on
the ﬁnancial statements are minor.

The aggregate purchase price for the two businesses is ap-
proximately CHF 507 million, a portion of which includes a de-
ferred  component  linked  to  future  results  of  operations.
Accordingly, a revision of the current purchase price estimate
will be made, if necessary, once ﬁnal payments have been de-
termined. The purchase price has been allocated to net assets
acquired of CHF 198 million, which includes a revaluation of
CHF 27 million related to UBS’s existing interest in Brunswick.
The difference of CHF 336 million from the purchase price has
been recognized as goodwill.

Details of assets and liabilities recognized are as follows:

CHF million

Assets

Intangible assets

Property and equipment

Financial investments

Deferred tax assets

Goodwill

All other assets

Total assets

Liabilities

Deferred tax liabilities

All other liabilities

Total liabilities

Equity attributable to minority interests

Equity attributable to shareholders

Total liabilities and equity

Book value

Step-up to
fair value

Fair value

21

20

99

37

0

361

538

0

364

364

40

134

538

133

(13 )

(2 )

(37 )

336

(1 )

416

23

32

55

(39 )

400

416

154

7

97

0

336

360

954

23

396

419

1

534

954

Intangible assets recognized relate to the businesses’ existing customer relationships and have been assigned useful lives

of ﬁve years, in the case of Brunswick, and eight years, in the case of Schwab, over which they will be amortized.

165

Financial Statements
Notes to the Financial Statements

Note 37 Business Combinations (continued)

Notz Stucki
In ﬁrst quarter 2004, Ferrier Lullin, one of UBS’s private label
banks, acquired Notz Stucki & Co., a small private bank in
Geneva. The activities have been integrated into the opera-
tions of Ferrier Lullin. The purchase price of CHF 42 million
was allocated to net tangible assets of CHF 22 million, and
Notz Stucki’s customer base of CHF 21 million, less deferred
taxes of CHF 5 million. The difference of CHF 4 million from
the  purchase  price  was  recognized  as  goodwill.  On  2
December  2005,  the  business  was  sold  as  part  of  Private
Banks & GAM to Julius Baer.

Motor-Columbus
On 1 July 2004, UBS acquired from RWE, a German utilities
company, its 20% ownership interest in Motor-Columbus AG
(Motor-Columbus)  for  a  cash  consideration,  including  inci-
dental acquisition costs, of approximately CHF 379 million.
UBS  now  holds  a  55.6%  majority  interest  in  Motor-
Columbus, a Swiss holding company whose most signiﬁcant

asset is an approximate 59.3% ownership interest in Aare-
Tessin AG für Elektrizität (Atel), a Swiss group engaged in the
production, distribution and trading of electricity.
UBS now consolidates Motor-Columbus and treated the ac-
quisition of the 20% ownership interest as a business combi-
nation. The purchase price was allocated to acquired net as-
sets of approximately CHF 260 million and the difference of
CHF 119 million from the purchase price was recognized as
goodwill. In accordance with IFRS 3, the existing 35.6% in-
terest in Motor-Columbus was revalued to the valuation basis
established at 1 July 2004, resulting in a revaluation amount
of approximately CHF 81 million (CHF 63 million net of de-
ferred tax liabilities), which was recorded directly in equity.
The minority interests were also revalued to the new valua-
tion basis, so that assets acquired and liabilities assumed are
carried at full fair value. Details of assets, liabilities and minor-
ity interests, for which a step-up to fair value was recognized
in purchase accounting, and all other assets and liabilities rec-
ognized at carryover basis are as follows:

CHF million

Assets

Intangible assets

Property and equipment

Investments in associates

Financial investments

Deferred tax assets

All other assets

Total assets

Liabilities

Provisions

Debt issued

Deferred tax liabilities

All other liabilities

Total liabilities

Equity attributable to minority interests

Equity attributable to shareholders

Total liabilities and equity

Book value

Step-up to
fair value

Fair value

444

1,939

655

621

113

2,629

6,401

835

700

293

3,045

4,873

784

744

6,401

750

144

367

19

67

0

1,347

75

27

308

0

410

382

555

1,347

1,194

2,083

1,022

640

180

2,629

7,748

910

727

601

3,045

5,283

1,166

1,299

7,748

The CHF 75 million step-up to fair value of provision relates
to contingent liabilities arising from guarantees and certain
contractual obligations. UBS’s share in the equity at fair value
of CHF 1,299 million is CHF 723 million, while the remaining
CHF 576 million is additional minority interests, bringing the
total minority interest as of the acquisition date to CHF 1,742
million.

Useful  economic  lives  of  between  4  and  25  years  have
been assigned to amortizable and depreciable assets based
on contractual lives, where applicable, or estimates of the pe-
riod during which the assets will beneﬁt the operations.

166

Note 37 Business Combinations (continued)

Pro-forma information (unaudited)
The  following  pro-forma  information  shows  UBS’s  total
operating income, net proﬁt and basic earnings per share as
if all of the acquisitions completed in 2005 had been made
as at 1 January 2005 and 2004, and all acquisitions completed

in  2004  had  been  made  as  at  1  January  2004  and  2003.
Adjustments have been made to reﬂect additional amortiza-
tion  and  depreciation  of  assets  and  liabilities,  which  have
been assigned fair values different from their carryover basis
in purchase accounting.

CHF million, except where indicated

Total operating income

Net proﬁt

Basic earnings per share (CHF)

31.12.05

51,069

14,043

13.95

For the year ended

31.12.04

46,336

8,044

7.81

31.12.03

39,536

6,277

5.62

Acquisitions announced in 2006

UBS Bunting Limited
On 19 January 2006, UBS announced the proposed acquisi-
tion of the 50% minority interest in its Canadian institutional
securities subsidiary, UBS Bunting Limited. The purchase price
will consist of a combination of cash and UBS stock totaling
CAD 144 million (approximately CHF 157 million) plus up to

an additional CAD 29 million (approximately CHF 32 million)
depending on the performance of the acquired business post-
closing in 2006 and 2007. The transaction is expected to close
during the ﬁrst quarter of 2006 and is subject to shareholder
and regulatory approvals. UBS currently owns a controlling
stake  of  50%  in  UBS  Bunting  Limited,  with  the  remaining
shares held by employees of its wholly owned operating sub-
sidiary.

Note 38 Discontinued Operations

Private Banks & GAM
On 2 December 2005, UBS sold its Private Banks & GAM unit
to Julius Baer for an aggregate consideration of CHF 5,683 mil-
lion, of which CHF 3,375 million was received in cash, CHF 225
million in the form of hybrid Tier 1 instruments, and the re-
maining CHF 2,083 million representing a 21.5% stake in the
enlarged Julius Baer. As part of the sales agreement, CHF 200
million of cash was retained within UBS. The gain on sale after
taxes  from  this  transaction  amounts  to  CHF  3,705  million.
As part of the agreement, UBS agreed to a lock-up period
of 18 months for 19.9% of the stake and of three months for
the  remaining  1.6%.  The  value  of  the  Julius  Baer  stake  is
based on a price of CHF 86.20 per share at the date of clos-
ing, which is a discount of 8.4% to the market price to take
into account the 18-month lock-up period to which 19.9%
of the stake is subject. Shortly after closing, UBS reduced its
21.5% stake to approximately 20.7% by settling call options
that were outstanding on the shares of the former holding
company of the Private Banks & GAM businesses.

UBS has agreed not to take a seat on Julius Baer’s board of
directors or exercise any control or inﬂuence on its strategy or
on its operational business decisions, and has no right to reg-
ister its shares with voting rights for a period of 3 years, un-
less speciﬁcally deﬁned events occur that could materially di-
lute or otherwise affect UBS’s position as an investor in Julius

Baer. In such an event, UBS has the option to register its shares
with voting rights and thus obtain the possibility to vote them
at shareholders’ meetings. Given the fact that the shares are
not entered into Julius Baer’s share register with voting rights,
UBS classiﬁed the stake as a ﬁnancial investment available-for-
sale.

Private Banks & GAM is presented as a discontinued oper-
ation  in  these  ﬁnancial  statements.  Private  Banks  &  GAM
comprised the three private banks Banco di Lugano, Ehinger
&  Armand  von  Ernst  and  Ferrier  Lullin  as  well  as  specialist
asset manager GAM and was presented as a separate busi-
ness segment.

Industrial Holdings
In 2005, UBS sold four of its consolidated private equity in-
vestments for an aggregate cash consideration of CHF 179
million. In 2004, UBS sold ﬁve of its consolidated private eq-
uity investments for an aggregate cash consideration of CHF
141 million, while in 2003 one consolidated private equity in-
vestment  was  sold  for  an  aggregate  cash  consideration  of
CHF 456 million. These private equity investments were all
held within the Industrial Holdings segment and were sold in
line with UBS’s strategy to exit the private equity business.
These investments are presented as discontinued operations
in these Financial Statements.

167

Note 38 Discontinued Operations (continued)

CHF million

Operating income

Operating expenses

Proﬁt from operations before tax

Pre-tax gain on sale

Proﬁt from discontinued operations before tax

Tax expense on proﬁt from operations 

Tax expense on gain on sale

Tax expense from discontinued operations

Net proﬁt from discontinued operations

Net cash ﬂows from

operating activities

investing activities

ﬁnancing activities

CHF million

Operating income

Operating expenses

Proﬁt from operations before tax

Pre-tax gain on sale

Proﬁt from discontinued operations before tax

Tax expense on proﬁt from operations 

Tax expense on gain on sale

Tax expense from discontinued operations

Net proﬁt from discontinued operations

Net cash ﬂows from

operating activities

investing activities

ﬁnancing activities

CHF million

Operating income

Operating expenses

Proﬁt from operations before tax

Pre-tax gain on sale

Proﬁt from discontinued operations before tax

Tax expense on proﬁt from operations 

Tax expense on gain on sale

Tax expense from discontinued operations

Net proﬁt from discontinued operations

Net cash ﬂows from

operating activities

investing activities

ﬁnancing activities

168

For the year ended 31.12.05

Private Banks & GAM 

Industrial Holdings

1,102

633

469

4,095

4,564

99

390

489

4,075

(143 )

(22 )

0

975

967

8

116

124

9

0

9

115

41

(14 )

1

For the year ended 31.12.04

Private Banks & GAM 

Industrial Holdings

1,086

690

396

0

396

97

0

97

299

(725 )

30

3

1,890

1,818

72

68

140

32

0

32

108

5

(34 )

44

For the year ended 31.12.03

Private Banks & GAM 

Industrial Holdings

882

662

220

0

220

52

0

52

168

2,348

135

(1 )

2,136

2,071

65

194

259

27

0

27

232

103

(118 )

(3 )

Note 38 Discontinued Operations (continued)

Motor-Columbus
On 30 September 2005, UBS announced that it had signed
agreements to sell its 55.6% stake in Motor-Columbus to a
consortium  of  Atel's  Swiss  minority  shareholders,  EOS
Holding and Atel, as well as to the French utility Electricité de
France (EDF). The sale price has been set at CHF 1.3 billion,
resulting in an estimated pre-tax gain for UBS of around CHF

350 million. The transaction must be approved by various na-
tional and international authorities.
Motor-Columbus continues to be presented as a continuing
operation until it is highly probable that the conditions prece-
dent, to which the sale is subject, will be met. At that time,
Motor-Columbus will be presented as a discontinued opera-
tion in the Financial Statements.

Note 39 Currency Translation Rates

The following table shows the principal rates used to translate the ﬁnancial statements of foreign entities into Swiss francs:

1 USD

1 EUR

1 GBP

100 JPY

Spot rate
As at

Average rate
Year ended

31.12.05

31.12.04

31.12.05

31.12.04

31.12.03

1.31

1.56

2.26

1.11

1.14

1.55

2.19

1.11

1.25

1.55

2.27

1.13

1.24

1.54

2.27

1.15

1.34

1.54

2.20

1.16

169

Financial Statements
Notes to the Financial Statements

Note 40 Swiss Banking Law Requirements

The consolidated Financial Statements of UBS are prepared in
accordance with International Financial Reporting Standards.
Set out below are the signiﬁcant differences regarding recog-
nition and measurement between IFRS and the provisions of
the  Banking  Ordinance  and  the  Guidelines  of  the  Swiss
Banking Commission governing ﬁnancial statement reporting
pursuant  to  Article  23  through  Article  27  of  the  Banking
Ordinance.

1. Consolidation
Under  IFRS,  all  entities  which  are  directly  or  indirectly  con-
trolled by the Group are consolidated. 

Under Swiss law, only entities that are active in the ﬁeld of
banking and ﬁnance as well as real estate entities are subject
to  consolidation.  Entities  which  are  held  temporarily  are
recorded as Financial investments.

2. Financial investments
Under IFRS, available-for-sale ﬁnancial investments are carried
at  fair  value.  Changes  in  fair  value  are  recorded  directly  in
Equity until an investment is sold, collected or otherwise dis-
posed of, or until an investment is determined to be impaired.
At the time an available-for-sale investment is determined to
be impaired, the cumulative unrealized loss previously recog-
nized in Equity is included in net proﬁt or loss for the period.
On disposal of a ﬁnancial investment, the difference between
the net disposal proceeds and the carrying amount plus any
attributable  unrealized  gain  or  loss  balance  recognized  in
Equity, is included in net proﬁt or loss for the period.

Under Swiss law, ﬁnancial investments are carried at the
lower of cost or market value. Reductions to market value
below cost and reversals of such reductions as well as gains
and losses on disposal are included in Other income.

3. Cash ﬂow hedges
The Group uses derivative instruments to hedge against the
exposure  from  varying  cash  ﬂows  receivable  and  payable.
Under IFRS, when hedge accounting is applied for these in-
struments, the unrealized gain or loss on the effective portion
of the derivatives is recorded in Equity until the hedged cash
ﬂows occur, at which time the accumulated gain or loss is re-
alized and released to income.

Under Swiss law, the unrealized gains or losses on the ef-
fective portion of the derivative instruments used to hedge
cash ﬂow exposures are deferred on the balance sheet as as-
sets or liabilities. The deferred amounts are released to income
when the hedged cash ﬂows occur.

4. Investment property
Under  IFRS,  investment  properties  are  carried  at  fair  value.
Under Swiss law, investment properties are carried at the
lower of cost less accumulated depreciation or market value.
Depreciation  on  investment  properties  is  continued  until  a
sale is executed.

5. Fair value option
Under IFRS, the Group applies the fair value option to com-
pound instruments issued. As a result the embedded deriva-
tive  as  well  as  the  host  contract  related  to  the  compound
instrument are marked to market.

Under  Swiss  law,  the  fair  value  option  is  not  available.
Compound instruments are bifurcated: while the embedded
derivative is marked to market, the host contract is accounted
for on an accrued cost basis.

6. Goodwill and intangible assets
Under IFRS, goodwill acquired in business combinations en-
tered into after 31 March 2004 is not amortized, but tested
annually for impairment. Intangible assets acquired in busi-
ness combinations entered into after 31 March 2004 to which
an indeﬁnite useful life has been assigned, are not amortized
but tested annually for impairment.

Under Swiss law, goodwill and intangible assets with in-
deﬁnite useful lives must be amortized over a period not ex-
ceeding ﬁve years, unless a longer useful life, which may not
exceed twenty years, can be justiﬁed.

7. Discontinued operations
Under certain conditions, IFRS requires that non-current as-
sets or disposal groups are classiﬁed as held for sale. Disposal
groups that meet the criteria of discontinued operations are
presented in the income statement in a single line as net in-
come from discontinued operations. 

Under Swiss law, no such reclassiﬁcations take place. 

170

Note 41 Reconciliation of International Financial Reporting Standards (IFRS) to United States Generally
Accepted Accounting Principles (US GAAP) 
Note 41.1 Valuation and Income Recognition Differences between IFRS and US GAAP

The consolidated ﬁnancial statements of UBS have been pre-
pared in accordance with IFRS. The principles of IFRS differ in
certain  respects  from  United  States  Generally  Accepted
Accounting Principles (“US GAAP”). The following is a sum-
mary of the relevant signiﬁcant accounting and valuation dif-
ferences between IFRS and US GAAP.

a. Purchase accounting (merger of Union Bank of
Switzerland and Swiss Bank Corporation)

Under IFRS, the 1998 merger of Union Bank of Switzerland
and  Swiss  Bank  Corporation  was  accounted  for  under  the
uniting of interests method. The balance sheets and income
statements of the banks were combined, and no adjustments
were made to the carrying values of the assets and liabilities.
Under US GAAP, the business combination creating UBS AG
is accounted for under the purchase method with Union Bank
of Switzerland being considered the acquirer. Under the pur-
chase method, the cost of acquisition is measured at fair value
and the acquirer’s interests in identiﬁable tangible assets and
liabilities of the acquiree are restated to fair values at the date
of  acquisition.  Any  excess  consideration  paid  over  the  fair
value of net tangible assets acquired is allocated, ﬁrst to iden-
tiﬁable intangible assets based on their fair values, if deter-
minable, with the remainder allocated to goodwill.

Goodwill and intangible assets
For US GAAP purposes, the excess of the consideration paid
for Swiss Bank Corporation over the fair value of the net tan-
gible assets received has been recorded as goodwill and was
amortized on a straight-line basis using a weighted average
life of 13 years from 29 June 1998 to 31 December 2001.
Under  US  GAAP  until  31  December  2001,  goodwill  ac-
quired before 30 June 2001 was capitalized and amortized
over its estimated useful life with adjustments for any impair-
ment.

On  1  January  2002,  UBS  adopted  SFAS  141,  Business
Combinations and SFAS 142, Goodwill and Other Intangible
Assets. SFAS 141 requires reclassiﬁcation of intangible assets
to  goodwill  which  no  longer  meet  the  recognition  criteria
under the new standard. SFAS 142 requires that goodwill and
intangible assets with indeﬁnite lives no longer be amortized
but be tested annually for impairment. Identiﬁable intangible
assets with ﬁnite lives will continue to be amortized. Upon
adoption, the amortization charges related to the 1998 busi-
ness  combination  of  Union  Bank  of  Switzerland  and  Swiss
Bank  Corporation  ceased  to  be  recorded  under  US  GAAP.
In 2005 and 2004, goodwill recorded under US GAAP was
reduced by CHF 67 million and CHF 78 million respectively,
due  to  recognition  of  deferred  tax  assets  of  Swiss  Bank

Corporation which had previously been subject to valuation
reserves.

Other purchase accounting adjustments
The restatement of Swiss Bank Corporation’s net assets to fair
value in 1998 resulted in decreasing net tangible assets by
CHF 1,077 million for US GAAP. This amount is being amor-
tized over periods ranging from two years to 20 years.

b. Goodwill

With  the  adoption  of  IFRS  3  Business  Combinations on  31
March 2004, UBS ceased amortizing goodwill on 1 January
2005 for all goodwill existing before 31 March 2004. Goodwill
is now subject to an annual impairment test as it is under US
GAAP and is no longer amortized under both sets of stan-
dards. Goodwill from business combinations entered into on
or after 31 March 2004 was already accounted for under the
provisions  of  IFRS  3,  and  no  goodwill  amortization  was
recorded for these transactions under IFRS or US GAAP. An
IFRS to US GAAP difference remains on the balance sheet due
to the fact that US GAAP goodwill amortization ceased on
1 January  2002  and  IFRS  goodwill  amortization  ceased  on
31 December 2004. This difference was reduced during 2005
due to the sale of GAM on 2 December 2005. 

In  addition  on  31  March  2004,  UBS  adopted  revised
IAS 38 Intangible Assets. Under the revised standard, intan-
gible assets acquired in a business combination must be rec-
ognized separately from goodwill if they meet deﬁned recog-
nition criteria. Existing intangible assets that do not meet the
recognition  criteria  have  to  be  reclassiﬁed  to  goodwill.  On
1 January  2005,  UBS  reclassiﬁed  the  trained  workforce  in-
tangible  asset recognized  in  connection  with  the  acquisi-
tion of PaineWebber with a book value of CHF 1.0 billion to
Goodwill.  Under  US  GAAP,  this  asset  was  reclassiﬁed  from
Intangible  assets  to  Goodwill  on  1  January  2002  with  the
adoption of SFAS 142 Goodwill and Other Intangible Assets.

c. Purchase accounting under IFRS 3 and FAS 141 

With the adoption of IFRS 3 on 31 March 2004, the account-
ing for business combinations generally converged with US
GAAP with the exception of the measurement of minority in-
terests and the recognition of a revaluation reserve in the case
of a step acquisition.

