Financial Report 2006
Introduction
Our Financial Report comprises the audited financial state-
ments of UBS for 2006, 2005 and 2004, 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 2006 and 2005,
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 required by Swiss and US regulations.
The Financial Report should be read together with the other
publications set out on page 4.
We hope that you will find this Financial Report useful and
informative. We believe that UBS is one of the leaders in cor-
porate disclosure, and would be keen to hear your views on
how we might improve the content, information or presen-
tation of all our publications.
Tom Hill
Chief Communication Officer
UBS
Introduction
UBS financial highlights
Who we are
More about us
Contacts
Presentation of Financial Information
UBS reporting structure
Measurement and analysis of performance
Changes in accounting and
presentation in 2007
UBS
Results
Risk factors
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
2
3
4
6
7
8
10
12
13
14
14
17
21
22
30
44
49
54
57
61
62
65
67
68
70
75
215
229
Introduction
UBS financial highlights
UBS income statement
CHF million, except where indicated
Net profit attributable to UBS shareholders
Diluted earnings per share (CHF) 1
Basic earnings per share (CHF) 1
Return on equity attributable to UBS shareholders (%) 2,3
Performance indicators from continuing operations
Diluted earnings per share (CHF) 1
Return on equity attributable to UBS shareholders (%) 3,4
Financial Businesses 5
Operating income
Operating expenses
Net profit attributable to UBS shareholders
Net profit attributable to UBS shareholders from continuing operations
Cost / income ratio (%) 6
Net new money (CHF billion) 7
Personnel (full-time equivalents)
UBS balance sheet & capital management
Total assets
Equity attributable to UBS shareholders 3
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
As of or for the year ended
31.12.06
12,257
31.12.05
14,029
31.12.04
8,016
5.95
6.20
28.2
5.58
26.5
47,171
32,782
11,253
11,249
69.7
151.7
78,140
6.68
6.97
39.7
4.66
27.7
39,896
27,704
13,517
9,442
70.1
148.5
69,569
3.70
3.89
25.8
3.49
24.3
35,971
26,149
7,656
7,357
73.2
89.9
67,407
2,396,511
2,058,348
1,737,171
49,686
154,222
11.9
14.7
341,892
2,989
AA+
Aa2
AA+
44,015
131,949
12.8
14.1
310,409
2,652
AA+
Aa2
AA+
33,632
103,649
11.8
13.6
264,832
2,217
AA+
Aa2
AA+
% change from
31.12.05
(13)
(11)
(11)
20
18
18
(17)
19
12
16
13
10
13
1 For the EPS calculation, see note 8 to the financial statements. 2 Net profit attributable to UBS shareholders / average equity attributable to UBS shareholders less proposed distributions. 3 Equity
attributable to UBS shareholders has been adjusted for the full-year periods ending 31 December 2006, 2005 and 2004 and is now different from the figure published in the Fourth Quarter 2006 Report.
For more information, please refer to note 1 to the financial statements. 4 Net profit attributable to UBS shareholders from continuing operations / average equity attributable to UBS shareholders
less proposed distributions. 5 Excludes results from Industrial Holdings. 6 Operating expenses / operating income less credit loss expense or recovery. 7 Excludes interest and dividend income.
8 Includes hybrid Tier 1 capital. Please refer to the BIS capital and ratios table in the capital management section and note 29 to the financial statements.
All share and earnings per share figures throughout this report, unless otherwise indicated, reflect the 2-for-1 share split
made on 10 July 2006.
2
Who we are
What we do
We are one of the world’s leading financial firms, serving a
discerning international client base. Our business, global in
scale, is focused on growth. As an integrated firm, we create
added value for clients by drawing on the combined resourc-
es and expertise of all our businesses.
We are present in all major financial centers, with offices
in more than 50 countries. We employ around 78,000 peo-
ple, with 39% in the Americas, 35% in Switzerland, 16% in
the rest of Europe and 10% in the Asia Pacific region.
We are one of the best capitalized financial institutions in
the world, with a BIS Tier 1 ratio of 11.9%, invested assets of
CHF 3.0 trillion, equity attributable to UBS shareholders of
around CHF 50 billion and market capitalization of roughly
CHF 154 billion (on 31 December 2006).
In wealth management, our services are designed for high
net worth and affluent individuals around the world, whether
investing internationally or in their home country. We pro-
vide them with tailored, unbiased advice and investment ser-
vices – ranging from asset management to estate planning
and from corporate finance to art banking.
As an asset manager, we offer innovative investment
management solutions in nearly every asset class to private,
institutional and corporate clients, and through financial
intermediaries. Our investment capabilities comprise tradi-
tional assets (for instance equities, fixed income and asset
allocation), alternative and quantitative investments (multi-
manager funds, funds of hedge funds, hedge funds) and
real estate.
In the investment banking and securities businesses, we
provide securities products and research (in the areas of
equities, fixed income, rates, foreign exchange, energy and
metals) as well as advice and access to the world’s capital
markets to corporate, institutional, intermediary and alter-
native asset management clients.
Our Swiss retail and corporate banking business provides
a complete set of banking and securities services for domes-
tic individual and corporate clients.
Our vision
We are determined to be the best global financial services company. We focus on wealth and asset management, and on
investment banking and securities businesses. We continually earn recognition and trust from clients, shareholders, and
staff through our ability to anticipate, learn and shape our future. We share a common ambition to succeed by delivering
quality in what we do. Our purpose is to help our clients make financial decisions with confidence. We use our resources to
develop effective solutions and services for our clients. We foster a distinctive, meritocratic culture of ambition, perfor-
mance and learning as this attracts, retains and develops the best talent for our company. By growing both our client and
our talent franchises, we add sustainable value for our shareholders.
3
Introduction
More about us
This Financial Report contains UBS’s audited financial statements for the year 2006 and related detailed
analysis. This Financial Report is available in English and German. (SAP no. 80531). You can find out more
about UBS from the sources shown below.
Publications
Annual Review 2006
Our Annual Review this year looks at some major global
economic and financial trends, and the part we play in them.
It also briefly reviews our financial performance in 2006,
corporate governance, and approach to corporate responsibi-
lity. It is available in English, German, French, Italian, Chinese
and Japanese. (SAP no. 80530).
Handbook 2006 / 2007
The Handbook contains a detailed description of UBS, its
strategy, organization, businesses, employees, corporate
governance and responsibility, as well as risk and treasury
management. (SAP no. 80532).
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 avail-
able in English.
Compensation Report 2006
The Compensation Report 2006 provides detailed informa-
tion on the compensation paid to the members of UBS’s Board
of Directors (BoD) and the Group Executive Board (GEB). The
report is available in English and German. (SAP no. 82307).
The same information can also be read in the Corporate Gov-
ernance chapter of the Handbook 2006 / 2007.
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 ante-
cedent companies and their historical roots. It is available in
English and German. (SAP no. 82252).
How to order reports
These reports are available in PDF format on the internet
at www.ubs.com/investors in the reporting section. Printed
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/inves-
tors offers a wide range of information about UBS, financial
information (including SEC filings), corporate information,
share price graphs and data, an event calendar, dividend in-
formation and recent presentations given by senior manage-
ment to investors at external conferences. Information on
the internet is available in English and German, with some
sections also in French and Italian.
Messaging service
On the Analysts and Investors website, you can register to
receive news alerts about UBS via Short Messaging System
(SMS) or e-mail. Messages are sent in either English or
German and users are able to state their preferences for the
topics 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
webcasts can be found in the Financials section of our Ana-
lysts and Investors website.
4
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 of 1934.
Our Form 20-F filing is structured as a “wrap-around”
document. Most sections of the filing are satisfied by refer-
ring to parts of the Handbook 2006 / 2007 or to parts of this
Financial Report 2006. 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 encouraged to refer to this additional disclosure.
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 by dialling
+1-800-SEC-0330 (in the US) or +1 202 942 8088 (outside
the US) for further information on the operation of its
public reference room. You may also inspect our SEC
reports and other information at the New York Stock Ex-
change, 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
documents filed with the SEC may be obtained from UBS’s
Investor Relations team at the address shown on the con-
tacts 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, phone +41-44-234 11 11;
and Aeschenvorstadt 1, CH-4051 Basel,
Switzerland, phone +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 (NYSE) and on
the Tokyo Stock Exchange (TSE).
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
Zurich
London
New York
Hong Kong
Hotline
New York
Fax (Zurich)
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
Zurich
London
New York
Hong Kong
Shareholder Services
UBS Shareholder Services, a unit of the
Company Secretary, is responsible for
the registration of the Global Registered
Shares.
Hotline
Fax
+41-44-234 1111
+44-20-7568 0000
+1-212-821 3000
+852-2971 8888
+41-44-234 4100
+1-212-882 5734
+44-44-234 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
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
6
Presentation of Financial Information
Presentation of Financial Information
UBS reporting structure
UBS reporting structure
Changes to reporting structure and presentation in
2006 and other adjustments
Dillon Read Capital Management (DRCM)
On 5 June 2006, we transferred the principal finance and
credit arbitrage and commercial real estate businesses in the
fixed income, rates and currencies area of the Investment
Bank to Global Asset Management. The business, now called
Dillon Read Capital Management (DRCM), manages alter-
native investment vehicles on behalf of the Investment Bank.
Towards the end of 2006, it launched its first outside inves-
tor fund. The Investment Bank continues to record the trad-
ing revenues generated by the assets managed by DRCM on
its fixed income, rates and currencies revenues line. DRCM
personnel and general and administrative expenses are
booked in Global Asset Management. DRCM charges the
Investment Bank for providing investment management
services. Those charges and expenses are reported in the
“Services to / from other business units” line. This arrange-
ment, also shown in the diagram below, has no impact on
UBS’s consolidated financial results.
Prime Brokerage
Our prime brokerage activities have, until now, been treated
differently in the United Kingdom than they have in the Unit-
ed States. Transactions in the US prime brokerage business
were booked as a secured loan balance in the Due to / from
customer line, whereas in the United Kingdom they were
treated as a securities borrowing / lending activity. Even
though there is no regulatory guidance on how to present
this particular business activity, we have decided to start
reporting it consistently in all locations. In the future, we will
report all of the transactions in the prime brokerage business
as a secured loan in the Due to / from customer line in our
balance sheet. This treatment best reflects most of the busi-
ness activity in prime brokerage and the market’s under-
standing of the business – which is to provide financing
facilities to clients from which they can obtain custody and
brokerage facilities, exposure to credit and interest rate de-
rivatives and exposure to other financial instruments that the
Investment Bank can provide.
To reflect the changes, we have restated our consolidated
financial statements and the segment reporting of business
Reporting of Dillon Read Capital Management
Investment Bank
Income
DRCM revenues on Investment Bank capital
Expenses
DRCM personnel expenses
DRCM general and administrative expenses
Investment Bank
Income
DRCM revenues on Investment Bank capital
Expenses
Global Asset Management
No impact on Global Asset Management
Global Asset Management
Income
Revenues from DRCM’s external investor
investment management business
Expenses
DRCM personnel expenses
DRCM general and administrative expenses
Charge from Global Asset Management for
investment management services
“Services to/from other
business units” cost line
Charge to Investment Bank for
investment management services
6
0
0
2
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n
u
J
4
l
i
t
n
U
6
0
0
2
e
n
u
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5
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F
8
UBS Reporting Structure
Global Asset Management
Investment Bank
Corporate Center
Private Equity
Industrial Holdings
Financial Businesses
Global Wealth Management
& Business Banking
Wealth Management
International & Switzerland
Wealth Management US
Business Banking Switzerland
units affected for all prior periods. The figures and results
presented in this report are based on restated numbers.
While the restatement affected certain interest income and
interest expense components, it did not have an impact on
UBS’s income statement, its internal measures of credit ex-
posure, or its regulatory capital.
Obligations to employees
UBS has adjusted its opening balance sheet per 1 January
2002 to reflect obligations for untaken holidays of employ-
ees, sabbatical leave and service anniversary awards. The
retained earnings for each full-year and interim period from
2002 to 2006 are affected by the same adjustment, which
reduces the equity attributable to UBS shareholders by
CHF 309 million. This has led to a recalculation of return on
equity, which is reflected in the current ratio and all past
ones published since 2002. Additional information is avail-
able in note 1 to the financial statements.
Changes to accounting
At the start of 2006, we implemented accounting changes
based on the revised IAS 39 Financial Instruments: Recog
nition and Measurement; Amendment to the Fair Value
Option. All financial instruments designated at fair value
through profit or loss on 31 December 2005 continued to
qualify for the use of the fair value option under the revised
fair value option and we did not apply the fair value option
to any previously recognized financial asset or financial liabil-
ity for which the fair value option was not adopted under
former guidance. Because of this, the adoption of the re-
vised standard did not have any effect on our financial state-
ments on the transition date, 1 January 2006.
Until the beginning of 2006, we had mainly applied the
fair value option to hybrid debt instruments. Starting in
second quarter, in line with the revised fair value option, we
also applied the fair value option to certain new loans and
loan commitments made by the Investment Bank, which are
substantially hedged with credit derivatives. By adopting this
option, we reduce temporary profits and losses caused by
the previous and different accounting treatments of the
loans and loan commitments and the hedging credit deriva-
tives (refer to Notes 1, 9 and 19 in the Financial Statements
section). In second half 2006, we additionally applied the fair
value option to certain hybrid instruments resulting from
structured repurchase and reverse repurchase agreements
and to a hedge fund investment which is part of a portfolio
managed on a fair value basis.
Changes in presentation in our credit risk disclosure
We have stopped reporting non-performing loans as a key
performance indicator for the Investment Bank and Business
Banking Switzerland in our 2006 Financial Report. We will
also stop disclosing them in quarterly reports from first quar-
ter 2007. The disclosure and discussion of the impaired lend-
ing portfolio, which is a key component of our internal cred-
it risk management and control processes, will continue. As
in previous years, non-performing loans, as defined under
Swiss Federal Banking Commission (SFBC) regulation, will be
reported in the notes to the annual financial statements.
Other new disclosures
We have made some minor enhancements to our disclosure
in 2006 as part of our continuing effort to improve the trans-
parency of our financial reporting and provide the best pos-
sible understanding of our business.
In first quarter 2006, we changed the name of our ad-
justed regulatory capital performance indicator to “allocated
regulatory capital”. The new term more accurately reflects
the fact that capital is actually allocated to the Business
Groups based on risk-weighted assets, goodwill and excess
intangible assets.
In our US wealth management business, the calculation
of revenues includes net goodwill funding as acquisition
costs are no longer disclosed separately when discussing
results.
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). Our results dis-
cussion and analysis comments on the underlying opera-
tional performance of our business, focusing on continuing
operations. As discontinued activities are no longer relevant
to our management of the company, we do not consider
them to be indicative of our future potential performance.
They are therefore not included in our business planning de-
cisions. This helps to better assess our performance against
peers and to estimate future growth potential.
In the last three years, two discontinued operations had a
significant impact on our consolidated financial statements:
– In fourth quarter 2005, we sold our Private Banks & GAM
unit to Julius Baer at a gain of CHF 3,705 million after tax
(pre-tax CHF 4,095 million). The unit comprised the Ban-
co di Lugano, Ehinger & Armand von Ernst and Ferrier
Lullin private banks as well as specialist asset manager
GAM. After the sale, we retained a stake of 20.7% in the
new Julius Baer.
– On 23 March 2006, UBS sold its 55.6% stake in Motor-
Columbus to a consortium representing Atel’s Swiss mi-
nority shareholders, EOS Holding and Atel, as well as to
French utility Electricité de France (EDF) for a sale price of
approximately CHF 1,295 million, leading to an after-tax
gain on sale of CHF 387 million.
Up to and including 2005, we provided comments and
analysis on an adjusted basis that also excluded the amorti-
zation of goodwill and other acquired intangible assets. With
the introduction of IFRS 3 Business Combinations at the be-
ginning of 2005, we ceased amortizing goodwill, which was
by far the largest adjustment made to our results. In this Fi-
nancial Report, comments related to 2004 include goodwill
amortization.
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 invest-
ment banking.
When discussing quarterly performance, we therefore
compare the Investment Bank’s financial results of the
reported 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 state-
ments, 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 previous quarter basis. For all other Business
Groups and Units, recent quarterly results are compared with
the previous quarter’s, as they are only slightly impacted by
seasonal components 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 seven years, we have consistently assessed our
performance against a set of four measures that were de-
signed to ensure the delivery of continuously improving
returns to our shareholders. In that time, UBS has evolved,
and its business and client base have grown. By late 2005 we
had arrived at a point where we were steadily exceeding the
original targets.
That is why, starting in first quarter 2006, we modified
our measures. On average through periods of varying mar-
ket conditions, we:
– seek to increase the value of UBS by achieving a sustain-
able, 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 financial businesses, including Global Asset Man-
agement and Business Banking Switzerland (this measure
was previously only applied to our wealth management
units).
– use diluted earnings per share (EPS) instead of basic EPS
as a reference for our EPS growth target that remains, as
before, annual double-digit percentage growth.
– continue our unchanged objective to manage our Busi-
ness Group / Business Unit cost / income ratios at levels
that compare well with our competitors. Our cost / income
ratio target is limited to our financial businesses.
Business Group Key Performance Indicators
At the Business Group or Business Unit level, our perfor-
mance is measured by carefully chosen Key Performance
Indicators (KPIs). They indicate the Business Group’s or Busi-
ness Unit’s success in creating value for shareholders but do
not disclose 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
Key performance indicators
Business
Key performance indicators
Definition
Business groups (excluding
Corporate Center) and business units
within Financial Businesses
Wealth & Asset Management businesses
and Business Banking Switzerland
Cost / income ratio (%)
Total operating expenses / total operating income before adjusted expected
credit loss.
Invested assets (CHF billion)
Net new money (CHF billion)
Client assets managed by or deposited with UBS for investment purposes only
(for further details please see below).
Inflow of invested assets from new clients
+ inflows from existing clients
– outflows from existing clients
– outflows due to client defection
Wealth & Asset Management businesses
Gross margin on invested assets (bps)
Operating income before adjusted expected credit loss / average
invested assets.
Wealth Management International &
Switzerland
Client advisors
Expressed in full-time equivalents.
Wealth Management US
Recurring income (CHF million)
Business Banking Switzerland
Investment Bank
Corporate Center
Revenues per advisor (CHF thousand)
Impaired lending portfolio, as a % of
total lending portfolio, gross
Return on allocated regulatory
capital (%)
Compensation ratio (%)
Impaired lending portfolio, as a % of
total lending portfolio, gross
Return on allocated regulatory
capital (%)
Average VaR (10-day, 99% confidence,
5 years of historical data)
IT infrastructure (ITI) cost per Financial
Businesses full-time employee
Interest, asset-based revenues for portfolio management and fund distribution,
account-based and advisory fees (as opposed to transactional revenues).
Income (including net goodwill funding) / average number of financial advisors.
Net goodwill funding is defined as goodwill and intangible asset-related funding,
net of risk-free return on the corresponding capital allocated.
Impaired lending portfolio, gross / total lending portfolio, gross.
Business Unit performance before tax / average allocated regulatory capital.
Personnel expenses / operating income before adjusted expected
credit loss.
Impaired lending portfolio, gross / total lending portfolio, gross.
Business Group performance before tax / average allocated regulatory capital.
Value at Risk (VaR) expresses the potential loss on a trading portfolio over
a 10-day time horizon, and measured to a 99% level of confidence, based on
5 years of historical data.
ITI costs / average number of Financial Businesses employees.
These Business Group KPIs are used for internal per-
formance measurement and planning as well as external
reporting. This ensures management accountability for per-
formance by senior executives 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
investment purposes.
Invested assets is our central measure and includes, for
example, discretionary and advisory wealth management
portfolios, 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 minimal advisory role for such clients
and as asset flows are driven more by liquidity requirements
than investment reasons. The same holds true for the corpo-
rate cash management business of the Wealth Management
US unit, which we excluded from invested assets towards
the end of 2005. Non-bankable assets (for example art col-
lections) and deposits from third-party banks for funding or
trading purposes are excluded from both measures.
Net new money in a reported period is the net amount of
invested assets that are entrusted to the bank by new and
existing clients less those withdrawn by existing clients and
clients who terminate their relationship with UBS. Net new
money is calculated using the direct method, by which in-
and outflows to and from invested assets are determined
at the client level based on transactions. Interest expenses
clients pay on their loans are treated as net new money out-
flows. Interest and dividend income from invested assets is
Presentation of Financial Information
Measurement and analysis of performance
not counted as net new money inflow. Market and currency
movements as well as fees and commissions are excluded
from net new money, as are the effects resulting from any
acquisition or divestment of a UBS subsidiary or business.
Reclassifications between invested assets and client assets as
a result of a change in the service level delivered are treated
as net new money flow.
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 Management 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 practice and our open architecture
strategy and allows us to accurately reflect the performance
of each individual business. Overall, CHF 371 billion of in-
vested assets were double counted in 2006 (CHF 332 bil-
lion in 2005).
Changes in accounting and presentation in 2007
IFRS 7 Financial Instruments:
Disclosures
Effective 2007, we will adopt the
disclosure requirements for financial
instruments under IFRS 7. The new
standard has no impact on recognition,
measurement and presentation of
financial instruments. Rather, it requires
entities to provide disclosures in their
financial statements that enable users
to evaluate: a) the significance of
financial instruments for the entity’s
financial position and performance;
and b) the nature and extent of the
credit, market and liquidity risks arising
from financial instruments during the
period and at the reporting date, and
how the entity manages those risks.
The principles of IFRS 7 complement
the principles for recognizing, measur-
ing and presenting financial assets and
financial liabilities in IAS 32 Financial
Instruments: Presentation and IAS 39
Financial Instruments: Recognition and
Measurement.
UBS has entered into transactions for
which fair value is determined using
valuation models for which not all
inputs are market observable prices or
rates. Such financial instruments are
initially recognized in UBS’s financial
statements at the transaction price,
which is generally the best indicator of
fair value, although the value obtained
from the relevant valuation model may
differ. Where such differences arise,
UBS will be required by IFRS 7 to
disclose, by class of financial instru-
ment: (a) its accounting policy for
recognizing that difference in profit or
loss to reflect a change in factors
(including time) that market partici-
pants would consider in setting a
price, and (b) the aggregate difference
yet to be recognized in profit or loss at
the beginning and end of the period
and a reconciliation of changes in the
balance of this difference.
12
UBS
UBS
Results
Results
2006
In 2006, attributable profit was CHF 12,257 million, down
13% from CHF 14,029 million a year earlier, which included
a net gain of CHF 3,705 million from the sale of Private
Banks & GAM.
Our financial businesses contributed CHF 11,253 million
to attributable profit, of which CHF 11,249 million was from
continuing operations. This was an improvement of 19%
from CHF 9,442 million in 2005. Discontinued operations
contributed CHF 4 million net profit to financial businesses.
Industrial Holdings added CHF 1,004 million to attributable
profit, with CHF 242 million stemming from continuing op-
erations.
Dividend
The Board of Directors will propose to the shareholders at
the Annual General Meeting (AGM) that we raise the payout
to CHF 2.20 a share in order to match our strong 2006 re-
sult. Subject to approval, this is a 16% increase from the
total payout last year, which included a par value repayment
of CHF 0.30 a share for the gain realized from the sale of
Private Banks & GAM. It is also 38% higher than last year’s
regular dividend of CHF 1.60 a share (after the 2-for-1 share
split). Our dividend for the 2004 financial year (paid in 2005)
was CHF 1.50 a share (after the 2-for-1 share split).