Under IFRS, minority interests are recognized at the per-
centage of fair value of identiﬁable net assets acquired at the
acquisition date whereas under US GAAP they are recognized
at  the  percentage  of  book  value  of  identiﬁable  net  assets
acquired at the acquisition date. In most cases, minority in-

171

Financial Statements
Notes to the Financial Statements

Note 41 Reconciliation of International Financial Reporting Standards (IFRS) to United States Generally
Accepted Accounting Principles (US GAAP) (continued)
Note 41.1 Valuation and Income Recognition Differences between IFRS and US GAAP (continued)

terests would tend to have a higher measurement value under
IFRS than under US GAAP.

Furthermore, IFRS requires that in a step acquisition the ex-
isting ownership interest in an entity be revalued to the new
valuation basis established at the time of acquisition. The in-
crease in value is recorded directly in equity as a revaluation
reserve. Under US GAAP, the existing ownership interest re-
mains at its original valuation.

d. Derivative instruments

Under IAS 39, UBS hedges interest rate risk based on forecast
cash inﬂows and outﬂows on a Group basis. For this purpose,
UBS  accumulates  information  about  non-trading  ﬁnancial
assets and ﬁnancial liabilities, which is then used to estimate
and aggregate cash ﬂows and to schedule the future periods
in which these cash ﬂows are expected to occur. Appropriate
derivative instruments are then used to hedge the estimated
future cash ﬂows against repricing risk. SFAS 133 does not
permit  hedge  accounting  for  hedges  of  future  cash  ﬂows
determined by this methodology. Accordingly, for US GAAP
such  hedging  instruments  continue  to  be  carried  at  fair
value with changes in fair value recognized in Net trading in-
come.

In addition to the above, a new hedge methodology, fair
value hedge of portfolio interest rate risk, has been imple-
mented for a speciﬁc portfolio of mortgage loans. This new
hedging method is not recognized under US GAAP and there-
fore, the fair value change of hedged items recorded sepa-
rately from the hedged items on the balance sheet under IFRS
is reversed to Net trading income under US GAAP. 

Amounts deferred under hedging relationships prior to the
adoption of IAS 39 on 1 January 2001 that do not qualify as
hedges under current requirements under IFRS are amortized
to income over the remaining life of the hedging relationship.
Such amounts have been reversed for US GAAP as they have
never been treated as hedges.

e. Financial investments and private equity

Financial investments available-for-sale
Three  exceptions  exist  between  IFRS  and  US  GAAP  in  ac-
counting for ﬁnancial investments available-for-sale: 1) Non-
marketable  equity  ﬁnancial  investments  (excluding  private
equity investments discussed in the next section), which are
classiﬁed as available-for-sale and carried at fair value under
IFRS, continue to be carried at cost less “other than tempo-
rary” impairments under US GAAP. The opening adjustment

and  subsequent  changes  in  fair  value  recorded  directly  in
Equity on non-marketable equity ﬁnancial instruments due to
the implementation of IAS 39 have been reversed under US
GAAP to reﬂect the difference between the two standards in
measuring  such  investments.  2)  Writedowns  on  impaired
debt  instruments  can  be  fully  or  partially  reversed  through
proﬁt under IFRS if the value of the impaired assets increases.
Such  reversals  of  impairment  writedowns  are  not  allowed
under US GAAP. Reversals under IFRS were not signiﬁcant in
2005,  2004  or  2003.  3)  Private  equity  investments,  as  de-
scribed in the next section.

Private equity investments
On 1 January 2005, UBS adopted revised IAS 27 Consolidated
and Separate Financial Statements and revised IAS 28 Invest-
ments in Associates. The comparative periods for 2004 and
2003 were restated. The adoption of these standards had an
impact  on  the  accounting  for  private  equity  investments.
Previously  under  IFRS,  such  investments  were  classiﬁed  as
Financial investments available-for-sale with changes in fair
value recorded directly in Equity. The effect of adopting these
standards  is  that  private  equity  investments  in  which  UBS
owns a controlling interest are now consolidated and those
where UBS has signiﬁcant inﬂuence are accounted for as as-
sociated companies using the equity method of accounting.
The remaining private equity investments continue to be ac-
counted for as Financial investments available-for-sale. 

Under  US  GAAP,  private  equity  investments  held  within
separate investment subsidiaries are accounted for in accor-
dance with the AICPA Audit and Accounting Guide, Audits of
Investment Companies. They are recorded on a separate line
on the US GAAP Balance sheet and are accounted for at fair
value with changes in fair value recorded in Net proﬁt. The re-
maining  private  equity  investments  held  by  UBS  are  ac-
counted for at cost less “other than temporary” impairment. 
The effects on the IFRS to US GAAP reconciliation are as
follows: 1) Private equity investments consolidated under IFRS
are de-consolidated under US GAAP and are either recorded
at fair value or at cost less “other than temporary” impair-
ment as described in the previous paragraph. 2) The equity
method accounting adjustment for those private equity in-
vestments accounted for as associated companies under IFRS
is reversed for US GAAP. The asset on the US GAAP Balance
sheet is reclassiﬁed from Investments in associates accounted
for under the equity method to Private equity investments ac-
counted  for  at  fair  value  through  net  proﬁt  or  at  cost  less
“other than temporary“ impairment as described in the pre-
vious  paragraph.  3)  Those  remaining  private  equity  invest-

172

Note 41 Reconciliation of International Financial Reporting Standards (IFRS) to United States Generally
Accepted Accounting Principles (US GAAP) (continued)
Note 41.1 Valuation and Income Recognition Differences between IFRS and US GAAP (continued)

ments still accounted for as Financial investments available-
for-sale with changes in fair value recorded directly in Equity
are reclassiﬁed to the line Private equity investments on the
US GAAP balance sheet and are recorded either at fair value
through net proﬁt or cost less “other than temporary” impair-
ment as described in the previous paragraph. 

See Note 2 for information regarding impairment charges

Under  US  GAAP,  expenses  and  liabilities  for  post-retire-
ment  medical  and  life  insurance  beneﬁts  are  determined
under the same methodology as under IFRS. Differences in
the levels of expenses and liabilities have occurred due to dif-
ferent transition date rules and the treatment of the merger
of Union Bank of Switzerland and Swiss Bank Corporation
under the purchase method.

recorded for ﬁnancial investments.

f. Pension plans

Under IFRS, UBS recognizes pension expense based on a spe-
ciﬁc method of actuarial valuation used to determine the pro-
jected plan liabilities for accrued service, including future ex-
pected salary increases, and expected return on plan assets.
Plan assets are recorded at fair value and are held in a sepa-
rate trust to satisfy plan liabilities. Under IFRS the recognition
of a prepaid asset is subject to certain limitations, and any un-
recognized prepaid asset is recorded as pension expense. US
GAAP does not allow a limitation on the recognition of pre-
paid assets recorded in the balance sheet.

Under US GAAP, pension expense is based on the same ac-
tuarial method of valuation of liabilities and assets as under
IFRS. Differences in the amounts of expense and liabilities (or
prepaid  assets)  exist  due  to  different  transition  date  rules,
stricter provisions for recognition of a prepaid asset, and the
treatment of the 1998 merger of Union Bank of Switzerland
and Swiss Bank Corporation.

In addition, under US GAAP, if the fair value of plan assets
falls below the accumulated beneﬁt obligation (which is the
current value of accrued beneﬁts without allowance for fu-
ture salary increases), an additional minimum liability must be
shown in the balance sheet. If an additional minimum liabil-
ity is recognized, an equal amount will be recognized as an
intangible asset up to the amount of any unrecognized prior
service  cost.  Any  amount  not  recognized  as  an  intangible
asset is reported in Other comprehensive income. The addi-
tional minimum liability required under US GAAP amounts to
CHF 1,252 million, CHF 1,125 million and CHF 306 million as
at  31  December  2005,  2004  and  2003,  respectively.  The
amount recognized in Other comprehensive income before
tax was CHF 1,252 million, CHF 1,125 million and CHF 306
million as at 31 December 2005, 2004 and 2003, respectively.

g. Other post-retirement beneﬁt plans 

Under  IFRS,  UBS  has  recorded  expenses  and  liabilities  for
post-retirement  medical  and  life  insurance  beneﬁts,  deter-
mined under a methodology similar to that described above
under pension plans.

h. Equity participation plans

On 1 January 2005, UBS adopted IFRS 2 Share-based payment
which requires that the fair value of all share-based payments
made to employees be recognized as compensation expense
from the date of grant over the service period, which is gen-
erally equal to the vesting period. UBS applied IFRS 2 on a ret-
rospective application basis and restated its 2003 and 2004
comparative prior periods for all awards that impact income
statements commencing 2003. UBS recorded an opening re-
tained earnings adjustment on 1 January 2003 to reﬂect the
cumulative  income  statement  effects  of  prior  periods.  See
Note 1aa)  for  details.  Previously  under  IFRS,  option  awards
were expensed at their intrinsic value which is generally zero
as options are normally granted at or out of the money. Shares
were recognized as compensation expense in full in the per-
formance year, which is generally the year prior to grant. 

On 1 January 2005, UBS also adopted SFAS 123 (revised
2004), Share-Based Payment, (SFAS 123-R). SFAS 123-R, like
IFRS  2,  also  requires  that  share-based  payments  to  em-
ployees be  recognized  in  the  income  statement  over  the
requisite service period based on their fair values at the date
of grant. The requisite service period is deﬁned as the period
that the employee is required to provide active employment
in  order  to  earn  their  award.  This  may  be  different  from
the service period under IFRS, which is generally equal to the
vesting period. 

UBS adopted SFAS 123-R using the modiﬁed prospective
method. Prior periods were not restated. Under this method,
compensation cost for the portion of awards for which the
service period has not been rendered and that are outstand-
ing (unvested) as of the effective date shall be recognized as
the service is rendered on or after the effective date. As such,
to the extent that the grant date fair value of shares or options
has been previously recognized in the income statement or
disclosed in the notes to the ﬁnancial statements, it should not
be re-recognized upon adoption of SFAS 123-R. Prior to the
adoption  of  SFAS 123-R,  UBS  recognized  the  fair  value  of
share awards granted as part of annual bonuses in the year of
corresponding performance, in alignment with the revenue
produced.  For  disclosure  purposes,  UBS  recognized  the  fair
value of option awards on the date of grant. Thus, for recog-

173

Financial Statements
Notes to the Financial Statements

Note 41 Reconciliation of International Financial Reporting Standards (IFRS) to United States Generally
Accepted Accounting Principles (US GAAP) (continued)
Note 41.1 Valuation and Income Recognition Differences between IFRS and US GAAP (continued)

nition and disclosure purposes, expense for share and option
awards issued prior to but outstanding at the date of adop-
tion of SFAS 123-R has been fully attributed to prior periods.
Prior  to  1  January  2005,  UBS  applied  the  intrinsic  value
method under APB 25 which was similar to the previous IFRS
treatment except that certain share and option plans were
deemed variable under US GAAP. Changes in intrinsic value
for these variable plans were recorded in US GAAP Net proﬁt.
Due to the fact that IFRS 2 was applied on a retrospective basis
and SFAS 123-R was applied on a modiﬁed prospective basis,
for the IFRS to US GAAP reconciliation, the opening IFRS re-
tained earnings adjustment on 1 January 2003 and subse-
quent IFRS 2 restatement adjustments were reversed and only
the  awards  required  to  be  expensed  were  recorded  in  the
2005 US GAAP Financial Statements. Future awards will be
recognized over the requisite service periods, which are de-
termined by the terms of the award. 

In addition, under the transition provisions of SFAS 123-R, a
cumulative adjustment of CHF 38 million expense reversal, net
of tax, was recorded in US GAAP Net proﬁt on 1 January 2005.
The adjustment mainly relates to the required recognition of es-
timated forfeitures of share-based compensation awards under
SFAS 123-R. The standard requires that expense be recognized
only for those instruments where the requisite service is per-
formed. During the service period, compensation cost recog-
nized  is  based  on  the  estimated  number  of  instruments  for
which the requisite service is expected to be rendered. That es-
timate is revised if subsequent information indicates that the
actual number is likely to differ from previous estimates. 

Under SFAS 123-R, entities are required to continue to pro-
vide pro-forma disclosures for the periods in which the fair
value method of accounting for share-based compensation
was not applied. See Note 42.5 for further information.

Certain  UBS  awards  contain  provisions  that  permit  the
employee to leave the bank and continue to vest in the award
provided they do not perform certain harmful acts against the
bank. These are generally referred to as non-compete provi-
sions. Under SFAS 123R, awards with non-compete provisions
generally do not impose a requisite service period, and there-
fore expense should be recognized upon grant. UBS has de-
termined that the appropriate expense recognition period for
such awards is the performance year, which is generally the
period prior to grant. This is consistent with the approach ap-
plied under APB 25. Compensation expense for awards with
non-compete provisions is generally recognized over the vest-
ing period under IFRS.

Certain  UBS  awards  contain  provisions  that  permit  the
employee to retire, provided they meet certain eligibility con-
ditions and continue to vest in their award. Under US GAAP,
compensation expense for such awards must be recognized

over the period from grant until the employee reaches retire-
ment eligibility. Under IFRS 2 such awards are generally rec-
ognized over the vesting period, with an acceleration of ex-
pense at the actual retirement date. 

UBS  also  has  employee  beneﬁt  trusts  that  are  used  in
connection  with  share-based  payment  arrangements  and
deferred compensation plans. In connection with the issuance
of IFRS 2, the IFRIC amended SIC 12 Consolidation – Special
Purpose Entities, an interpretation of IAS 27, to eliminate the
scope  exclusion  for  equity  compensation  plans.  Therefore,
pursuant to the criteria set out in SIC 12, an entity that con-
trols an employee beneﬁt trust (or similar entity) set up for the
purposes of share-based payment arrangements will be re-
quired to consolidate that trust. UBS consolidated such em-
ployee beneﬁt trusts retrospectively to 1January 2003. For fur-
ther  details  on  the  restatement,  see  Note 1aa).  Under  US
GAAP prior to 1 January 2004, certain equity compensation
trusts were already consolidated under US GAAP under the
provisions of EITF-97-14, Accounting for Deferred Compen-
sation Arrangements Where Amounts Earned Are Held in a
Rabbi Trust and Invested. With the adoption of FASB Inter-
pretation  No. 46  Consolidation  of  Variable  Interest  Entities
(revised  December  2003),  an  interpretation  of  Accounting
Research Bulletin No. 51 (FIN 46-R), on 1 January 2004, the
remaining  unconsolidated  employee  equity  compensation
trusts formed before 1 February 2003 were consolidated for
US GAAP purposes for the ﬁrst time. Thus, from 1 January
2004 onwards, there is no difference between IFRS and US
GAAP in regard to these trust consolidations. For 2003, the
trust consolidations under IFRS only are shown in Note 41.3
in line i – Consolidation of Variable Interest Entities (VIEs) and
deconsolidation of entities issuing preferred securities.

With  the  consolidation  of  the  additional  trusts  under
FIN 46-R from 1 January 2004, UBS re-evaluated its account-
ing  for  share-based  compensation  plans  under  APB  25  by
taking into consideration the settlement methods and activi-
ties of the trusts. Based on this review, most share plans is-
sued prior to 2001 were treated as variable awards under APB
25.  There  were  no  changes  to  the  accounting  for  option
plans. On 1 January 2004, a CHF 6 million expense reduction
was recorded as a cumulative adjustment due to a change
in accounting.

Under IFRS, UBS recognizes an obligation and related ex-
pense for payroll taxes related to share-based payment trans-
actions  over  the  period  that  the  related  compensation  ex-
pense is recognized. This is generally the vesting period. US
GAAP requires recognition of the liability on the date that the
measurement of any payment of the tax to the taxing author-
ity is triggered. This is generally the distribution date for share
awards and the exercise date of options. 

174

Note 41 Reconciliation of International Financial Reporting Standards (IFRS) to United States Generally
Accepted Accounting Principles (US GAAP) (continued)
Note 41.1 Valuation and Income Recognition Differences between IFRS and US GAAP (continued)

i. Consolidation of Variable Interest Entities (VIEs) and
deconsolidation of entities issuing preferred securities 

IFRS and US GAAP generally require consolidation of entities
on the basis of controlling a majority of voting rights. However,
in certain situations, there are no voting rights, or control of a
majority of voting rights is not a reliable indicator of the need
to consolidate, such as when voting rights are signiﬁcantly dis-
proportionate to risks and rewards. There are differences in
the approach of IFRS and US GAAP to those situations.

Under IFRS, when control is exercised through means other
than controlling a majority of voting rights, the consolidation
assessment  is  based  on  the  substance  of  the  relationship.
Indicators of control in these situations include: predetermi-
nation of the entity’s activities; the entity’s activities being con-
ducted on behalf of the enterprise; decision-making powers
being held by the enterprise; the right to obtain the majority
of the beneﬁts or be exposed to the risks inherent in the ac-
tivities of the entity; or retaining the majority of the residual
or ownership risks related to the entity’s assets in order to ob-
tain beneﬁts from its activities.

Under US GAAP, consolidation considerations are subject
to  FASB  interpretation  No.  46  Consolidation  of  Variable
Interest Entities (revised December 2003), an interpretation of
Accounting Research Bulletin No. 51 (FIN 46-R). FIN 46-R re-
quires that when voting interests do not exist, or differ signiﬁ-
cantly from economic interests, an entity is considered to be
a  “Variable  Interest  Entity”  (“VIE”).  An  enterprise  holding
variable interests that will absorb a majority of a VIE’s “ex-
pected losses”, receive a majority of a VIE’s “expected resid-
ual returns”, or both, is known as the “primary beneﬁciary”,
and must consolidate the VIE.

Since 1 January 2004 UBS has fully applied FIN 46-R con-
solidation requirements to its US GAAP Financial Statements.
Until 31 December 2003, the consolidation requirements of
the predecessor standard, FIN 46, only applied to VIEs created
after 31 January 2003.

In many cases the assessment of consolidation under IFRS and
US GAAP is the same; however, there are certain differences.
The  entities  consolidated  for  US  GAAP  purposes  at  31
December 2005, which were not otherwise consolidated in
UBS’s primary consolidated Financial Statements under IFRS,
are mostly investment fund products and securitization VIEs.
These are discussed in more detail in Note 42.1.

The entities not consolidated for US GAAP purposes at 31
December 2005, which UBS consolidates under IFRS, are cer-
tain entities which have issued preferred securities. Under IFRS
these  are  equity  instruments  held  by  third  parties  and  are
treated as minority interests, with dividends paid also reported
in  Equity  attributable  to  minority  interests;  the  UBS-issued

debt held by these entities and the respective interest amounts
are eliminated in the UBS Group Financial Statements. Under
US GAAP, these entities are not consolidated, and the UBS-is-
sued debt is recognized as a liability in the UBS Group Financial
Statements, with interest paid reported in interest expense.
A discussion of FIN 46-R measurement requirements and

disclosures is set out in Note 42.1.

j. Financial assets and liabilities designated at 
fair value through proﬁt and loss

Revised  IAS  39  provides  the  election  to  designate  at  initial
recognition any ﬁnancial asset or liability as held at fair value
through proﬁt and loss. UBS applies this fair value designa-
tion election to a signiﬁcant portion of its issued debt. Many
debt issues are in the form of compound instruments, con-
sisting of a debt host with an embedded derivative. Regular
debt instruments as well as compound instruments are car-
ried in their entirety at fair value with all changes in fair value
recorded in proﬁt and loss. Under US GAAP, debt instruments
have to be carried at amortized cost. Derivatives embedded
in compound instruments are separated from the debt hosts
and accounted for as if they were freestanding derivatives.

k. Physically settled written puts

With the adoption of revised IAS 32 and IAS 39 at 1 January
2004, the accounting for physically settled written put op-
tions  on  UBS  shares  changed.  Previously,  such  put  options
were accounted for as derivatives whereas now the present
value  of  the  contractual  amount  is  recorded  as  a  liability,
while  the  premium  received 
is  credited  to  equity.
Subsequently, the liability is accreted over the life of the put
option to its contractual amount recognizing interest expense
in accordance with the effective interest method. Under US
GAAP, physically settled written put options on UBS shares
continue to be accounted for as derivative instruments. All
other outstanding derivative contracts, except written put op-
tions with the UBS share as underlying, are treated as deriva-
tive  instruments  under  both  sets  of  accounting  standards.

l. Investment properties

From 1 January 2004, UBS changed its accounting for invest-
ment properties from the cost less depreciation method to the
fair value method. Under the fair value method, changes in
fair value are recognized in the income statement, and depre-
ciation is no longer recognized. Under US GAAP, investment
properties continue to be carried at cost less accumulated de-
preciation.

175

Financial Statements
Notes to the Financial Statements

Note 41 Reconciliation of International Financial Reporting Standards (IFRS) to United States Generally
Accepted Accounting Principles (US GAAP) (continued)
Note 41.2 Recently Issued US Accounting Standards

In December 2004, the FASB issued SFAS 123 (revised 2004),
Share-Based  Payment (SFAS  123-R),  which  is  a  revision  of
SFAS 123, Accounting for Stock-Based Compensation (SFAS
123), and supersedes APB Opinion 25, Accounting for Stock
Issued to Employees (APB Opinion 25). Further information on
the impact of the adoption of SFAS 123-R can be found in
Note 41.1. h.

In  March  2005,  the  SEC  Staff  issued  Staff  Accounting
Bulletin No. 107, Share-Based Payment (SAB 107). SAB 107
expresses  the  SEC  Staff’s  views  on  certain  aspects  of  SFAS
123-R  and  certain  SEC  rules  and  regulations  including  the
types of valuation methods and associated inputs. SAB 107
outlines  that  a  valuation  technique  should  be  applied  in  a
manner consistent with the fair value measurement objectives
and other requirements of SFAS 123-R, based on established
principles of ﬁnancial economic theory, and reﬂect all sub-
stantive characteristics of the instrument. SAB 107 did not
have a material impact on UBS’s Financial Statements. Further
information on the impact of the adoption of SFAS 123-R can
be found in Note 41.1. h.

In June 2005, the FASB ratiﬁed the consensus on EITF Issue
No.  04-5,  Determining  Whether  a  General  Partner,  or  the
General Partners as a Group, Controls a Limited Partnership
or  Similar  Entity  When  the  Limited  Partners  Have  Certain
Rights (EITF 04-5), which provides guidance in determining
whether a general partner controls a limited partnership. EITF
04-5 provides that the general partner in a limited partner-
ship is presumed to control that limited partnership unless the
limited  partners  have  either  substantive  kick-out  rights  or
substantive participating rights. EITF 04-5 is effective after 29
June 2005 for new limited partnership agreements and for
pre-existing  limited  partnership  agreements  that  are  modi-
ﬁed; otherwise, effective no later than the beginning of the
ﬁrst  reporting  period  in  ﬁscal  years  beginning  after  15
December 2005. The adoption of EITF 04-05 is not expected
to  have  a  material  impact  on  UBS's  Financial  Statements. 

Recently issued US accounting standards not yet adopted
In May 2005, the FASB issued Statement No. 154, Accounting
Changes  and  Error  Corrections  –  a  Replacement  of  APB
Opinion No. 20 and FASB Statement No. 3 (Statement 154),
which changes the requirements for the accounting and re-
porting of a change in accounting principle. Statement 154
applies to all voluntary changes in accounting principle as well
as to changes required by an accounting pronouncement that
does not include speciﬁc transition provisions. Statement 154
requires  retrospective  application  to  prior  periods’  ﬁnancial
statements of a voluntary change in accounting principle un-
less it is impracticable, whereas Opinion 20 previously required
that the cumulative effect of most voluntary changes in ac-
counting principle be recognized in the net income of the pe-
riod of the change. Statement 154 is effective for accounting
changes and corrections of errors made in ﬁscal years begin-
ning after 15 December 2005. Statement 154 is not expected
to have a material impact on UBS’s Financial Statements.

In February 2006, the FASB issued Statement of Financial
Accounting Standard No. 155, Accounting for Certain Hybrid
Instruments (Statement 155), an amendment of FASB State-
ments No. 133 and 140. Statement 155 permits UBS to elect
to measure any hybrid ﬁnancial instrument at fair value, with
changes in fair value recognized in Net proﬁt, if the hybrid in-
strument contains an embedded derivative that would other-
wise require bifurcation under Statement 133. The election to
measure the hybrid instrument at fair value is made on an in-
strument by instrument basis and is irreversible. 

Statement 155 is effective after the beginning of an en-
tity’s ﬁrst ﬁscal year that begins after 15 September 2006, un-
less it is applied as at the beginning of an entity’s ﬁscal year a
year  earlier.  UBS  has  not  yet  decided  whether  it  will  early
adopt Statement 155 as at 1 January 2006 nor whether it will
make use of the fair value option for hybrid ﬁnancial instru-
ments where it currently applies the fair value option provided
in IAS 39. UBS is still assessing the impact of Statement 155.

176

Note 41.3 Reconciliation of IFRS Equity Attributable to UBS Shareholders to US GAAP Shareholders’ Equity and
IFRS Net Proﬁt Attributable to UBS Shareholders to US GAAP Net Proﬁt

Equity attributable to 
UBS shareholders (IFRS) /
Shareholders’equity 
(US GAAP) 
as at

Net proﬁt attributable to
UBS shareholders (IFRS) / 
Net proﬁt (US GAAP)
for the year ended

31.12.05

31.12.04

31.12.05

31.12.04

31.12.03

44,324

33,941

14,029

8,016

5,904

Note 41.1

Reference

a

b

c

d

e

f

g

h

i

j

k

l

15,116

2,373

15,152

2,603

(86)

(40)

325

230

(1)

(792)

(98)

(197)

131

(8)

74

(876)

(88 )

(75 )

605

372

(1 )

86

47

197

93

(8 )

(50 )

(206 )

16,151

60,475

18,727

52,668

(36)

0

35

(455)

(486)

(18)

0

358

0

(436)

8

0

(118)

(529)

(1,677)

12,352

(44 )

778

3

(217 )

217

(110 )

0

62

18

100

9

14

(50 )

22

802

8,818

(89 )

808

0

188

(243 )

(235 )

0

267

(10 )

78

5

88

0

(248 )

609

6,513

CHF million

Amounts determined in accordance with IFRS

Adjustments in respect of:

SBC purchase accounting goodwill and other purchase accounting adjustments

Goodwill

Purchase accounting under IFRS 3 and FAS 141

Derivative instruments

Financial investments and private equity

Pension plans

Other post-retirement beneﬁt plans

Equity participation plans

Consolidation of variable interest entities (VIEs) and
deconsolidation of entities issuing preferred securities

Financial assets and liabilities designated at fair value through proﬁt and loss

Physically settled written puts

Investment properties

Other adjustments

Tax adjustments

Total adjustments

Amounts determined in accordance with US GAAP

Note 41.4 Earnings per Share

Under both IFRS and US GAAP, basic earnings per share (“EPS”) is computed by dividing income available to common share-
holders by the weighted-average number of common shares outstanding. Diluted EPS includes the determinants of basic EPS
and, in addition, gives effect to dilutive potential common shares that were outstanding during the period.

The computations of basic and diluted EPS for the years ended 31 December 2005, 31 December 2004 and 31 December

2003 are presented in the following table.

For the year ended

31.12.05

31.12.04

31.12.03

Net proﬁt (US GAAP) / Net proﬁt attributable to UBS share-
holders (IFRS) – available for ordinary shares (CHF million)

from continuing operations

from discontinued operations

Net proﬁt (US GAAP) / Net proﬁt attributable to 
UBS shareholders – for diluted EPS (CHF million)

from continuing operations

from discontinued operations

US GAAP

IFRS

US GAAP

IFRS

US GAAP

12,352

8,499

3,853

12,330

8,500

3,830

14,029

9,844

4,185

14,007

9,845

4,162

8,818

8,446

372

8,813

8,449

364

8,016

7,609

407

8,011

7,612

399

6,513

6,263

250

6,514

6,264

250

IFRS

5,904

5,510

394

5,905

5,511

394

Weighted-average shares outstanding

1,006,929,991 1,006,993,877 1,029,895,610 1,029,918,463 1,116,602,289 1,086,161,476

Diluted weighted-average shares outstanding

1,048,595,770 1,048,595,770 1,081,961,360 1,081,961,360 1,138,800,625 1,138,800,625

Basic earnings per share (CHF)

from continuing operations

from discontinued operations

Diluted earnings per share (CHF)

from continuing operations

from discontinued operations

12.27

8.44

3.83

11.76

8.11

3.65

13.93

9.78

4.15

13.36

9.39

3.97

8.56

8.20

0.36

8.15

7.81

0.34

7.78

7.39

0.39

7.40

7.04

0.36

5.83

5.61

0.22

5.72

5.50

0.22

5.44

5.07

0.37

5.19

4.84

0.35

177

Financial Statements
Notes to the Financial Statements

Note 41.5 Presentation Differences between IFRS and US GAAP

In addition to the differences in valuation and income recog-
nition, other differences, essentially related to presentation,
exist between IFRS and US GAAP. Although there is no impact
on US GAAP reported Shareholders’ equity and Net proﬁt due
to these differences, it may be useful to understand them to
interpret the Financial Statements presented in accordance
with US GAAP. The following is a summary of presentation
differences that relate to the basic IFRS Financial Statements.

1. Settlement date vs. trade date accounting
UBS’s  transactions  from  securities  activities  are  recorded
under IFRS on the settlement date. This results in recording a
forward  transaction  during  the  period  between  the  trade
date and the settlement date. Forward positions relating to
trading activities are revalued to fair value and any unrealized
proﬁts and losses are recognized in Net proﬁt.

Under US GAAP, trade date accounting is required for spot
purchases and sales of securities. Therefore, all such transac-
tions with a trade date on or before the balance sheet date
with a settlement date after the balance sheet date have been
recorded at trade date for US GAAP. This has resulted in re-
ceivables and payables to broker-dealers and clearing organ-
izations recorded in Other assets and Other liabilities in the
US GAAP balance sheet.

2. Financial investments
Under IFRS, UBS’s private equity investments and non-mar-
ketable equity ﬁnancial investments are included in Financial
investments  available-for-sale.  For  US  GAAP  presentation,
non-marketable equity ﬁnancial investments are reclassiﬁed
to Other assets, and private equity investments accounted for
under  the  AICPA  Audit  and  Accounting  Guide,  Audits  of
Investment Companies or accounted for at cost less “other
than  temporary”  impairment  are  shown  separately  on  the
balance sheet.

3. Securities received as collateral in a securities-for-
securities lending transaction
When UBS acts as the lender in a securities lending agreement
and receives securities as collateral that can be pledged or
sold, it recognizes the securities received and a corresponding
obligation to return them. These securities are reﬂected on
the US GAAP balance sheet in the line Securities received as
collateral on the asset side of the balance sheet. The offset-
ting liability is presented in the line Obligation to return secu-
rities received as collateral.

4. Reverse repurchase, repurchase, securities borrowing and
securities lending transactions
UBS  enters  into  certain  types  of  reverse  repurchase,  repur-
chase, securities borrowing and securities lending transactions
that result in a difference between IFRS and US GAAP. Under
IFRS, they are considered ﬁnancing transactions which do not
result in the recognition of the borrowed ﬁnancial assets or
derecognition of the ﬁnancial assets lent. The cash collateral
received or delivered in such transactions is reﬂected in the bal-
ance sheet with a corresponding receivable or obligation to re-
turn  it.  Under  US  GAAP,  however,  certain  transactions  are
considered purchase and sale transactions due to the fact that
the contracts do not meet speciﬁc collateral or margining re-
quirements or the repurchase of the transferred securities is
not before maturity of these securities. Due to the different
treatment of these transactions under IFRS and US GAAP, in-
terest income and expense recorded under IFRS must be reclas-
siﬁed to Net trading income for US GAAP. Additionally under
US GAAP, the securities received are recognized on the balance
sheet as a spot purchase (Trading portfolio assets or Trading
portfolio  assets  pledged  as  collateral)  with  a  corresponding
forward sale transaction (Replacement values) and a receivable
(Cash collateral on securities borrowed) is reclassiﬁed, as ap-
plicable. The securities delivered are recorded as a spot sale,
which means that the securities are derecognized if they are
on-balance sheet securities or recorded as a short sale if the
delivered  securities  are  off-balance  sheet  securities  (Trading
portfolio liabilities). Additionally, a corresponding forward re-
purchase transaction (Replacement values) and a liability (Cash
collateral on securities lent) is reclassiﬁed, as applicable.

5. Recognition / derecognition of ﬁnancial assets
The guidance governing recognition and derecognition of a
ﬁnancial asset is considerably more complex under revised IAS
39 than previously and requires a multi-step decision process
to determine whether derecognition is appropriate. UBS dere-
cognizes ﬁnancial assets for which it transfers the contractual
rights to the cash ﬂows and no longer retains any risk or re-
ward coming from them nor maintains control over the ﬁnan-
cial assets. The provisions of this guidance were applied pros-
pectively from 1 January 2004. As a result of the new require-
ments, certain transactions are now accounted for as secured
ﬁnancing transactions instead of purchases or sales of trad-
ing portfolio assets with an accompanying swap derivative.
Under US GAAP, these transactions continue to be shown as
purchases and sales of trading portfolio assets and were re-
classiﬁed accordingly.

178

Note 41.6 Consolidated Income Statement

The following is a Consolidated Income Statement of the Group, for the years ended 31 December 2005, 31 December 2004
and 31 December 2003, restated to reﬂect the impact of valuation and income recognition differences and presentation dif-
ferences between IFRS and US GAAP.

CHF million, for the year ended

31.12.05

31.12.04

31.12.03

Reference

US GAAP

IFRS

US GAAP

IFRS

US GAAP

IFRS

Operating income

Interest income

Interest expense

Net interest income

Credit loss (expense) / recovery

Net interest income after credit loss (expense) / recovery

Net fee and commission income

Net trading income

Other income

Revenues from Industrial Holdings

Total operating income

Operating expenses

Personnel expenses

General and administrative expenses

Depreciation of property and equipment

Amortization of goodwill

Amortization of other intangible assets

Goods and materials purchased

Total operating expenses

Operating proﬁt from continuing operations before tax

Tax expense

Minority interests (US GAAP)

Net proﬁt from continuing operations

Net proﬁt from discontinued operations

Net proﬁt (IFRS)

Net proﬁt attributable to minority interests (IFRS)

Cumulative adjustment due to the adoption of SFAS123 (revised 2004),
“Share-Based Payment” on 1 January 2005, net of tax

Cumulative adjustment of accounting for certain equity-
based compensation plans as cash settled, net of tax

Net proﬁt (US GAAP) / Net proﬁt attributable 
to UBS shareholders (IFRS)

a, d, e, i, j, 1, 4, 5

59,039

59,286

a, c, d,e, i, j, k,1, 4, 5

(49,588)

(49,758)

e

e

d, e, i, j, k, 4

c, e, i

e

9,451

375

9,826

9,528

375

9,903

21,436

21,436

6,864

793

8,674

47,593

7,996

1,125

10,515

50,975

e, f, g, h

20,220

21,049

7,047

1,493

0

334

8,003

37,926

13,049

2,549

10,500

4,190

14,690

(661)

6,667

1,414

0

201

7,142

35,644

11,949

3,078

(410)

8,461

3,853

38

c, e

a, c, e

b

b, c, e

e

c, e, i

c, e, i

h

h

38,991

(27,245 )

11,746

334

12,080

18,435

4,795

1,180

3,648

39,228

(27,484 )

11,744

241

11,985

18,506

4,902

932

6,086

39,802

(27,628 )

12,174

(74 )

12,100

16,606

3,944

382

40,045

(27,784 )

12,261

(102 )

12,159

16,673

3,670

225

2,900

40,138

42,411

33,032

35,627

17,234

5,917

1,368

0

110

0

24,629

8,403

1,790

(350)

6,263

250

18,612

7,160

1,477

653

337

3,885

32,124

10,287

2,224

8,063

407

8,470

(454 )

18,218

6,630

1,498

703

193

1,113

28,355

7,272

1,419

5,853

400

6,253

(349 )

18,297

6,545

1,365

0

180

2,861

29,248

10,890

2,015

(435 )

8,440

372

6

12,352

14,029

8,818

8,016

6,513

5,904

Note: References above coincide with the discussions in Note 41.1 and Note 41.5. These references indicate which IFRS

to US GAAP differences affect an individual ﬁnancial statement caption.

179

Financial Statements
Notes to the Financial Statements

Note 41.7 Condensed Consolidated Balance Sheet

The following is a Condensed Consolidated Balance Sheet of the Group, as at 31 December 2005 and 31 December 2004,
restated to reﬂect the impact of valuation and income recognition principles and presentation differences between IFRS and
US GAAP.

CHF million

Assets

Cash and balances with central banks

Due from banks

Cash collateral on securities borrowed

Reverse repurchase agreements

Trading portfolio assets

Trading portfolio assets pledged as collateral

Positive replacement values

Financial assets designated at fair value

Loans

Financial investments

Securities received as collateral

Accrued income and prepaid expenses

Investments in associates

Property and equipment

Goodwill

Other intangible assets

Private equity investments

Other assets

Total assets

Liabilities

Due to banks

Cash collateral on securities lent

Repurchase agreements

Trading portfolio liabilities

Obligation to return securities received as collateral

Negative replacement values

Financial liabilities designated at fair value

Due to customers

Accrued expenses and deferred income

Debt issued

Other liabilities

Total liabilities

Minority interests

Total shareholders’ equity (US GAAP) /
Equity attributable to UBS shareholders (IFRS)

Total equity (IFRS)

Reference

US GAAP

IFRS

US GAAP

IFRS

31.12.05

31.12.04

e, i, j, 1, 5

4

e, i, j, 1, 4, 5

5

i, j, 1, 4, 5

j

a, e, j, 1, 5

e, j, 2

3

e, i, j

c, e

a, c, e, l

a, b, e

b, c, e

e, 2

5,359

33,427

274,099

404,432

607,432

152,237

337,409

267,530

3,407

67,430

8,853

2,554

9,282

28,104

1,665

2,210

5,359

33,644

300,331

404,432

499,297

154,759

333,782

1,153

269,969

6,551

8,918

2,956

9,423

11,313

2,173

6,036

35,286

218,414

357,164

449,389

159,115

284,468

228,968

1,455

12,950

5,882

2,153

9,045

26,977

1,722

3,094

6,036

35,419

220,242

357,164

389,487

159,115

284,577

653

232,167

4,188

6,309

2,675

9,510

8,865

3,336

c, d, e, f, h, i, j, 1, 2, 5

116,831

2,322,261

16,190

2,060,250

101,068

1,903,186

17,375

1,737,118

e, j, 1, 5

4

i, 4

i, j, 1, 4

3

i, j, k, 1, 4

i, j

e, i, j, 1, 5

e, i, j

a, c, e, i, 1

c, d, e, f, g, h, i, j, k, 1

c, e, i

127,252

66,916

482,843

193,965

67,430

432,171

466,410

18,707

240,212

163,872

124,328

77,267

478,508

188,631

337,663

117,401

451,533

18,392

160,710

53,874

119,021

57,792

423,513

190,907

12,950

360,345

386,913

14,830

164,744

117,743

120,026

61,545

422,587

171,033

303,712

65,756

376,076

15,040

117,856

44,120

2,259,778

2,008,307

1,848,758

1,697,751

2,008

60,475

7,619

44,324

51,943

1,760

52,668

5,426

33,941

39,367

Total liabilities, minority interests and shareholders’ equity

2,322,261

2,060,250

1,903,186

1,737,118

Note: References above coincide with the discussions in Note 41.1 and Note 41.5. These references indicate which IFRS

to US GAAP differences affect an individual ﬁnancial statement caption.