If the dividend is approved, the ex-dividend date will be
19 April 2007, with payment on 23 April 2007 for share-
holders of record on 18 April 2007.
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 28%
from CHF 7,357 million in 2004. Discontinued operations
contributed CHF 4,075 million. Industrial Holdings added
CHF 512 million to attributable profit, with CHF 334 million
stemming from continuing operations.
Risk factors
Certain risk factors, including those
described below, can impact our ability
to carry out our business strategies
and can directly affect our earnings.
As a consequence, our revenues and
operating profit have varied – and are
likely to continue to vary – from period
to period and revenues and operating
profit for any particular period may
not be indicative of sustainable results.
Performance in our industry depends
on the economic climate – negative
developments can adversely affect our
business activities
The financial services industry prospers
in conditions of economic growth,
market liquidity and buoyancy and
positive investor sentiment. An
economic downturn, inflation or a
severe financial crisis could negatively
affect our revenues, and we would
be unable to immediately adjust all
our costs to the resulting deterioration
in market or business conditions.
A market downturn can be precipi-
tated by geopolitical events, changes
in monetary or fiscal policy, develop-
ment of trade imbalances, natural
disasters, pandemics and civil unrest,
and war or terrorism. Because financial
markets are global and highly
interconnected, even local and
regional events can have widespread
impact well beyond their sources.
A crisis could develop, regionally or
globally, as a result of disruption in
emerging markets, which are particu-
larly susceptible to macro-economic
and geopolitical developments, or as a
result of the failure of a major market
participant. As our presence and
business in emerging markets
increases, we may become more
exposed to these risks.
Adverse and extreme developments of
this kind could affect our businesses in
a number of ways:
– a general reduction in business
activity and market volumes affects
fees, commissions and margins
from market-making and customer-
driven transactions and activities.
A market downturn may reduce the
volume and valuations of assets
we manage on behalf of clients,
reducing our asset- and perfor-
mance-based fees
– reduced market liquidity may limit
trading and arbitrage opportunities
or impede our ability to manage
risks, impacting both trading income
and performance-based fees
14
Risk factors (continued)
– the assets we hold for our own
account as investments or trading
positions may fall in value
– impairments and defaults on credit
exposures and on trading and
investment positions may increase.
Losses may be exacerbated by
falling collateral values
– if individual countries impose
restrictions on cross-border
payments or other exchange or
capital controls we may suffer
losses from enforced default by
counterparties, we may be unable
to access our own assets, or we
may be impeded in – or prevented
from – managing our risks.
We might be unable to identify or
capture competitive opportunities
The financial services industry is
characterized by intense competition,
continuous innovation, detailed – and
sometimes fragmented – regulation
and ongoing consolidation. We face
competition at the level of local
markets and individual business lines,
and from global financial institutions
comparable to UBS in their size and
breadth. Barriers to entry in individual
markets are being eroded by new
technology. We expect these trends to
continue and competition to increase
in the future.
If we are unable to identify market
trends and developments, do not
respond to them by devising and
implementing adequate business
strategies, or are unable to attract or
retain the qualified people to carry
them out, our competitive strength
and market position might be eroded.
Our risk management and control
processes may not always protect us
from loss
Risk-taking is a major part of the
business of a financial services firm.
We derive a substantial part of our
revenue from market making and
proprietary trading in cash and
derivatives markets and credit is an
integral part of many of our retail and
investment bank activities. Interest
rates, equity prices, foreign exchange
levels and other market fluctuations
can adversely affect our earnings.
Some losses from risk-taking activities
are inevitable but to be successful over
time we must balance the risks we
take with the returns we generate. We
must therefore diligently identify,
assess, manage and control our risks,
not only in normal market conditions
but also as they might develop under
more extreme – “stressed” – condi-
tions, when concentrations of
exposure can lead to severe losses.
Our risk management and control
culture, tools and processes for market
and credit risk, including country risk,
are described in the Risk Management
chapter of our Handbook 2006 / 2007.
We could, however, suffer losses if:
– we do not fully identify the risks in
our portfolio, in particular risk
concentrations and correlated risks
– our assessment of the risks we
have identified, or our response
to negative trends proves to be
inadequate or incorrect
– markets move in ways that are
unexpected in terms of their speed,
direction, severity or correlation and
our ability to manage risks in the
resultant environment is restricted
– third parties to whom we have
credit exposure or whose securities
we hold for our own account or
as collateral are severely affected by
unexpected events and we suffer
defaults and impairments beyond
the level implied by our risk
assessment
-– collateral or other security provided
by our counterparties proves
inadequate to cover their obliga-
tions at the time of their default.
We also manage risk on behalf of our
clients in our asset and wealth
management businesses, and our
performance in these activities could
be harmed by the same factors. If
clients suffer losses or our perfor-
mance does not match that of our
competitors, we may suffer reduced
fee income and a decline in assets
under management or withdrawal of
mandates.
Liquidity and funding management are
critical to our ongoing performance
A substantial part of our funding
requirement is met using short-term
unsecured funding sources, including
wholesale and retail deposits and
the regular issuance of money market
paper. The volume of these funding
sources is largely stable. If this
situation were to change, we could be
forced to liquidate assets, in particular
from our trading portfolio, to meet
maturing liabilities or deposit with-
drawals. We might be forced to sell
them at discounts that could adversely
affect our profitability and our
business franchises.
A reduction in our credit rating could
adversely affect our cost of borrowing,
in particular from wholesale unsecured
sources, and reduce our access to
capital markets. It could also result in
our having to make additional cash
payments or post collateral, or in the
premature termination of contracts
with rating trigger clauses.
Our approach to liquidity and funding
management is described in the
Treasury Management chapter of our
Handbook 2006 / 2007.
Operational risks may affect our
business
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 operational risk management and
control systems and processes, which
are described in the Risk Management
chapter of our Handbook 2006 / 2007
15
UBS
Results
Risk factors (continued)
under “Operational Risk”, are
designed to ensure that the risks
associated with our activities, includ-
ing those arising from process error,
failed execution, fraud, systems failure,
and failure of security and physical
protection, are appropriately con-
trolled. If these internal controls fail or
prove ineffective in identifying and
remedying such risks, we could suffer
operational failures that might result
in losses.
Legal claims may arise in the conduct
of our business
In the ordinary course of our business
we are involved in a variety of claims,
disputes and legal proceedings in
Switzerland and other jurisdictions
where we are active, including the
United States. Such legal proceedings
may expose us to substantial mone-
tary damages and legal defense costs,
injunctive relief and criminal and civil
penalties.
Our global presence exposes us to
other risks
We operate in more than 50 countries,
earn income and hold assets and
liabilities in many different currencies
and are subject to many different
legal, tax and regulatory regimes.
Changes in local tax laws or regula-
tions may affect our clients’ ability or
willingness to do business with us or
the viability of our strategies and
business model.
Because we prepare our accounts in
Swiss francs while a substantial
part of our assets, liabilities, revenues
and expenses are denominated in
other currencies, changes in foreign
exchange rates – particularly between
the Swiss franc and the US dollar
(US dollar income representing the
major part of our non-Swiss franc
income) – may have an effect on our
reported earnings. Our approach
to management of this currency risk
is explained in the Treasury Manage-
ment chapter of our Handbook 2006 /
2007 under “Corporate currency
management”.
16
UBS Performance Indicators
UBS Performance Indicators
UBS Performance Indicators
RoE (%) 1,2
as reported
from continuing operations
Diluted EPS (CHF) 3
as reported
from continuing operations
Cost / income ratio of the financial businesses (%) 4,5
Net new money, financial businesses (CHF billion) 6
For the year ended
31.12.06
31.12.05
31.12.04
28.2
26.5
5.95
5.58
69.7
151.7
39.7
27.7
6.68
4.66
70.1
148.5
25.8
24.3
3.70
3.49
73.2
89.9
RoE 1, 2
in %
40
30
20
10
0
2004
2005
2006
2004
2005
2006
Cost / income ratio of the financial businesses 4, 5
in %
39.7
27.7
28.2
26.5
25.8
24.3
80
70
60
50
40
73.2
70.1
69.7
As reported
From continuing operations
Diluted EPS 3
CHF
Net new money, financial businesses 6
CHF billion
2004
2005
2006
2004
2005
8.00
6.00
4.00
2.00
0.00
6.68
4.66
5.95
5.58
3.70
3.49
As reported
From continuing operations
160
120
80
40
0
148.5
89.9
2006
151.7
1 Net profit attributable to UBS shareholders / average equity attributable to UBS shareholders less proposed distributions. 2 RoE as reported and from continuing operations reflects the adjusted equity
attributable to UBS shareholders. See note 1 to the financial statements for more information. 3 Details of the EPS calculation can be found in note 8 to the financial statements. 4 Excludes results
from Industrial Holdings. 5 Operating expenses / operating income less credit loss expense or recovery. 6 Excludes interest and dividend income.
40
32
24
16
8
8.0
6.4
4.8
3.2
1.6
18
40
32
24
16
8
0
8.0
6.4
4.8
3.2
1.6
0.0
0
0.0
160
128
96
64
32
0
2006
For the last seven years, we have consistently focused on
four performance indicators designed to ensure we deliver
continually improving returns to our shareholders. We modi-
fied some of them in 2006 to reflect the evolution of our
business (see page 10). All are calculated based on results
from continuing operations. The first two, return on equity
and diluted earnings per share, are based on the results of
the entire firm. The cost / income ratio and net new money
indicators are limited to our financial businesses. On this ba-
sis, performance indicators 2006 show:
– return on equity in full-year 2006 at 26.5%, down from
27.7% in 2005, but well above our target of 20% mini-
mum over the cycle. Higher attributable profit was offset
by an increase in average equity following strong retained
earnings.
– diluted earnings per share in 2006 at CHF 5.58, up 20%
from CHF 4.66 a year ago, reflecting increased earnings
and a slight reduction in the average number of shares
outstanding (–2%) following share repurchases.
– a cost / income ratio for our financial businesses of
69.7% in 2006, down 0.4 percentage points from
70.1% a year ago. This reflects the increase in net trad-
ing income and net fee and commission income, partly
offset by higher personnel and general and administra-
tive expenses. We have added over 8,500 employees
during the last year in areas where we see long-term
strategic opportunities.
– net new money at a record CHF 151.7 billion, up from CHF
148.0 billion a year earlier (excluding Private Banks & GAM),
corresponding to an annual growth rate of 5.7% of the as-
set base at the end of 2005. Inflows remained strong world-
wide. Wealth Management International & Switzerland
Net new money 1
CHF billion
Wealth Management International & Switzerland
Wealth Management US
Business Banking Switzerland
Global Wealth Management & Business Banking
Institutional
Wholesale Intermediary
Global Asset Management
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
Wealth Management International & Switzerland
Wealth Management US
Business Banking Switzerland
Global Wealth Management & Business Banking
Institutional
Wholesale Intermediary
Global Asset Management
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
31.12.06
31.12.05
31.12.04
97.6
15.7
1.2
114.5
29.8
7.4
37.2
151.7
151.7
68.2
26.9
3.4
98.5
21.3
28.2
49.5
148.0
0.5
148.5
42.3
18.1
2.6
63.0
23.7
(4.5)
19.2
82.2
7.7
89.9
As of
% change from
31.12.06
31.12.05
31.12.04
31.12.05
1,138
824
161
2,123
519
347
866
2,989
0
2,989
982
752
153
1,887
441
324
765
2,652
0
2,652
778
606
140
1,524
344
257
601
2,125
92
2,217
16
10
5
13
18
7
13
13
13
19
UBS Performance Indicators
recorded inflows of CHF 97.6 billion, driven by consistent-
ly high inflows during the year, particularly in Asia Pacific
and Europe, both a result of our growth strategy. Our US
business contributed CHF 15.7 billion in net new money,
CHF 11.2 billion below 2005 levels. Global Asset Manage-
ment inflows fell to CHF 37.2 billion, down from the strong
CHF 49.5 billion result a year earlier. The Swiss retail busi-
ness recorded net new money inflows of CHF 1.2 billion.
2005
– diluted earnings per share in 2005 at CHF 4.66, up 34%
from CHF 3.49 a year earlier, reflecting increased earnings
and a slight reduction in the average number of shares
outstanding (–3%) following share repurchases.
– a cost / income ratio for our financial businesses of 70.1%
in 2005, down 3.1 percentage points from 73.2% a year
earlier. This reflects the increase in net fee and commis-
sion income and net income from trading activities and
the absence of goodwill amortization, partly offset by
higher costs related to personnel – all related to the ex-
pansion of business volumes.
From our continuing operations, performance indicators show:
– return on equity in full-year 2005 at 27.7%, up from 24.3%
in 2004. The increase was driven by higher attributable
profit, but was partially offset by an increase in average
equity levels, reflecting the growth in retained earnings.
– for the whole of 2005, net new money of CHF 148.0 bil-
lion, up 80% from CHF 82.2 billion a year earlier. This
amounts to an annual growth rate of 7.0% of the asset
base at the end of 2004. All the figures above exclude
Private Banks & GAM.
20
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 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)
As of or for the year ended
% change from
31.12.06
31.12.05
31.12.04
31.12.05
87,401
(80,880)
6,521
156
6,677
25,881
13,318
1,295
47,171
21,282
2,187
23,469
7,929
(9)
1,245
0
148
32,782
14,389
2,751
11,638
4
0
4
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
11,642
13,971
389
389
0
11,253
11,249
4
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
78,140
69,569
67,407
47
63
(32)
(58)
(33)
21
67
131
18
16
34
18
23
36
0
17
18
18
20
18
(100)
(100)
(100)
(17)
(14)
(14)
(17)
19
(100)
12
1 Excludes results from Industrial Holdings. 2 Additionally includes social security contributions and expenses related to alternative investment awards. 3 Includes goodwill amortization of CHF 68
million for the year ended 31 December 2004.
22
2006
Results
On a continuing basis, 2006 was another record year for
UBS, with all businesses reporting a stronger performance in
2006 compared with a year earlier. Attributable net profit in
2006 was CHF 11,253 million. Discontinued operations con-
tributed CHF 4 million, compared with CHF 4,075 million in
2005, when we sold Private Banks & GAM. Net profit from
continuing operations was CHF 11,249 million, up 19% from
CHF 9,442 million in 2005. It was at the highest level ever,
fueled by a 19% increase in income, which rose to CHF
47,015 million. Asset-based revenues showed particular
strength, reflecting rising market levels as well as strong in-
flows into our wealth and asset management businesses.
Brokerage fees were up, reflecting brisk client activity. Cor-
porate finance and underwriting fees rose, not just because
of buoyant capital market conditions, but also as a result of
our efforts to grow our market share in key sectors, such as
large cap deals, emerging markets, technology and as a
partner of financial sponsors. Overall, net fee and commis-
sion income now contributes 55% to total operating income
in 2006. Income from trading activities reached a record
high as well, mainly driven by higher gains from equity de-
rivatives, prime brokerage and equity proprietary trading.
Fixed income activities saw stronger results driven by positive
market conditions and improved performances in deriva-
tives, mortgage-backed securities and commodities. Reve-
nues from interest margin products increased to the highest
level ever, reflecting the success and growth of lending ac-
tivities to wealthy private clients worldwide. They also re-
flected an increase in spreads for US dollar, euro and Swiss
franc deposits and higher Swiss mortgage volumes. The
wealth management business in the US saw the level of de-
posits rise and benefited from higher spreads. In 2006, we
continued to record credit loss recoveries, although they
were lower than a year earlier.
Expenses continued to increase in the context of our strate-
gic expansion. In 2006, they rose 18% or CHF 5,078 million
from 2005. Personnel expenses were up 18%, reflecting the
12% increase in personnel numbers across our businesses.
Performance-related payments rose with revenues. For 2006,
53% of personnel expenses took the form of bonus or other
variable compensation, up from 50% a year earlier. Average
variable compensation per head in 2006 was 16% higher
than in 2005.
General and administrative expenses were up 23% from a
year earlier. Provision expenses rose, mainly as a result of the
settlement agreement with Sumitomo Corporation and the
sublease of unused office space in New Jersey. Although we
needed less office space than expected in New Jersey, we
expanded our presence in other regions, leading to overall
higher occupancy costs. Activity levels and business volumes
increased worldwide, resulting in higher spending for IT out-
sourcing, communication and travel. Investment in growth
initiatives resulted in higher costs for IT and strategic proj-
ects, in particular at the Investment Bank.
The rise in costs was outpaced by the improvement in
revenues, driving our cost / income ratio down to 69.7% –
the lowest level ever recorded.
Operating income
Total operating income was CHF 47,171 million in 2006, up
18% from CHF 39,896 million in 2005. This was the highest
level ever.
Net interest income was CHF 6,521 million in 2006, down
from CHF 9,528 million a year earlier. Net trading income
was CHF 13,318 million, up from CHF 7,996 million in
2005.
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 period
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 15%
or CHF 1,700 million from CHF 11,419 million in 2005 to
CHF 13,119 million in 2006. At CHF 4,759 million, equities
trading income in 2006 was up 21% or CHF 831 million from
CHF 3,928 million in 2005. Last year saw a large increase in
derivatives trading, mainly in Asia Pacific and in the US, as
we experienced growing market demand in these regions.
Our prime brokerage services continued to grow around the
globe as we were able to further expand our client base. Ad-
ditionally, our proprietary business recorded higher results.
These gains were partially offset by lower revenues in our
cash equity business, partly due to increased client facilita-
tion requirements by clients in the US and Europe. Fixed in-
come trading revenues, at CHF 6,204 million in 2006, were
up 8% or CHF 463 million from CHF 5,741 million in 2005.
Our rates business recorded significant increases with busi-
ness expansion in energy trading and in mortgage backed
securities driven by higher client activity and favorable mar-
ket conditions. This was partially offset by lower derivatives
income due to declining customer flows. The metals busi-
ness was positively affected by active markets, with the pre-
cious metals business benefiting from rising gold prices. Rev-
enues from our credit fixed income business were up slightly
compared with last year. We recorded a loss of CHF 245 mil-
lion relating to Credit Default Swaps (CDSs) hedging existing
credit exposure in the loan book, against a gain of CHF 103
million a year earlier. At CHF 1,745 million, revenues from
our foreign exchange business were up in 2006 compared
23
Financial Businesses
Results
with CHF 1,458 million recorded a year earlier. Foreign ex-
change trading revenues rose due to higher volumes.
Net income from interest margin products was CHF
5,829 million in 2006, up 9% from CHF 5,355 million in
2005, reflecting the growth in collateralized lending to
wealthy clients worldwide. It also reflected an increase in
spreads for US dollar, euro and Swiss franc deposits and
higher volumes of mortgages to Swiss clients. The wealth
management business in the US achieved higher levels of
deposits, and benefited from higher spreads on them. This
increase was partially offset by lower income from our shrink-
ing Swiss recovery portfolio, which dropped by CHF 0.7 bil-
lion compared to year-end 2005.
At CHF 891 million, net income from treasury and other
activities in 2006 was CHF 141 million or 19% higher than
CHF 750 million in 2005. Interest income increased due to
a higher consolidated capital base, partially offset by lower
interest rate spreads. Compared with last year, income
benefited from mark-to-market gains on USD foreign ex-
change options used to hedge the currency exposure arising
from future earnings. The US dollar fell against the Swiss
franc in 2006 while it increased in 2005. During 2005 trea-
sury revenues were negatively affected by the accounting
treatment of interest rate swaps, as these hedges were not
fully effective.
In 2006, we experienced a net credit loss recovery of
CHF 156 million, compared to a net credit loss recovery of
CHF 375 million in 2005. This result reflects the favorable
credit market environment that has prevailed over a pro-
longed period. World economic growth continued to be ro-
bust, despite a moderate slowdown in the US. Credit spreads
remained very tight in almost all major developed and emerg-
ing capital markets, as healthy expansion of cash flows al-
lowed the corporate sector to reduce leverage and build
liquidity. The ongoing positive macro-economic environment
in key emerging markets allowed the release of CHF 48 mil-
lion of collective loan loss provisions for country risk.
Net credit loss recovery at Global Wealth Management &
Business Banking amounted to CHF 109 million in 2006
compared with a net credit loss recovery of CHF 223 million
in 2005. The benign credit environment in Switzerland,
where the corporate bankruptcy rate continued to fall in
2006, coupled with the measures taken in recent years to
improve the quality of our credit portfolio has again resulted
in a low level of new defaults. The management of our im-
paired portfolio, which continues to shrink, has also contrib-
uted to this result.
The Investment Bank realized a net credit loss recovery of
CHF 47 million in 2006, compared with a net credit loss re-
covery of CHF 152 million in 2005. This continued strong
performance was the result of further recoveries of previ-
ously established allowances and provisions from the work-
out of the impaired portfolio, and no new defaults in 2006.
>> For further details on our risk management approach, how we
measure credit risk and the development of our credit risk
exposures, please see the “Risk Management” chapter of our
Handbook 2006 / 2007.
In 2006, net fee and commission income was CHF
25,881 million, up 21% from CHF 21,436 million a year ear-
lier. The increase was driven by a strong contribution from
recurring asset-based fees, higher investment fund fees and
net brokerage fees, rising underwriting fees as well as cor-
porate finance fees. Underwriting fees, at their highest lev-
el ever, were CHF 3,538 million in 2006, up 24% from
CHF 2,857 million in 2005. Equity underwriting fees, at
CHF 1,834 million, increased by CHF 493 million or 37% in all
regions, especially in Asia. This was partially due to our role in
the initial public offering of the Bank of China during second
quarter 2006, where we acted as joint coordinator and book-
runner. Fixed income underwriting fees, at CHF 1,704 million,
were up 12% or CHF 188 million, which reflects the strong
market conditions and our enhanced competitive position in
the leveraged finance business. At CHF 1,852 million, corpo-
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
24
For the year ended
% change from
31.12.06
31.12.05
31.12.04
31.12.05
6,521
13,318
19,839
4,759
6,204
1,745
411
13,119
5,829
891
19,839
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
(32)
67
13
21
8
20
41
15
9
19
13
Credit loss (expense) / recovery
CHF million
Global Wealth Management & Business Banking
Investment Bank
UBS
For the year ended
% change from
31.12.06
31.12.05
31.12.04
31.12.05
109
47
156
223
152
375
94
147
241
(51)
(69)
(58)
rate finance fees in 2006 were up 27% from CHF 1,460 mil-
lion a year earlier. Advisory gross revenues increased during
2006, as clients took advantage of strategic opportunities in
the brisk merger and acquisition environment and our grow-
ing franchise in this area. Net brokerage fees were CHF 6,149
million in 2006, up 21% or CHF 1,062 million from CHF 5,087
million in 2005, reflecting the improved markets and the re-
sulting higher confidence of institutional and individual cli-
ents – especially in the first half and at the end of 2006. Ad-
ditionally, higher income from exchange-traded derivatives
was driven by the acquisition of ABN AMRO’s global futures
and options business. Investment fund fees, at their highest
level ever, were CHF 5,858 million in 2006, up 23% from
CHF 4,750 million in 2005, mainly reflecting higher asset-
based fees for our wealth and asset management businesses,
driven by strong client money inflows and favorable market
conditions. Fiduciary fees were slightly higher in 2006, increas-
ing from CHF 212 million in 2005 to CHF 252 million, reflect-
ing an increase in the underlying asset base. At CHF 1,266
million, custodian fees in 2006 were up 8% from CHF 1,176
million in 2005. This increase was due to an enlarged asset
base. Portfolio and other management and advisory fees in-
creased by 25% to CHF 6,622 million in 2006 from CHF 5,310
million in 2005. The increase is again the result of rising in-
vested asset levels driven by market valuations and strong net
new money inflows and to a lesser extent due to higher per-
formance fees. Insurance-related and other fees, at CHF 449
million in 2006, increased by 21% from a year earlier, due to
higher commissions from insurance related products. Credit-
related fees and commissions decreased by 12% to CHF 269
million in 2006 from CHF 306 million in 2005, reflecting de-
clining business volumes and lower income from loans.