180

Note 41.8 Comprehensive Income

Comprehensive  income  under  US  GAAP  is  deﬁned  as  the
C
change  in  shareholders’  equity  excluding  transactions  with
shareholders. Comprehensive income has two major compo-
nents: Net proﬁt, as reported in the income statement, and
Other comprehensive income. Other comprehensive income
includes such items as foreign currency translation, unrealized
gains / losses on available-for-sale securities, unrealized gains /

losses on changes in fair value of derivative instruments des-
ignated as cash ﬂow hedges and additional minimum pension
liability.  The  components  and  accumulated  other  compre-
hensive income amounts on a US GAAP basis for the years
ended  31  December  2005,  31  December  2004  and  31
December 2003 are as follows:

Unrealized
gains /
(losses) on
available-
for-sale
translation investments

Foreign
currency

Unrealized
gains /
(losses) on
cash ﬂow
hedges

Additional
minimum
pension
liability

Accumu-
lated other
compre-
hensive
income /
(loss)

Deferred
income
taxes

(849)

263

(3)

(1,223)

131

(1,681)

CHF million

Balance at 1 January 2003

Net proﬁt

Other comprehensive income:

Foreign currency translation

Net unrealized gains / (losses) on available-for-sale investments

Impairment charges reclassiﬁed to the income statement

Reclassiﬁcation of (gains) /
losses on available-for-sale investments realized in net proﬁt

Reclassiﬁcation of (gains) /
losses on cash ﬂow hedges realized in net proﬁt

Additional minimum pension liability

Other comprehensive income / (loss)

Comprehensive income

Balance at 31 December 2003

Net proﬁt

Other comprehensive income:

Foreign currency translation

Net unrealized gains / (losses) on available-for-sale investments

Impairment charges reclassiﬁed to the income statement

Reclassiﬁcation of (gains) / losses on available-for-sale 
investments realized in net proﬁt

Additional minimum pension liability

Other comprehensive income / (loss)

Comprehensive income

Balance at 31 December 2004

Net proﬁt

Other comprehensive income:

Foreign currency translation

Net unrealized gains / (losses) on available-for-sale investments

Impairment charges reclassiﬁed to the income statement

Reclassiﬁcation of (gains) / losses on available-for-sale investments 
realized in net proﬁt

Additional minimum pension liability

Other comprehensive income / (loss)

Comprehensive income

Balance at 31 December 2005

(966 )

(130 )

111

(69 )

(966 )

(88 )

(1,815)

175

(1,062 )

(1,062 )

32

10

(5 )

37

(2,877)

212

2,380

2,380

(497)

130

19

(19 )

130

342

3

3

0

0

0

0

0

Compre-
hensive
income /
(loss)

6,513

(845 )

(81 )

93

(58 )

2

835

(54 )

6,459

8,818

17

8

(4 )

(798 )

(1,603 )

7,215

12,352

2,088

124

16

(16 )

(109 )

2,103

14,455

121

49

(18 )

11

(1 )

(82 )

(80 )

(845 )

(81 )

93

(58 )

2

835

(54 )

917

917

(306)

211

(1,735)

(826 )

(826 )

236

(15 )

(2 )

1

21

241

(819 )

(819 )

17

8

(4 )

(798 )

(1,603 )

(1,125)

452

(3,338)

(292 )

(6 )

(3 )

3

18

(280 )

2,088

124

16

(16 )

(109 )

2,103

(127 )

(127 )

(1,252)

172

(1,235)

181

Financial Statements
Notes to the Financial Statements

Note 42 Additional Disclosures Required under US GAAP and SEC Rules
Note 42.1 Variable Interest Entities

Introduction
Since  1  January  2004,  UBS  has  fully  applied  Financial  Ac-
counting Standards Board (FASB) Interpretation No. 46, Con-
solidation  of  Variable  Interest  Entities (revised  December
2003), an interpretation of Accounting Research Bulletin No.
51 (FIN 46-R). Until 31 December 2003 the predecessor stan-
dard, FIN 46, had application to UBS only with respect to tran-
sitional  disclosure  requirements,  and  consolidation  require-
ments for certain VIEs created after 31 January 2003.

Identiﬁcation of variable interest entities (VIEs) and
measurement of variable interests
Qualifying special purpose entities (QSPEs) per Statement of
Financial Accounting Standards (SFAS) No. 140 Accounting
for Transfers and Servicing of Financial Assets and Extinguish-
ments of Liabilities are excluded from the scope of FIN 46-R.
In most other cases, US GAAP requires that control over an
entity be assessed ﬁrst based on voting interests; if voting in-
terests do not exist, or differ signiﬁcantly from economic in-
terests, the entity is considered a VIE under FIN 46-R, and con-
trol is assessed based on its variable interests. Speciﬁcally, VIEs
are entities in which no equity investors exist, or the equity in-
vestors:
– do not have sufﬁcient equity at risk for the entity to ﬁnance
its activities without additional subordinated ﬁnancial sup-
port from other parties; or

– do not have the characteristics of a controlling ﬁnancial in-

terest; or

– have voting rights that are not proportionate to their eco-
nomic interests, and the activities of the entity involve or
are conducted on behalf of investors with disproportion-
ately small or no voting interests.
Variable interests are interests held in a VIE that change
with changes in the fair value of a VIE’s net assets, exclusive
of  variable  interests.  Interests  of  related  parties  (including
management, employees, afﬁliates and agents) are included
in the evaluation as if owned directly by the enterprise.

A primary beneﬁciary is an enterprise which absorbs a ma-
jority of a VIE’s expected losses, expected residual returns, or
both – it must consolidate the VIE and provide certain disclo-
sures. The holder of a signiﬁcant variable interest in a VIE is
required to make disclosures only. UBS treats variable inter-
ests of more than 20% of a VIE’s expected losses, expected
residual returns, or both, as signiﬁcant.

The FASB Emerging Issues Task Force (EITF) has summa-
rized four different general approaches to the application of
FIN 46-R in EITF issue No. 04-7. In applying FIN 46-R, UBS has
adopted a quantitative approach, particularly for derivatives,
which is known as “View A”, and is based on variability in the
fair value of the net assets in the VIE, exclusive of variable in-
terests.

Under View A, investments or derivatives in a VIE either
create  (increase),  or  absorb  (decrease)  variability  in  the  fair
value of a VIE’s net assets. The VIE counterparty is a risk cre-
ator  (risk  maker),  or  risk  absorber  (risk  taker),  respectively.
Only risk absorption (risk taker) positions are assessed; risk
creation  interests  are  deemed  not  to  be  variable  interests.
VIEs often contain multiple risk factors, such as credit, eq-
uity,  foreign  currency  and  interest  rate  risks,  which  require
quantiﬁcation by variable interest holders. UBS analyzes these
risks into components, identiﬁes the parties absorbing them,
and uses models to quantify and compare them. These mod-
els are based on internally approved valuation models and in
some cases require the use of Monte Carlo simulation tech-
niques.

They are applied when UBS ﬁrst becomes involved with a

VIE, or after a major restructuring.

Measurement of maximum exposure to loss
Maximum exposure to loss is disclosed for VIEs in which UBS
has a signiﬁcant variable interest.

UBS’s maximum exposure to loss is generally measured as
its net investment in the VIE, plus any additional amounts it
may be obligated to invest. If UBS receives credit protection
from credit derivatives it is measured as any positive replace-
ment value of the derivatives. If UBS has provided guarantees
or other types of credit protection to a VIE it is measured as
the notional amount of the credit protection instruments or
credit  derivatives.  In  other  derivative  transactions  exposing
UBS  to  potential  losses,  there  is  no  theoretical  limit  to  the
maximum  loss  which  could  be  incurred  before  considering
offsetting positions or hedges entered into outside of the VIE.
However, UBS’s general risk management process involves the
hedging of risk exposures for VIEs, on the same basis as for
non-VIE counterparties. See Note 28 for a further discussion
of UBS’s risk mitigation strategies.

VIEs in which UBS is the primary beneﬁciary
VIEs in which UBS is the primary beneﬁciary require consoli-
dation, which may increase both total assets and liabilities of
the US GAAP Financial Statements, or in other cases may re-
sult in a reclassiﬁcation of existing assets or liabilities.

In certain cases, an entity not consolidated under IFRS is
consolidated under FIN 46-R because UBS is the primary ben-
eﬁciary. Signiﬁcant groups of these include CHF 0.7 billion of
investment fund products, and CHF 1.1 billion of securitization
VIEs, which includes some third-party VIEs mentioned below.
The other signiﬁcant group of VIEs which have previously
been consolidated for US GAAP but not under IFRS were em-
ployee equity compensation trusts, for which UBS is the pri-
mary beneﬁciary because of the variable interests of employ-
ees. For US GAAP purposes, these trusts have been consoli-

182

Note 42 Additional Disclosures Required under US GAAP and SEC Rules (continued)
Note 42.1 Variable Interest Entities (continued)

dated since 1 January 2004. For IFRS purposes, on 1 January
2005, these trusts were retrospectively consolidated from 1
January 2003. See Note 41.1h) Equity Participation Plans for
further details. 

this population is approximately CHF 13.9 billion, mostly com-
prising investment funds managed by UBS, other investment
fund products, employee equity compensation trusts men-
tioned previously, and private equity investments.

UBS has reviewed the population of potential third-party
VIEs it is involved with. Those identiﬁed in which UBS is the
primary beneﬁciary, and which are consolidated for US GAAP
purposes, have combined assets of approximately CHF 3.5 bil-
lion and are included in the table below.

Certain VIEs in which UBS is the primary beneﬁciary, but
for which UBS also holds a majority voting interest, are con-
solidated, but do not require disclosure in the table below. In
most cases such VIEs, or their ﬁnancial position and perfor-
mance, are already consolidated under IFRS.

Many  entities  consolidated  under  US  GAAP  due  to  FIN 
46-R are already consolidated under IFRS, based on the de-
termination of exercise of control under IFRS. The total size of

The creditors or beneﬁcial interest holders of VIEs in which
UBS is the primary beneﬁciary do not have any recourse to the
general credit of UBS.

VIEs in which UBS is the primary beneﬁciary

(CHF million)
Nature, purpose and activities of VIEs

Total assets

Securitizations

Investment fund products

Investment funds managed by UBS

Credit protection vehicles

Passive intermediary to a derivative transaction

Trust vehicles for awards to UBS employees

Private equity investments

Other miscellaneous structures

Total 31.12.05

1,140

4,079

5,290

220

157

2,882

500

1,521

15,789

Consolidated assets that are collateral 
for the VIEs’ obligations
Classiﬁcation

Loan receivables, government debt securities, corporate debt securities

Investment funds

Debt, equity

Corporate debt securities

Loan receivables, corporate debt securities

UBS shares and derivatives thereon

Private equity investments

Equity, derivatives, investment funds

Amount

1,140

4,079

5,015

220

47

2,882

242

1,488

15,113

Entities which are de-consolidated for US GAAP purposes 
In certain cases, an entity consolidated under IFRS is not consolidated under FIN 46-R. UBS consolidates under IFRS several
entities that have issued preferred securities amounting to CHF 5.1 billion, which are de-consolidated for US GAAP purposes.
Under IFRS the preferred securities are equity instruments held by third parties and are treated as minority interests, with div-
idends paid also reported in minority interests; the UBS-issued debt held by these entities and the respective interest amounts
are eliminated in consolidation. Under US GAAP, these entities are not consolidated and the UBS-issued debt is recognized
as a liability in the UBS Group Financial Statements, with interest paid reported in interest expense.

VIEs in which UBS holds a signiﬁcant variable interest
VIEs in which UBS holds a signiﬁcant variable interest are mostly used in securitizations, or as investment fund products, in-
cluding funds managed by UBS.

UBS has reviewed the population of potential third-party VIEs it is involved with. Those identiﬁed in which UBS holds a sig-
niﬁcant variable interest have combined assets of approximately CHF 3.3 billion, for which UBS has a maximum exposure to
loss of approximately CHF 1.9 billion. Disclosures for these are included in the table below.

VIEs in which UBS holds a signiﬁcant variable interest

(CHF million)
Nature, purpose and activities of VIEs

Securitizations

Investment fund products

Investment funds managed by UBS

Credit protection vehicles

Other miscellaneous structures

Total 31.12.05

Total assets

Nature of involvement

Maximum exposure
to loss

1,162

1,476

3,425

894

778

7,735

UBS acts as swap counterparty

UBS holds notes or units

UBS acts as investment manager

SPE used for credit protection – 
UBS sells credit risk on portfolios to investors

UBS acts as swap counterparty

1,056

633

936

633

186

3,444

183

Financial Statements
Notes to the Financial Statements

Note 42 Additional Disclosures Required under US GAAP and SEC Rules (continued)
Note 42.1 Variable Interest Entities (continued)

Third-party VIEs not otherwise classiﬁed
FIN 46-R requires UBS to consider all VIEs for consolidation, including VIEs which UBS has not created, but in which it holds
variable interests as a third-party counterparty, either through direct or indirect investment, or through derivative transactions.
UBS has identiﬁed that it holds variable interests in 88 third party VIEs that in some cases could result in UBS being con-
sidered the primary beneﬁciary, but the information necessary to make this determination, or perform the accounting required
to consolidate the VIE was held by third parties, and was not available to UBS. Additional disclosures for these VIEs are pro-
vided in the table below.

VIEs not originated by UBS – information determining VIE status unavailable from third parties

(CHF million)
Nature, purpose and activities of VIEs

Securitizations

Investment fund products

Total 31.12.05

Total assets

Nature of involvement

1,917

4,730

6,647

UBS acts as swap counterparty

UBS acts as swap counterparty

Net income
from VIE in
current period

(1 )

200

199

Maximum
exposure
to loss

1,917

4,711

6,628

Future developments
As the guidance for FIN 46-R has seen considerable continued development, it is possible UBS may be required to apply a
different approach in the future, which would impact the US GAAP ﬁnancial position, results, and reporting. However, it is
not possible at this time to predict the impact this might have.

184

Note 42 Additional Disclosures Required under US GAAP and SEC Rules (continued)
Note 42.2 Industrial Holdings’ Income Statement

In 2004, following the acquisition of an additional 20% stake
in Motor-Columbus, a Swiss holding company whose most
signiﬁcant  asset  is  a  59.3%  interest  in  Atel,  a  Swiss-based
European energy provider, UBS now holds a majority owner-
ship interest in the company. As a result, UBS has fully con-
solidated Motor-Columbus in its Financial Statements since
1 July 2004. In addition, due to the adoption of IAS 27 Con-

solidated and Separate Financial Statements which is further
described  in  Note  1aa),  UBS  retrospectively  consolidated
certain  private  equity  investments  to  1  January  2003.  The
following table provides information required by Regulation
S-X  for  commercial  and  industrial  companies,  including  a
condensed income statement and certain additional balance
sheet information:

Note 42.2 Industrial Holdings’ Income Statement

CHF million

Operating income

Net sales

Operating expenses

Cost of products sold

Marketing expenses

General and administrative expenses

Amortization of goodwill

Amortization of other intangible assets

Other operating expenses

Total operating expenses

Operating proﬁt / (loss)

Non-operating proﬁt

Interest income

Interest expense

Other non-operating income, net

Non-operating proﬁt / (loss)

Net proﬁt / (loss) from continuing operations before tax

Income taxes

Equity in income of associates, net of tax

Net proﬁt / (loss) from continuing operations

Net proﬁt from discontinued operations

Net proﬁt / (loss)

Net proﬁt / (loss) attributable to minority interests

Net proﬁt / (loss) attributable to UBS shareholders

Accounts receivables trade, gross

Allowance for doubtful receivables

Accounts receivables trade, net

1 Includes results for the six-month period beginning on 1 July 2004 for Motor-Columbus.

For the year ended or as at

31.12.05

31.12.04 1

31.12.03

10,515

6,086

2,900

9,044

5,028

2,161

283

478

0

207

210

10,222

293

26

(138)

582

470

763

247

88

604

115

719

207

512

2,068

(62)

2,006

144

553

7

169

74

5,975

111

40

(141 )

430

329

440

117

22

345

108

453

93

360

2,084

(39 )

2,045

77

610

26

8

76

2,958

(58 )

7

(113 )

(138 )

(244 )

(302 )

11

15

(298 )

232

(66 )

(11 )

(55 )

185

Financial Statements
Notes to the Financial Statements

Note 42 Additional Disclosures Required under US GAAP and SEC Rules (continued)
Note 42.3 Indemniﬁcations

In the normal course of business, UBS provides representa-
tions,  warranties  and  indemniﬁcations  to  counterparties  in
connection with numerous transactions. These provisions are
generally ancillary to the business purposes of the contracts
in  which  they  are  embedded.  Indemniﬁcation  clauses  are
generally standard contractual terms related to the Group’s
own  performance  under  a  contract  and  are  entered  into
based on an assessment that the risk of loss is remote. Indem-
niﬁcations may also protect counterparties in the event that
additional taxes are owed due either to a change in applicable
tax laws or to adverse interpretations of tax laws. The purpose
of these clauses is to ensure that the terms of a contract are
met at inception.

The most signiﬁcant business where UBS provides repre-
sentations and warranties is asset securitizations. UBS gener-
ally  represents  that  certain  securitized  assets  meet  speciﬁc
requirements, for example documentary attributes. UBS may
be  required  to  repurchase  the  assets  and/or  indemnify  the
purchaser of the assets against losses due to any breaches of

such representations or warranties. Generally, the maximum
amount of future payments the Group would be required to
make  under  such  repurchase  and/or  indemniﬁcation  provi-
sions would be equal to the current amount of assets held by
such  securitization-related  SPEs  as  at  31  December  2005,
plus, in certain circumstances, accrued and unpaid interest on
such assets and certain expenses. The potential loss due to
such repurchase and/or indemnity is mitigated by the due dili-
gence UBS performs to ensure that the assets comply with the
requirements set forth in the representations and warranties.
UBS receives no compensation for representations and war-
ranties, and it is not possible to determine their fair value be-
cause  they  rarely,  if  ever,  result  in  a  payment.  Historically,
losses incurred on such repurchases and / or indemniﬁcations
have been insigniﬁcant. Management expects the risk of ma-
terial loss to be remote. No liabilities related to such represen-
tations, warranties, and indemniﬁcations are included in the
balance sheet at 31 December 2005 and 2004.

Note 42.4 Supplemental Guarantor Information

Guarantee of PaineWebber securities
Following the acquisition of Paine Webber Group Inc., UBS AG
made a full and unconditional guarantee of the senior and
subordinated notes and trust preferred securities (“Debt Secu-
rities”) of PaineWebber. Prior to the acquisition, PaineWebber
was an SEC Registrant. Upon the acquisition, PaineWebber
was  merged  into  UBS  Americas  Inc.,  a  wholly  owned  sub-
sidiary of UBS.

Under the guarantee, if UBS Americas Inc. fails to make any
timely  payment  under  the  Debt  Securities  agreements,  the
holders of the Debt Securities or the Debt Securities trustee
may  demand  payment  from  UBS  without  ﬁrst  proceeding
against UBS Americas Inc. UBS’s obligations under the subor-

dinated  note  guarantee  are  subordinated  to  the  prior  pay-
ment in full of the deposit liabilities of UBS and all other lia-
bilities of UBS. At 31 December 2005, the amount of senior
liabilities  of  UBS  to  which  the  holders  of  the  subordinated
debt securities would be subordinated is approximately CHF
1,997 billion.

The information presented in this note is prepared in accor-
dance with IFRS and should be read in conjunction with the
Consolidated Financial Statements of UBS of which this infor-
mation is a part. At the bottom of each column, Net proﬁt and
Shareholders’  equity  has  been  reconciled  to  US  GAAP.  See
Note  41  for  a  detailed  reconciliation  of  the  IFRS  Financial
Statements to US GAAP for UBS on a consolidated basis.

186

Note 42 Additional Disclosures Required under US GAAP and SEC Rules (continued)
Note 42.4 Supplemental Guarantor Information (continued)

Supplemental Guarantor Consolidating Income Statement

CHF million
For the year ended 31 December 2005

UBS AG
Parent Bank 1

UBS
Americas Inc.