Commission income from other services increased by 4%
from CHF 1,027 million in 2005 to CHF 1,064 million in
2006, mainly driven by equity derivative products and higher
fees for credit cards.
Other income increased by 131% to CHF 1,295 million in
2006 from CHF 561 million in 2005. This was driven by gains
on our New York Stock Exchange membership seats, which
were exchanged into shares when it went public in March
2006. In addition we sold our stakes in the London Stock
Exchange, Babcock & Brown and EBS group.
Operating expenses
Total operating expenses increased by 18% to CHF 32,782
million in 2006 from CHF 27,704 million in 2005.
Net fee and commission income
CHF million
Equity underwriting fees
Debt 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
31.12.06
31.12.05
31.12.04
31.12.05
1,834
1,704
3,538
1,852
8,053
5,858
252
1,266
6,622
449
27,890
269
1,064
29,223
1,904
1,438
3,342
25,881
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
37
12
24
27
20
23
19
8
25
21
22
(12)
4
21
17
28
21
21
25
Financial Businesses
Results
Personnel expenses increased CHF 3,566 million or 18%
to CHF 23,469 million in 2006 from CHF 19,903 million in
2005. The rise was driven by higher performance-related
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
12% increase in personnel over the year, exemplifying the
continuous expansion of our business as well as annual
pay rises. Share-based components were up 34% or CHF
559 million to CHF 2,187 million from CHF 1,628 million,
mainly reflecting more share awards granted in 2006 and
the higher fair value of options, driven by the rise in the
share price. Contractors’ expenses, at CHF 822 million, were
CHF 1 million below 2005’s. Insurance and social security
contributions rose by 9% to CHF 1,374 million in 2006 com-
pared with CHF 1,256 million in 2005, reflecting higher
salary and bonus payments. Contributions to retirement
benefit plans rose 13% or CHF 90 million to CHF 802 million
in 2006 as a result of both higher salaries paid and the
increased staff levels. At CHF 1,564 million in 2006, other
personnel expenses increased CHF 174 million from 2005,
mainly driven by increased headcount.
At CHF 7,929 million in 2006, general and administrative
expenses increased CHF 1,481 million from CHF 6,448 mil-
lion a year ago. The increase was driven by a number of pro-
visions, mainly for the Sumitomo settlement and the long
term lease on an office building in New Jersey. Professional
fees rose for projects that support our growth strategy. IT
and other outsourcing costs, marketing and public relations
as well as expenses for market data services were driven up
by increased business volume. Higher staff levels resulted in
increased costs for occupancy and for travel.
Depreciation was CHF 1,245 million in 2006, almost un-
changed from CHF 1,240 million in 2005. Higher deprecia-
tion on real estate was partially offset by falling IT-related
charges.
There was no goodwill amortization in either 2006 or
2005.
At CHF 148 million, amortization of intangible assets was
up 17% from CHF 127 million a year earlier, related to acqui-
sitions made during 2006.
Tax
Tax expense for 2006 was CHF 2,751 million, resulting in an
effective tax rate of 19.1%, compared with the full-year
2005 tax rate of 18.8%. The tax rate for 2006 as a whole,
and particularly in fourth quarter, was positively influenced
by the release of deferred tax valuation allowances, mainly
reflecting improved forecast earnings in certain group com-
panies and branches. We believe that a tax rate of about
22% is a reasonable initial estimate for 2007.
Business Group tax rates
Indicative Business Group and Business Unit tax rates are cal-
culated on an annual basis based on the results and statu-
tory tax rates of the financial year. These rates are approxi-
mate calculations, based upon the application to the year’s
adjusted earnings of statutory tax rates for the locations in
which the Business Groups operated. These tax rates, there-
fore, give guidance on the tax cost of each Business Group
doing business during 2006 on a stand-alone basis, without
the benefit of tax losses brought forward from earlier years.
The indicative tax rates for 2004 are presented pre-good-
will. They give an indication of what the tax rate would have
been if goodwill had not been charged for accounting pur-
poses. It is the sum of the tax expense payable on net profit
before tax and goodwill in each location, calculated on the
above basis, divided by the total net profit before tax and
goodwill. Tax rates post-goodwill are higher than the pre-
goodwill rates, because in some jurisdictions there are limita-
tions 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 2006 rose to CHF 1,858
million, up CHF 477 million or 35% from CHF 1,381 million
a year earlier. The increase compared with 2005 is primarily
driven by higher performance-based compensation and a
rise in the proportion of bonuses being delivered in restricted
shares.
Indicative 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
1 The tax rates for 2004 are calculated based on pre-goodwill profits.
26
For the year ended
31.12.06
31.12.05
20
19
42
20
24
31
19
18
40
17
24
29
31.12.04 1
18
18
37
19
21
30
The fair value of options granted as of 31 December 2006
was CHF 564 million, up CHF 202 million or 56% from CHF
362 million in 2005. The increase reflects a higher fair value
per option, primarily due to a higher UBS share price.
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
Our group combines global scale and focus on growth in a
unique way. Our businesses occupy strong market positions
in those segments of the financial industry that are expected
to grow significantly faster than the economy as a whole
over the long term.
When we wrote to you on 13 February, we said that in
the short term, as the economic cycle matures, investors
might become more sensitive to any disappointing political
or economic developments, so our top-class risk control re-
mains paramount. Recent market developments appear to
confirm this hightened level of sensitivity. However, for UBS,
2007 has started on a positive note, with a strong deal pipe-
line and continued investor confidence and activity. With a
global presence that is balanced across the Americas, Europe
and Asia Pacific, the building blocks of our growth strategy
are firmly in place. Last year we made a highly concentrated
number of acquisitions while investing heavily in organic
growth. In 2007, our focus will be on integrating our new
areas of activity and we expect to start seeing the benefits
from them materializing for our clients and shareholders.
2005
Results
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, up
28% from CHF 7,357 million in 2004. Higher revenues in
practically all businesses drove the increase, clearly outpacing
growth in costs. Asset-based revenues showed particular
strength, reflecting rising market levels as well as strong
inflows into the wealth and asset management businesses.
We also saw a strong increase in brokerage, corporate
finance and underwriting fees. Income from trading activi-
ties was fueled by improved market opportunities, particu-
larly in second half 2005. Revenues from interest margin
products increased, reflecting the success and growth of
lending activities to wealthy private clients worldwide. We
also reported record credit loss recoveries. Personnel expen-
ses were up 12% from a year earlier; performance-related
payments rose with revenues and there was a general
increase in staff numbers. For 2005, 50% of personnel
expenses took the form of bonus or other variable compen-
sation, up from 49% a year earlier. General and administrative
expenses were up just 1% in 2005 from a year earlier.
Because of the strength of revenue growth and due to the
cessation of goodwill amortization in 2005, 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.
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.
Business Group performance from continuing operations before tax
CHF million
Wealth Management International & Switzerland
Wealth Management US
Business Banking Switzerland
Global Wealth Management & Business Banking
Global Asset Management
Investment Bank
Corporate Center
Financial Businesses
For the year ended
% change from
31.12.06
31.12.05
31.12.04
31.12.05
5,203
582
2,356
8,141
1,392
5,943
(1,087)
14,389
4,161
312
2,189
6,662
1,057
5,181
(708)
12,192
3,396
29
2,013
5,438
552
4,610
(778)
9,822
25
87
8
22
32
15
(54)
18
27
Financial Businesses
Results
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 trad-
ing income in 2005 was up 27% or CHF 830 million from
CHF 3,098 million in 2004. These gains were partially 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 income and fixed
income, partially offset by increased revenues in our rates,
principal finance and commercial real estate business. Credit
fixed income saw large revenue decreases in structured cred-
it. Revenues in our rates business were up, driven mainly by
structured LIBOR derivatives, European interest rates and US
energy 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 com-
pared with 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 higher 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 management
collateralized lending business also grew during the year. In
addition, revenues rose due to a rise in interest rates for
client liabilities. They 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
offset by lower income from our shrinking Swiss recovery
portfolio, which dropped by CHF 1.1 billion compared with
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 other
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 positive
timing effect related to cash flow hedging.
In 2005, we experienced a net credit loss recovery of CHF
375 million, compared with 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.
The net credit loss recovery at Global Wealth Manage-
ment & Business Banking was CHF 223 million in 2005 com-
pared with a net credit loss recovery of CHF 94 million in
2004. The benign credit environment in Switzerland, where
the corporate bankruptcy rate receded in 2005, coupled
28
with the measures taken in the years before to improve the
quality of our credit portfolio, resulted in a continued low
level of new defaults. The success we had in managing our
impaired portfolio 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 with a net credit
loss recovery of CHF 147 million in 2004. This continued
strong performance was the result of minimal exposure to
new defaults and strong recoveries of previously established
allowances and provisions as we actively sold impaired assets
at better than anticipated terms.
In 2005, net fee and commission income was CHF
21,436 million, up 16% from CHF 18,506 million a year ear-
lier. Underwriting fees were CHF 2,857 million in 2005, up
13% from CHF 2,531 million in 2004. Fixed income under-
writing fees increased due to significantly improved market
conditions and our enhanced competitive position, but were
slightly offset by lower equity underwriting fees. Fixed in-
come underwriting 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 increased notably during 2005, signalling the con-
tinued strength of merger and acquisition markets, and our
growing 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 improved markets and
the resulting higher confidence of institutional and individu-
al clients – especially in the second half of 2005. Investment
fund fees were CHF 4,750 million in 2005, up 20% from
CHF 3,948 million in 2004, mainly reflecting higher asset-
based fees for our wealth and asset management business-
es, driven by strong client money inflows and strong market
conditions. Fiduciary fees were slightly higher in 2005, in-
creasing 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 entirely 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 driven 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 commissions from insurance re-
lated products. Credit-related fees and commissions in-
creased 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 lower net
gains from both disposals of associates and subsidiaries and
from investments in property. This was partially offset by
higher net gains from disposal of investments in financial
assets available-for-sale.
Operating expenses
Total operating 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 million in
2004. The rise was driven by higher performance-related
compensation reflecting the better performance in all our
businesses. Salary expenses rose due to the 6% increase
in personnel over the year (excluding the staff of Private
Banks & GAM), showing the continuous expansion of our
business as well as annual pay rises. Share-based components
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 expenses.
Contractors’ expenses increased to CHF 823 million in 2005,
up 45% from CHF 567 million in 2004, mainly related to the
integration of former Perot employees into our central ITI
function. They also reflects higher usage, mainly in our Invest-
ment Bank in support of increased business flows. Insurance
and social security contributions rose by 23% to CHF 1,256
million in 2005 compared with CHF 1,024 million in 2004.
Contributions to retirement benefit plans were up 9% or CHF
61 million from CHF 651 million in 2004 to CHF 712 million in
2005. At CHF 1,390 million in 2005, other personnel expens-
es increased CHF 25 million from CHF 1,365 million in 2004,
mainly driven by increased headcount, partially offset by the
end of retention payments in the Wealth Management US
business and lower severance payments.
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 high-
er employee levels and further increases in business activity.
Marketing costs increased due to continued investment in our
brand. This was partially offset by lower provisions (2004 in-
cluded the civil penalty levied by the Federal Reserve Board
relating to our banknote trading business) and reduced ex-
penses 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 cease this so at the start of the year. In
2004, amortization of goodwill was CHF 646 million.
At CHF 127 million, amortization of intangible assets was
down 24% from CHF 168 million a year earlier, due to the
reclassification of the Wealth Management US workforce 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%. The tax rate for full-year 2005 was posi-
tively influenced by the absence of goodwill amortization
and the successful conclusion of tax audits in the third and
fourth quarters.
Fair value disclosure of shares and options
The fair value of shares granted in 2005 rose to CHF 1,381
million, 25% higher than CHF 1,109 million a year earlier.
The increase compared with 2004 was 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 reflected a lower fair value per option,
primarily due to a change in the valuation model, and a drop
in the number of options granted.
29
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 5,203 million, up 25%
from the result achieved in 2005. In the US, pre-tax profit rose to CHF 582 million from CHF 312 million a year
earlier. Business Banking Switzerland’s pre-tax profit was CHF 2,356 million, up 8% from 2005.
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 intangible assets
Total operating expenses
Business Group performance before tax
KPIs
Cost / income ratio (%) 3
Capital return and BIS data
Return on allocated regulatory capital (%) 4
BIS risk-weighted assets
Goodwill and excess intangible assets 5
Allocated regulatory capital 6
Additional information
Invested assets (CHF billion)
Net new money (CHF billion)
Client assets (CHF billion)
Personnel (full-time equivalents)
As of or for the year ended
31.12.06
21,775
156
21,931
9,043
306
9,349
3,028
1,118
232
0
63
13,790
8,141
31.12.05
19,131
107
19,238
8,252
237
8,489
2,845
960
226
0
56
12,576
6,662
31.12.04
17,506
(38)
17,468
7,630
235
7,865
2,473
1,137
202
238
115
12,030
5,438
63.3
65.7
68.7
39.3
155,158
5,978
21,494
2,123
114.5
3,337
48,034
34.7
147,348
5,407
20,142
1,887
98.5
2,895
44,612
31.3
134,004
3,648
17,048
1,524
63.0
2,306
42,570
% change from
31.12.05
14
46
14
10
29
10
6
16
3
13
10
22
5
11
7
13
15
8
1 In management accounts, adjusted expected credit loss rather than credit loss expense or recovery is reported for the business groups (see note 2 to the financial statements). 2 Additionally includes
social security contributions and expenses related to alternative investment awards. 3 Operating expenses / income. 4 Business Group performance before tax / average allocated regulatory capital.
5 Goodwill and intangible assets in excess of 4% of BIS Tier 1 Capital. 6 10% of BIS risk-weighted assets plus goodwill and excess intangible assets.
Marcel Rohner | Chairman and CEO
Global Wealth Management &
Business Banking
30
Wealth Management International & Switzerland
Business Unit 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 intangible assets
Total operating expenses
Business Unit performance before tax
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 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)
As of or for the year ended
% change from
31.12.06
10,827
(29)
10,798
2,999
138
3,137
885
1,479
84
0
10
5,595
5,203
1,138
97.6
103
51.7
47.5
4,742
7,907
862
90.8
101
1,010
144
18.2
870
31.12.05
31.12.04
31.12.05
9,024
(13)
9,011
2,491
88
2,579
804
1,371
89
0
7
4,850
4,161
982
68.2
102
53.7
47.7
4,154
6,476
729
64.2
100
722
114
21.8
803
7,701
(8)
7,693
2,047
72
2,119
642
1,395
66
67
8
4,297
3,396
778
42.3
103
55.8
47.9
3,744
5,429
562
40.4
102
437
82
13.7
838
20
123
20
20
57
22
10
8
(6)
43
15
25
16
1
14
22
18
1
40
26
8
1 In management accounts, adjusted expected credit loss rather than credit loss expense or recovery is reported for the business groups (see note 2 to the financial statements). 2 Additionally includes
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.
31
Financial Businesses
Global Wealth Management & Business Banking
Business Unit reporting (continued)
CHF million, except where indicated
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 allocated regulatory capital (%) 3
BIS risk-weighted assets
Goodwill and excess intangible assets 4
Allocated regulatory capital 5
Additional information
Recurring income 6
Client assets (CHF billion)
Personnel (full-time equivalents)
As of or for the year ended
% change from
31.12.06
31.12.05
31.12.04
31.12.05
2,920
276
6.8
110
81.2
51,485
1,740
6,889
8,143
1,436
13,564
2,548
253
4.0
109
78.9
43,369
1,566
5,903
6,635
1,235
11,555
2,272
216
1.9
106
82.5
31,903
1,176
4,366
5,679
972
10,093
15
9
1
19
11
17
23
16
17
1 Excludes interest and dividend income. 2 Income / average invested assets. 3 Business Unit performance before tax / average allocated regulatory capital. 4 Goodwill and intangible assets in excess
of 4% of BIS Tier 1 Capital. 5 10% of BIS risk-weighted assets plus goodwill and excess intangible assets. 6 Interest, asset-based revenues for portfolio management and fund distribution, account-
based and advisory fees.
Components of operating income
Wealth Management International & Switzerland derives its operating
income principally from:
–
–
–
–
fees for financial planning and wealth management services;
fees for investment management services;
transaction-related fees; and
interest income from client loans.
These revenues 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 factors such as fluc-
tuations in invested assets, changes in market conditions, investment
performance, inflows and outflows of client funds, and investor
activity levels.
2006
Key performance indicators
In 2006, net new money was a record CHF 97.6 billion,
compared with CHF 68.2 billion in 2005, representing an
annual growth rate of 10% of the underlying invested asset
base at end-2005. This outstanding result reflected increases
Net new money
CHF billion
2004
2005
2006
97.6
68.2
42.3
100
75
50
25
0
32
in all geographical regions throughout the year, particu-
larly in Asia Pacific and Europe, both a result of our growth
strategy.
Invested assets, at CHF 1,138 billion on 31 December
2006, were up 16% from CHF 982 billion a year earlier,
mainly reflecting the strong inflow of net new money and
Invested assets
CHF billion
31.12.04
31.12.05
31.12.06
1,250
1,000
750
500
250
0
253
729
216
562
276
862
International Clients
Swiss Clients
rising financial markets, with CHF 4.8 billion coming from
new assets gained from acquisitions we integrated in 2006.
This increase was partially offset by negative currency ef-
fects. The 7% fall of the US dollar against the Swiss franc
contributed to this decrease – approximately 36% of invest-
ed assets were denominated in US dollars at the end of
2006.
The gross margin on invested assets was 103 basis points
in 2006, up 1 basis point from 102 basis points a year earlier,
as the increase in recurring margin due to higher fee income
and increased Lombard lending was partly offset by a lower
non-recurring margin. Overall, recurring income made up
78 basis points of the margin in 2006, up from 75 basis points
in 2005. Non-recurring income comprised 25 basis points of
the margin in 2006, down 2 basis points from 2005.
Gross margin on invested assets
bps
2004
2005
2006
125
100
75
50
25
0
27
76
27
75
25
78
Excluding the European wealth management business,
the 2006 cost / income ratio fell to 47.5% from 47.7% a
year earlier.
European wealth management
Our European wealth management business continued to
make good progress. With a good performance in the UK
and Germany, particularly in the first half of the year, the
inflow of net new money in 2006 was CHF 18.2 billion,
down 17% from the 2005 intake of CHF 21.8 billion. The
result reflects an annual net new money growth rate of 16%
of the underlying asset base at year-end 2005, with positive
contributions from all five target markets.
Net new money European wealth management
CHF billion
2004
2005
2006
21.8
18.2
13.7
25
20
15
10
5
0
Gross margin on recurring income
Gross margin on non-recurring income
The cost / income ratio improved to 51.7% in 2006 from
53.7% a year earlier. The cost / income ratio has improved for
the fourth consecutive year despite the rise in costs in pursuit
of our global expansion strategy. This improvement reflects
the strong rise in income due to a higher asset base and
higher volumes in Lombard lending, which more than offset
the increase in personnel expenses (mainly headcount in-
crease and performance-related compensation) and higher
general and administrative costs.
Cost / income ratio
in %
2004
2005
2006
55.8
53.7
51.7
60
50
40
30
20
The level of invested assets was a record CHF 144 billion
on 31 December 2006, a 26% increase compared with CHF
114 billion a year earlier. This reflected rising equity markets
and new inflows across Europe, particularly in the first half
of the year.
Invested assets European wealth management
CHF billion
31.12.04
31.12.05
31.12.06
144
114
82
160
120
80
40
0
In 2006, income from our European wealth management
business was CHF 1,010 million, up 40% from a year earlier,
reflecting our growing asset and client base. The business
was profitable in all quarters of 2006 and all five markets
made a positive contribution.
33
Financial Businesses
Global Wealth Management & Business Banking
In 2006, the number of client advisors increased by 67.
The increase in client advisors was mainly in Italy and France.
We remain committed to growing our presence in our Euro-
pean target markets and will continue to invest in qualified
advisory staff.
Results
In 2006, pre-tax profit, at a record CHF 5,203 million, was up
25% compared with 2005. This increase reflects higher as-
set-based fees as well as rising interest income, a reflection
of higher volumes in our Lombard lending business. Operat-
ing expenses, up 15% in 2006 from 2005, also rose as our
business expanded. Personnel expenses rose 22% due to the
hiring of an additional 2,009 employees.
awards and the increased fair value of options. General and
administrative expenses, at CHF 885 million, were up 10% in
2006 from CHF 804 million a year earlier due to investments
in our physical and IT infrastructure, as well as travel and
entertainment and marketing costs – all a consequence of
our continuous business expansion. Expenses for services
from other business units, at CHF 1,479 million in 2006,
were up 8% from CHF 1,371 million the previous year, mainly
due to higher information technology charges. Depreciation
was CHF 84 million in 2006, down 6% from CHF 89 million
a year earlier because of lower charges for information tech-
nology equipment. Amortization of intangible assets was
CHF 10 million, practically unchanged from CHF 7 million
in 2005.
Performance before tax
CHF million
2005
2004
2005
2006
Key performance indicators
5,203
4,161
3,396
6,000
4,800
3,600
2,400
1,200
0
Operating income
Total operating income in 2006 was CHF 10,798 million, up
20% from CHF 9,011 million a year earlier. This was the
highest level ever, reflecting a rise in recurring as well as in
non-recurring revenues. Recurring income increased 23%
on rising asset-based fees, benefiting from a buoyant market
and net new money inflows. This was accentuated by higher
interest income due to the expansion of our margin lending
activities. Non-recurring income rose due to higher broker-
age fees, reflecting high client activity levels. These positive
effects were offset by the depreciation of the US dollar
against the Swiss franc.
Operating expenses
At CHF 5,595 million, operating expenses in 2006 were up
15% from CHF 4,850 million a year earlier, reflecting higher
personnel expenses and general and administrative expenses
as well as the ongoing investment in our growth initiatives.
Personnel expenses rose 22% to CHF 3,137 million in 2006
compared with CHF 2,579 million a year earlier, reflecting
the increase in salaries from the expansion of our business as
well as higher performance-related compensation. Share-
based expenses in 2006 increased due to higher share
34
In 2005, net new money inflows totaled CHF 68.2 billion, up
61% from CHF 42.3 billion in 2004. This increase was driven
by gains in all geographical areas, especially from Asian
clients, and a particularly strong 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-
mately 36% of invested assets were denominated in US dol-
lars at the end of 2005.