Subsidiaries

Consolidating
entries

UBS Group

Operating income

Interest income

Interest expense

Net interest income

Credit loss (expense) / recovery

Net interest income after credit loss expense

Net fee and commission income

Net trading income

Income from subsidiaries

Other income

Revenues from industrial holdings

Total operating income

Operating expenses

Personnel expenses

General and administrative expenses

Depreciation of property and equipment

Amortization of other intangible assets

Goods and materials purchased

Total operating expenses

Operating proﬁt from continuing operations before tax

Tax expense / (beneﬁt)

Net proﬁt / (loss) from continuing operations

Net proﬁt / (loss) from discontinued operations

Net proﬁt / (loss)

Net proﬁt / (loss) attributable to minority interests

Net proﬁt / (loss) attributable to UBS shareholders

Net proﬁt / (loss) US GAAP 2

39,779

(33,892 )

5,887

370

6,257

9,670

7,453

(675 )

2,635

0

25,340

9,962

2,330

988

24

0

13,304

12,036

1,712

10,324

3,705

14,029

0

14,029

14,490

27,782

(24,803 )

2,979

(3 )

2,976

7,420

(123 )

0

476

0

10,749

6,587

2,667

140

70

0

9,464

1,285

1,079

206

0

206

122

84

20,729

(20,067 )

662

8

670

4,346

666

0

(1,986 )

10,515

14,211

4,500

2,050

365

240

8,003

15,158

(947 )

(242 )

(705 )

485

(220 )

539

(759 )

(891 )

(1,247 )

(29,004 )

29,004

59,286

(49,758 )

0

0

0

0

0

675

0

0

675

0

0

0

0

0

0

675

0

675

0

675

0

675

0

9,528

375

9,903

21,436

7,996

0

1,125

10,515

50,975

21,049

7,047

1,493

334

8,003

37,926

13,049

2,549

10,500

4,190

14,690

661

14,029

12,352

1 UBS AG Parent Bank prepares its ﬁnancial statements in accordance with Swiss Banking Law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.
Note 41 for a description of the differences between IFRS and US GAAP.

2 Refer to

187

Financial Statements
Notes to the Financial Statements

Note 42 Additional Disclosures Required under US GAAP and SEC Rules (continued)
Note 42.4 Supplemental Guarantor Information (continued)

Supplemental Guarantor Consolidating Balance Sheet

CHF million
For the year ended 31 December 2005

Assets

Cash and balances with central banks

Due from banks

Cash collateral on securities borrowed

Reverse repurchase agreements

Trading portfolio assets

Trading portfolio assets pledged as collateral

Positive replacement values

Financial assets designated at fair value

Loans

Financial investments

Accrued income and prepaid expenses

Investments in associates

Property and equipment

Goodwill and other intangible assets

Other assets

Total assets

Liabilities

Due to banks

Cash collateral on securities lent

Repurchase agreements

Trading portfolio liabilities

Negative replacement values

Financial liabilities designated at fair value

Due to customers

Accrued expenses and deferred income

Debt issued

Other liabilities

Total liabilities

Equity attributable to UBS shareholders

Equity attributable to minority interests

Total equity

Total liabilities and equity

Total shareholders’ equity – US GAAP 2

UBS AG
Parent Bank 1

UBS
Americas Inc.

Subsidiaries

Consolidating
entries

UBS Group

2,712

127,321

110,001

240,762

299,750

79,333

330,894

2,186

289,577

3,198

5,720

31,250

5,462

641

7,456

1,536,263

181,592

102,698

132,073

113,171

337,172

93,207

419,301

10,090

87,267

10,431

1,487,002

49,261

0

49,261

1,536,263

32,577

5

14,684

257,943

162,069

174,707

36,956

6,656

737

41,901

910

3,135

173

592

11,095

3,758

715,321

126,834

50,395

360,932

69,460

7,274

0

63,243

7,494

19,496

3,594

708,722

6,485

114

6,599

715,321

7,893

2,642

156,999

118,415

284,360

24,840

38,470

158,514

(1,770 )

33,987

2,443

4,877

1,974

3,369

1,750

7,468

0

(265,360 )

(186,028 )

(282,759 )

0

0

(162,282 )

0

(95,496 )

0

(4,814 )

(30,441 )

0

0

(2,492 )

5,359

33,644

300,331

404,432

499,297

154,759

333,782

1,153

269,969

6,551

8,918

2,956

9,423

13,486

16,190

838,338

(1,029,672 )

2,060,250

81,262

110,202

268,262

6,000

155,499

24,194

64,485

5,622

53,947

42,341

811,814

19,019

7,505

26,524

838,338

20,005

(265,360 )

(186,028 )

(282,759 )

0

(162,282 )

0

(95,496 )

(4,814 )

0

(2,492 )

(999,231 )

(30,441 )

0

(30,441 )

124,328

77,267

478,508

188,631

337,663

117,401

451,533

18,392

160,710

53,874

2,008,307

44,324

7,619

51,943

(1,029,672 )

2,060,250

0

60,475

2 Refer to

1 UBS AG Parent Bank prepares its ﬁnancial statements in accordance with Swiss Banking Law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.
Note 41 for a description of the differences between IFRS and US GAAP.

188

Note 42 Additional Disclosures Required under US GAAP and SEC Rules (continued)
Note 42.4 Supplemental Guarantor Information (continued)

Supplemental Guarantor Consolidating Cash Flow Statement

CHF million
For the year ended 31 December 2005

Net cash ﬂow from / (used in) operating activities

Cash ﬂow from / (used in) investing activities

Investments in subsidiaries and associates

Disposal of subsidiaries and associates

Purchase of property and equipment

Disposal of property and equipment

Net (investment in) / divestment of ﬁnancial investments

Net cash ﬂow from / (used in) investing activities

Cash ﬂow from / (used in) ﬁnancing activities

Net money market paper issued / (repaid)

Net movements in treasury shares and own equity derivative activity

Capital issuance

Dividends paid

Issuance of long-term debt, including ﬁnancial liabilities designated at fair value

Repayment of long-term debt, including ﬁnancial liabilities designated at fair value

Increase in minority interests

Dividend payments to / purchase from minority interests

Net activity in investments in subsidiaries

Net cash ﬂow from / (used in) ﬁnancing activities

Effects of exchange rate differences

Net increase / (decrease) in cash equivalents

Cash and cash equivalents, beginning of the year

Cash and cash equivalents, end of the year

Cash and cash equivalents comprise:

Cash and balances with central banks

Money market paper 2

Due from banks with original maturity of less than three months

Total

UBS AG
Parent Bank 1

(29,118 )

UBS
Americas Inc.

Subsidiaries

UBS Group

(15,771 )

(18,318 )

(63,207 )

(1,540 )

3,240

(1,153 )

71

(4,667 )

(4,049 )

22,698

(2,416 )

2

(3,105 )

50,587

(17,780 )

0

0

(1,591 )

48,395

3,283

18,511

50,037

68,548

2,712

47,838

17,998

68,548

0

0

(155 )

6

(40 )

(189 )

615

0

0

0

14,635

(753 )

8

(175 )

(214 )

14,116

(720 )

(2,564 )

16,095

13,531

5

8,991

4,535

13,531

0

0

(584 )

193

2,220

1,829

(92 )

0

0

0

11,085

(11,924 )

1,564

(400 )

1,805

2,038

2,455

(11,996 )

20,959

8,963

2,642

997

5,324

8,963

(1,540 )

3,240

(1,892 )

270

(2,487 )

(2,409 )

23,221

(2,416 )

2

(3,105 )

76,307

(30,457 )

1,572

(575 )

0

64,549

5,018

3,951

87,091

91,042

5,359

57,826

27,857

91,042

2 Money

1 UBS AG Parent Bank prepares its ﬁnancial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.
market paper is included in the Balance sheet under Trading portfolio assets and Financial investments. CHF 4,744 million was pledged at 31 December 2005.

Guarantee of other securities
In October 2000, UBS AG, acting through a wholly owned
subsidiary, issued USD 1.5 billion of 8.622% UBS Trust Pre-
ferred Securities. In June 2001, UBS issued an additional USD
800 million of such securities (USD 300 million at 7.25% and
USD 500 million at 7.247%). In May 2003, UBS issued USD
300 million of Floating Rate Non-Cumulative Trust Preferred
Securities at 0.7% above one-month LIBOR of such securities.

UBS AG has fully and unconditionally guaranteed these secu-
rities.  UBS’s  obligations  under  the  trust  preferred  securities
guarantee are subordinated to the prior payment in full of the
deposit liabilities of UBS and all other liabilities of UBS. At 31
December  2005,  the  amount  of  senior  liabilities  of  UBS  to
which the holders of the subordinated debt securities would
be subordinated is approximately CHF 1,997 billion.

189

Financial Statements
Notes to the Financial Statements

Note 42 Additional Disclosures Required under US GAAP and SEC Rules (continued)
Note 42.5 Pro-Forma Effect of the Fair Value Method of Accounting on US GAAP Net Proﬁt

The following table presents US GAAP Net proﬁt and earnings
per  share  for  the  years  ended  31  December  2004  and  31
December 2003 as if UBS had applied the fair value method
of accounting for its share-based compensation plans in that

period. With the adoption of SFAS 123-R on 1 January 2005,
UBS adopted the fair value method of accounting for its share-
based  compensation  plans  using  the  modiﬁed  prospective
method. See Note 41.1 h) for details.

CHF million, except per share data

Net proﬁt under US GAAP, as reported

Add: Equity-based employee compensation expense included in reported net income, net of tax

Deduct: Total equity-based employee compensation expense determined under the 
fair-value-based method for all awards, net of tax

Net proﬁt, pro-forma

Earnings per share

Basic, as reported

Basic, pro-forma

Diluted, as reported

Diluted, pro-forma

31.12.04

31.12.03

8,818

1,209

(1,717 )

8,310

8.56

8.07

8.15

7.68

6,513

752

(1,191)

6,074

5.83

5.44

5.72

5.33

190

UBS AG (Parent Bank)

UBS AG (Parent Bank)
Table of Contents

UBS AG (Parent Bank)
Table of Contents

Parent Bank Review

Financial Statements

Income Statement
Balance Sheet
Statement of Appropriation of Retained Earnings

Notes to the Financial Statements

Additional Income Statement Information
Net Trading Income
Extraordinary Income and Expenses

Additional Balance Sheet Information
Allowances and Provisions
Statement of Shareholders’ Equity
Share Capital

Off-Balance Sheet and Other Information
Assets Pledged or Assigned as Security for 
Own Obligations, Assets Subject to Reservation of Title
Commitments and Contingent Liabilities
Derivative Instruments
Fiduciary Transactions
Due to UBS Pension Plans, Loans to 
Corporate Bodies / Related Parties
Personnel

Report of the Statutory Auditors

Report of the Capital Increase Auditors

193

194

194
195
196

197

198
198
198

199
199
199
199

200

200
200
200
201

201
201

202

203

192

UBS AG (Parent Bank)
Parent Bank Review

Parent Bank Review

Income Statement

Balance Sheet

The Parent Bank UBS AG net proﬁt increased by CHF 7,551
million from CHF 5,946 million to CHF13,497 million. Income
from  investments  in  associated  companies  increased  to
CHF 3,943 million from CHF 461 million in 2004 mainly due
to higher distributions received. The increase in extraordinary
income and expenses is explained on page 198.

Total assets increased by CHF 224 billion to CHF 1,360 billion
at 31 December 2005. This movement is mainly caused by
increased positions in Money market paper of CHF17 billion,
Due from banks of CHF 81 billion and Due from customers
of CHF 25 billion. A considerable increase resulted as well in
Trading balances in securities and precious metals of CHF 70
billion (thereof debt instruments CHF 23 billion and equities
CHF 44 billion).

193

UBS AG (Parent Bank)
Financial Statements

Financial Statements

Income Statement

CHF million

Interest and discount income

Interest and dividend income from trading portfolio

Interest and dividend income from ﬁnancial investments

Interest expense

Net interest income

Credit-related fees and commissions

Fee and commission income from securities and investment business

Other fee and commission income

Fee and commission expense

Net fee and commission income

Net trading income

Net income from disposal of ﬁnancial investments

Income from investments in associated companies

Income from real estate holdings

Sundry income from ordinary activities

Sundry ordinary expenses

Other income from ordinary activities

Operating income

Personnel expenses

General and administrative expenses

Operating expenses

Operating proﬁt

Depreciation and write-offs on investments in associated companies and ﬁxed assets

Allowances, provisions and losses

Proﬁt before extraordinary items and taxes

Extraordinary income

Extraordinary expenses

Tax expense / (beneﬁt)

Proﬁt for the period

194

For the year ended

% change from

31.12.05

31.12.04

31.12.04

27,320

12,482

36

18,902

10,457

13

(33,972)

(21,659 )

5,866

244

9,751

773

(1,349)

9,419

7,289

95

3,943

38

46

(234)

3,888

26,462

10,999

4,113

15,112

11,350

1,265

27

10,058

5,274

0

1,835

13,497

7,713

228

8,002

735

(1,135 )

7,830

3,469

87

461

46

1,418

(26 )

1,986

20,998

9,699

3,833

13,532

7,466

1,021

184

6,261

1,016

49

1,282

5,946

45

19

177

57

(24 )

7

22

5

19

20

110

9

755

(17 )

(97 )

800

96

26

13

7

12

52

24

(85 )

61

419

(100 )

43

127

Balance Sheet

CHF million

Assets

Liquid assets

Money market paper

Due from banks

Due from customers

Mortgage loans

Trading balances in securities and precious metals

Financial investments

Investments in associated companies

Fixed assets

Accrued income and prepaid expenses

Positive replacement values

Other assets

Total assets

Total subordinated assets

Total amounts receivable from Group companies

Liabilities

Money market paper issued

Due to banks

Due to customers on savings and deposit accounts

Other amounts due to customers

Medium-term bonds

Bond issues and loans from central mortgage institutions

Accruals and deferred income

Negative replacement values

Other liabilities

Allowances and provisions

Share capital

General statutory reserve

Reserve for own shares

Other reserves

Proﬁt for the period

Total liabilities

Total subordinated liabilities

Total amounts payable to Group companies

31.12.05

31.12.04

% change from
31.12.04

2,712

47,840

431,071

185,331

153,387

358,600

4,216

22,016

4,527

5,359

136,503

7,980

4,152

31,262

350,055

159,988

132,941

288,170

4,503

20,547

4,212

3,129

128,300

8,550

1,359,542

1,135,809

6,094

557,355

52,335

482,134

86,997

406,724

1,464

102,386

11,451

160,002

5,648

4,249

871

7,927

10,562

13,295

13,497

4,970

446,850

29,637

428,371

83,976

316,467

1,686

60,125

7,588

158,811

5,951

3,929

901

7,572

9,056

15,793

5,946

1,359,542

1,135,809

16,022

404,108

12,695

357,311

(35 )

53

23

16

15

24

(6 )

7

7

71

6

(7 )

20

23

25

77

13

4

29

(13 )

70

51

1

(5 )

8

(3 )

5

17

(16 )

127

20

26

13

195

UBS AG (Parent Bank)
Financial Statements

Statement of Appropriation of Retained Earnings

CHF million

The Board of Directors proposes to the Annual General Meeting the following appropriation:

Proﬁt for the ﬁnancial year 2005 as per the Parent Bank’s Income Statement

Appropriation to general statutory reserve

Appropriation to other reserves

Proposed dividends

Total appropriation

Dividend Distribution

13,497

334

9,788

3,375

13,497

The Board of Directors will recommend to the Annual General
Meeting on 19 April 2006 that UBS should pay a dividend of
CHF 3.20 per share of CHF 0.80 par value. If the dividend is
approved, the payment of CHF 3.20 per share, after deduc-
tion of 35% Swiss withholding tax, would be made on 24 April
2006 for shareholders who hold UBS shares on 19 April 2006.
In addition to the already increased dividend of CHF 3.20,
the Board of Directors proposes that a repayment of CHF 0.60

per share be made to shareholders by means of a reduction
in the par value from CHF 0.80 to CHF 0.20 for all registered
shares. This payout will not be subject to the 35% Swiss with-
holding tax. Subject to the approval by the shareholders and
the entry of the capital reduction in the Commercial Register,
the payout will be made on 12 July 2006, to those sharehold-
ers in possession of UBS shares on 7 July 2006.

196

UBS AG (Parent Bank)
Notes to the Financial Statements

Notes to the Financial Statements

Accounting Principles

The Parent Bank’s accounting policies are in compliance with
Swiss  banking  law.  The  accounting  policies  are  principally
the same as for the Group Financial Statements outlined in
Note1, Summary of Signiﬁcant Accounting Policies. Major dif-
ferences between the Swiss banking law requirements and
International Financial Reporting Standards are described in
Note 40 to the Group Financial Statements.

In  addition,  the  following  principles  are  applied  for  the

Parent Bank:

Treasury shares
Treasury shares is the term used to describe when an enter-
prise holds its own equity instruments. Under IFRS, treasury
shares are presented in the balance sheet as a deduction from
equity. No gain or loss is recognized in the income statement
on  the  sale,  issuance,  acquisition,  or  cancellation  of  those
shares.  Consideration  received  or  paid  is  presented  in  the
ﬁnancial statement as a change in equity.

Under Swiss law, treasury shares are classiﬁed in the bal-
ance sheet as trading balances or as ﬁnancial assets. Short
positions are included in Due to banks. Realized gains and
losses on the sale, issuance or acquisition of treasury shares,
and unrealized gains or losses from re-measurement of treas-
ury shares in the trading portfolio to market value are in-
cluded  in  the  Income  statement. Treasury  shares  included
in Financial investments are carried at the lower of cost or
market value.

Foreign currency translation
Assets and liabilities of foreign branches are translated into
CHF at the exchange rates at the balance sheet date, while

income and expense items are translated at weighted aver-
age rates for the period. Exchange differences arising on the
translation of each of these foreign branches are credited to
a provision account (other liabilities) in case of a gain, while
any losses are ﬁrstly debited to that provision account until
such provision is fully utilized, and secondly to proﬁt and loss.

Investments in associated companies
Investments  in  associated  companies  are  equity  interests
which are held for the purpose of the Parent Bank’s business
activities or for strategic reasons. They are carried at cost less
valuation reserves, if needed.

Property and equipment
Bank buildings and other real estate are carried at cost less
accumulated  depreciation.  Depreciation  of  computer  and
telecommunications equipment, other ofﬁce equipment, ﬁx-
tures and ﬁttings is recognized on a straight-line basis over the
estimated useful lives of the related assets. The useful lives of
Property and equipment are summarized in Note 1, Summary
of  Signiﬁcant  Accounting  Policies,  of  the  Group  Financial
Statements.

Extraordinary income and expenses
Certain items of income and expense appear as extraordinary
within the Parent Bank Financial Statements, whereas in the
Group Financial Statements they are considered to be oper-
ating income or expenses and appear within the appropriate
income or expense category or they are included in net proﬁt
from  discontinued  operations,  if  required.  These  items  are
separately identiﬁed on page 198.

197

UBS AG (Parent Bank)
Notes to the Financial Statements

Additional Income Statement Information

Net Trading Income

CHF million

Equities

Fixed income 1

Foreign exchange and other

Total

1 Includes commodities trading income.

Extraordinary Income and Expenses

For the year ended

% change from

31.12.05

31.12.04

31.12.04

3,068

1,540

2,681

7,289

2,262

(266 )

1,473

3,469

36

82

110

Extraordinary income includes a CHF 3,183 million gain on sale
of Private Banks & GAM compared to a gain on sale of asso-
ciated companies of CHF 72 million in 2004. Additionally 2005
included a write-up of investments in associated companies of
CHF 1,263 million, a gain of CHF 370 million resulting from a
merger with a subsidiary and releases of provisions of CHF 452
million  (2004:  CHF  334  million).  2004  further  included  the

CHF  609  million  ﬁrst-time  adoption  impact  as  at 1 January
2004 from changing the valuation method for treasury shares
from lower of cost or market to the mark to market method.
Extraordinary  expense  contained  a  CHF  48  million  loss
from the liquidation of investments in associated companies
in 2004.