The gross margin on invested assets was 102 basis points
in 2005, down 1 basis point from 103 basis points a year
earlier, 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.
The cost / income ratio improved to 53.7% in 2005 from
55.8% a year earlier, reflecting the strong rise in income,
which more than offset the increase in personnel expenses
(mainly performance-related compensation) and higher gen-
eral and administrative costs. Excluding the European wealth
management business, the 2005 cost / income ratio fell to
47.7% from 47.9% a year earlier.
European wealth management
In 2005, 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 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.
The level of invested assets was 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
rising equity market levels and a 15% appreciation of the US
dollar against the Swiss franc.
In 2005, income from our European wealth management
business was CHF 722 million, up 65% from a year earlier,
reflecting 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
Sauerborn Trust employees, and the departure of less pro-
ductive client advisors.
Results
Wealth Management International and Switzerland’s 2005
pre-tax profit, at CHF 4,161 million, increased 23% from
2004, mainly due to higher asset-based fees, and strength-
ening client activity. Rising interest income, a reflection of
the expansion of our margin lending activities, also bolstered
revenues. At the same time, our expenses, up 13% in 2005
from 2004, reflect our ongoing growth strategy.
Operating income
Total operating income in 2005 was CHF 9,011 million, up
17% from CHF 7,693 million in 2004. Recurring income
increased 17% on rising asset-based fees, benefiting from
gains in asset levels. This was accentuated by higher interest
income due to the expansion of our margin lending activi-
ties. Non-recurring income rose due to higher brokerage
fees and commissions for sales of investment funds, reflect-
ing an increase in client activity levels. 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
13% from CHF 4,297 million a year earlier, reflecting higher
personnel expenses as well as the ongoing investment 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.
General and administrative 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. There
was no amortization of goodwill in 2005, due to a change in
accounting. In 2004, amortization of goodwill totaled CHF 67
million. Amortization of intangible assets was CHF 7 million,
practically unchanged from CHF 8 million in 2004.
35
Financial Businesses
Global Wealth Management & Business Banking
Wealth Management US
Business Unit 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 intangible assets
Total operating expenses
Business Unit performance before tax
KPIs
Invested assets (CHF billion)
Net new money (CHF billion) 3
Interest and dividend income (CHF billion) 4
Gross margin on invested assets (bps) 5
Cost / income ratio (%) 6
Recurring income 7
Revenues per advisor (CHF thousand) 8
Capital return and BIS data
Return on allocated regulatory capital (%) 9
BIS risk-weighted assets
Goodwill and excess intangible assets 10
Allocated regulatory capital 11
Additional information
Client assets (CHF billion)
Personnel (full-time equivalents)
Financial advisors (full-time equivalents)
As of or for the year ended
% change from
31.12.06
31.12.05
31.12.04
31.12.05
5,863
0
5,863
3,683
117
3,800
1,073
281
74
0
53
5,281
582
824
15.7
22.2
76
90.1
3,488
776
10.2
18,308
4,238
6,069
909
18,557
7,880
5,158
(2)
5,156
3,353
107
3,460
1,047
223
65
0
49
4,844
312
752
26.9
18.3
75
93.9
2,834
690
5.8
18,928
3,841
5,734
826
17,034
7,520
4,741
(5)
4,736
3,206
114
3,320
767
275
67
171
107
4,707
29
606
18.1
15.3
77
99.3
2,343
633
0.6
17,664
2,472
4,238
679
16,969
7,519
14
(100)
14
10
9
10
2
26
14
8
9
87
10
21
1
23
12
(3)
10
6
10
9
5
1 In management accounts, adjusted expected credit loss rather than credit loss expense or recovery is reported for the Business Groups (see note 2 to the financial statements). 2 Additionally includes
social security contributions and expenses related to alternative investment awards. 3 Excludes interest and dividend income. 4 For purposes of comparison with US peers. 5 Income / average in-
vested assets. 6 Operating expenses / income. 7 Interest, asset-based revenues for portfolio management and fund distribution, account-based and advisory fees. 8 Income (includes net goodwill
funding) / average number of financial advisors. 9 Business Unit performance before tax / average allocated regulatory capital. 10 Goodwill and intangible assets in excess of 4% of BIS Tier 1 Capi-
tal. 11 10% of BIS risk-weighted assets plus goodwill and excess intangible 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 revenues 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 fluc-
tuations in invested assets, changes in market conditions, investment
performance, inflows and outflows of client funds, and investor
activity levels.
36
2006
Key performance indicators
The inflow of net new money in 2006 was CHF 15.7 billion,
down 42% from CHF 26.9 billion in 2005. Although the
result was lower, the inflow of net new money compared
favorably with peers in terms of growth rate relative to the
asset base.
Including interest and dividends, net new money in
2006 was CHF 37.9 billion, down from CHF 45.2 billion a
year earlier.
Net new money
CHF billion
Gross margin on invested assets1
bps
2004
2005
2006
125
100
75
50
25
0
39
38
34
41
31
45
30
25
20
15
10
2004
2005
2006
Gross margin on recurring income
Gross margin on non-recurring income
1 Includes costs from the PaineWebber acquisition.
26.9
18.1
15.7
reflects higher operating income due to strong growth in
recurring income, partially offset by a rise in expenses mainly
reflecting higher personnel expenses in support of growth
initiatives and the integration of the Piper Jaffray private
client branch network.
–12% in US dollar
Cost / income ratio1
in %
Wealth Management US had CHF 824 billion in invested
assets on 31 December 2006, up 10% from CHF 752 billion
on 31 December 2005. The increase was due to the strong
market performance in 2006 as well as to the inclusion
of the private client branch network of Piper Jaffray in the
third quarter, adding CHF 54 billion of invested assets on a
net basis. In US dollar terms, invested assets were 18%
higher on 31 December 2006 than they were on the same
date in 2005.
100
80
60
40
20
2004
99.3
2005
2006
93.9
90.1
1 Includes costs from the PaineWebber acquisition.
Invested assets
CHF billion
31.12.04
31.12.05
31.12.06
900
800
700
600
500
824
752
606
The gross margin on invested assets was 76 basis points
in 2006, up from 75 basis points in 2005. The increase is
mainly a result of the gain in revenues outpacing the increase
in average invested asset levels over the year.
The cost / income ratio was 90.1% for 2006, compared
to 93.9% in 2005. The decrease in the cost / income ratio
In 2006, recurring income was a record CHF 3,488 mil-
lion, up 23% from CHF 2,834 million a year earlier. Excluding
the impact of currency fluctuations, recurring income was
also up 23% in 2006 from 2005. This increase mainly reflects
+10% in US dollar
Recurring income
CHF million
2004
2005
2006
3,488
+15% in US dollar
2,834
2,343
3,500
3,000
2,500
2,000
1,500
37
70
64
58
52
46
40
109.375007
93.750006
78.125005
62.500004
46.875003
30
31.250002
25
15.625001
0.000000
20
15
10
As reported
Adjusted for goodwill and significant financial events
As reported 6
Before goodwill and adjusted for significant financial events 7
3500
3000
2500
2000
1500
900
800
700
600
500
100
80
60
40
20
Financial Businesses
Global Wealth Management & Business Banking
higher levels of managed account fees on a record level of
invested assets, higher investment advisory fees and higher
net interest income. Recurring income represented 59% of
income in 2006 compared with 55% in 2005.
Revenue per advisor increased in 2006 to CHF 776,000
from CHF 690,000 in 2005 as a slightly higher average num-
ber of financial advisors was able to produce significantly
higher recurring income than a year earlier. The number of
financial advisors rose by 5% compared to 2005, increasing
by 360 advisors to 7,880 at the end of 2006. The increase
was due to the Piper Jaffray private client group branch net-
work acquisition in third quarter.
Revenues per advisor1
CHF thousand
Performance before tax1
CHF million
2004
2005
600
450
300
150
0
312
1 Includes costs from the PaineWebber acquisition.
29
2006
582
2004
2005
633
690
2006
776
1 Income (including net goodwill funding)/average number of financial advisors.
800
600
400
200
0
Financial advisors
full-time equivalents
31.12.04
31.12.05
31.12.06
7,519
7,520
7,880
8,000
7,000
6,000
5,000
4,000
Results
In 2006, we reported a pre-tax profit of CHF 582 million
compared to CHF 312 million in 2005. Because this business
is almost entirely conducted in US dollars, comparisons of
results with prior periods are affected by the movements of
the US dollar against the Swiss franc. In US dollar terms, per-
formance in 2006 was up 86% from 2005. Performance in
2006 benefited from record levels of recurring income, and
lower litigation provisions.
Operating income
In 2006, total operating income was CHF 5,863 million, up
14% compared to CHF 5,156 million in 2005. Excluding cur-
rency effects, operating income also increased by 14% from
2005. The increase in operating income is primarily due to
strong growth in recurring income based on higher levels of
assets.
Operating expenses
Total operating expenses rose 9% to CHF 5,281 million in
2006 from CHF 4,844 million in 2005. Excluding currency
effects, operating expenses were also 9% higher. This re-
flects higher personnel costs and general and administra-
tive expenses, both also related to strategic growth initia-
tives in support of our business and the Piper Jaffray private
client branch network inclusion and the New Jersey office
provision that was made after the decision to sublet un-
used office space instead of occupying it ourselves. This
was offset by a lower impact of litigation provisions com-
pared to 2005.
Personnel expenses increased by CHF 340 million or
10%, with higher salaries as well as share-based compen-
sation reflecting rising headcount and more financial advi-
sor compensation related to higher compensable revenue.
General and administrative expenses increased 2% to CHF
1,073 million in 2006 from CHF 1,047 million in 2005. In
US dollar terms, they also rose 2%, reflecting higher occu-
pancy and marketing expenses, partially offset by lower
litigation provisions compared to 2005. Services from other
business units increased by 26% from CHF 223 million in
2005 to CHF 281 million in 2006. Depreciation was also
higher due to leasehold improvement. The amortization of
intangibles was CHF 53 million in 2006, up 8% from CHF
49 million, mainly due to the acquisition of the Piper Jaffray
private client branch network.
38
600
450
300
150
0
800
600
400
200
0
8000
7000
6000
5000
4000
2005
Results
Key performance indicators
In 2005, inflows of net new money were CHF 26.9 billion,
up 49% from CHF 18.1 billion in 2004. Including interest
and dividends, net new money in 2005 was CHF 45.2 billion,
up from CHF 33.4 billion a year earlier.
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.
The gross margin on invested assets was 75 basis points
in 2005, down from 77 basis points in 2004.
The cost / income ratio was 93.9% for 2005, compared to
99.3% in 2004. The decrease in the cost / income ratio reflects
higher income which was slightly offset by higher expenses.
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 man-
aged account fees on invested assets, and increased net in-
terest income from the lending business. Flows into man-
aged account products were USD 16.7 billion in full-year
2005, comparing favorably to the USD 12.7 billion flow for
full-year 2004.
Revenues per advisor increased in 2005 to CHF 690,000
from CHF 633,000 in 2004 as practically the same number
of financial advisors were able to produce higher recurring
income than a year earlier. The number of financial advisors
increased by 1 to 7,520 at the end of 2005. Increases in
highly efficient financial advisors and trainees were offset by
attrition among less productive advisors.
In 2005, we reported a pre-tax profit of CHF 312 million
compared to CHF 29 million in 2004. This increase reflects
mainly higher recurring income which was slightly offset by
increased expenses.
Operating income
In 2005, total operating income was CHF 5,156 million,
up 9% compared to CHF 4,736 million in 2004. Excluding
currency effects, operating income increased by 8% from
2004. The increase in operating income is primarily due to
higher recurring income based on higher levels of assets and
rising net interest income in UBS Bank USA, which was
slightly offset by lower transactional revenues.
Operating expenses
Total operating expenses rose 3% to CHF 4,844 million in
2005 from CHF 4,707 million in 2004. Excluding currency
effects, operating expenses were 2% higher primarily due to
the impact of increased litigation provisions in second half
2005.
Personnel expenses increased by CHF 140 million due to
higher variable compensation. Excluding the currency trans-
lation effect, the increase in personnel expenses amounted
to 3%. General and administrative expenses 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. 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). There was no goodwill amortization in
2005 due to accounting changes. In 2004, amortization of
goodwill totaled CHF 171 million. The amortization of intan-
gibles was CHF 49 million in 2005, down 54% due to the
reclassification of certain intangible assets. Under the new
accounting rules, these assets are classified as goodwill,
which is no longer amortized.
39
Financial Businesses
Global Wealth Management & Business Banking
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 intangible assets
Total operating expenses
Business Unit performance before tax
KPIs
Invested assets (CHF billion)
Net new money (CHF billion) 3
Cost / income ratio (%) 4
Impaired lending portfolio as a % of total lending portfolio, gross
Capital return and BIS data
Return on allocated regulatory capital (%) 5
BIS risk-weighted assets
Goodwill and excess intangible assets 6
Allocated regulatory capital 7
Additional information
Deferral (included in adjusted expected credit loss)
Client assets (CHF billion)
Personnel (full-time equivalents)
As of or for the year ended
% change from
31.12.06
31.12.05
31.12.04
31.12.05
3,339
1,746
5,085
185
5,270
2,361
51
2,412
1,070
(642)
74
0
0
2,914
2,356
161
1.2
57.3
1.7
27.5
85,365
0
8,537
512
992
15,913
3,317
1,632
4,949
122
5,071
2,408
42
2,450
994
(634)
72
0
0
2,882
2,189
153
3.4
58.2
2.3
25.6
85,051
0
8,505
485
834
16,023
3,390
1,674
5,064
(25)
5,039
2,377
49
2,426
1,064
(533)
69
0
0
3,026
2,013
140
2.6
59.8
3.0
23.2
84,437
0
8,444
411
655
15,508
1
7
3
52
4
(2)
21
(2)
8
(1)
3
1
8
5
0
0
6
19
(1)
1 In management accounts, adjusted expected credit loss rather than credit loss expense or recovery is reported for the Business Groups (see note 2 to the financial statements). 2 Additionally includes
social security contributions and expenses related to alternative investment awards. 3 Excludes interest and dividend income. 4 Operating expenses / income. 5 Business Unit performance before
tax / average allocated regulatory capital. 6 Goodwill and intangible assets in excess of 4% of BIS Tier 1 Capital. 7 10% of BIS risk-weighted assets plus goodwill and excess intangible assets.
Components of operating income
Business Banking Switzerland derives its operating income principally
from:
– net interest income from its lending 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.
40
2006
Key performance indicators
Net new money was CHF 1.2 billion in 2006, CHF 2.2 billion
lower than the inflow of CHF 3.4 billion in 2005. This was
due to a decrease in inflows from existing clients, combined
with transfers of client assets from discretionary to custody
mandates.
Invested assets rose to CHF 161 billion in 2006 from CHF
153 billion a year earlier, driven by positive market develop-
ments and net new money inflows. This was slightly offset
by the transfer of assets to Wealth Management Inter-
national & Switzerland. Over the course of 2006, we trans-
ferred CHF 8.2 billion in client assets from the Business
Banking Switzerland unit to the Wealth Management Inter-
national & Switzerland unit, reflecting the development of
client relationships. In 2005, we transferred CHF 8.6 billion
in client assets for the same reason.
In 2006 the cost / income ratio stood at 57.3%, 0.9 per-
centage points lower than the previous year’s ratio of 58.2%,
as the rise in income outpaced the increase in expenses.
Business Banking Switzerland’s gross lending portfolio
was CHF 143.4 billion on 31 December 2006, up 1% from
the previous year, due to an increase in volumes of private
Cost / income ratio
in %
client mortgages, which more than offset the ongoing
reduction of our recovery portfolio, which fell to CHF 2.6
billion from CHF 3.3 billion a year earlier. This positive devel-
opment was also reflected in the key credit quality ratio of
the impaired lending portfolio, gross, to the total lending
portfolio, gross, which was 1.7% compared to 2.3% in
2005.
The return on allocated regulatory capital was 27.5% for
2006, up 1.9 percentage points from 25.6% a year earlier.
This reflects the increased profitability of the business unit,
outpacing the increase in risk-weighted assets.
Return on allocated regulatory capital
in %
2004
2005
23.2
25.6
2006
27.5
28
21
14
7
0
Results
60
55
50
45
40
2004
59.8
2005
2006
58.2
57.3
Pre-tax profit in 2006, at a record level of CHF 2,356 mil-
lion, was CHF 167 million or 8% above the result achieved
in 2005. This was mainly due to income growth. In 2006
non-interest income rose due to higher asset-based and
brokerage fees. The result also shows the continued tight
management of our cost base, and an adjusted expected
credit loss recovery of CHF 185 million. While personnel
costs were at their lowest levels, general and administrative
expenses increased, reflecting the outsourcing of Edelweiss
facility management.
Impaired lending portfolio, gross/
total lending portfolio, gross
in %
Performance before tax
CHF million
31.12.04
31.12.05
31.12.06
2004
2005
2006
As reported
Adjusted for goodwill and significant financial events
5
4
3
2
1
0
3.0
2.3
1.7
2,500
2,000
1,500
1,000
500
0
2,189
2,356
2,013
70
64
58
52
46
40
41
28
21
14
7
0
As reported 6
Before goodwill and adjusted for significant financial events 7
2500
1875
1250
625
0
60
55
50
45
40
5.00
3.75
2.50
1.25
0.00
Financial Businesses
Global Wealth Management & Business Banking
Operating income
Total operating income in 2006 was CHF 5,270 million,
up slightly from 2005’s level of CHF 5,071 million. Interest
income increased by 1% to CHF 3,339 million in 2006
from CHF 3,317 million in 2005. The slight increase reflects
the expansion of our loan portfolio as well as higher invest-
ment interest rates on our variable rate accounts, offset
by lower revenues from our reduced recovery portfolio. Non-
interest income increased by CHF 114 million to CHF 1,746
million in 2006 from CHF 1,632 million in 2005, reflecting a
higher asset base as well as valuation gains from equity par-
ticipations and divestment proceeds. Adjusted expected
credit loss recoveries, at CHF 185 million in 2006, increased
from recoveries of CHF 122 million in 2005. This positive re-
sult reflects the deferred benefit of the structural improve-
ment in our loan portfolio in recent years.
Operating expenses
Operating expenses in 2006 were CHF 2,914 million, up 1%
from CHF 2,882 million in 2005. Personnel expenses, at CHF
2,412 million, were down 2% from CHF 2,450 million in
2006, due to lower salary costs reflecting the outsourcing of
Edelweiss, partly offset by higher share-based expenses,
mainly reflecting higher share awards and the higher fair
value of options in 2006. General and administrative expens-
es, at CHF 1,070 million in 2006, rose and were 8% higher
than the CHF 994 million recorded in 2005, mainly due to
the outsourcing of Edelweiss facility management at the end
of 2005. Net charges to other business units continued to
rise to CHF 642 million in 2006 from CHF 634 million in
2005 because of lower charges-in for IT services. Deprecia-
tion in 2006 slightly increased to CHF 74 million from CHF
72 million in 2005 due to higher expenses for information
technology equipment.
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.
Business Banking Switzerland’s gross lending 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 mortgages and higher credit demand from
corporate clients were 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. The
ratio of the gross impaired lending portfolio to gross lending
portfolio was 2.3% compared to 3.0% in 2004.
The return on allocated 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,
outpacing the increase in risk-weighted assets.
Results
Pre-tax profit in 2005 was CHF 2,189 million, CHF 176 mil-
lion or 9% higher than the result achieved in 2004. It was
achieved despite a CHF 115 million fall in income, driven
mainly by lower interest income. The result shows the con-
tinued tight management of our cost base, with an adjusted
expected credit loss recovery of CHF 122 million reflecting
the structural improvement in our loan portfolio in recent
years. While general and administrative costs were at their
lowest levels, personnel expenses increased slightly, reflect-
ing an increase in staff levels.
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 reve-
nues from our reduced recovery portfolio, as well as lower
interest margins in our mortgage business. This was par-
tially 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. Adjusted ex-
pected credit loss recoveries, at CHF 122 million in 2005,
increased from an adjusted expected 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
personnel, partly offset by lower share-based expenses as
less share awards have been granted. General and admini-
strative expenses, at CHF 994 million in 2005, continued to
42
drop and were 7% lower than the CHF 1,064 million re-
corded in 2004, reflecting our continuing tight cost con-
trols. Net charges to other business units rose to CHF 634
million in 2005 from CHF 533 million in 2004 because of
lower charges-in for IT services and insurance. Depreciation
in 2005 slightly increased to CHF 72 million from CHF 69
million in 2004 due to higher expenses for information
technology equipment.
43
Financial Businesses
Global Asset Management
Global Asset Management
Pre-tax profit was CHF 1,392 million in 2006, an increase of 32% from the 2005 profit of CHF 1,057 million.
Compared with 2005, the increase reflects higher management fees in all businesses and alternative and quan-
titative investment performance fees. The result was partly offset by higher operating expenses, reflecting
increased staffing, performance-related compensation and investments in strategic initiatives and IT projects.
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 intangible assets
Total operating expenses
Business Group performance before tax
KPI
Cost / income ratio (%) 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
As of or for the year ended
% change from
31.12.06
31.12.05
31.12.04
31.12.05
1,803
1,417
3,220
1,305
198
1,503
399
(105)
27
0
4
1,828
1,392
56.8
519
28
29.8
11.0
38
1,330
1,157
2,487
899
89
988
304
116
21
0
1
1,430
1,057
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
72.7
344
17
23.7
(1.2)
32
36
22
29
45
122
52
31
29
300
28
32
18
75
12
1 Additionally includes social security contributions and expenses related to alternative investment awards. 2 Operating expenses / operating income. 3 Excludes interest and dividend income.
4 Operating income / average invested assets.
John A. Fraser | Chairman and CEO
Global Asset Management
44
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 allocated regulatory capital (%) 3
BIS risk-weighted assets
Goodwill and excess intangible assets 4
Allocated regulatory capital 5
Additional information
Invested assets (CHF billion)
Net new money (CHF billion)
Personnel (full-time equivalents)
As of or for the year ended
% change from
31.12.06
31.12.05
31.12.04
31.12.05
347
59
7.4
(2.5)
43
84.8
2,723
1,677
1,949
866
37.2
3,436
324
62
28.2
(9.7)
40
69.9
1,570
1,438
1,595
765
49.5
2,861
257
64
(4.5)
(20.6)
36
36.4
1,702
1,189
1,359
601
19.2
2,665
7
(5)
8
73
17
22
13
20
1 Excludes interest and dividend income. 2 Operating income / average invested assets. 3 Business Group performance before tax / average allocated regulatory capital. 4 Goodwill and intangible
assets in excess of 4% of BIS Tier 1 Capital. 5 10% of BIS risk-weighted assets plus goodwill and excess intangible assets.
Components of operating income
Global Asset Management generates its revenue from the asset
management 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 cur-
rency valuation levels, as well as flows of client funds, and relative
investment performance.
45
Financial Businesses
Global Asset Management
2006
Net new money, institutional
CHF billion
Key performance indicators
2004
2005
2006
For 2006, the cost / income ratio was 56.8%, a decrease of
0.7 percentage points from 2005. This was a result of im-
proving operating income, representing higher management
fees across all businesses, combined with significantly higher
performance fees in alternative and quantitative invest-
ments. This was partly offset by increased operating ex-
penses from increased staff levels and higher variable per-
sonnel expenses, in line with business growth.
30
20
10
0
(10)
24.9
24.3
18.8
11.0
(1.2)
(3.0)
Non-money market funds
Money market funds
Cost/income ratio
in %
2004
2005
2006
57.5
56.8
Gross margin on invested assets, institutional
bps
2004
2005
2006
72.7
80
70
60
50
40
30
Institutional
Institutional invested assets were CHF 519 billion on 31 De-
cember 2006 – up 18% from CHF 441 billion on 31 Decem-
ber 2005, reflecting positive market performance (mainly in
equities), strong net new money inflow and the inclusion of
Pactual.
In 2006, net new money inflows were CHF 29.8 billion,
up from the CHF 21.3 billion recorded in 2005. Strong in-
flows were reported in most asset classes, partly offset by
outflows from equity mandates.
Invested assets, institutional
CHF billion
31.12.04
31.12.05
31.12.06
The gross margin on invested assets for 2006 was
38 basis points, up 4 basis points from 2005. The increase is
due to income growth, mainly driven by strong performance
fees and Dillon Read Capital Management (DRCM) revenues
from outside clients, which outpaced the growth in average
invested assets.
38
34
32
40
35
30
25
20
Wholesale intermediary
Invested assets were CHF 347 billion on 31 December 2006,
up by CHF 23 billion from 31 December 2005, reflecting
positive market performance, net new money inflows and
the inclusion of Pactual.
Invested assets, wholesale intermediary
CHF billion
31.12.04
31.12.05
31.12.06
600
480
360
240
120
0
46
16
425
17
327
28
491
400
300
200
100
0
62
262
59
288
64
193
Non-money market funds
Money market funds
Non-money market funds
Money market funds
600
450
300
150
0
400
300
200
100
0
30
20
10
0
-10
As reported 6
Before goodwill and adjusted for significant financial events 7
48.0
38.4
28.8
19.2
9.6
0.0
40
35
30
25
20
In 2006, net new money was CHF 7.4 billion, down from
CHF 28.2 billion a year earlier. In 2005, net new money in-
flows resulted from the large number of product launches
across all major asset classes. In 2006 we experienced out-
flows in fixed income and equities while continuing to expe-
rience inflows into multi-asset funds.
Net new money, wholesale intermediary
CHF billion
2004
2005
2006
37.9
16.1
(20.6)
(9.7)
9.9
(2.5)
45
30
15
0
(15)
(30)
Non-money market funds
Money market funds
The 2006 gross margin on invested assets was 43 basis
points, up by 3 basis points from a year earlier, largely driven
by increased management fees.
Gross margin on invested assets,
wholesale intermediary
bps
2004
2005
2006
40
43
36
50
40
30
20
10
Performance before tax
CHF million
2004
2005
2006
1,600
1,200
800
400
0
1,392
1,057
552
Results
We had a very strong full-year result in 2006. Pre-tax profit
was CHF 1,392 million, up from CHF 1,057 million a year
earlier. The increase reflects higher management fees in all
businesses and alternative and quantitative investment per-
formance fees. The result was partly offset by higher operat-
ing expenses, reflecting increased staffing, performance-re-
lated compensation and investments in strategic initiatives
and IT projects.
Operating income
In 2006, operating income was CHF 3,220 million, up 29%
from CHF 2,487 million a year earlier. Institutional revenues
increased by 36% to CHF 1,803 million in 2006 from CHF
1,330 million in 2005, reflecting higher management fees in
most investment areas, the result of net new money inflows
and higher financial market valuations, combined with sig-
nificantly higher performance
in alternative
and quantitative investments. Wholesale intermediary reve-
nues rose by 22% to CHF 1,417 million in 2006 from CHF
1,157 million in 2005, reflecting higher management fees
in most areas due to net new money inflows and higher
market valuations.
fees
Operating expenses
In 2006, operating expenses increased to CHF 1,828 million
from CHF 1,430 million in 2005, due to higher staff levels
and performance-related compensation. Personnel expenses
were CHF 1,503 million in 2006, 52% above 2005, mainly
due to the inclusion of DRCM. General and administrative
expenses increased by 31% to CHF 399 million in 2006 from
CHF 304 million in 2005 mainly due to investments in strate-
gic initiatives. Other business units were charged CHF 105
million compared to the net charges from other business
units of CHF 116 million a year earlier, mainly reflecting high-
er net charges-out to the Investment Bank for investment
management services provided by DRCM. Over the same pe-
riod, depreciation increased by CHF 6 million to CHF 27 mil-
lion. Amortization of intangible assets slightly increased to
CHF 4 million in 2006.
2005
Key performance indicators
For 2005, the cost / income ratio was 57.5%, a decrease of
15.2 percentage points from 2004. This was a result of
improving operating income across all businesses, mainly in-
duced by higher asset-based fees. This was also helped by
declining operating expenses, mainly the result of the dis-
continuation of goodwill amortization in 2005.
47
As reported 6
Before goodwill and adjusted for significant financial events 7
45.00
26.25
7.50
-11.25
-30.00
48.0
38.4
28.8
19.2
9.6
0.0
50
40
30
20
10
1600
1200
800
400
0
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
2004. Although inflows in traditional investments continued
to grow, alternative and quantitative investments did not
reach the same level as a year earlier.
The gross margin on invested assets for full-year 2005
was 34 basis points, slightly above the 32 basis points of full-
year 2004.
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.
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
income, asset allocation).
The 2005 gross margin on invested assets was 40 basis
points, up by 4 basis points from a year earlier, reflecting
shifts into higher margin asset classes.
Results
Pre-tax profit was CHF 1,057 million, an increase of 91%
from 2004. The increase was driven by higher operating in-
come, which rose 23%, reflecting strong net new money
inflows and a positive market environment that resulted
in higher asset valuations. In addition, performance fees,
particularly in alternative and quantitative investments, in-
creased. Operating expenses decreased, mainly as a result of
the discontinuation of goodwill amortization in 2005, which
was partially offset by higher personnel expenses, which
rose with the growth of the business.
Operating income
In 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 environ-
ment resulting in higher asset valuations and consequently
higher asset-based income across all businesses. In addition,
performance fees, particularly in alternative and quantitative
investments, increased significantly. Institutional revenues in-
creased by 23% to CHF 1,330 million in 2005 from CHF 1,085
million in 2004, reflecting higher management fees in all ar-
eas, and higher performance fees, mainly in alternative and
quantitative investments. Wholesale intermediary revenues
rose by 23% to CHF 1,157 million in 2005 from CHF 937 mil-
lion in 2004, reflecting higher management fees in all areas
due to net new money inflows and higher market valuations.
Operating expenses
In 2005, operating expenses decreased to CHF 1,430 million
from CHF 1,470 million in 2004, primarily due to the discon-
tinuation of goodwill amortization and partially offset by high-
er personnel costs, which rose with the growth of
the business. Personnel 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 de-
creased by CHF 10 million to CHF 116 million in 2005 from
CHF 126 million in 2004, partly due to higher charges-out to
the wealth management businesses reflecting the higher
demand for specialized investment research. Over the same
period, depreciation remained virtually unchanged at CHF 21
million, down by only CHF 2 million. There was no amortiza-
tion of goodwill in 2005 due to a change in accounting. In
2004, amortization of goodwill totaled CHF 129 million. Amor-
tization of intangible assets increased slightly to CHF 1 million
due to the acquisition of Siemens’ real estate business.
48
Financial Businesses
Investment Bank
Investment Bank
In 2006, the Investment Bank’s pre-tax profit was CHF 5,943 million, up 15% from a year earlier. Revenues
increased in all three business areas, particularly in equities and investment banking. This was matched
by higher costs, for both personnel and general and administrative expenses, as we continued to expand
our range of products and services.
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 intangible assets
Total operating expenses
Business Group performance before tax
For the year ended
% change from
31.12.06
31.12.05
31.12.04
31.12.05
9,397
9,056
3,273
21,726
61
21,787
9,801
1,552
11,353
3,260
956
203
0
72
15,844
5,943
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
5,906
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
35
14
31
25
69
25
22
30
23
47
49
49
36
29
15
1 In management accounts, adjusted expected credit loss rather than credit loss expense or recovery is reported for the Business Groups (see note 2 to the financial statements). 2 Additionally includes
social security contributions and expenses related to alternative investment awards.
Huw Jenkins | Chairman and CEO
Investment Bank
49
Financial Businesses
Investment Bank
Business Group reporting (continued)
CHF million, except where indicated
KPIs
Compensation ratio (%) 1
Cost / income ratio (%) 2
Impaired lending portfolio as a % of total lending portfolio, gross 3
Average VaR (10-day 99% confidence, 5 years of historical data)
Capital return and BIS data
Return on allocated regulatory capital (%) 4
BIS risk-weighted assets
Goodwill and excess intangible assets 5
Allocated regulatory capital 6
Additional information
Deferral (included in adjusted expected credit loss)
Client assets (CHF billion)
Personnel (full-time equivalents)
As of or for the year ended
% change from
31.12.06
31.12.05
31.12.04
31.12.05
52.3
72.9
0.1
420.5
29.4
174,599
5,465
22,925
232
174
21,899
53.1
70.5
0.2
346.4
28.6
151,313
4,309
19,440
155
164
18,174
50.7
71.3
0.5
358.0
30.5
116,512
3,579
15,230
85
147
16,970
21
15
27
18
50
6
20
1 Personnel expenses / income. 2 Operating expenses / income. 3 Figures reflect the prime brokerage reclassification as explained in note 1 to the financial statements. 4 Business Group performance
before tax / average allocated regulatory capital. 5 Goodwill and intangible assets in excess of 4% of BIS Tier 1 Capital. 6 10% of BIS risk-weighted assets plus goodwill and excess intangible assets.
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 trans-
actions;
– mergers and acquisitions and other advisory fees;
–
interest income on principal transactions and from the loan
portfolio; 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.
2006
Key performance indicators
The cost / income ratio rose to 72.9% in 2006 from 70.5% a
year earlier. The increase in performance-related personnel
expenses and higher general and administrative expenses
Cost / income ratio
in %
2004
2005
2006
71.3
70.5
72.9
80
75
70
65
65
50
was only partly offset by revenue growth in all of our three
businesses.
Compensation ratio
in %
2004
2005
2006
53.1
52.3
50.7
55
50
45
40
35
The full-year compensation ratio, at 52.3%, fell 0.8 per-
centage points between 2005 and 2006. Higher revenues
more than offset higher performance-related compensation
and increased staff levels.
As reported
Adjusted for goodwill and significant financial events
As reported
Adjusted for goodwill and significant financial events
70
64
58
52
46
40
70
64
58
52
46
40
80
75
70
65
60
55
50
45
40
35
Average Value at Risk (VaR – 10-day, 99% confidence,
5 years of historical data) increased to CHF 420 million, up
from CHF 346 million in 2005. Year-end VaR was also higher
at CHF 473 million, up from CHF 355 million a year earlier,
following the integration of Pactual from 1 December 2006.
Average VaR (10-day, 99% confidence,
5 years of historical data)
CHF million
The return on allocated regulatory capital was 29.4%
in 2006, up from 28.6% a year earlier, reflecting the increase
in profit. Risk-weighted assets grew, mainly driven by higher
credit exposures from OTC derivatives, collateral trading and
the leveraged finance portfolio, in line with the rise in busi-
ness activity. Goodwill and excess intangible assets rose com-
pared with last year due to the acquisitions of ABN AMRO’s
futures and options business and Pactual.
2004
2005
2006
Results
450
400
350
300
250
420
358
346
Total gross lending portfolio at the Investment Bank was
CHF 134 billion on 31 December 2006 compared with CHF
97 billion on 31 December 2005, reflecting our expanding
prime brokerage and exchange traded derivatives businesses.
The gross impaired lending portfolio to total gross lending
portfolio ratio fell to 0.1% from 0.2% in the same period.
Impaired lending portfolio, gross/
total lending portfolio, gross1
in %
31.12.04
31.12.05
31.12.06
0.8
0.6
0.4
0.2
0.0
0.5
0.2
0.1
1 Figures reflect the prime brokerage reclassification as explained in Note 1
to the financial statements.
Return on allocated regulatory capital
in %
2004
2005
2006
30.5
28.6
29.4
32
24
16
8
0
This was our most profitable year ever. Pre-tax profit in 2006
was CHF 5,943 million, up 15% from 2005. This result was
driven by strong revenues in equities (up 35%), due to the
improved market conditions starting in second half 2005
and continuing throughout 2006. It was also helped by our
investment banking business (up 31%), which saw strong
performances across all regions. The increase in fixed in-
come, rates and currencies (up 14%) reflects progress in our
plan to expand our global syndicated finance, mortgage-
backed securities, structured credit and commodities busi-
nesses as well as strong revenues in foreign exchange and
cash and collateral trading. DRCM‘s business activities
managed on behalf of the Investment Bank achieved reve-
nues at a level consistent with 2005. We also invested in our
IT infrastructure and incurred more professional fees.
2006
5,943
Performance before tax
CHF million
2004
2005
5,181
4,610
6,000
5,000
4,000
3,000
2,000
Operating income
Total operating income in 2006 was CHF 21,787 million, up
25% from CHF 17,484 million a year earlier.
Equities revenues, at CHF 9,397 million in 2006, were up
35% from CHF 6,980 million in 2005. Overall, cash equity
revenues were higher, with results benefiting from positive
market conditions generating strong revenues in emerging
markets. Increased cash commissions were partially offset by
greater facilitation requirements from our clients. Revenues
in our derivatives business increased globally due to higher
business demand. Equity capital markets revenues rose with
increased capital raising activities. Prime brokerage services
continued to grow as client numbers and balances increased.
Exchange-traded derivatives revenues rose, boosted by the
51
As reported 6
Before goodwill and adjusted for significant financial events 7
6000
5000
4000
3000
2000
450
400
350
300
250
0.8
0.6
0.4
0.2
0.0
32
24
16
8
0
Financial Businesses
Investment Bank
impact of the acquisition of ABN AMRO’s global futures and
options business towards the end of the year. Our proprie-
tary as well as our equity-linked businesses contributed also
higher returns compared to the previous year.
Fixed income, rates and currencies revenues were CHF
9,056 million, up 14% from CHF 7,962 million a year ear-
lier. Revenues in the rates business were up against the pri-
or year as a result of higher revenues in energy trading and
mortgage backed securities, partially offset by lower in-
come from derivatives. Credit fixed income saw strong
growth in structured credit and secondary loan activity.
Syndicated finance also recorded higher income as the
business benefited from increased market activity. Credit
default swaps hedging loan exposures recorded a loss of
CHF 245 million compared with gains of CHF 103 million a
year earlier. While municipal securities revenues were lower
in 2006, the foreign exchange and cash collateral trading
business, especially the metals business, saw a significant
increase in revenues.
Investment banking revenues, at CHF 3,273 million in
2006, increased 31% from CHF 2,506 million a year earlier.
This reflected growth in each region, especially in Asia. The
debt and equity capital markets groups reported significant
gains over the prior year. Our leveraged finance franchise
continued to grow, demonstrating our strengthened com-
mitment to this part of the business. Revenues from the ad-
visory business also increased compared with last year, as
clients took advantage of strategic opportunities.
Income by business area
CHF million
2004
2005
2006
25,000
20,000
15,000
10,000
5,000
0
1,915
5,906
2,506
6,980
8,269
7,962
3,273
9,397
9,056
Fixed income, rates and currencies
(1,602)
Equities
Investment banking
Operating expenses
Operating expenses rose by CHF 3,541 million to CHF 15,844
million in 2006, a 29% increase from CHF 12,303 million a
year earlier.
Personnel expenses, at CHF 11,353 million in 2006, in-
creased 23% from a year earlier, reflecting an increase in the
bonus accrual and additional salaries due to higher staff
levels. Share-based compensation rose 30% from prior year
as a result of higher share awards in 2006, and the increased
52
fair value of options granted in 2006 – driven by the rise in
UBS’s share price.
General and administrative expenses were CHF 3,260
million in 2006, up 47% from 2005’s CHF 2,215 million. In
2006 we recorded a number of new provisions. IT and other
outsourcing costs as well as professional fees rose, driven by
higher project spending in support of future business growth
in fixed income, prime brokerage and emerging markets.
Administration, travel and entertainment and, to a lesser ex-
tent, occupancy expenses, increased as well. Provision levels
in 2006 rose from 2005.
Charges from other business units increased to CHF
956 million in 2006 from CHF 640 million in 2005. The rise
reflects the charges by Global Asset Management for man-
aging the Investment Bank’s funds invested in DRCM as well
as higher charges from ITI (IT infrastructure unit) as a result
of the increased levels of staff.
Depreciation rose by 49% to CHF 203 million in 2006
from CHF 136 million in 2005 due to higher IT write-offs, of-
fice expansion and renewal costs.
The amortization of intangible assets, at CHF 72 million in
2006, was up 36% from CHF 53 million a year earlier due to
the two acquisitions – ABN AMRO’s futures and options
business and Pactual.
2005
Key performance indicators
The cost / income ratio fell to 70.5% in 2005 from 71.3% a
year earlier. Revenue growth, driven by strong performances
in investment banking and equities, was partly offset by
higher personnel expenses.
The full-year compensation ratio, at 53.1%, rose 2.4 per-
centage points between 2004 and 2005. This reflects higher
performance-related compensation and increased staff lev-
els. Share-based compensation was also higher, since awards
made in 2005 for the 2004 financial year contained an in-
creased proportion of stock.
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.
The total gross lending portfolio was CHF 97 billion on
31 December 2005 compared with CHF 78 billion on 31 De-
cember 2004, reflecting our expanding prime brokerage and
equity finance businesses as well as increased underwriting
activity. The gross impaired lending portfolio to total gross
lending portfolio ratio fell to 0.2% at the end of 2005 from
0.5% on 31 December 2004.
The return on allocated regulatory capital in 2005 was
28.6%, down 1.9 percentage points from the return of
20000
16000
12000
8000
4000
0
30.5% 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 increased
lending activity to the Investment Bank’s growing client
base.
Results
Pre-tax profit was CHF 5,181 million, up 12% from 2004.
The result was driven by strong revenues in investment bank-
ing (up 31%) and in equities (up 18%), reflecting our suc-
cessful expansion in significant growth areas such as M&A,
in particular in Asia Pacific, equity derivatives and prime bro-
kerage. Results in the fixed income, rates and currencies
business were slightly lower than last year. Lower revenues in
structured credit – mainly driven by lower volumes and fol-
lowing the turmoil in the automotive sector in second quar-
ter 2005 – were offset by an increase in the rates business.
At the same time, costs increased as our business continued
to expand, partially offset by the cessation of goodwill amor-
tization.
Operating income
Total operating income in 2005 was CHF 17,484 million, up
9% from CHF 16,083 million a year earlier.
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 Europe as well as prime brokerage, where we
saw an impressive revenue gain in the US. Our proprietary
and equity-linked businesses contributed slightly lower re-
turns than the previous year.
Fixed income, rates and currencies revenues were CHF
7,962 million, down 4% from CHF 8,269 million a year
earlier. Revenues in the rates business were up against the
prior year as a result of rising revenues in energy trading and
derivatives. Credit fixed income saw lower revenues in struc-
tured 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 vola-
tility levels. This was partially offset by rising cash and col-
lateral trading revenues due to higher market share and
volumes.
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 transac-
tions. During 2005, our Investment Bank advised on a total of
343 transactions with a deal volume of USD 496 billion, more
than doubling from a year earlier. 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
prompted total operating expenses in 2005 to rise to CHF
12,303 million, 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 salaries from higher staff levels.
Share-based compensation rose 17% from prior year due to
an increase in share-based awards and the higher 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.
Provisions 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 increase 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 million in 2005 from CHF 243 million in 2004 due
to the transfer of further IT infrastructure functions into our
central ITI unit in Corporate Center. There was no amortiza-
tion of goodwill in 2005, following a change in accounting.
In 2004, amortization of goodwill totaled CHF 278 million.
Amortization of intangible assets was CHF 53 million in
2005, 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 Prediction, which
became part of UBS in 2005.
53
Financial Businesses
Corporate Center
Corporate Center
In 2006 Corporate Center recorded a pre-tax loss of CHF 1,083 million, compared with the pre-tax gain of
CHF 3,856 million in 2005. The swing between 2005 and 2006 was due to the sale of Private Banks & GAM at
the end of 2005. The continuing operations of Corporate Center reported a pre-tax loss of CHF 1,087 million,
compared with a loss of CHF 708 million in 2005.
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 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
Additional information
BIS risk-weighted assets
Personnel (full-time equivalents)
Personnel excluding ITI (full-time equivalents)
Personnel for ITI (full-time equivalents)
As of or for the year ended
% change from
31.12.06
31.12.05
31.12.04
31.12.05
294
(61)
233
1,133
131
1,264
1,242
(1,978)
783
0
9
1,320
(1,087)
4
(1,083)
8,969
4,771
1,716
3,055
455
232
687
1,059
108
1,167
1,084
(1,730)
857
0
17
1,395
(708)
4,564
3,856
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)
9,841
5,202
2,848
2,354
(35)
(66)
7
21
8
15
(14)
(9)
(47)
(5)
(54)
(100)
10
22
25
20
1 In order to show the relevant Business Group performance over time, the adjusted expected credit loss rather than credit loss expense or recovery is reported for all Business Groups. The difference
between the adjusted expected credit loss and the credit loss expense or recovery recorded at Group level is reported in the Corporate Center (see note 2 to the financial statements). 2 Additionally
includes 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 Group Chief Financial
Officer and Head of the Corporate Center
54
2006
Results
Corporate Center recorded a pre-tax loss from continuing
operations of CHF 1,087 million in full-year 2006, compared
with a loss of CHF 708 million a year earlier. The increase was
mainly driven by a CHF 454 million decline in operating in-
come. The main reason for the decrease was the credit loss
expense for 2006, which contrasts with the recovery we re-
corded in 2005. Additionally, 2006 was negatively impacted
by losses from cash flow hedges that were not fully effec-
tive.
Operating income
Total operating income decreased to CHF 233 million in
2006 from CHF 687 million in 2005. This reflects the credit
loss expense recorded this year, which contrasts with the
credit recovery we reported a year earlier. It is also a result of
lower income from treasury activities.
The credit loss result booked in Corporate Center repre-
sents the difference between the adjusted expected credit
loss result recorded in the business units and the credit loss
expense or recovery recognized in the UBS financial state-
ments. In 2006, UBS recorded a credit loss recovery of CHF
156 million, compared to a recovery of CHF 375 million in
2005. In 2006, the adjusted expected credit loss recoveries
of CHF 217 million credited to the Business Units exceeded
UBS’s credit
recovery. The difference of CHF
61 million was recorded in Corporate Center as a credit loss
expense compared with the recovery of CHF 232 million re-
corded in 2005.
loss
Income decreased by CHF 161 million to CHF 294 million
in 2006 compared to CHF 455 million in 2005, mainly due to
lower real estate gains and losses related to cash flow hedg-
ing (that were gains in 2005). This was slightly offset by
gains from FX options in 2006.