198

Additional Balance Sheet Information

Allowances and Provisions

CHF million

Default risks (credit and country risk)

Trading portfolio risks

Litigation risks

Operational risks

Capital and income taxes

Total allowances and provisions

Allowances deducted from assets

Total provisions as per balance sheet

Provisions
applied in
accordance
with their
speciﬁed purpose

Recoveries,
doubtful interest,
currency
translation
differences

Balance at
31.12.04

(629 )

(80 )

(56 )

(1,658 )

(2,423)

61

534

148

(105 )

72

710

2,777

3,337

233

1,508

1,858

9,713

5,784

3,929

Provisions
released
to income

(971 )

(62 )

(247 )

(1,280)

New
provisions
charged
to income

598

9

89

562

1,839

3,097

Balance at
31.12.05

1,836

3,880

328

1,662

2,111

9,817

5,568

4,249

Statement of Shareholders’ Equity

CHF million

Share capital

As at 31.12.03 and 1.1.04

Cancellation of own shares

Capital increase

Increase in reserves

Prior year dividend

Proﬁt for the period

Changes in reserves for own shares

As at 31.12.04 and 1.1.05

Cancellation of own shares

Capital increase

Increase in reserves

Prior year dividend

Proﬁt for the period

Changes in reserves for own shares

946

(47 )

2

901

(32 )

2

General statutory
reserves:
Share premium

General statutory
reserves:
Retained earnings

6,141

1,071

Reserves for
own shares

8,024

72

288

6,213

1,359

33

322

Total shareholders’
equity (before
Other reserves distribution of proﬁt)

24,388

(4,469 )

(288 )

(2,806 )

5,946

(1,032 )

21,739

(3,511 )

(322 )

(3,105 )

13,497

(1,506 )

26,792

40,570

(4,516)

74

(2,806)

5,946

39,268

(3,543)

35

(3,105)

13,497

46,152

1,032

9,056

1,506

10,562

As at 31.12.05

871

6,246

1,681

Share Capital

As at 31.12.05

Issued and paid up

Conditional share capital

As at 31.12.04

Issued and paid up

Conditional share capital

Par value

Ranking for dividends

No. of shares

Capital in CHF

No. of shares

Capital in CHF

1,088,632,522

870,906,018

1,054,747,522

843,798,018

1,823,501

1,458,801

1,126,858,177

901,486,542

1,086,923,083

869,538,466

3,533,012

2,826,410

199

UBS AG (Parent Bank)
Notes to the Financial Statements

Off-Balance Sheet and Other Information

Assets Pledged or Assigned as Security for Own Obligations, Assets Subject to Reservation of Title

CHF million

Money market paper

Mortgage loans

Securities

Total

31.12.05

31.12.04

Change in %

Book value

Effective liability

Book value

Effective liability

Book value

Effective liability

26,513

64

102,330

128,907

6,120

38

48,580

54,738

15,387

175

79,534

95,096

4,633

60

41,310

46,003

72

(63 )

29

36

32

(37 )

18

19

Assets  are  pledged  as  collateral  for  securities  borrowing  and  repurchase  transactions,  for  collateralized  credit  lines  with 
central banks, loans from mortgage institutions and security deposits relating to stock exchange membership.

Commitments and Contingent Liabilities

CHF million

Contingent liabilities

Irrevocable commitments

Liabilities for calls on shares and other equities

Conﬁrmed credits

31.12.05

184,665

68,071

130

2,004

31.12.04

123,429

50,552

104

1,820

% change from
31.12.04

50

35

25

10

Derivative Instruments

CHF million

Interest rate contracts

Credit derivative contracts

Foreign exchange contracts

Precious metal contracts

Equity / index contracts

Commodity contracts

Total derivative instruments

Replacement values netting

Replacement values after netting

PRV 1

222,508

15,811

57,705

3,616

25,663

10,677

335,980

199,477

136,503

31.12.05

NRV 2

221,437

16,427

58,600

3,444

49,924

9,647

359,479

199,477

160,002

Notional amount
CHF bn

20,656

1,557

4,757

82

706

194

27,952

PRV

174,994

7,895

81,377

1,919

20,487

1,739

288,411

160,111

128,300

31.12.04

NRV

183,210

9,353

79,046

1,590

44,107

1,616

318,922

160,111

158,811

Notional amount
CHF bn

15,398

671

3,729

61

721

41

20,621

1 PRV (Positive replacement values).

2 NRV (Negative replacement values).

200

Fiduciary Transactions

CHF million

Deposits:

with other banks

with Group banks

Loans and other ﬁnancial transactions

Total

Due to UBS Pension Plans, Loans to Corporate Bodies / Related Parties

CHF million

Due to UBS pension plans and UBS debt instruments held by pension plans

Securities borrowed from pension plans

Loans to directors, senior executives and auditors 1

31.12.05

31.12.04

% change from
31.12.04

37,171

1,382

0

38,553

30,581

740

6

31,327

22

87

(100 )

23

31.12.05

31.12.04

% change from
31.12.04

719

2,222

21

1,329

3,778

16

(46 )

(41 )

31

1 Loans to directors, senior executives and auditors are loans to members of the Board of Directors, the Group Executive Board and the Group’s ofﬁcial auditors under Swiss company law. This also
includes loans to companies which are controlled by these natural or legal persons. There are no loans to the auditors.

The employees of UBS AG are covered through the pension plans of UBS Group. The major Group pension plans are disclosed
in Note 30 of the Group’s Financial Statements.

a) Deﬁned beneﬁt plans
Swiss pension plan
In 2005, UBS AG contributed CHF 372 million (2004: CHF 336 million) to the Swiss pension plan of UBS Group.

Foreign pension plans
UBS Group operates various other pension plans in foreign locations which cover the employees of UBS AG and other em-
ployees of UBS Group at these locations. In 2005, UBS AG contributed CHF 82 million (2004: CHF 59 million) to these plans.

b) Deﬁned contribution plans
UBS  Group  also  sponsors  a  number  of  deﬁned  contribution  plans,  primarily  in  the  UK  and  the  US.  In  2005,  UBS  AG 
contributed CHF 60 million (2004: CHF 73 million) to these plans. 

Personnel

Parent Bank personnel was 38,189 on 31 December 2005 and 35,542 on 31 December 2004.

201

UBS AG (Parent Bank)
Report of the Statutory Auditors

202

UBS AG (Parent Bank)
Report of the Capital Increase Auditors

203

204

Additional Disclosure Required 
under SEC Regulations

Additional Disclosure Required under SEC Regulations
Table of Contents

Additional Disclosure Required 
under SEC Regulations
Table of Contents

Introduction

Selected Financial Data
Balance Sheet Data
US GAAP Income Statement Data
US GAAP Balance Sheet Data
Ratio of Earnings to Fixed Charges

Information on the Company

Information Required by Industry Guide 3
Selected Statistical Information
Average Balances and Interest Rates
Analysis of Changes in 
Interest Income and Expense
Deposits
Short-term Borrowings
Contractual Maturities of the Investments
in Debt Instruments
Due from Banks and Loans (gross)
Due from Banks and Loan Maturities (gross)
Impaired and Non-performing Loans
Cross-Border Outstandings
Summary of Movements in Allowances and 
Provisions for Credit Losses
Allocation of the Allowances and 
Provisions for Credit Losses
Due from Banks and Loans by 
Industry Sector (gross)
Loss History Statistics

207

207
209
210
211
211

211

212
212
212

214
216
217

218
219
220
221
222

223

225

226
227

A

B

C

D

206

A – Introduction

The following pages contain additional disclosure about UBS
Group which is required under SEC regulations.

Unless otherwise stated, UBS’s Financial Statements have
been prepared in accordance with International Financial Re-
porting Standards (IFRS) and are denominated in Swiss francs,

or CHF, the reporting currency of the Group. Certain ﬁnancial
information has also been presented in accordance with Uni-
ted  States  Generally  Accepted  Accounting  Principles  (US
GAAP).

B – Selected Financial Data

The tables below set forth, for the periods and dates indi-
cated, information concerning the noon buying rate for the
Swiss franc, expressed in United States dollars, or USD, per
one Swiss franc. The noon buying rate is the rate in New York

City for cable transfers in foreign currencies as certiﬁed for
customs purposes by the Federal Reserve Bank of New York.
On 28 February 2006, the noon buying rate was 0.7627

USD per 1 CHF.

Year ended 31 December

2001

2002

2003

2004

2005

Month

September 2005

October 2005

November 2005

December 2005

January 2006

February 2006

1 The average of the noon buying rates on the last business day of each full month during the relevant period.

Average rate 1
(USD per 1 CHF)

At period end

0.5910

0.6453

0.7493

0.8059

0.8039

0.5857

0.7229

0.8069

0.8712

0.7606

High

0.6331

0.7229

0.8189

0.8843

0.8721

High

0.8139

0.7855

0.7825

0.7820

0.7940

0.7788

Low

0.5495

0.5817

0.7048

0.7601

0.7544

Low

0.7712

0.7679

0.7544

0.7570

0.7729

0.7575

207

Additional Disclosure Required under SEC Regulations

B – Selected Financial Data (continued)

CHF million, except where indicated

Income statement data

Interest income

Interest expense

Net interest income

Credit loss (expense) / recovery

Net interest income after credit loss (expense) / recovery

Net fee and commission income

Net trading income

Other income

Income from Industrial Holdings

Total operating income

Total operating expenses

Operating proﬁt from continuing operations before tax

Tax expense

Net proﬁt from continuing operations

Net proﬁt from discontinued operations

Net proﬁt

Net proﬁt attributable to minority interests

Net proﬁt attributable to UBS shareholders

Cost / income ratio (%) 1

Per share data (CHF)

Basic earnings per share 2

Diluted earnings per share 2

Operating proﬁt before tax per share

Cash dividends declared per share (CHF) 3

Cash dividend equivalent in USD 3

Dividend payout ratio (%)

Rates of return (%)

Return on equity attributable to UBS shareholders 4

Return on average equity

Return on average assets

31.12.05

31.12.04

31.12.03

31.12.02

31.12.01

For the year ended

59,286

(49,758)

9,528

375

9,903

21,436

7,996

1,125

10,515

50,975

37,926

13,049

2,549

10,500

4,190

14,690

661

14,029

70.1

13.93

13.36

12.96

3.20

23.0

39.4

36.9

0.67

39,228

(27,484 )

11,744

241

11,985

18,506

4,902

932

6,086

42,411

32,124

10,287

2,224

8,063

407

8,470

454

8,016

73.2

7.78

7.40

9.99

3.00

2.54

38.6

25.5

23.6

0.44

40,045

(27,784 )

12,261

(102 )

12,159

16,673

3,670

225

2,900

35,627

28,355

7,272

1,419

5,853

400

6,253

349

5,904

76.8

5.44

5.19

6.70

2.60

2.00

47.8

17.8

16.8

0.38

39,896

(29,417 )

10,479

(112 )

10,367

17,481

5,381

285

1,245

34,759

31,007

3,752

597

3,155

210

3,365

348

3,017

84.7

2.59

2.54

3.22

2.00

1.46

77.2

8.2

7.6

0.20

52,187

(44,236 )

7,951

(499 )

7,452

19,440

8,732

609

1,691

37,924

31,723

6,201

1,359

4,842

445

5,287

356

4,931

79.1

4.05

3.90

5.09

0.00

0.00

12.4

11.9

0.36

1 Operating expenses / operating income before credit loss expense for Financial Businesses.
3 Dividends are normally declared and paid
in the year subsequent to the reporting period. In 2001 an amount of CHF 1.60 per share was distributed to shareholders in the form of a par value reduction, in respect of 2000. No dividend was paid
out for the year 2001. A par value reduction of CHF 2.00 per share was paid on 10 July 2002. A dividend of CHF 2.00 per share was paid on 23 April 2003, CHF 2.60 on 20 April 2004 and CHF 3.00 on
26 April 2005. A dividend of CHF 3.20 per share will be paid on 24 April 2006, and a par value reduction of CHF 0.60 per share will be distributed in July 2006 subject to approval by shareholders at
the Annual General Meeting. The USD amount per share will be determined on 20 April 2006.
4 Net proﬁt attributable to UBS shareholders / average equity attributable to UBS shareholders less
distributions.

2 For EPS calculation, see Note 8 to the Financial Statements.

208

B – Selected Financial Data (continued)

CHF million, except where indicated

31.12.05

31.12.04

As at

31.12.03

31.12.02

31.12.01

Balance sheet data

Total assets

Equity attributable to UBS shareholders

Average equity to average assets (%)

Market capitalization

Shares

Registered ordinary shares

Treasury shares

BIS capital ratios

Tier 1 (%)

Total BIS (%)

Risk-weighted assets

Invested assets (CHF billion)

Personnel Financial Businesses (full-time equivalents)

Switzerland

Europe (excluding Switzerland)

Americas

Asia Paciﬁc

Total

Long-term ratings 1

Fitch, London

Moody’s, New York

Standard & Poor’s, New York

2,060,250

1,737,118

1,553,979

1,350,852

1,258,093

44,324

1.81

131,949

33,941

1.86

103,638

33,659

2.25

95,401

36,010

2.67

79,448

40,873

3.03

105,475

1,088,632,522

1,126,858,177

1,183,046,764

1,256,297,678

1,281,717,499

104,259,874

124,663,310

136,741,227

141,230,691

89,804,451

12.9

14.1

310,409

2,652

26,028

11,007

27,136

5,398

69,569

AA+

Aa2

AA+

11.9

13.8

264,832

2,217

25,990

10,764

26,232

4,438

67,424

AA+

Aa2

AA+

12.0

13.5

252,398

2,098

26,662

9,906

25,511

3,850

65,929

AA+

Aa2

AA+

11.3

13.8

238,790

1,959

27,972

10,009

27,350

3,730

69,061

AAA

Aa2

AA+

11.6

14.8

253,735

2,448

29,163

9,650

27,463

3,709

69,985

AAA

Aa2

AA+

1 See the Handbook 2005/2006, page 57 for information about the nature of these ratings.

Balance Sheet Data

CHF million

Assets

Total assets

Due from banks

Cash collateral on securities borrowed

Reverse repurchase agreements

Trading portfolio assets

Trading portfolio assets pledged as collateral

Positive replacement values

Loans

Liabilities and Equity

Due to banks

Cash collateral on securities lent

Repurchase agreements

Trading portfolio liabilities

Negative replacement values

Financial liabilities designated at fair value

Due to customers

Debt issued

Equity attributable to UBS shareholders

31.12.05

31.12.04

As at

31.12.03

31.12.02

31.12.01

2,060,250

1,737,118

1,553,979

1,350,852

1,258,093

33,644

300,331

404,432

499,297

154,759

333,782

269,969

124,328

77,267

478,508

188,631

337,663

117,401

451,533

160,710

44,324

35,419

220,242

357,164

389,487

159,115

284,577

232,167

120,026

61,545

422,587

171,033

303,712

65,756

376,076

117,856

33,941

31,959

213,932

320,499

354,558

120,759

248,206

212,670

129,084

53,278

415,863

143,957

254,768

35,286

346,577

88,874

33,659

32,777

139,049

294,067

261,080

110,365

247,421

211,707

83,561

36,870

366,858

106,453

247,206

14,516

306,876

115,798

36,010

27,736

162,938

269,256

397,888

73,447

226,535

107,031

30,317

368,620

105,798

71,443

333,781

158,307

40,873

209

Additional Disclosure Required under SEC Regulations

B – Selected Financial Data (continued)

US GAAP Income Statement Data

CHF million

Operating income

Interest income

Interest expense

Net interest income

Credit loss (expense) / recovery

Net interest income after credit loss (expense) / recovery

Net fee and commission income

Net trading income

Other income

Revenues from Industrial Holdings

Total operating income

Operating expenses

Personnel expenses

General and administrative expenses

Depreciation of property and equipment

Amortization of goodwill

Amortization of other intangible assets

Goods and materials purchased

Restructuring costs

Total operating expenses

Operating proﬁt from continuing operations before tax

Tax expense

Minority interests

Net proﬁt from continuing operations

Net proﬁt from discontinued operations

Change in accounting principle: cumulative effect of adoption of 
“AICPA Audit and Accounting Guide, Audits of Investment Companies”
on certain ﬁnancial investments, net of tax

Cumulative adjustment of accounting for certain equity-based 
compensation plans as cash settled, net of tax

Cumulative adjustment due to the adoption of SFAS 123 (revised 2004),
“Share-Based Payment” on 1 January 2005, net of tax

Net proﬁt

31.12.05

31.12.04

31.12.03

31.12.02

31.12.01

For the year ended

59,039

(49,588)

9,451

375

9,826

21,436

6,864

793

8,674

47,593

20,220

6,667

1,414

0

201

7,142

0

35,644

11,949

3,078

(410)

8,461

3,853

38

12,352

39,802

(27,628 )

12,174

(74 )

12,100

16,606

3,944

382

39,612

(29,334 )

10,278

(112 )

10,166

17,481

5,870

(65 )

51,817

(44,096 )

7,721

(499 )

7,222

19,440

8,889

504

33,032

33,452

36,055

17,234

5,917

1,368

0

110

0

24,629

8,403

1,790

(350 )

6,263

250

19,294

7,465

1,759

2,385

298

112

31,313

4,742

1,323

(344 )

3,075

159

18,224

6,953

1,573

0

1,443

0

28,193

5,259

456

(331 )

4,472

435

639

38,991

(27,245 )

11,746

334

12,080

18,435

4,795

1,180

3,648

40,138

18,297

6,545

1,365

0

180

2,861

0

29,248

10,890

2,015

(435 )

8,440

372

6

8,818

6,513

5,546

3,234

210

B – Selected Financial Data (continued)

US GAAP Balance Sheet Data

CHF million

Assets

Total assets

Due from banks

Cash collateral on securities borrowed

Reverse repurchase agreements

Trading portfolio assets

Trading portfolio assets pledged as collateral

Positive replacement values 1

Loans

Goodwill

Other intangible assets

Other assets

Liabilities and Equity

Due to banks

Cash collateral on securities lent

Repurchase agreements

Trading portfolio liabilities

Obligation to return securities received as collateral

Negative replacement values 1

Due to customers

Accrued expenses and deferred income

Debt issued

Shareholders’ equity

31.12.05

31.12.04

As at

31.12.03

31.12.02

31.12.01

2,322,261

1,903,186

1,699,007

1,296,938

1,361,920

33,427

274,099

404,432

607,432

152,237

337,409

267,530

28,104

1,665

116,831

127,252

66,916

482,843

193,965

67,430

432,171

466,410

18,707

240,212

60,475

35,286

218,414

357,164

449,389

159,115

284,468

228,968

26,977

1,722

101,068

119,021

57,792

423,513

190,907

12,950

360,345

386,913

14,830

164,744

52,668

31,758

211,058

320,499

423,733

120,759

248,924

212,729

26,775

1,174

64,381

127,385

51,157

415,863

149,380

13,071

326,136

347,358

13,673

123,259

53,174

32,481

139,073

294,086

331,480

110,365

83,757

211,755

28,127

1,222

21,314

83,178

36,870

366,858

117,721

16,308

132,354

306,872

15,330

129,527

55,576

27,550

162,566

269,256

455,406

73,474

226,747

29,255

4,510

36,972

106,531

30,317

368,620

119,528

10,931

116,666

333,766

17,289

156,462

59,282

1 Positive and negative replacement values represent the fair value of derivative instruments. From 2003 onwards, they are presented on a gross basis under US GAAP.

Ratio of Earnings to Fixed Charges

The following table sets forth UBS’s ratio of earnings to ﬁxed charges for the periods indicated. Ratios of earnings to com-
bined ﬁxed charges and preferred stock dividend requirements are not presented as there were no preferred share dividends
in any of the periods indicated.

IFRS 1

US GAAP 1

For the year ended

31.12.05

31.12.04

31.12.03

31.12.02

31.12.01

1.24

1.23

1.35

1.37

1.24

1.28

1.11

1.17

1.13

1.10

1 The ratio is provided using both IFRS and US GAAP values, since the ratio is materially different under the two accounting standards.

C – Information on the Company

Property, Plant and Equipment
At  31  December  2005,  UBS  Financial  Businesses  operated
about 1,061 business and banking locations worldwide, of
which about 44% were in Switzerland, 44% in the Americas,
10% in the rest of Europe, Middle East and Africa and 2% in
Asia-Paciﬁc. 39% of the business and banking locations in
Switzerland were owned directly by UBS, with the remainder,
along with most of UBS’s ofﬁces outside Switzerland, being
held under commercial leases.

At 31 December 2005, the Industrial Holdings segment
operated about 303 business locations worldwide, of which
about 21% were in Switzerland, 71% in the rest of Europe,
Middle East and Africa, 7% in the Americas and 1% in Asia-
Paciﬁc. 76% of the business locations worldwide were held
under commercial leases.

These  premises  are  subject  to  continuous  maintenance
and upgrading and are considered suitable and adequate for
current and anticipated operations.