Operating expenses
Total operating expenses were CHF 1,320 million in 2006,
down CHF 75 million from CHF 1,395 million in 2005. At
CHF 1,264 million in 2006, personnel expenses were up
8% from CHF 1,167 million in 2005, mainly reflecting the
higher personnel numbers in ITI driven by higher business
demand and hiring of people to address the growing com-
plexity of regulatory requirements. Personnel costs increased
due to higher performance-related compensation as well as
higher expenses for share-based components as the UBS
share price increased compared with 2005. In the same pe-
riod, general and administrative expenses increased 15% to
CHF 1,242 million from CHF 1,084 million. In ITI, expenses
for rent and maintenance of IT equipment, occupancy and
communications increased with higher staff levels. Costs
also increased as a small portion of the provision for sub-
leasing office space in the US was booked in Corporate
Center. Other businesses were charged CHF 1,978 million
compared to CHF 1,730 million, reflecting the business driv-
en cost increases of UBS’s IT infrastructure. Depreciation of
property and equipment decreased to CHF 783 million by
CHF 74 million or 9%, as several software components came
to the end of their depreciation cycle. Amortization of intan-
gible assets was CHF 9 million in 2006, CHF 8 million below
the level a year earlier.
IT infrastructure
In 2006, the information technology infrastructure cost per
average number of financial business employees was CHF
28,072, up CHF 1,341 from CHF 26,731 in 2005, reflecting
the impact of supporting businesses in their growth plans.
This was partially offset by cost savings from managing our
information technology infrastructure centrally.
2005
Results
Corporate Center’s result from continuing operations was a
loss of CHF 708 million in full-year 2005, compared to a loss
of CHF 778 million a year earlier. The improvement was driv-
en by a CHF 343 million increase in income.
Private Banks & GAM (discontinued operations)
The sale of Private Banks & GAM to Julius Baer was com-
pleted on 2 December 2005. The disposal gain and the op-
erating result realized during the year before the deal closed
is reported as pre-tax profit from discontinued operations of
CHF 4,564 million in 2005.
Operating income
Total operating income increased to CHF 687 million in 2005
from CHF 398 million in 2004. The result was driven by
higher revenues, partially offset by lower credit loss recover-
ies.
In 2005, the credit loss recovery was CHF 375 million. The
adjusted expected credit loss recovery at the Business Unit
level was CHF 143 million. This resulted in a credit loss recov-
ery in Corporate Center of CHF 232 million.
In 2004, the Group credit loss recovery was CHF 241 mil-
lion. The adjusted expected credit loss expense at Business
Unit level was CHF 45 million in the same year, resulting in a
Corporate Center credit loss recovery of CHF 286 million.
Income increased by CHF 343 million to CHF 455 million
in 2005 mainly due to the diversification of capital into US
dollars. The higher average equity base produced a positive
impact on treasury income, as did a timing effect related to
cash flow hedging.
55
Financial Businesses
Corporate Center
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 integra-
tion of UBS’s IT infrastructure into ITI. The figure was also due
to additional hiring and accruals for performance-related com-
pensation. In the same period, general and administrative ex-
penses increased 1% to CHF 1,084 million from CHF 1,077
million. Lower 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 regulatory requirements. Additionally, we saw higher ex-
penses for our brand initiative and corporate real estate. Other
businesses were charged CHF 1,730 million compared to CHF
1,509 million, reflecting the further integration of UBS’s IT in-
frastructure into ITI. Amortization of 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
average 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 tech-
nology infrastructure centrally.
56
Industrial Holdings
Industrial Holdings
Industrial Holdings
Income statement
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 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 / (benefit)
Net profit from discontinued operations
Net profit
Net profit / (loss) attributable to minority interests
from continuing operations
from discontinued operations
Net profit attributable to UBS shareholders
from continuing operations
from discontinued operations
Additional information
Private Equity 1
Investments, at cost 2
Unrecognized gains
Portfolio fair value
Cost / income ratio (%) 3
BIS risk-weighted assets
Personnel (full-time equivalents)
As of or for the year ended
% change from
31.12.06
31.12.05
31.12.04
31.12.05
693
301
994
202
187
9
18
0
5
295
716
278
35
243
852
(13)
865
1,108
104
1
103
1,004
242
762
344
517
861
72.0
443
4,241
675
561
1,236
245
184
14
21
0
4
283
751
485
175
310
496
87
409
719
207
(24)
231
512
334
178
744
264
1,008
60.8
2,035
21,636
640
275
915
185
176
20
22
27
2
263
695
220
51
169
385
101
284
453
93
(21)
114
360
190
170
1,219
467
1,686
76.0
2,773
29,453
3
(46)
(20)
(18)
2
(36)
(14)
25
4
(5)
(43)
(80)
(22)
72
111
54
(50)
(55)
96
(28)
328
(54)
96
(15)
(78)
(80)
1 Only comprises financial investments available-for-sale. 2 Historical cost of investments made, less divestments and impairments. 3 Operating expenses / operating income.
58
Major participations
Our private equity investments were moved to our Industrial
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 sale of UBS’s 55.6% stake of 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), which was included in this segment, was successfully
completed on 23 March 2006. The sale price was set at
approximately CHF 1,295 million. The disposal gain of CHF
387 million and the operating result of CHF 71 million real-
ized during the quarter before the deal closed are reported
as discontinued operations after tax. All prior periods have
been restated accordingly.
2006
In 2006, the Industrial Holdings segment reported a net
profit of CHF 1,108 million, of which CHF 1,004 million was
attributable to UBS shareholders.
In 2006, we completed the sale of four fully consolidated
investments. The realized divestment gains are presented as
discontinued operations for Industrial Holdings. Previous in-
come statements have also been restated to reflect these
divestments.
In 2006, unconsolidated private equity investments,
including those accounted for under the equity method,
recorded total divestment gains of CHF 391 million. The
level of financial investments available-for-sale fell to CHF
344 million on 31 December 2006 from CHF 744 million 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 portfolio decreased to CHF 861 mil-
lion in 2006 from CHF 1,008 million in 2005 reflecting re-
valuations and successful divestments. Unfunded commit-
ments on 31 December 2006 were CHF 227 million, down
from CHF 367 million at the end of December 2005.
2005
In 2005, the Industrial Holdings segment reported a net profit
attributable to UBS shareholders of CHF 512 million. In 2005,
it completed the sale of four fully consolidated investments.
The operating profit or loss and gains on disposal are pre-
sented as discontinued operations for Industrial Holdings.
In 2005, unconsolidated private equity investments,
including those accounted for under the equity method,
recorded total divestment gains of CHF 684 million. The
level of financial investments available-for-sale fell to CHF
744 million on 31 December 2005 from CHF 1,219 million a
year earlier due to a number of exits which were partially
offset by the funding of existing commitments. The fair val-
ue of this part of the portfolio decreased to CHF 1,008 mil-
lion in 2005 from CHF 1,686 million 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 investment.
59
60
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 2,396.5 billion on 31 Decem-
ber 2006, up from CHF 2,058.3 billion on 31 December 2005.
The increase was driven by the growth in the trading portfolio
(up CHF 225 billion), collateral trading (up CHF 65 billion) and
the loan portfolios (up CHF 33 billion), while positive and
negative replacement values each were down CHF 5 billion.
Currency movements against the Swiss franc (mainly the 7%
depreciation of the US dollar) partially offset the rise. Total li-
abilities rose due to higher borrowing (up CHF 241 billion),
collateral trading liabilities (up CHF 70 billion) and trading li-
abilities (up CHF 16 billion).
Lending and borrowing
Lending
Cash was CHF 3.5 billion on 31 December 2006, down CHF
1.9 billion from a year earlier, mainly from lower sight de-
posit balances held with central banks. At CHF 50.4 billion
on 31 December 2006, the Due from banks line increased by
CHF 16.8 billion, largely related to the integration of ABN
AMRO’s futures and options business, and higher lending by
the cash and collateral trading business, which is the central
funding instance of the bank. The increase was partially off-
set by lower current account balances in Industrial Holdings
relating to the divestment of Motor-Columbus at the begin-
ning of 2006. Our loans to customers stood at CHF 312.5
billion on 31 December 2006, up by CHF 32.6 billion from a
year earlier, reflecting higher mortgage volumes in Switzer-
land and increased secured lending, mainly in our interna-
tional wealth management businesses. This was further ac-
centuated by a substantial increase in the Investment Bank’s
secured lending to prime brokerage clients and to a lesser
extent by the integration of ABN AMRO’s futures and op-
tions business. This was partially offset by lower secured
lending balances to US mortgage originators.
Borrowing
The Due to banks line rose by CHF 79.4 billion mainly due to
increased time deposits. Major movements in the Investment
Bank’s cash and collateral trading activities were related to a
shift from repos to uncollateralized borrowing in connection
with the funding of Dillon Read Capital Management (DRCM)
assets and the accommodation of the firm’s general growth.
Further growth was driven by the integration of ABN AMRO’s
futures and options business. Total debt issued (including fi-
nancial liabilities designated at fair value) increased to CHF
335.8 billion on 31 December 2006, up CHF 57.7 billion from
a year earlier. Money market paper issuance increased by CHF
16.9 billion, mainly in Europe and the US. The amount of
long-term debt issued (including financial liabilities designated
at fair value) grew by CHF 40.9 billion to CHF 216.3 billion.
The Due to customers line was up CHF 103.7 billion,
mainly reflecting larger time deposits from private clients in
our wealth management franchise around the globe and in
Switzerland for our retail banking business. Growth from our
Investment Bank’s prime brokerage and exchange traded de-
rivative business related to the integration of ABN AMRO’s
futures and options business.
Repo and securities borrowing / lending
In 2006, cash collateral on securities borrowed and reverse
repurchase agreements increased by CHF 65 billion or 9% to
CHF 757 billion, while the sum of securities lent and repos
grew by CHF 70 billion or 13% to CHF 609 billion. The in-
crease stems primarily from the Investment Bank’s matched
book (a repo portfolio comprised of assets and liabilities with
equal maturities and equal value, so that the risks substan-
tially cancel each other out), and equity securities borrowing
activities. Securities lending and repos rose, largely to finance
the growth in trading inventory.
Trading portfolio
Trading assets increased by CHF 225 billion to CHF 879 billion
on 31 December 2006 from CHF 654 billion on 31 December
2005. Increases were registered in debt instruments (up CHF
124 billion), mainly in asset-backed securities in our mortgage
trading and securitized products business and in government
securities (within the rates business). Assets in cash and col-
lateral proprietary trading increased and were mostly pledged
to central banks. Equity instruments were up by CHF 52 bil-
lion, largely driven by the derivatives business on the back of
rising equity markets. Money market paper inventories rose in
our fixed income, rates and currencies business by CHF 29 bil-
lion. Traded loans rose by CHF 11 billion, mainly in the securi-
tization business, while precious metals grew by CHF 8 billion.
Over the same period, short trading positions increased by
CHF 16 billion to CHF 205 billion.
Replacement values
In 2006 positive and negative replacement values declined
by CHF 5 billion to CHF 328 billion and CHF 333 billion re-
spectively. This was the net result of increases in the Equities
business from the integration of ABN Amro’s futures and op-
tions business and movements in exchange rates in major
currencies, slightly outweighed by the decline in replace-
ment values driven by movements in interest rates.
62
Other assets / liabilities
Investments in associates decreased by 48%, to CHF 1.5 bil-
lion on 31 December 2006, mainly due to the sale of UBS’s
stake in Motor-Columbus. Property and equipment was
down 27% to CHF 6.9 billion, mainly driven by write-offs,
partially offset by new investments. Goodwill and other in-
tangible assets, at CHF 14.8 billion on 31 December 2006,
rose 10% from a year earlier, reflecting the acquisitions
of several businesses during 2006, partially offset by a
negative currency impact and the disposal of Motor-
Columbus.
Equity
At CHF 49.7 billion on 31 December 2006, equity attribut-
able to UBS shareholders increased by CHF 5.7 billion from
2005. The increase reflects the attributable profit of CHF
12.3 billion, partially offset by dividend payments and share
repurchases.
Equity attributable to minority interests decreased by
20% to CHF 6.1 billion on 31 December 2006 from CHF 7.6
billion on the same date a year ago, mainly reflecting the
new issuance of preferred securities and the sale of Motor-
Columbus.
Contractual obligations
The table below summarizes our contractual obligations as
of 31 December 2006. All contracts, with the exception of
purchase obligations (those where we are committed to
purchasing 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 27 to the Financial
Statements.
The following liabilities recognized on the balance sheet
are excluded from the table because we do not consider
these obligations to be contractual: provisions, current and
deferred tax liabilities, liabilities to employees for equity
participation 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.
UBS has entered into firm commitments for the acquisi-
tion of certain businesses. The terms and conditions of these
agreements are disclosed in Note 37 to the Financial State-
ments – Business Combinations.
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 they
do not become onerous, UBS does not incur an obligation
from them or become entitled to a specific asset. As soon as
such an obligation is incurred, it is recognized on the balance
sheet, with the resulting loss recorded in the income state-
ment. It should be noted, however, that the amount recog-
nized on the balance sheet does not, in many instances, rep-
resent the full loss potential inherent in such arrangements.
For the most part, the arrangements discussed below ei-
ther meet the financial needs of customers or offer invest-
ment opportunities through entities that are not controlled
by UBS. The importance of such arrangements to us, with
respect to liquidity, capital resources or market and credit risk
support, is minimal. We do not rely on such arrangements as
a major source of revenue. They have also not resulted in
significant expenses for UBS and we do not expect them to
do so in the future. The following paragraphs discuss three
distinct areas of off-balance sheet arrangements and any po-
tential obligations that may arise from them as of 31 Decem-
ber 2006.
Guarantees
In the normal course of business, we issue various forms of
guarantees to support our customers. With the exception of
related premiums, these guarantees are kept off-balance
sheet unless a provision is needed to cover probable losses.
The maximum claim subject to credit risk arising from these
guarantees is disclosed in Note 26 to the Financial State-
ments. On 31 December 2006 the amount is slightly above
the level of a year earlier. Fee income from issuing guaran-
tees is not material to our total revenues. Losses incurred
under guarantees and income from the release of related
provisions were insignificant for each of the last three years.
Contractual obligations
CHF million
Long-term debt
Capital lease obligations
Operating leases
Purchase obligations
Other long-term liabilities
Total
Payment due by period
Less than 1 year
37,086
154
1,003
712
419
39,374
1–3 years
52,263
324
1,919
528
2,079
57,113
3–5 years More than 5 years
32,435
115
1,561
279
39
34,429
84,421
0
4,280
103
1,775
90,579
63
Balance Sheet and Cash Flows
Balance sheet and off-balance sheet
Retained interests
UBS sponsors the creation of Special Purpose Entities (SPEs)
that facilitate the securitization of acquired residential and
commercial mortgage loans and related securities. We also
securitize customers’ debt obligations in transactions that
involve SPEs which issue collateralized debt obligations. A
typical securitization transaction of this kind would involve
the transfer of assets 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 secu-
ritization. We do not provide guarantees or other forms of
credit support to these SPEs. Financial assets are no longer
reported in our consolidated financial statements once their
risks and rewards are transferred to a third party. For further
discussion of our securitization activities, see Note 42.2 to
the Financial Statements.
Derivative instruments recorded in equity
We have no derivative contracts linked to our own shares
that are accounted for as equity instruments. With the ex-
ception of physically settled written put options (see Note 1
to the Financial Statements), derivative contracts linked to
our shares are accounted for as derivative instruments and
are carried at fair value on the balance sheet under positive
replacement values or negative replacement values.
64
Balance Sheet and Cash Flows
Cash Flows
Cash flows
2006
At end-2006, the level of cash and cash equivalents rose to
CHF 136.1 billion, up CHF 45.1 billion from CHF 91.0 billion
at end-2005.
Operating activities
Net cash flow used in operating activities was CHF 4.7 billion
in 2006 compared to a cash outflow of CHF 63.2 billion in
2005. Operating cash inflows (before changes in operating
assets and liabilities and income taxes paid) totaled CHF
15.3 billion in 2006, an increase of CHF 0.7 billion from
2005. Our net profit decreased by CHF 1.9 billion compared
to 2005.
Cash of CHF 98.7 billion was used to fund the net in-
crease in operating assets, while a net increase in operating
liabilities generated cash inflows of CHF 81.3 billion. The in-
crease in cash was used to fund operating assets – in line
with the expansion of our business. Payments to tax author-
ities were CHF 2.6 billion in 2006, up CHF 0.2 billion from a
year earlier.
Investing activities
Investing activities generated a cash inflow of CHF 4.4 bil-
lion. The net cash inflow for investments in associates and
subsidiaries was CHF 2.9 billion. This reflected cash outflows
of CHF 3.5 billion for acquisitions, which were more than
offset by cash inflows of CHF 6.4 billion relating to them.
Purchases of property and equipment totaled CHF 1.8 billion
and the net divestment of financial investments available-
for-sale was CHF 1.7 billion. Disposals of subsidiaries and as-
sociates in 2006 generated a cash inflow of CHF 1.2 billion,
mainly due to the sale of Motor-Columbus. In 2005, we saw
a net cash outflow from investing activities of CHF 2.4 bil-
lion. This was because we acquired new businesses worth
CHF 1.5 billion and made CHF 1.6 billion in net purchases of
property and equipment. This was only partially offset by
disposals of subsidiaries and associates.
Financing activities
In 2006, financing activities generated cash flow of CHF 47.4
billion, which were used to finance the expansion of our
business activities. This reflected the net issuance of money
market paper of CHF 16.9 billion and the issuance of CHF
97.7 billion in long-term debt – the latter significantly out-
pacing long-term debt repayments, which totaled CHF 60.0
billion. That inflow was partly offset by outflows attributable
to net movements in treasury shares and own equity deriva-
tive activity (CHF 3.6 billion), and dividend payments (CHF
3.2 billion). In 2005, we also had a net cash inflow of CHF
64.5 billion from our financing activities. The difference be-
tween the two years was mainly due to a net decrease in is-
suance of long-term debt and money market paper by CHF
14.4 billion in 2006.
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
billion in 2005 compared to CHF 24.1 billion in 2004. Op-
erating cash inflows (before changes in operating assets
and liabilities and income taxes paid) totaled CHF 14.6 bil-
lion in 2005, an increase of CHF 3.4 billion from 2004. Our
net profit rose by CHF 6.2 billion compared to 2004. Dis-
continued operations contributed CHF 3.8 billion which
had to be reclassified to cash flow from investing activi-
ties.
Cash of CHF 155.5 billion was used to fund the net in-
crease in operating assets, while a net increase in operating
liabilities generated cash inflows of CHF 80.1 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 recovery seen in the financial markets. Pay-
ments 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 totaling 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
contrast, in 2004 we saw a net cash outflow from investing
activities of CHF 1.0 billion mainly due to the acquisitions of
new businesses of CHF 2.5 billion and 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 financial investments.
65
Balance Sheet and Cash Flows
Cash Flows
Financing activities
In 2005, financing activities generated cash flow 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 also had 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.
66
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 42 to the Financial Statements of the significant dif-
ferences which would arise were our accounts to be pre-
sented under the United States Generally Accepted Account-
ing Principles (US GAAP), and a detailed reconciliation of
equity attributable to shareholders under IFRS 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 con-
solidated basis under IFRS.
Pages 215 to 228 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 pre-
pared in order to meet Swiss regulatory requirements and in
compliance with Swiss Banking Law. Except in those pages,
or where otherwise explicitly stated, all references to “UBS”
refer to the UBS Group and not to the Parent Bank.
All references to 2006, 2005 and 2004 refer to the UBS
Group and the Parent Bank’s fiscal years ended 31 December
2006, 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 deter-
mine the revenues and expenses directly attributable to each
business unit. The presentation of the business segments
reflects UBS’s organizational structure and management
responsibilities. Internal charges and transfer pricing adjust-
ments are reflected in the performance of each business
unit.
Transactions between Business Units are conducted at inter-
nally agreed transfer prices or at arm’s length. Corporate
Center expenses are allocated to the operating Business
Units to the extent 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 their regulatory capital requirements add-
ing goodwill and excess intangible assets (see below).
Commissions are credited to the Business Unit with the
corresponding 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
results discussion, we measure credit loss using an expected
loss concept. Expected credit loss reflects the average an-
nual 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 be-
tween credit loss expense and expected credit loss, amor-
tized over a three-year period (shown as ‘deferral’ in the
table). The difference between the sum of these adjusted
expected credit loss figures, which are charged to the Busi-
ness Groups or Units, and the credit loss expense recorded
at Group level for financial reporting purposes is reported in
Corporate Center. 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 and excess intangible assets allo-
cated. Return on allocated regulatory capital is a key perfor-
mance indicator for the Investment Bank and the Business
Banking Switzerland unit.
Inter-business unit revenues and expenses. Revenue-
sharing agreements are used to allocate external customer
revenues to business units on a reasonable basis. Inter-busi-
ness unit charges are reported in the line “Services to / from
other Business Units” for both Business Units concerned.
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 individual. Per-
sonnel includes all staff and trainees other than contractors.
68
Credit loss result recorded at Business Group / Unit level
CHF million
Global Wealth Management & Business Banking
Investment Bank
UBS total
For the year ended 31.12.06
Expected credit loss
Deferral
Adjusted expected credit loss
Credit loss (expense) / recovery
Balancing item recorded as credit loss (expense) / recovery
in Corporate Center
Wealth Management
International &
Switzerland
Wealth
Management US
Business Banking
Switzerland
(78)
49
(29)
1
(8)
8
0
(1)
(327)
512
185
109
(171)
232
61
47
(584)
801
217
156
(61)
69
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 ac-
counting principles in the United States (US GAAP). The ap-
plication of certain of these accounting principles requires
considerable judgment based upon estimates and assump-
tions that involve significant uncertainty at the time they are
made. Changes in assumptions may have a significant im-
pact on the Financial Statements in the periods where as-
sumptions are changed. Accounting treatments where sig-
nificant assumptions and estimates are used are discussed
in this section, as a guide to understanding how their appli-
cation affects our reported results. A broader and more de-
tailed description of the accounting policies we employ is
shown in Note 1 to the Financial Statements.
The application of assumptions and estimates means that
any selection of different assumptions would cause our re-
ported 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.
Liquidity is discussed in more detail in the Treasury Manage-
ment chapter of the Handbook 2006 / 2007.
Fair value of financial instruments
Financial assets and financial liabilities in our trading port-
folio, financial assets and liabilities designated 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 af-
fecting this accounting policy relate to how we determine
fair value for such assets and liabilities.
Where no active market exists, or where quoted prices
are not otherwise available, we determine fair value using a
variety 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
derivatives, and unlisted securities with embedded deriva-
tives. All valuation models are validated before they are used
as a basis 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 instruments, and with actual values when realized,
in order to further validate and calibrate our models.