211

Additional Disclosure Required under SEC Regulations

D – Information Required by Industry Guide 3 (continued)

Selected Statistical Information
The tables below set forth selected statistical information re-
garding the Group’s banking operations extracted from the
Financial  Statements.  Unless  otherwise  indicated,  average
balances for the years ended 31 December 2005, 31 Decem-

ber 2004 and 31 December 2003 are calculated from month-
ly data. The distinction between domestic and foreign is gen-
erally based on the booking location. For loans, this method
is  not  signiﬁcantly  different  from  an  analysis  based  on  the
domicile of the borrower.

Average Balances and Interest Rates

The following table sets forth average interest-earning assets and average interest-bearing liabilities, along with the average
rates, for the years ended 31 December 2005, 2004 and 2003.

31.12.05

Average
balance

Interest

Average
rate (%)

Average
balance

31.12.04

Interest

31.12.03

Average
rate (%)

Average
balance

Interest

Average
rate (%)

15,467

25,497

270

1,334

33,012

787,389

1,079

22,562

15,545

457

580,763

23,630

3,390

58

584,153

23,688

616

691

0

26

174,299

81,264

5,424

3,241

1,036

3,546

3,546

1,722,515

3

83

83

58,167

1,119

1.7

5.2

3.3

2.9

2.9

4.1

1.7

4.1

3.8

3.1

4.0

0.3

2.3

2.3

3.4

12,463

23,843

154

397

17,969

710,065

10,122

513,922

2,309

457

10,549

336

18,914

27

516,231

18,941

196

0

0

0

168,456

60,145

5,308

1,813

1,132

3,000

0

3,000

1,523,622

17

21

0

21

37,993

1,235

1.2

1.7

2.5

1.5

3.3

3.7

1.2

3.7

3.2

3.0

1.5

0.7

0.0

0.7

2.5

11,417

21,317

158

1,064

6,576

200

582,066

10,948

7,990

219

421,413

18,151

1,668

21

423,081

18,172

0

0

0

0

165,397

51,459

6,357

1,805

1,988

2,880

0

2,880

27

30

0

30

1,274,171

38,980

1,065

1,722,515

59,286

3.4

1,523,622

39,228

2.6

1,274,171

40,045

319,698

9,308

55,125

2,106,646

246,952

8,808

53,087

1,832,469

249,155

12,874

29,750

1,565,950

1.4

5.0

3.0

1.9

2.7

4.3

1.3

4.3

3.8

3.5

1.4

1.0

0.0

1.0

3.1

3.1

CHF million, except where indicated

Assets

Due from banks

Domestic

Foreign

Cash collateral on securities borrowed and
reverse repurchase agreements

Domestic

Foreign

Trading portfolio assets

Domestic

Foreign taxable

Foreign non-taxable

Foreign total

Financial assets designated at fair value

Domestic

Foreign

Loans

Domestic

Foreign

Financial investments

Domestic

Foreign taxable

Foreign non-taxable

Foreign total

Total interest-earning assets

Net interest on swaps

Interest income and average 
interest-earning assets

Non-interest-earning assets

Positive replacement values

Fixed assets

Other

Total average assets

212

D – Information Required by Industry Guide 3 (continued)

31.12.05

Average
balance

Interest

Average
rate (%)

Average
balance

31.12.04

Interest

31.12.03

Average
rate (%)

Average
balance

Interest

Average
rate (%)

CHF million, except where indicated

Liabilities and Equity

Due to banks

Domestic

Foreign

Cash collateral on securities
lent and repurchase agreements

Domestic

Foreign

Trading portfolio liabilities

Domestic

Foreign

Financial liabilities designated at fair value

Domestic

Foreign

Due to customers

Domestic demand deposits

Domestic savings deposits

Domestic time deposits

Domestic total

Foreign 1

Short-term debt

Domestic

Foreign

Long-term debt

Domestic

Foreign

35,713

92,431

897

3,321

40,772

881

661,722

19,745

3,632

145

173,394

10,591

638

5

86,688

2,385

67,987

86,373

24,245

178,605

236,228

1,584

96,767

4,250

43,035

292

404

386

1,082

5,760

20

2,905

117

1,904

Total interest-bearing liabilities

1,655,459

49,758

Non-interest-bearing liabilities

Negative replacement values

Other

Total liabilities

Total equity

Total average liabilities and equity 

Net interest income

Net yield on interest-earning assets

335,992

70,292

2,061,743

44,903

2,106,646

1 Due to customers in foreign ofﬁces consists mainly of time deposits.

2.5

3.6

2.2

3.0

4.0

6.1

0.8

2.8

0.4

0.5

1.6

0.6

2.4

1.3

3.0

2.8

4.4

3.0

31,129

96,335

33,846

614,295

3,717

161,286

385

1,582

489

9,525

180

7,813

85

1

49,234

1,167

67,005

84,112

19,052

170,169

192,992

246

79,902

10,358

28,259

167

414

250

831

2,677

0

1,338

168

1,328

1,471,853

27,484

260,629

60,482

1,792,964

39,505

1,832,469

1.2

1.6

1.4

1.6

4.8

4.8

1.2

2.4

0.2

0.5

1.3

0.5

1.4

28,719

74,695

116

1,747

23,287

515,665

3,252

127,104

0

22,445

55,496

81,963

21,125

158,584

161,738

295

9,328

156

9,769

0

751

100

527

357

984

2,149

64

0

1.7

73,193

1,015

1.6

4.7

1.9

6,413

30,805

188

1,286

1,225,964

27,784

254,819

46,025

1,526,808

39,142

1,565,950

0.4

2.3

1.3

1.8

4.8

7.7

3.3

0.2

0.6

1.7

0.6

1.3

0.0

1.4

2.9

4.2

2.3

9,528

11,744

12,261

0.6

0.8

1.0

The percentage of total average interest-earning assets attrib-
utable to foreign activities was 86% for 2005 (86% for 2004
and 85% for 2003). The percentage of total average interest-
bearing liabilities attributable to foreign activities was 84%
for 2005 (83% for 2004 and 82% for 2003). All assets and
liabilities are translated into CHF at uniform month-end rates.
Interest income and expense are translated at monthly aver-
age rates.

Average rates earned and paid on assets and liabilities can
change from period to period based on the changes in inter-
est rates in general, but are also affected by changes in the
currency mix included in the assets and liabilities. This is espe-
cially true for foreign assets and liabilities. Tax-exempt income
is not recorded on a tax-equivalent basis. For all three years
presented, tax-exempt income is considered to be insigniﬁcant
and the impact from such income is therefore negligible.

213

Additional Disclosure Required under SEC Regulations

D – Information Required by Industry Guide 3 (continued)

Analysis of Changes in Interest Income and Expense

The following tables allocate, by categories of interest-earn-
ing assets and interest-bearing liabilities, the changes in inter-
est income and expense due to changes in volume and inter-
est rates for the year ended 31 December 2005 compared
with  the  year  ended  31  December  2004,  and  for  the  year
ended 31 December 2004 compared with the year ended 31

December 2003. Volume and rate variances have been calcu-
lated on movements in average balances and changes in in-
terest rates. Changes due to a combination of volume and
rates have been allocated proportionally. Refer to page 221
of Industry Guide 3 for a discussion of the treatment of im-
paired, non-performing and restructured loans.

2005 compared with 2004

2004 compared with 2003

Increase / (decrease)
due to changes in

Increase / (decrease)
due to changes in

Average
volume

Average
rate

Net
change

Average
volume

Average
rate

Net
change

36

28

376

1,160

179

2,473

13

2,486

0

26

187

634

(1)

4

0

4

80

909

246

116

937

622

10,853

12,013

(58)

2,243

18

2,261

0

0

(71)

794

(13)

58

0

58

121

4,716

31

4,747

0

26

116

1,428

(14)

62

0

62

961

19,213

20,174

(116)

20,058

777

4,338

5,115

184

14,875

15,059

15

126

342

2,432

58

3,978

8

3,986

0

0

116

304

(12 )

1

0

1

519

6,849

7,368

(19 )

(793 )

(85 )

(2,831 )

59

(3,215 )

(2 )

(3,217 )

0

0

(4 )

(667 )

257

(399 )

117

763

6

769

0

0

(1,165 )

(296 )

(1,049 )

8

2

(10 )

0

(10 )

(1,208 )

(7,147 )

(8,355 )

(10 )

(9 )

0

(9 )

(689 )

(298 )

(987 )

170

(817 )

CHF million

Interest income from interest-earning assets

Due from banks

Domestic

Foreign

Cash collateral on securities borrowed and reverse repurchase agreements

Domestic

Foreign

Trading portfolio assets

Domestic

Foreign taxable

Foreign non-taxable

Foreign total

Financial assets designated at fair value

Domestic

Foreign

Loans

Domestic

Foreign

Financial investments

Domestic

Foreign taxable

Foreign non-taxable

Foreign total

Interest income

Domestic

Foreign

Total interest income from interest-earning assets

Net interest on swaps

Total interest income

214

D – Information Required by Industry Guide 3 (continued)

Analysis of Changes in Interest Income and Expense (continued)

CHF million

Interest expense on interest-bearing liabilities

Due to banks

Domestic

Foreign

Cash collateral on securities lent and repurchase agreements

Domestic

Foreign

Trading portfolio liabilities

Domestic

Foreign

Financial liabilities designated at fair value

Domestic

Foreign

Due to customers

Domestic demand deposits

Domestic savings deposits

Domestic time deposits

Domestic total

Foreign

Short-term debt

Domestic

Foreign

Long-term debt

Domestic

Foreign

Interest expense

Domestic

Foreign

Total interest expense

2005 compared with 2004

2004 compared with 2003

Increase / (decrease)
due to changes in

Increase / (decrease)
due to changes in

Average
volume

Average
rate

Net
change

Average
volume

Average
rate

Net
change

55

(62)

97

759

(4)

581

7

899

2

11

68

81

605

20

287

(98)

694

158

3,763

3,921

457

1,801

295

9,461

(31)

2,197

(3)

319

123

(21)

68

170

512

1,739

392

10,220

(35)

2,778

4

1,218

125

(10)

136

251

2,478

3,083

0

1,280

47

(118)

20

1,567

(51)

576

935

17,418

18,353

1,093

21,181

22,274

10

498

137

1,775

22

2,632

0

884

23

13

(35 )

1

406

0

94

114

(107 )

284

6,182

6,466

259

(663 )

57

(1,578 )

2

269

(165 )

194

197

24

(4,588 )

(1,956 )

1

(468 )

44

(126 )

(72 )

(154 )

122

0

229

(134 )

149

31

(6,797 )

(6,766 )

1

416

67

(113 )

(107 )

(153 )

528

0

323

(20 )

42

315

(615 )

(300 )

215

Additional Disclosure Required under SEC Regulations

D – Information Required by Industry Guide 3 (continued)

Deposits
The following table analyzes average deposits and the aver-
age rates on each deposit category listed below for the years
ended 31 December 2005, 2004 and 2003. The geographic
allocation  is  based  on  the  location  of  the  ofﬁce  or  branch

where the deposit is made. Deposits by foreign depositors in
domestic ofﬁces were CHF 54,968 million, CHF 49,699 mil-
lion  and  CHF  49,857  million  at  31  December  2005,  31
December 2004 and 31 December 2003, respectively.

CHF million, except where indicated

31.12.05

31.12.04

31.12.03

Average
deposit

Average
rate (%)

Average
deposit

Average
rate (%)

Average
deposit

Average
rate (%)

Banks

Domestic ofﬁces

Demand deposits

Time deposits

Total domestic ofﬁces

Foreign ofﬁces

Interest-bearing deposits 1

Total due to banks

Customer accounts

Domestic ofﬁces

Demand deposits

Savings deposits

Time deposits

Total domestic ofﬁces

Foreign ofﬁces

Interest-bearing deposits 1

Total due to customers

1 Mainly time deposits.

8,491

6,976

15,467

25,497

40,964

67,987

86,373

24,245

178,605

236,228

414,833

0.1

3.3

1.5

3.6

2.8

0.4

0.5

1.6

0.6

2.4

1.6

7,770

4,693

12,463

23,843

36,306

67,005

84,112

19,052

170,169

192,992

363,161

0.1

1.7

0.7

1.6

1.3

0.2

0.5

1.3

0.5

1.4

1.0

3,836

7,581

11,417

21,317

32,734

55,496

81,963

21,125

158,584

161,738

320,322

0.0

0.6

0.4

2.4

1.7

0.2

0.6

1.7

0.6

1.3

1.0

At 31 December 2005, the maturity of time deposits exceeding CHF 150,000, or an equivalent amount in other currencies,
was as follows:

Domestic

26,427

1,588

823

581

296

Foreign

179,430

3,779

2,745

1,606

60

29,715

187,620

CHF million

Within 3 months

3 to 6 months

6 to 12 months

1 to 5 years

Over 5 years

Total time deposits

216

D – Information Required by Industry Guide 3 (continued)

Short-term Borrowings

The following table presents the period-end, average and maximum month-end outstanding amounts for short-term bor-
rowings, along with the average rates and period-end rates at and for the years ended 31 December 2005, 2004 and 2003.

CHF million, except where indicated

31.12.05 31.12.04 31.12.03 31.12.05 31.12.04 31.12.03 31.12.05 31.12.04 31.12.03

Money market paper issued

Due to banks

Repurchase agreements 1

Period-end balance

Average balance

Maximum month-end balance

Average interest rate during the period (%)

Average interest rate at period-end (%)

102,662

98,351

112,217

3.0

4.0

79,442

80,148

94,366

1.7

2.1

58,115

90,651

73,257

87,180

84,351

91,158

90,615 667,317 557,892

500,592

70,680 628,362 587,988

498,679

92,605 101,178 115,880

96,694 719,208 637,594

593,738

1.4

1.3

3.3

3.0

1.6

2.0

2.8

1.5

3.0

2.6

1.5

2.0

1.8

1.3

1 For the purpose of this disclosure, balances are presented on a gross basis.

217

Additional Disclosure Required under SEC Regulations

D – Information Required by Industry Guide 3 (continued)

Contractual Maturities of Investments in Debt Instruments 1,2

CHF million, except percentages

31 December 2005

Swiss national government and agencies

Swiss local governments

US Treasury and agencies

Foreign governments and ofﬁcial institutions

Corporate debt securities

Mortgage-backed securities

Other debt securities

Total fair value

CHF million, except percentages

31 December 2004

Swiss national government and agencies

Swiss local governments

Foreign governments and ofﬁcial institutions

Corporate debt securities

Mortgage-backed securities

Other debt securities

Total fair value

CHF million, except percentages

31 December 2003

Swiss national government and agencies

Swiss local governments

Foreign governments and ofﬁcial institutions

Corporate debt securities

Mortgage-backed securities

Other debt securities

Total fair value

Within 1 year

1–5 years

5–10 years

Over 10 years

Amount Yield (%)

Amount Yield (%)

Amount Yield (%)

Amount Yield (%)

0.00

0.00

0.00

1.91

3.20

0.00

0.00

0

0

0

38

13

0

0

51

4.36

0.00

5.51

1.90

4.25

0.00

0.00

2

0

42

2

239

0

0

285

0.00

0.00

5.77

5.64

5.38

3.92

0.00

0

0

10

5

66

14

0

95

4.00

0.00

6.03

6.17

5.66

4.80

0.00

1

0

12

2

103

129

0

247

Within 1 year

1–5 years

5–10 years

Over 10 years

Amount Yield (%)

Amount Yield (%)

Amount Yield (%)

Amount Yield (%)

5.50

3.97

2.13

2.74

2.50

0.00

1

10

36

57

3

0

107

4.29

4.14

1.25

2.92

0.00

0.00

2

10

4

50

0

0

66

3.80

0.00

0.00

0.00

3.21

0.00

6

0

0

0

5

0

11

4.00

0.00

0.00

0.00

4.36

0.00

1

0

0

33

64

0

98

Within 1 year

1–5 years

5–10 years

Over 10 years

Amount Yield (%)

Amount Yield (%)

Amount Yield (%)

Amount Yield (%)

6.61

3.90

1.89

1.09

0.00

0.00

3

5

45

81

0

4

138

2.92

2.01

1.49

3.53

0.00

0.00

4

20

9

68

0

8

109

3.80

0.00

0.00

7.38

0.00

0.00

6

0

0

7

0

0

13

4.00

0.00

0.00

0.00

0.00

0.00

1

0

0

0

0

0

1

1 Money market paper has a contractual maturity of less than one year.

2 Average yields are calculated on an amortized cost basis for all years presented.

218

D – Information Required by Industry Guide 3 (continued)

Due from Banks and Loans (gross)

Loans are widely dispersed over industry sectors both within
and outside Switzerland. With the exception of private house-
holds (foreign and domestic), banks and ﬁnancial institutions
outside  Switzerland,  and  real  estate  and  rentals  in  Swit-
zerland, there is no material concentration of loans. For fur-
ther  discussion  of  the  loan  portfolio,  see  the  Handbook

2005/2006. The following table illustrates the diversiﬁcation
of the loan portfolio among industry sectors at 31 December
2005, 2004, 2003, 2002 and 2001. The industry categories
presented are consistent with the classiﬁcation of loans for re-
porting to the Swiss Federal Banking Commission and Swiss
National Bank.

CHF million

Domestic 1

Banks

Construction

Financial institutions

Hotels and restaurants

Manufacturing 2

Private households

Public authorities

Real estate and rentals

Retail and wholesale

Services 3

Other 4

Total domestic

Foreign 1

Banks

Chemicals

Construction

Electricity, gas and water supply

Financial institutions

Manufacturing 5

Mining

Private households

Public authorities

Real estate and rentals

Retail and wholesale

Services

Transport, storage and communication

Other 6

Total foreign

Total gross

31.12.05

31.12.04

31.12.03

31.12.02

31.12.01

1,407

1,816

4,213

2,044

5,038

111,549

5,494

11,792

4,808

9,300

1,004

1,406

1,943

4,332

2,269

5,485

105,160

5,460

11,466

4,908

9,110

591

619

2,175

4,009

2,440

6,478

102,180

5,251

12,449

6,062

9,493

1,014

1,029

2,838

4,301

2,655

7,237

95,295

5,529

13,573

7,172

10,237

1,722

1,533

3,499

5,673

2,950

8,686

93,746

5,222

14,992

8,674

12,161

1,860

158,465

152,130

152,170

151,588

158,996

32,282

2,716

295

1,637

52,365

3,899

2,694

38,280

1,501

2,707

1,257

5,596

1,419

156

146,804

305,269

34,269

31,405

366

122

745

35,459

2,758

1,695

30,237

1,228

940

1,102

8,002

762

318

118,003

270,133

245

84

249

23,493

2,421

1,114

21,195

1,224

473

1,880

7,983

3,658

432

95,856

248,026

31,882

519

153

1,105

18,378

2,300

868

33,063

2,628

616

1,367

1,654

676

2,314

26,728

1,080

266

977

14,458

4,258

1,313

25,619

6,454

10,227

1,732

4,786

2,117

2,956

97,523

249,111

102,971

261,967

1 Includes Due from banks and Loans from Industrial Holdings of CHF 728 million at 31 December 2005, CHF 909 million at 31 December 2004 and CHF 220 million at 31 December 2003.
chemicals, food and beverages.
water supply.

3 Includes transportation, communication, health and social work, education and other social and personal service activities.

2 Includes
4 Includes mining and electricity, gas and

6 Includes hotels and restaurants.

5 Includes food and beverages.

219

Additional Disclosure Required under SEC Regulations

D – Information Required by Industry Guide 3 (continued)

Due from Banks and Loans (gross) (continued)

The following table analyzes the Group’s mortgage portfolio by geographic origin of the client and type of mortgage at 31
December 2005, 2004, 2003, 2002 and 2001. Mortgages are included in the industry categories mentioned above.

CHF million

Mortgages

Domestic

Foreign

Total gross mortgages

Mortgages

Residential

Commercial

Total gross mortgages

31.12.05

31.12.04

31.12.03

31.12.02

31.12.01

130,880

15,619

146,499

127,990

18,509

146,499

124,496

12,185

136,681

117,731

18,950

136,681

122,069

7,073

129,142

109,980

19,162

129,142

116,359

11,510

127,869

108,779

19,090

127,869

116,628

9,583

126,211

101,969

24,242

126,211

Due from Banks and Loan Maturities (gross)

The following table discloses loans by maturity at 31 December 2005. The determination of maturities is based on contract
terms. Information on interest rate sensitivities can be found in Note 28 to the Financial Statements.