A variety of factors are incorporated into our models,
including 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
estimating fair value inherently involves a significant degree
of judgment. Management therefore establishes valuation
adjustments 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 deteriorating creditworthiness (in-
cluding country-specific risks), concentrations in specific types
of instruments and market risk factors (interest rates, curren-
cies etc), and market depth and liquidity. Although a signifi-
cant degree of judgment is, in some cases, required in estab-
lishing fair values, management believes that the fair values
recorded in the balance sheet and the changes in fair values
recorded in the income statement are prudent and reflective
of the underlying economics, based on our established fair
value and model governance policies and the related controls
and procedural safeguards we employ. Nevertheless, for valu-
ations 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 all financial instruments carried at fair value which
rely on assumptions for their valuation, we estimate that fair
value could lie in a range from CHF 1,038 million lower to
CHF 955 million higher than the fair values recognized in the
Financial Statements. In 2005 the estimate of that range was
CHF 1,094 million lower to CHF 1,176 million higher than the
amounts recognized on the balance sheet.
70
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 in the long term, where we determine fair value
using valuation models for which not all inputs are market
observable prices or rates. We initially recognize such a fi-
nancial instrument at the transaction price, which is the best
indicator 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 com-
monly referred to as "Day 1 P / L". We do not immediately
recognize that initial difference, usually a gain, in profit and
loss because the applicable accounting literature prohibits
immediate recognition of Day 1 profit. The accounting litera-
ture does not, however, address its subsequent recognition
prior to the time when fair value can be determined using
market observable inputs or by reference to prices for similar
instruments in active markets. It also does not address sub-
sequent measurement of these instruments and recognition
of subsequent fair value changes indicated by the model.
Our decisions regarding recognizing deferred Day 1 profit
are made after careful consideration of facts and circum-
stances to ensure we do not prematurely release a portion of
the deferred profit to income. For each transaction, we de-
termine, individually, the appropriate method of recognizing
the Day 1 profit amount in the income statement. It may be
amortized over the life of the transaction, or deferred until
fair value can be determined using market observable in-
puts, or realized through settlement. In all instances, any un-
recognized Day-1 profit is immediately released to income if
fair value of the financial instrument in question can be de-
termined either by using market observable model inputs or
by reference to a quoted price for the same product in an
active market.
Changes in fair value after Day 1 resulting from changes
in observable parameters or otherwise indicated by the mod-
el are recognized immediately in the income statement inde-
pendently of the release of deferred Day 1 profits.
Special Purpose Entities and securitizations
UBS sponsors the formation of Special Purpose Entities (SPEs)
primarily to allow clients to hold investments in separate
legal entities, to allow clients to jointly invest in alternative
assets, 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. In order to deter-
mine whether we control an SPE or not, we have to make
judgments about risks and rewards and assess our ability to
make operational decisions for the SPE in question. 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 conclu-
sion. When assessing whether we have to consolidate an
SPE we evaluate a range of factors, including whether (a) the
activities of the SPE are being conducted on our behalf ac-
cording to our specific business needs so that we obtain the
benefits from the SPE’s operations, or (b) we have decision-
making powers to obtain the majority of the benefits of the
activities of the SPE, or UBS has delegated these decision-
making powers by setting up an autopilot mechanism, or
(c) we have the rights to obtain the majority of the benefits
of the activities of an SPE and therefore may be exposed to
risks arising from the activities of the SPE, or (d) we retain the
majority of the residual or ownership risks related to the SPE
or its assets in order to obtain the benefits from its activities.
We consolidate an SPE if our assessment of the relevant fac-
tors indicates that we control the SPE.
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
rewards of the assets held by the SPE reside with the clients.
Typically, UBS will receive service and commission fees for
creation of the SPE, or because it acts as investment man-
ager, custodian 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.
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
assets, e.g. feeder funds, for which generally no active mar-
kets 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 discretion about investment and other administra-
tive decisions, but has no or only a nominal amount of capi-
tal invested. UBS typically receives service and commission
fees for its services as general partner, but does not, or only
to a minor extent, participate in the risks and rewards of the
vehicle, which reside with the limited partners. In most in-
stances, limited partnerships are not consolidated under IFRS
because UBS’s legal and contractual rights and obligations
indicate that UBS does not have the power to govern the
financial and operating policies of these entities and concur-
rently does not have the objective of obtaining benefits from
its activities through such power.
SPEs used for securitization. SPEs for securitization are
created when UBS has assets (for example a portfolio of
loans) which it sells to an SPE, and the SPE in turn sells inter-
ests in the assets as securities to investors. Consolidation of
these SPEs depends mainly on whether UBS retains the ma-
jority of the benefits or risks of the assets in the SPE.
71
Accounting Standards and Policies
Critical accounting policies
We do not consolidate SPEs for securitization if UBS has
no control over the assets and no longer retains any signifi-
cant exposure (for gain or loss) to the income or investment
returns on the assets sold to the SPE or the proceeds of their
liquidation. This type of SPE is a bankruptcy remote entity –
if UBS were to go bankrupt the holders of the securities
would clearly be owners of the asset, while if the SPE were
to go bankrupt the securities holders would have no re-
course 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 pro-
tection to UBS. The SPE in turn has investors who provide it
with capital 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
Financial assets accounted for at amortized cost are assessed
for objective evidence of impairment and required allowan-
ces are estimated in accordance with IAS 39. Impairment
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 from guarantees), including liquidation of
collateral where available.
The total allowance for recognized financial assets and
credit loss provision for off-balance sheet obligations con-
sists of two components: specific counterparty allowances
and provisions, and collectively assessed allowances and pro-
visions. The specific counterparty component applies to
claims evaluated individually for impairment and is based
upon management’s best estimate of the present value of
the cash flows which are expected to be received. In estimat-
ing these cash flows, management makes judgments about
a counterparty’s financial situation and the net realizable
value of any underlying collateral or guarantees in our favor.
Each impaired financial asset is assessed on its merits, and
the workout strategy and estimate of cash flows considered
recoverable are independently approved by the Credit Risk
Control function. Collectively assessed credit loss allowances
and provisions cover credit losses 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 identi-
fied. In assessing the need for collective loan loss allowances
and provisions, management considers factors such as credit
quality, portfolio size, concentrations, and economic factors.
In order to estimate the required allowance or provision, we
make assumptions both to define the way we model inher-
ent losses and to determine the required input parameters,
based on historical experience and current economic condi-
tions.
The accuracy of the allowances and provisions we make
depends on how well we estimate future cash flows for spe-
cific counterparty allowances and provisions and the model
assumptions and parameters used in determining collective
allowances and provisions. While this necessarily involves
judgment, we believe that our allowances and provisions are
reasonable and supportable.
Further details on this subject are given in Note 1a10) to
the Financial Statements and in the Risk Management chap-
ter of the Handbook 2006 / 2007.
Equity compensation
IFRS 2, Share-based Payments, addresses the accounting for
share-based employee compensation and was adopted by
UBS on 1 January 2005 on a fully retrospective basis. The
effect of applying IFRS 2 is disclosed in Note 1b) to the Finan-
cial Statements, and further information on UBS equity com-
pensation plans, including inputs used to determine the fair
value of options, is disclosed in Note 32.
IFRS 2 requires that share options awarded to employees
are recognized as compensation expense based on their fair
value at grant date. The share options we issue to our em-
ployees have features that make them incomparable to op-
tions on our shares traded in active markets. Accordingly, we
cannot determine 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 interest rates, expected dividends, volatility measures
and specific employee exercise behavior patterns based on
statistical data.
Some of the model inputs we use are not market-observ-
able and have to be estimated or derived from available
data. Use of different estimates would produce different op-
tion values, which in turn would result in higher or lower
compensation expense recognized.
Several recognized models for the valuation of options
exist but none can be singled out as the best or most correct.
The model we apply has been selected because it is able to
handle some of the specific features included in the options
granted to our employees. If we were to use a different
model, the option values produced would be different, even
if we used the same inputs.
Using both different inputs and a different valuation
model could have a significant impact on the fair value of
employee share options, which could be either higher or
lower than the values produced by the model we apply and
the inputs we have used.
72
Financial Statements
Financial Statements
Table of Contents
Financial Statements
Table of Contents
Management’s Report on Internal Controls over Financial Reporting
Report of Independent Registered Public Accounting
Firm – Internal Control over Financial Reporting
Report of the Group Auditors
Financial Statements
Income Statement
Balance Sheet
Statement of Changes in Equity
Statement of Recognized Income and Expense
Statement of Cash Flows
77
78
80
82
82
83
84
85
86
74
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
9
Financial Assets Designated at Fair Value
10a Due from Banks and Loans
10b Allowances and Provisions for Credit Losses
10c
Impaired Due from Banks and Loans
10d Non-Performing Due from Banks and Loans
11
Securities Borrowing, Securities Lending,
Repurchase and Reverse Repurchase Agreements
12
13
14
15
16
17
Trading Portfolio
Financial Investments Available-for-Sale
Investments in Associates
Property and Equipment
Goodwill and Other Intangible Assets
Other Assets
88
88
105
112
113
113
114
115
115
115
116
117
117
118
119
119
120
120
121
122
124
125
126
127
75
128
128
128
130
130
131
133
139
139
139
140
142
143
143
143
154
159
165
169
171
172
176
177
183
185
186
187
201
Financial Statements
Table of Contents
Balance Sheet: Liabilities
18
19
20
21
22
23
Due to Banks and Customers
Financial Liabilities Designated at Fair Value and Debt Issued
Other Liabilities
Provisions
Income Taxes
Derivative Instruments and Hedge Accounting
Off-Balance Sheet Information
24
25
26
27
Pledgeable Off-Balance Sheet Securities
Fiduciary Transactions
Commitments and Contingent Liabilities
Operating Lease Commitments
Additional Information
Pledged Assets
Financial Instruments Risk Position
Fair Value of Financial Instruments and
Continued Recognition of Transferred Financial Assets
Pension and Other Post-Retirement Benefit Plans
Equity Participation and Other Compensation Plans
Related Parties
Post–Balance Sheet Events
Significant Subsidiaries and Associates
Invested Assets and Net New Money
Business Combinations
Discontinued Operations
Currency Translation Rates
Swiss Banking Law Requirements
Reconciliation to US GAAP
Additional Disclosures Required under US GAAP and SEC Rules
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
76
Financial Statements
Management’s report on internal control over financial reporting
Management’s report on internal control
over financial reporting
The Board of Directors and management of UBS AG (UBS)
are responsible for establishing and maintaining adequate
internal control over financial reporting. UBS’s internal con-
trol over financial reporting is designed to provide reason-
able assurance regarding the preparation and fair presenta-
tion of published financial statements in accordance with
International Financial Reporting Standards (IFRS) including a
reconciliation of net profit and equity attributable to UBS
shareholders to US Generally Accepted Accounting Principles
(US GAAP).
UBS’s internal control over financial reporting includes
those policies and procedures that:
– Pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions and dispo-
sitions of assets;
– Provide reasonable assurance that transactions are re-
corded as necessary to permit preparation and fair pre-
sentation of financial statements, and that receipts and
expenditures of the company are being made only in ac-
cordance with authorizations of UBS management; and
– Provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or dis-
position of the company’s assets that could have a mate-
rial effect on the financial statements.
Because of its inherent limitations, internal control over fi-
nancial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
UBS management assessed the effectiveness of UBS’s
internal control over financial reporting as of December 31,
2006 based on the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework. Based on
this assessment, management believes that, as of Decem-
ber 31, 2006, UBS’s internal control over financial reporting
was effective.
The audited consolidated financial statements of UBS in-
clude the results of Banco UBS Pactual S.A. but manage-
ment’s assessment does not include an assessment of the
internal control over financial reporting of this entity because
it was acquired on December 1, 2006. This approach is con-
sistent with published SEC guidance on the permissible
scope of management’s internal control report. The financial
statements for this entity reflect total assets and operating
income constituting less than 1% of the related consolidated
financial statement amounts as of and for the year ended
December 31, 2006.
Management’s assessment of the effectiveness of UBS’s
internal control over financial reporting as of December 31,
2006 has been audited by Ernst & Young Ltd, UBS’s indepen-
dent registered public accounting firm, as stated in their re-
port appearing on page 78, which expressed unqualified
opinions on management’s assessment and on the effective-
ness of UBS’s internal control over financial reporting as of
December 31, 2006.
77
Financial Statements
Report of Independent Registered Public Accounting
Firm – Internal Control over Financial Reporting
78
79
Financial Statements
Report of the Group Auditors
80
81
Financial Statements
Financial Statements
Income Statement
CHF million, except per share data
Note
31.12.06
31.12.05
31.12.04
31.12.05
For the year ended
% change from
3
3
3
4
3
5
6
7
15
16
16
22
38
22
8
8
87,401
(80,880)
59,286
(49,758)
6,521
156
6,677
25,881
13,318
1,596
693
48,165
23,671
8,116
1,263
0
153
295
33,498
14,667
2,786
11,881
856
(13)
869
9,528
375
9,903
21,436
7,996
1,122
675
41,132
20,148
6,632
1,261
0
131
283
28,455
12,677
2,471
10,206
5,060
576
4,484
12,750
14,690
493
390
103
12,257
11,491
766
6.20
5.81
0.39
5.95
5.58
0.37
661
430
231
14,029
9,776
4,253
6.97
4.85
2.12
6.68
4.66
2.02
39,228
(27,484)
11,744
241
11,985
18,506
4,902
853
640
36,886
17,891
6,563
1,284
673
170
263
26,844
10,042
2,155
7,887
781
198
583
8,470
454
340
114
8,016
7,547
469
3.89
3.66
0.23
3.70
3.49
0.21
47
63
(32)
(58)
(33)
21
67
42
3
17
17
22
0
17
4
18
16
13
16
(83)
(81)
(13)
(25)
(9)
(55)
(13)
18
(82)
(11)
20
(82)
(11)
20
(82)
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
Operating profit from discontinued operations before tax
Tax expense / (benefit)
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
82
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 available-for-sale
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 income recognized directly in equity, 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
31.12.06
31.12.05
31.12.05
% change from
10
11
11
12
12
23
9
10
13
14
15
16
17, 22
18
11
11
12
23
19
18
19
20, 21, 22
3,495
50,426
351,590
405,834
627,036
251,478
328,445
5,930
312,521
8,937
10,361
1,523
6,913
14,773
17,249
5,359
33,644
288,435
404,432
499,297
154,759
333,782
1,153
279,910
6,551
8,918
2,956
9,423
13,486
16,243
2,396,511
2,058,348
203,689
63,088
545,480
204,773
332,533
145,687
570,565
21,527
190,143
63,251
124,328
59,938
478,508
188,631
337,663
117,401
466,907
18,791
160,710
53,837
2,340,736
2,006,714
211
9,870
815
38
49,151
(185)
(10,214)
49,686
6,089
55,775
871
9,992
(182)
101
44,105
(133)
(10,739)
44,015
7,619
51,634
2,396,511
2,058,348
(35)
50
22
0
26
62
(2)
414
12
36
16
(48)
(27)
10
6
16
64
5
14
9
(2)
24
22
15
18
17
17
(76)
(1)
(62)
11
(39)
5
13
(20)
8
16
83
Financial Statements
Statement of Changes in Equity
CHF million
Share capital
Balance at the beginning of the year
Issue of share capital
Capital repayment by par value reduction
Cancellation of second trading line treasury shares
Balance at the end of the year
Share premium
Balance at the beginning of the year
Premium on shares issued and warrants exercised
Net premium / (discount) on treasury share and own equity derivative activity
Employee share and share options plans
Tax benefits from exercise of employee share options
Balance at the end of the year
Net income recognized directly in equity, net of tax
Foreign currency translation
Balance at the beginning of the year
Movements during the year
Subtotal – balance at the end of the year 1
Net unrealized gains / (losses) on financial investments available-for-sale, net of tax
Balance at the beginning of the year
Net unrealized gains / (losses) on financial investments available-for-sale
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
Changes 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 unrealized (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 tax
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
Net profit attributable to UBS shareholders for the year
Dividends paid 2
Cancellation of second trading line treasury shares
Balance at the end of the year
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
Acquisitions
Disposals
Cancellation of second trading line treasury shares
Balance at the end of the year
Equity attributable to UBS shareholders
31.12.06
For the year ended
31.12.05
31.12.04
871
1
(631)
(30)
211
9,992
46
(271)
(508)
611
9,870
(432)
(1,186)
(1,618)
931
2,574
19
(649)
1
2,876
(681)
1
237
(443)
815
101
(63)
38
44,105
12,257
(3,214)
(3,997)
49,151
(133)
(52)
(185)
(10,739)
(8,314)
4,812
4,027
(10,214)
49,686
901
2
(32)
871
9,231
36
(309)
768
266
9,992
(2,520)
2,088
(432)
761
463
96
(396)
7
931
(322)
(474)
115
(681)
(182)
90
11
101
36,692
14,029
(3,105)
(3,511)
44,105
(96)
(37)
(133)
(11,105)
(8,375)
5,198
3,543
(10,739)
44,015
946
2
(47)
901
7,595
70
(20)
1,244
342
9,231
(1,694)
(826)
(2,520)
399
501
192
(353)
22
761
(144)
(223)
45
(322)
(2,081)
90
90
35,951
8,016
(2,806)
(4,469)
36,692
(49)
(47)
(96)
(9,654)
(9,368)
3,401
4,516
(11,105)
33,632
1 Net of CHF 83 million, CHF (292) million and CHF 236 million of related taxes for the years ended 2006, 2005 and 2004 respectively. 2 Dividends of CHF 1.60 per share, CHF 1.50 per share and CHF
1.30 per share were paid on 24 April 2006, 26 April 2005 and 20 April 2004, respectively.
84
Statement of Changes in Equity (continued)
CHF million
Equity attributable to minority interests
Balance at the beginning of the year
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
Cancellation of second trading line treasury shares
Balance at the end of the year
Treasury shares
Number of shares
Balance at the beginning of the year
Acquisitions
Disposals
Cancellation of second trading line treasury shares
Balance at the end of the year
31.12.06
For the year ended
31.12.05
31.12.04
7,619
1,219
131
(3,191)
(182)
493
6,089
55,775
5,426
1,539
44
(595)
544
661
7,619
51,634
3,879
1,922
(523)
(306)
454
5,426
39,058
31.12.06
2,177,265,044
2,208,242
(74,200,000)
2,105,273,286
For the year ended
31.12.05
2,253,716,354
3,418,878
(79,870,188)
2,177,265,044
31.12.04
2,366,093,528
6,586,826
(118,964,000)
2,253,716,354
% change from
31.12.05
(3)
(35)
7
(3)
31.12.06
208,519,748
117,160,339
(87,004,388)
(74,200,000)
164,475,699
For the year ended
31.12.05
249,326,620
156,436,070
(117,372,754)
(79,870,188)
208,519,748
31.12.04
273,482,454
192,278,008
(97,469,842)
(118,964,000)
249,326,620
% change from
31.12.05
(16)
(25)
26
7
(21)
In July 2006, UBS made a distribution of CHF 0.60 per share
to shareholders which reduced the par value of UBS shares
from CHF 0.80 to CHF 0.20 per share. At the same time, UBS
split its share 2-for-1, resulting in a new par value of CHF
0.10 per share.
During the year a total of 74,200,000 shares acquired
under the second trading line buyback program 2005 were
cancelled. Out of the total number of 164,475,699 trea-
sury shares, 22,600,000 shares (CHF 1,615 million) have
been repurchased for cancellation. The Board of Directors
will propose to the Annual General Meeting on 18 April
2007 to reduce the outstanding number of shares and the
share capital by the number of shares purchased for cancel-
lation.
On 31 December 2006, a maximum of 1,437,410 shares
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. In addition, during 2006, shareholders ap-
proved the creation of conditional capital of up to a maxi-
mum of 150 million shares to fund UBS's employee share
option programs. As of 31 December 2006, no shares have
been issued under this program.
All issued shares are fully paid.
Statement of Recognized Income and Expense
For the year ended
CHF million
Net unrealized gains / (losses) on financial investments
available-for-sale, before tax
Change in fair value of derivative instruments designated as
cash flow hedges, before tax
Foreign currency translation
Tax on items transferred to / (from) equity
Net income recognized directly in equity
Net income recognized in the income statement
Total recognized income and expense
31.12.06
Attributable to
UBS
share-
holders
minority
interests
Total
31.12.05
Attributable to
UBS
share-
holders
minority
interests
31.12.04
Attributable to
UBS
share-
holders
minority
interests
Total
Total
2,610
9
2,619
152
(58)
94
444
79
523
332
(1,186)
(759)
997
12,257
13,254
0
(21)
0
(12)
493
481
332
(1,207)
(759)
985
12,750
13,735
(479)
2,088
138
1,899
14,029
15,928
0
62
0
4
661
665
(479)
2,150
138
1,903
14,690
16,593
(238)
(826)
(50)
(670)
8,016
7,346
0
(184)
0
(105)
454
349
(238)
(1,010)
(50)
(775)
8,470
7,695
85
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, net replacement values and financial assets designated at fair value
Loans / due to customers
Accrued income, prepaid expenses and other assets
Net increase / (decrease) in operating liabilities:
Repurchase agreements, 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 available-for-sale
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
Capital repayment by par value reduction
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, at the 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
For the year ended
31.12.06
31.12.05
31.12.04
12,750
14,690
8,470
1,325
196
(156)
(117)
(517)
(2,092)
3,870
80,269
(61,382)
(177,087)
64,029
(4,536)
66,370
14,975
(2,607)
(4,710)
2,856
1,154
(1,793)
499
1,723
4,439
16,921
(3,624)
1
(631)
(3,214)
97,675
(59,951)
1,331
(1,072)
47,436
(2,117)
45,048
91,042
136,090
3,495
87,144
45,451
136,090
1,556
340
(374)
(152)
(382)
(5,062)
4,025
(1,690)
(125,097)
(74,799)
47,265
(1,227)
64,558
15,536
(2,394)
(63,207)
(1,540)
3,240
(1,892)
270
(2,487)
(2,409)
23,221
(2,416)
2
0
(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
1,576
1,066
(241)
(67)
171
(1,008)
1,203
(7,471)
(40,752)
(19,733)
13,108
(10,809)
9,753
22,019
(1,345)
(24,060)
(2,511)
1,277
(1,149)
704
703
(976)
21,379
(4,999)
2
0
(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
1 Includes issuance of preferred securities of CHF 1,219 million and CHF 1,539 million for the years ended 31 December 2006 and 31 December 2005, respectively. 2 Money market paper is included
in the balance sheet under Trading portfolio assets and Financial investments available-for-sale. CHF 7,183 million, CHF 4,744 million and CHF 5,289 million were pledged at 31 December 2006,
31 December 2005 and 31 December 2004, respectively.
86
Statement of Cash Flows (continued)
CHF million
Additional information
Cash received as interest
Cash paid as interest
Cash received as dividends on equities (incl. Associates, see Note 14)
Significant non-cash investing and financing activities
Motor-Columbus, Baden, from valuation at equity to full consolidation
Financial investments available-for-sale
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 available-for-sale
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 available-for-sale
Property and equipment
Goodwill and other intangible assets
Minority interests
Motor-Columbus, deconsolidation
Financial investments available-for-sale
Property and equipment
Goodwill and other intangible assets
Debt issued
Minority interests
Acquisition of ABN AMRO's Global Futures and Options Business
Property and equipment
Goodwill and other intangible assets
Acquisition of Banco Pactual
Financial investments available-for-sale
Property and equipment
Goodwill and other intangible assets
Debt issued
Acquisition of Piper Jaffray
Goodwill and other intangible assets
For the year ended
31.12.06
31.12.05
31.12.04
79,805
76,109
4,839
53,117
44,392
3,869
60
180
362
5
248
3
27
35
112
377
6
264
62
178
2,229
951
718
2,057
13
428
36
9
2,218
1,496
605
36,063
24,192
2,934
644
261
2,083
1,194
727
1,742
336
87
Financial Statements
Notes to the Financial Statements
Notes to the Financial Statements
Note 1 Summary of Significant Accounting Policies
a) Significant Accounting Policies
1) 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 Inter-
national 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 8 March 2007, the Board of
Directors approved them for issue.