CHF million

Domestic

Banks

Mortgages

Other loans

Total domestic

Foreign

Banks

Mortgages

Other loans

Total foreign

Total gross 1

Within 1 year

1 to 5 years

Over 5 years

Total

1,101

51,060

19,372

71,533

30,542

13,956

88,568

133,066

204,599

294

65,686

5,318

71,298

1,523

1,381

8,155

11,059

82,357

12

14,134

1,488

15,634

217

282

2,180

2,679

18,313

1,407

130,880

26,178

158,465

32,282

15,619

98,903

146,804

305,269

At 31 December 2005, the total amounts of Due from banks and loans due after one year granted at ﬁxed and ﬂoating rates
are as follows:

CHF million

Fixed-rate loans

Adjustable or ﬂoating-rate loans

Total

1 Includes Due from banks from Industrial Holdings of CHF 728 million at 31 December 2005.

1 to 5 years

Over 5 years

79,139

3,218

82,357

16,923

1,390

18,313

Total

96,062

4,608

100,670

220

D – Information Required by Industry Guide 3 (continued)

Impaired and Non-performing Loans

A loan (included in Due from banks or Loans) is classiﬁed as
non-performing: 1) when the payment of interest, principal
or fees is overdue by more than 90 days and there is no ﬁrm
evidence that they will be made good by later payments or
the liquidation of collateral; 2) when insolvency proceedings
have commenced; or 3) when obligations have been restruc-
tured on concessionary terms.

The  gross  interest  income  that  would  have  been  re-
corded on non-performing  loans  was  CHF  81 million  for
domestic loans and CHF 8 million for foreign loans for the
year ended 31 December 2005, CHF 107 million for domestic
loans and CHF 17 million for foreign loans for the year ended
31 December 2004, CHF 171 million  for  domestic  loans
and CHF  23  million  for  foreign  loans  for  the  year  ended
31 December 2003,  CHF 148  million  for  domestic  loans
and CHF  53  million  for  foreign  loans  for  the  year  ended 

31 December 2002 and CHF 336 million for all non-perform-
ing loans for the year ended 31 December 2001.

The amount of interest income that was included in net in-
come  for  those  loans  was  CHF  72  million  for  domestic
loans and CHF 9 million for foreign loans for the year ended
31 December 2005, CHF 106  million  for  domestic  loans
and CHF  8  million  for  foreign  loans  for  the  year  ended
31 December 2004, CHF 163  million  for  domestic  loans
and CHF  8  million  for  foreign  loans  for  the  year  ended
31 December 2003, CHF 152  million  for  domestic  loans
and CHF  22  million  for  foreign  loans  for  the  year  ended
31 December 2002 and CHF 201 million for all non-perform-
ing  loans  for  the  year  ended  31 December 2001. The  table
below  provides  an  analysis  of  the  Group’s  non-performing
loans. For further information see the Handbook 2005/2006.

CHF million

Non-performing loans:

Domestic

Foreign

Total non-performing loans

31.12.05

31.12.04

31.12.03

31.12.02

31.12.01

2,106

257

2,363

2,772

783

3,555

4,012

746

4,758

4,609

1,170

5,779

6,531

1,882

8,413

UBS does not, as a matter of policy, typically restructure loans
to accrue interest at rates different from the original contrac-
tual terms or reduce the principal amount of loans. Instead,
speciﬁc  loan  allowances  are  established  as  necessary.
Unrecognized interest related to restructured loans was not
material  to  the  results  of  operations  in  2005,  2004,  2003,
2002 or 2001.

In addition to the non-performing loans shown above, the
Group had CHF 1,071 million, CHF 1,144 million, CHF 2,241
million, CHF 3,875 million and CHF 5,990 million in “other
impaired  loans”  for  the  years  ended  31 December 2005,

2004, 2003, 2002 and 2001, respectively. For the years ended
31 December 2003,  2002  and  2001,  these  are  loans  that
are current  or  less  than  90  days  in  arrears  with  respect  to
payment  of  principal  or  interest;  and  for  the  years  ended
31 December 2005 and 2004, these are loans not considered
“non-performing”  in  accordance  with  Swiss  regulatory
guidelines,  but  where  the  Group’s  credit  ofﬁcers  have  ex-
pressed  doubts  as  to  the  ability  of  the  borrowers  to  repay
the loans. As at 31 December 2005 and 31 December 2004,
speciﬁc allowances of CHF 200 million and CHF 241 million,
respectively, had been established against these loans.

221

Additional Disclosure Required under SEC Regulations

D – Information Required by Industry Guide 3 (continued)

Cross-Border Outstandings

Cross-border outstandings consist of general banking prod-
ucts such as loans (including unutilized commitments) and de-
posits  with  third  parties,  credit  equivalents  of  over-the-
counter (OTC) derivatives and repurchase agreements, and
the market value of the inventory of securities. Outstandings
are monitored and reported on an ongoing basis by the credit
risk management and control organization with a dedicated
country risk information system. With the exception of the 32
most developed economies, these exposures are rigorously
limited. The following analysis excludes Due from banks and
Loans from Industrial Holdings.

Claims  that  are  secured  by  third-party  guarantees  are
recorded  against  the  guarantor’s  country  of  domicile.  Out-
standings that are secured by collateral are recorded against

the country where the asset could be liquidated. This follows
the “Guidelines for the Management of Country Risk”, which
are applicable to all banks that are supervised by the Swiss
Federal Banking Commission.

The following tables list those countries for which cross-
border  outstandings  exceeded  0.75%  of  total  assets  at
31 December 2005, 2004 and 2003. At 31 December 2005,
there  were  no  outstandings  that  exceeded  0.75%  of  total
assets  in  any  country  currently  facing  liquidity  problems
that the Group expects would materially affect the country’s
ability to service its obligations.

For more information on cross-border exposure, see the

Handbook 2005/2006.

Private Sector

Public Sector

Total % of total assets

31.12.05

140,905

10,202

8,975

13,351

3,012

171,638

28,577

22,660

20,490

17,814

23,855

1,338

11,015

624

11,370

31.12.04

8.3

1.4

1.1

1.0

0.9

Private Sector

Public Sector

Total % of total assets

114,202

5,977

2,699

10,409

11,929

6,835

132,085

31,994

24,090

21,247

20,578

15,170

9,150

7,351

16,803

9,472

328

2,776

31.12.03

7.6

1.8

1.4

1.2

1.2

0.9

Private Sector

Public Sector

Total % of total assets

108,461

2,233

5,884

11,344

5,604

7,845

8,138

18,289

1,270

550

4,271

4,001

126,724

25,269

24,654

20,234

14,716

13,477

8.2

1.6

1.6

1.3

0.9

0.9

Banks

6,878

17,037

2,670

6,515

3,432

Banks

8,733

18,666

4,588

1,366

8,321

5,559

Banks

10,125

4,747

17,499

8,340

4,841

1,630

CHF million

United States

Germany

Japan

United Kingdom

Italy

CHF million

United States

Germany

Italy

Japan

United Kingdom

France

CHF million

United States

Italy

Germany

United Kingdom

France

Japan

222

D – Information Required by Industry Guide 3 (continued)

Summary of Movements in Allowances and Provisions for Credit Losses

The following table provides an analysis of movements in al-
lowances and provisions for credit losses. The following analy-
sis includes Due from banks from Industrial Holdings.

UBS writes off loans against allowances only on ﬁnal set-
tlement of bankruptcy proceedings, the sale of the underly-

ing assets and / or in case of debt forgiveness. Under Swiss
law, a creditor can continue to collect from a debtor who has
emerged from bankruptcy, unless the debt has been forgiven
through a formal agreement.

CHF million

Balance at beginning of year

31.12.05

2,802

31.12.04

3,775

31.12.03

5,015

31.12.02

7,992

31.12.01

10,581

Domestic

Write-offs

Banks

Construction

Financial institutions

Hotels and restaurants

Manufacturing 1

Private households

Public authorities

Real estate and rentals

Retail and wholesale

Services 2

Other 3

Total domestic write-offs

Foreign

Write-offs

Banks

Chemicals

Construction

Electricity, gas and water supply

Financial institutions

Manufacturing 4

Mining

Private households

Public authorities

Real estate and rentals

Retail and wholesale

Services

Transport, storage and communication

Other 5

Total foreign write-offs

Total write-offs

1 Includes  chemicals, food  and  beverages.
electricity, gas and water supply.

4 Includes food and beverages.

0

(16)

(14)

(26)

(39)

(131)

0

(56)

(25)

(35)

(4)

(346)

(164)

0

0

0

(50)

(8)

(23)

(21)

(22)

(3)

(9)

0

0

(5)

(305)

(651)

0

(49 )

(24 )

(101 )

(77 )

(208 )

0

(109 )

(68 )

(83 )

(9 )

(728)

(21 )

(1 )

(3 )

0

(34 )

(23 )

(8 )

(8 )

(2 )

0

0

(7 )

0

(21 )

(128)

(856)

0

(73 )

(37 )

(57 )

(121 )

(262 )

(18 )

(206 )

(67 )

(111 )

(43 )

(995)

(17 )

0

0

0

(112 )

(77 )

(15 )

(11 )

0

(1 )

(76 )

(25 )

(24 )

(83 )

(441)

(1,436)

0

(148 )

(103 )

(48 )

(275 )

(536 )

0

(357 )

(101 )

(155 )

(49 )

0

(248 )

(51 )

(52 )

(109 )

(1,297 )

0

(317 )

(115 )

(93 )

(46 )

(1,772)

(2,328)

(49 )

0

0

(36 )

(228 )

(70 )

(1 )

(65 )

(1 )

(2 )

(10 )

(39 )

(74 )

(189 )

(764)

(2,536)

(24 )

(2 )

(10 )

(63 )

(74 )

(119 )

(304 )

(5 )

0

(1 )

0

(30 )

0

(48 )

(680)

(3,008)

2 Includes  transportation, communication, health  and  social  work, education  and  other  social  and  personal  service  activities.

3 Includes  mining  and

5 Includes hotels and restaurants.

223

Additional Disclosure Required under SEC Regulations

D – Information Required by Industry Guide 3 (continued)

Summary of Movements in Allowances and Provisions for Credit Losses (continued)

CHF million

Recoveries

Domestic

Foreign

Total recoveries

Net write-offs

Increase / (decrease) in credit loss allowance and provision

Collective loan loss provisions

Other adjustments 1

Balance at end of year

1 See the table below for details.

CHF million

Net foreign exchange

Subsidiaries sold and other adjustments

Total adjustments

31.12.05

31.12.04

31.12.03

31.12.02

31.12.01

53

10

63

(588)

(298)

(76)

(64)

1,776

54

5

59

(797)

(216 )

(25 )

65

2,802

49

38

87

(1,349)

102

7

3,775

43

27

70

(2,466)

115

(626 )

5,015

58

23

81

(2,927)

498

(160 )

7,992

31.12.05

31.12.04

31.12.03

31.12.02

31.12.01

50

(114)

(64)

2

63

65

(57 )

64

7

(269 )

(357 )

(626)

44

(204 )

(160)

224

D – Information Required by Industry Guide 3 (continued)

Allocation of the Allowances and Provisions for Credit Losses

The following table provides an analysis of the allocation of the allowances and provisions for credit loss by industry sector
and geographic location at 31 December 2005, 2004, 2003, 2002 and 2001. For a description of procedures with respect to
allowances and provisions for credit losses, see the Handbook 2005/2006. The following analysis includes Due from banks
from Industrial Holdings.

CHF million

Domestic

Banks

Construction

Financial institutions

Hotels and restaurants

Manufacturing 1

Private households

Public authorities

Real estate and rentals

Retail and wholesale

Services 2

Other 3

Total domestic

Foreign

Banks 4

Chemicals

Construction

Electricity, gas and water supply

Financial institutions

Manufacturing 5

Mining

Private households

Public authorities

Real estate and rentals

Retail and wholesale

Services

Transport, storage and communication

Other 6

Total foreign

Collective loan loss provisions 7

Total allowances and provisions for credit losses 8

31.12.05

31.12.04

31.12.03

31.12.02

31.12.01

10

91

75

49

174

262

8

168

330

196

61

10

112

82

98

224

333

9

250

363

222

188

10

158

137

214

327

511

9

383

201

549

150

10

265

89

286

458

750

39

577

315

470

225

1,425

1,891

2,649

3,484

35

5

2

15

8

57

1

30

72

3

1

27

0

8

265

86

1,776

246

4

1

15

140

112

14

48

66

5

95

32

1

(75)

704

207

2,802

256

5

0

0

168

359

19

48

69

7

51

32

195

(345)

864

262

3,775

24

5

6

96

153

314

148

58

0

6

13

262

144

(394)

835

696

5,015

34

467

262

346

722

1,082

37

1,067

395

448

165

5,025

39

5

0

88

420

653

169

103

0

9

0

414

45

25

1,970

1,006

8,001

1 Includes  chemicals, food  and  beverages.
electricity, gas and water supply.
provisions for 2005 and CHF 17 million for 2004.
161 million, CHF 262 million, CHF 696 million and CHF 1,006 million, respectively, of country provisions.
CHF 290 million, CHF 366 million and CHF 305 million, respectively, of provisions for unused commitments and contingent claims.

3 Includes  mining  and
4 Counterparty allowances and provisions only. Country provisions with banking counterparties amounting to CHF 37 million are disclosed under Collective loan loss
7 The 2005, 2004, 2003, 2002 and 2001 amounts include CHF 48 million, CHF
8 The 2005, 2004, 2003, 2002 and 2001 amounts include CHF 109 million, CHF 214 million,

2 Includes  transportation, communication, health  and  social  work, education  and  other  social  and  personal  service  activities.

6 Includes hotels and restaurants.

5 Includes food and beverages.

225

Additional Disclosure Required under SEC Regulations

D – Information Required by Industry Guide 3 (continued)

Due from Banks and Loans by Industry Sector (gross)

The following table presents the percentage of loans in each industry sector and geographic location to total loans. This table
can be read in conjunction with the preceding table showing the breakdown of the allowances and provisions for credit losses
by industry sector to evaluate the credit risks in each of the categories.

in %

Domestic 1

Banks

Construction

Financial institutions

Hotels and restaurants

Manufacturing 2

Private households

Public authorities

Real estate and rentals

Retail and wholesale

Services 3

Other 4

Total domestic

Foreign 1

Banks

Chemicals

Construction

Electricity, gas and water supply

Financial institutions

Manufacturing 5

Mining

Private households

Public authorities

Real estate and rentals

Retail and wholesale

Services

Transport, storage and communication

Other 6

Total foreign

Total gross

31.12.05

31.12.04

31.12.03

31.12.02

31.12.01

0.5

0.6

1.4

0.7

1.6

36.5

1.8

3.9

1.6

3.0

0.3

51.9

10.6

0.9

0.1

0.5

17.1

1.3

0.9

12.5

0.5

0.9

0.4

1.8

0.5

0.1

0.5

0.7

1.6

0.8

2.0

39.0

2.0

4.3

1.8

3.4

0.2

56.3

12.7

0.1

0.1

0.3

13.1

1.0

0.6

11.2

0.5

0.3

0.4

3.0

0.3

0.1

0.2

0.9

1.6

1.0

2.6

41.2

2.1

5.0

2.4

3.8

0.6

61.4

12.7

0.1

0.0

0.1

9.5

1.0

0.4

8.5

0.5

0.2

0.8

3.2

1.5

0.1

0.4

1.1

1.7

1.1

2.9

38.3

2.2

5.4

2.9

4.1

0.8

60.9

12.8

0.2

0.1

0.4

7.4

0.9

0.3

13.3

1.1

0.2

0.5

0.7

0.3

0.9

0.6

1.3

2.2

1.1

3.3

35.8

2.0

5.7

3.3

4.7

0.7

60.7

10.2

0.4

0.1

0.4

5.5

1.6

0.5

9.8

2.5

3.9

0.7

1.8

0.8

1.1

48.1

100.0

43.7

100.0

38.6

100.0

39.1

100.0

39.3

100.0

1 Includes Due from banks and Loans from Industrial Holdings in the amount of CHF 728 million for 2005, CHF 909 million for 2004 and CHF 220 million for 2003.
beverages.
5 Includes food and beverages.

3 Includes transportation, communication, health and social work, education and other social and personal service activities.

6 Includes hotels and restaurants.

2 Includes chemicals, food and
4 Includes mining and electricity, gas and water supply.

226

D – Information Required by Industry Guide 3 (continued)

Loss History Statistics

The following is a summary of the Group’s loan loss history (relating to Due from banks and loans).

CHF million, except where indicated

Gross loans

Impaired loans

Non-performing loans

Allowances and provisions for credit losses 2

Net write-offs

Credit loss (expense) / recovery

Ratios

Impaired loans as a percentage of gross loans

Non-performing loans as a percentage of gross loans

Allowances and provisions for credit losses as a percentage of:

Gross loans

Impaired loans

Non-performing loans

Allocated allowances as a percentage of impaired loans 3

Allocated allowances as a percentage of non-performing loans 4

Net write-offs as a percentage of:

Gross loans

Average loans outstanding during the period

Allowances and provisions for credit losses

Allowances and provisions for credit losses as a multiple of net write-offs

31.12.05

305,269 1

31.12.04

270,133 1

31.12.03

248,026 1

31.12.02

249,111

3,434

2,363

1,776

588

375

1.1

0.8

0.6

51.7

75.2

46.4

59.0

0.2

0.2

33.1

3.02

4,699

3,555

2,802

797

241

1.7

1.3

1.0

59.6

78.8

51.6

61.4

0.3

0.3

28.5

3.51

6,999

4,758

3,775

1,349

(102 )

2.8

1.9

1.5

53.9

79.3

46.8

55.1

0.5

0.5

35.7

2.80

9,654

5,779

5,015

2,466

(115 )

3.9

2.3

2.0

52.7

86.8

44.8

56.0

1.0

1.0

49.2

2.03

31.12.01

261,967

14,403

8,413

8,001

2,927

(498 )

5.5

3.2

3.1

55.6

95.1

46.1

60.8

1.1

2.2

36.6

2.73

1 Includes Due from banks and Loans from Industrial Holdings in the amount of CHF 728 million for 2005, CHF 909 million for 2004 and CHF 220 million for 2003.
provisions.

4 Allowances relating to non-performing loans only.

3 Allowances relating to impaired loans only.

2 Includes collective loan loss

227

228

On the cover
“Hand in hand we are worldclass.”
What “You & Us” means to Christian Mutzner, who works for us in Zurich.

Cautionary statement regarding forward-looking statements | This communication contains statements that constitute 
“forward-looking statements”, including, but not limited to, statements relating to the implementation of strategic initiatives, such 
as the European wealth management business, and other statements relating to our future business development and economic 
performance.While these forward-looking statements represent our judgments and future expectations concerning the development
of our business, a number of risks, uncertainties and other important factors could cause actual developments and results to differ 
materially from our expectations. These factors include, but are not limited to, (1) general market, macro-economic, governmental 
and regulatory trends, (2) movements in local and international securities markets, currency exchange rates and interest rates, (3) 
competitive pressures, (4) technological developments, (5) changes in the ﬁnancial position or creditworthiness of our customers,
obligors and counterparties and developments in the markets in which they operate, (6) legislative developments, (7) management 
changes and changes to our Business Group structure and (8) other key factors that we have indicated could adversely affect our 
business and ﬁnancial performance which are contained in other parts of this document and in our past and future ﬁlings and 
reports, including those ﬁled with the SEC. More detailed information about those factors is set forth elsewhere in this document 
and in documents furnished by UBS and ﬁlings made by UBS with the SEC, including UBS’s Annual Report on Form 20-F for the year 
ended 31 December 2005. UBS is not under any obligation to (and expressly disclaims any such obligations to) update or alter its 
forward-looking statements whether as a result of new information, future events, or otherwise.

Imprint | Publisher / Copyright: UBS AG, Switzerland | Languages: English, German | SAP-No. 80531E-0601

ab

Financial Report 2005

ab

UBS AG
P.O. Box, CH-8098 Zurich
P.O. Box, CH-4002 Basel

www.ubs.com

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