2) Use of estimates in the preparation of
Financial Statements
In preparing the Financial Statements, management is
required to make estimates and assumptions that affect
reported income, expenses, assets, liabilities and disclosure
of contingent assets and liabilities. Use of available informa-
tion and application of judgment are inherent in the forma-
tion of estimates. Actual results in the future could differ
from such estimates, and the differences may be material to
the Financial Statements.
3) Subsidiaries and associates
The Financial Statements comprise those of the parent com-
pany (UBS AG) and its subsidiaries including certain special
purpose entities, presented as a single economic entity. The
effects of intra-group transactions are eliminated in prepar-
ing the Financial Statements. Subsidiaries including special
purpose entities that are directly or indirectly controlled by
the Group are consolidated. Subsidiaries acquired are con-
solidated from the date control is transferred to the Group.
Subsidiaries to be divested are consolidated up to the date of
disposal (i. e. loss of control).
Assets held in an agency or fiduciary capacity are not
assets 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 statement.
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
UBS owns 20% or more of a company’s voting rights. Invest-
ments 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 net profit or loss (including
net profit or loss recognized directly in equity) after the date
of acquisition.
Assets and liabilities of subsidiaries and investments in
associates 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 exclusively with the intent for resale are pre-
sented as discontinued 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 opera-
tions are presented in the income statement as a single
amount comprising the total of profit or loss 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 defined objectives. These companies may acquire
assets directly or indirectly from UBS or its affiliates. Some
of these companies 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 relationship between the Group and
the company indicates that the company is controlled by
the Group. Certain transactions of consolidated entities
meet the criteria for derecognition of financial assets – see
part 4).
4) Recognition and derecognition of financial instruments
UBS recognizes financial instruments on its balance sheet
when, and only when, the Group becomes a party to the
contractual provisions of the instrument.
UBS enters into transactions where it transfers financial
assets recognized on its balance sheet but retains either all
risks and rewards of the transferred financial assets or a
portion of them. If all or substantially all risks and rewards
are retained, the transferred financial assets are not derec-
ognized from the balance sheet. Transfers of financial
88
assets with retention of all or substantially all risks and
rewards include, for example, securities lending and repur-
chase transactions described under parts 12) and 13). They
further include transactions where financial 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 of the risks and
rewards of ownership of a financial asset are neither retained
nor transferred, UBS derecognizes the financial asset if con-
trol over the asset is lost. The rights and obligations retained
in the transfer are recognized separately as assets and liabili-
ties as appropriate. In transfers where control over the finan-
cial asset is retained, the Group continues to recognize the
asset to the extent of its continuing involvement, determined
by the extent to which it is exposed to changes in the value
of the transferred asset. Examples of such transactions are
transfers of financial assets involving guarantees, writing put
options, acquiring call options, or specific types of swaps
linked to the performance of the asset.
UBS removes a financial liability from its balance sheet
when, and only when, it is extinguished, i.e. when the obli-
gation specified in the contract is discharged or cancelled or
expires.
5) Determination of fair value
For financial instruments traded in active markets, the de-
termination of fair values of financial assets and financial
liabilities is based on quoted market prices or dealer price
quotations. For all other financial instruments, fair value is
determined using valuation techniques. Valuation tech-
niques include net present value techniques, the discounted
cash flow method, comparison to similar instruments for
which market observable prices exist and valuation models.
UBS uses widely recognized valuation models for determin-
ing fair values of common and more simple financial instru-
ments like options or interest rate and currency swaps. For
these financial instruments, 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
market-observable and are therefore estimated based on as-
sumptions. When entering into a transaction where model
inputs are unobservable, the financial instrument is initially
recognized at the transaction price, which is generally the
best indicator of fair value. This may differ from the value
obtained from the valuation model. The timing of the recog-
nition 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 ob-
servable. Refer to Note 30 Fair Value of Financial Instruments
for further details.
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 addition-
al factors including model risks, liquidity risk and counter-
party credit risk. Based on the established fair value and
model governance policies and related controls and proce-
dures applied, management believes that these valuation
adjustments are necessary and appropriate to fairly state the
values of financial instruments carried at fair value on the
balance sheet.
6) Trading portfolio
Trading portfolio assets consist of money market paper,
other debt instruments, including traded loans, equity in-
struments, precious metals and other commodities owned
by the Group (“long” positions). Trading portfolio liabilities
consist of obligations to deliver financial instruments 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).
The trading portfolio is carried at fair value. Gains
and losses realized on disposal or redemption and un-
realized gains and losses from changes in the fair value of
trading portfolio assets and liabilities are reported as
Net trading income. Interest and dividend income and ex-
pense 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 financial asset transactions. From the date the
transaction is entered into (trade date), UBS recognizes any
unrealized profits and losses arising from revaluing that con-
tract to fair value in Net trading income. The corresponding
receivable or payable is presented on the balance sheet as a
positive or negative replacement value. When the trans-
action is consummated (settlement date), a resulting finan-
cial asset is recognized on or derecognized from 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 (settle-
ment date).
Trading portfolio assets transferred to external parties
that do not qualify for derecognition (see part 4) ) are reclas-
sified on UBS‘s balance sheet from Trading portfolio assets
to Trading portfolio assets pledged as collateral, if the trans-
feree has received the right to sell or repledge them.
89
Financial Statements
Notes to the Financial Statements
7) Financial assets and Financial liabilities designated at fair
value through profit or loss (“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 (“Revised Fair Value Option”). UBS
adopted the Revised Fair Value Option for financial instru-
ments on a prospective basis on 1 January 2006.
Prior to 1 January 2006, UBS designated almost all of its
issued hybrid debt instruments as Financial liabilities desig-
nated at fair value through profit or loss. These liabilities are
presented in a separate line on the face of the balance sheet.
A small amount of financial assets was also designated as
Financial assets designated at fair value through profit or
loss, and they are likewise presented in a separate line. A
financial instrument may only be designated at fair value
through profit or loss at inception and this designation
cannot subsequently be changed.
Under the revised accounting standard, UBS continues to
apply the fair value option for these existing financial instru-
ments. The conditions for such designation are still met ei-
ther on the basis that they are hybrid instruments which
would otherwise have to be bifurcated into debt host con-
tracts and embedded derivatives or because they are items
that are part of a portfolio which is risk managed on a fair
value basis and reported to senior management as such. In
2006, UBS started applying the fair value option to certain
new loans and loan commitments which are substantially
hedged with credit derivatives, to certain hybrid instruments
resulting from structured repurchase and reverse repurchase
agreements and to a hedge fund investment which is part
of a portfolio managed on a fair value basis. All fair value
changes related to financial instruments designated at fair
value through profit or loss are recognized in Net trading
income.
Interest and dividend income and interest expense on fi-
nancial assets and liabilities designated at fair value through
profit or loss are included in Interest income or Interest ex-
pense.
UBS applies the same recognition and derecognition
principles to financial instruments designated at fair value
as for financial instruments held for trading (refer to parts 4)
and 6)).
8) Financial investments available-for-sale
Financial investments available-for-sale are non-derivative
financial assets that are not classified as held for trading,
designated at fair value through profit or loss, or loans and
receivables. They are recognized on a settlement date basis.
Financial investments available-for-sale are instruments that,
in management’s opinion, 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 invest-
ments available-for-sale consist mainly of equity instruments,
including certain private equity investments. In addition, cer-
tain debt instruments are classified as financial investments
available-for-sale.
Financial investments available-for-sale are carried at fair
value. Unrealized gains or losses are reported in Equity, net
of applicable income taxes, until such investments are sold,
collected or otherwise disposed of, or until any such invest-
ment is determined to be impaired. On disposal of an invest-
ment, the accumulated unrealized gain or loss included in
Equity 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 financial investments
available-for-sale are included in Interest and dividend in-
come from financial investments available-for-sale.
If a financial investment available-for-sale is determined
to be impaired, the cumulative unrealized loss previously
recognized in Equity is included in Net profit and loss for the
period and reported in Other income. UBS assesses at each
balance sheet date whether there is objective evidence that
a financial investment available-for-sale is impaired. In case
of such evidence, it is considered impaired if its cost exceeds
the recoverable amount. For a quoted financial investment
available-for-sale, the recoverable amount is determined by
reference to the market price. It is considered impaired if
objective evidence indicates that the decline in market price
has reached such a level that recovery of the cost value can-
not be reasonably expected within the foreseeable future.
For non-quoted financial instruments (debt and equity in-
struments), the recoverable amount is determined by apply-
ing recognized valuation techniques. The standard method
applied for non-quoted equity investments available-for-sale
is based on the multiple of earnings observed in the market
for comparable companies. Management may adjust valua-
tions determined in this way based on its judgment. For non-
quoted debt instruments, UBS typically determines the re-
coverable amount by applying the discounted cash flow
method.
After the recognition of impairment on a financial invest-
ment available-for-sale, a) increases in fair value of equity
instruments are reported in Equity and b) increases in fair
value of debt instruments up to original cost are recognized
in Other income, provided the fair value increase has been
triggered by a specific event (as defined by IFRS).
9) 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 generally
recorded as Trading portfolio assets.
90
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 ef-
fective interest rate method.
Interest on loans is included in Interest earned on loans
and advances and is recognized on an accrual basis. Fees
and direct costs relating to loan origination, refinancing or
restructuring 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 approx-
imates 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.
10) 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, or a commitment such as a
letter of credit, a guarantee, a commitment to extend credit
or other credit products.
An allowance for credit losses is reported as a reduction
of the carrying value of a claim on the balance sheet. For an
off-balance sheet item, such as a commitment, a provision
for credit loss is reported in Other liabilities. Additions to al-
lowances 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
future cash flows, including amounts that may result from
restructuring or the liquidation of collateral. Impairment is
measured and allowances for credit losses are established for
the difference between the carrying amount and the esti-
mated recoverable amount.
Upon impairment, the accrual of interest income based
on the original terms of the claim is discontinued, but the
increase of the present value of impaired claims due to the
passage 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
estimates 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
reasonable assurance of timely collection of principal and
interest in accordance with the original contractual terms of
the claim or equivalent value.
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
written 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 it 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 identi-
fied on a counterparty-specific level are grouped into sub-
portfolios with similar credit risk characteristics to collectively
assess whether impairment exists within a portfolio. Allow-
ances from collective assessment of impairment are recog-
nized as Credit loss expense and result in an offset to the
aggregated loan position. As the allowance cannot be allo-
cated to individual loans, the loans are not considered to be
impaired and interest is accrued on each loan according to
its contractual terms.
11) 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
investors. Interests in the securitized financial assets may be
retained in the form of senior or subordinated tranches, in-
terest-only strips or other residual interests (‘retained inter-
ests’). Retained interests are primarily recorded in Trading
portfolio assets and carried at fair value. Gains or losses on
securitization are recorded in Net trading income.
12) Securities borrowing and lending
Securities borrowing and securities lending transactions are
generally entered into on a collateralized basis. In such trans-
actions, UBS typically lends or borrows securities in exchange
for securities or cash collateral. Additionally, UBS borrows
securities from its clients’ custody accounts in exchange for
a fee. The majority of securities lending and borrowing agree-
91
Financial Statements
Notes to the Financial Statements
ments involve shares, and the remainder typically involve
bonds and notes. The transactions are conducted under
standard agreements employed by financial market partici-
pants and are undertaken with counterparties subject to
UBS’s normal credit risk control processes. UBS monitors the
market value of the securities received or delivered on a dai-
ly basis and requests or provides additional collateral or
returns or recalls surplus collateral in accordance with the
underlying agreements.
The securities which have been transferred, whether in a
borrowing / lending transaction or as collateral, are not rec-
ognized on or derecognized from 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 balance sheet
from Trading portfolio assets 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 receivable reflecting UBS’s right to
receive it back (Cash collateral 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
actually resold or repledged also disclosed separately (see
Note 24). Additionally, the sale of securities received in a
borrowing or lending transaction triggers the recognition of
a trading liability (short sale).
Consideration exchanged (i. e. interest received or paid) is
recognized on an accrual basis and recorded as Interest in-
come or Interest expense.
13) 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. Nearly all repurchase
and reverse repurchase agreements involve debt instru-
ments, such as bonds, notes or money market paper. The
transactions are conducted under standard agreements em-
ployed by financial market participants and are undertaken
with counterparties subject to UBS’s normal credit risk con-
trol processes. UBS monitors the market value of the securi-
ties received or delivered on a daily basis and requests or
provides additional collateral or returns or recalls surplus col-
lateral in accordance with the underlying agreements.
In reverse repurchase agreements, the cash delivered is
derecognized and a corresponding receivable, including
accrued interest, is recorded under the balance sheet line
Reverse repurchase agreements, recognizing UBS’s right to
receive it back. In Repurchase agreements, the cash received,
including accrued interest, is recognized on the balance
sheet with a corresponding obligation to return it (Repur-
chase agreements). Securities received under reverse repur-
chase agreements and securities delivered under repurchase
agreements are not recognized on or derecognized from the
balance sheet, unless the risks and rewards of ownership are
obtained or relinquished. In repurchase agreements where
UBS transfers owned securities and where the recipient is
granted the right to resell or re-pledge them, the securities
are reclassified in the balance sheet from Trading portfolio
assets to Trading portfolio assets pledged as collateral. Secu-
rities received in a reverse repurchase agreement are dis-
closed as off-balance sheet items if UBS has the right to
resell or repledge them, with securities that UBS has actually
resold or repledged also disclosed separately (see Note 24).
Additionally, the sale of securities received in reverse repur-
chase transactions triggers the recognition of a trading liabil-
ity (short sale).
Interest earned on reverse repurchase agreements and
interest incurred on repurchase agreements is recognized as
interest income or interest expense over the life of each
agreement.
The Group offsets reverse repurchase agreements and
repurchase agreements with the same counterparty for
transactions covered by legally enforceable master netting
agreements when net or simultaneous settlement
is
intended.
14) Derivative instruments and hedge accounting
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,
including exposures arising from forecast transactions. The
Group applies either fair value or cash flow hedge account-
ing when transactions meet the specified criteria to obtain
hedge accounting 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 derivatives have been “highly effec-
tive” in offsetting changes in the fair value or cash flows of
the hedged items. UBS regards a hedge as highly effective
only if the following criteria are met: a) at inception of the
hedge and throughout its life, the hedge is expected to be
92
highly effective in achieving offsetting changes in fair value
or cash flows attributable to the hedged risk, and b) actual
results of the hedge 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 reported Net profit or loss. The Group discontin-
ues hedge accounting 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, is sold or repaid; or when a
forecast transaction 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 present value of cash flows
of the hedging derivative differ from changes (or expected
changes) in the present value of cash flows of the hedged
item. Such ineffectiveness is recorded in current period earn-
ings in Net trading income, as are gains and losses on com-
ponents of a hedging derivative that are excluded from
assessing hedge effectiveness.
For qualifying fair value hedges, the change in fair value
of the hedging derivative is recognized in the income state-
ment. Those changes in fair value of the hedged item that
are attributable to the risks hedged with the derivative in-
strument are reflected in an adjustment to the carrying value
of the hedged item, which is also recognized in the income
statement. The fair value change of the hedged item in a
portfolio hedge of interest rate risks is reported separately
from the hedged portfolio 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 existed (the “unamortized fair
value adjustment”), is, in the case of interest-bearing instru-
ments, amortized to the income statement over the remain-
ing term of the original hedge, while for non-interest bear-
ing 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 adjustment is
recognized immediately in the income statement.
A fair value gain or loss associated with the effective
portion of a derivative designated as a cash flow hedge is
recognized initially in Equity. When the cash flows that the
derivative is hedging materialize, resulting in income or
expense, then the associated gain or loss on the hedging
derivative is simultaneously transferred from Equity to the
corresponding 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
terminated, the cumulative gain or loss on the hedging
derivative previously reported in Equity remains there until
the committed or forecast transaction occurs or is no longer
expected to occur, at which point it is transferred to the
income statement.
Derivative instruments which are transacted as economic
hedges but do not qualify 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 except that, in certain
cases, the forward points on short duration foreign exchange
contracts are presented in Net interest income. In particular,
the Group has entered into economic hedges of credit risk
within the loan portfolio using credit default swaps to which
it cannot apply hedge accounting. In the event that the
Group recognizes an impairment on a loan that is economi-
cally 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 23 for ad-
ditional information. Where UBS designates an economically
hedged item at fair value through profit or loss, all fair value
changes, including impairments, on both the hedged item
and the hedging instrument are reflected in Net trading
income (refer to part 7)).
A derivative may be embedded in a ‘host contract’. Such
combinations are known as hybrid instruments and arise
predominantly from the issuance of certain structured debt
instruments. If the host contract is not carried at fair value
with changes in fair value reported in the income statement,
the embedded derivative is generally required to be sepa-
rated from the host contract and accounted for as a stand-
alone derivative instrument at fair value if the economic
characteristics and risks of the embedded derivative are not
closely related to the economic characteristics and risks of
the host contract and the embedded derivative actually
meets the definition of a derivative. Typically, UBS applies the
fair value option to hybrid instruments (see part 7)), so that
bifurcation of an embedded derivative component is not
required.
15) 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 available-for-sale.
16) Physical commodities
Physical commodities (precious metals, base metals, energy
and other commodities) held by UBS as a result of its broker-
trader activities are accounted for at fair value less costs to
sell and presented within the Trading portfolio. Changes in
fair value less costs to sell are reflected in Net trading
income.
93
Financial Statements
Notes to the Financial Statements
17) 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 separately ac-
counted 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 Group 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 lia-
bility is recognized to reflect the obligation incurred. Rein-
statement costs are recognized in profit and loss through
depreciation 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
software meeting these criteria and purchased software are
classified within IT, software and communication.
With the exception of investment properties, Property
and equipment is carried at cost less accumulated deprecia-
tion and accumulated impairment losses, and is periodically
reviewed for impairment. The useful life of property and
equipment is estimated on the basis of the economic utiliza-
tion of the asset.
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
Not exceeding 50 years
Residual lease term,
but not exceeding 10 years
Not exceeding 10 years
Not exceeding 5 years
Property formerly own-used or leased to third parties
under an operating lease and equipment the Group has de-
cided 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 properties are
included in Properties held for sale and recorded in Other
assets. They are carried at the lower of cost and net realiz-
able 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 to
determine the fair value of investment property by applying
recognized valuation techniques. In cases where prices of
recent market transactions of comparable properties are
available, fair value is determined by reference to these
transactions.
18) 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. 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. Since 31 December
2004, goodwill has not been amortized but is tested annu-
ally for impairment. The impairment test is conducted at the
segment level as reported in Note 2a. The segment has been
determined as the cash generating unit for impairment test-
ing purposes as this is the level at which the performance of
investments is reviewed and assessed by management.
Other intangible assets comprise separately identifiable
intangible items arising from acquisitions and certain pur-
chased trademarks and similar items. Other intangible assets
acquired in business combinations are recognized on the
balance sheet with their fair value at the date of acquisition
and, if they have a definite useful life, are amortized using
the straight-line method over their estimated useful eco-
nomic life, generally not exceeding 20 years. At each bal-
ance sheet date, other intangible 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 carrying amount is fully
recoverable. A write-down is made if the carrying amount
exceeds the recoverable amount.
Intangible assets are classified into two categories: a) in-
frastructure, and b) customer relationships, contractual
rights and other. Infrastructure consists of an intangible asset
recognized in connection with the acquisition of PaineWeb-
ber Group, Inc. Customer relationships, contractual rights
and other includes mainly intangible assets for client rela-
tionships, non-compete agreements, favorable contracts,
proprietary software, trademarks and trade names acquired
in business combinations.
94
19) Income taxes
Income tax payable on profits is recognized as an expense
based on the applicable tax laws in each jurisdiction in the
period in which profits arise. The tax effects of income tax
losses available for carry forward are recognized as a de-
ferred tax asset if it is probable that future taxable profit will
be available against which those losses can be utilized.
Deferred tax liabilities are recognized for temporary dif-
ferences between the carrying amounts of assets and liabili-
ties in the balance sheet and their amounts as measured for
tax purposes, 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 differ-
ences 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.
Tax assets and liabilities of the same type (current or de-
ferred) are offset when they arise from the same tax report-
ing group, they 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,
(ii) unrealized gains or losses on financial investments avail-
able-for-sale and changes in fair value of derivative instru-
ments designated as cash flow hedges, and (iii) certain tax
benefits on deferred compensation awards. Items (ii) and (iii)
are recorded in Net income recognized directly in equity.
20) Debt issued
Debt issued is initially measured at fair value, which is the
consideration received, net of transaction costs incurred.
Subsequent measurement is at amortized cost, using the ef-
fective interest rate method to amortize cost at inception to
the redemption value over the life of the debt.
Hybrid debt instruments that are related to non-UBS AG
equity instruments, foreign exchange, credit instruments or
indices are considered structured instruments. If such instru-
ments have not been designated at fair value through profit
or loss, the embedded derivative is separated from the host
contract and accounted for as a stand-alone derivative if the
criteria for separation are met. The host contract is subse-
quently measured at amortized cost. UBS has designated
most of its structured debt instruments at fair value through
profit or loss – see part 7).
The fair value option is not applied to certain hybrid in-
struments which contain bifurcatable embedded derivatives
with references to foreign exchange rates and precious met-
al prices and which are not hedged by derivative instruments.
Those hybrids are still subject to bifurcation of the embed-
ded derivative.
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
liability and an equity component at issue date if they
require physical settlement. When the hybrid debt instru-
ment is issued, a portion of the net proceeds is allocated to
the debt component based on its fair value. The determina-
tion of fair value is generally based on quoted market prices
for UBS debt instruments with comparable terms. The debt
component is subsequently measured at amortized cost.
The remaining amount of the net proceeds is allocated to
the equity component and reported in Share premium. Sub-
sequent changes in fair value of the separated equity com-
ponent are not recognized. However, if the hybrid instru-
ment or the embedded derivative related to UBS AG shares
is to be 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 Net
trading income unless the entire hybrid debt instrument is
designated at fair value through profit or loss with changes
in fair value of the entire hybrid instrument also reflected in
Net trading income (see part 7)).
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 23), and to apply fair value hedge
accounting, if the fair value option is not applied to such fi-
nancial instruments – see part 7). When hedge accounting is
applied to fixed-rate debt instruments, the carrying values of
debt issues are adjusted for changes in fair value related to
the hedged exposure rather than carried at amortized cost
– refer to part 14). Derivative instruments and hedge ac-
counting for further discussion.
Bonds issued by UBS held as a result of market making
activities or deliberate purchases in the market are treated as
a redemption of debt. A gain or loss on redemption is record-
ed depending on whether the repurchase price of the bond is
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 Inter-
est on debt issued.
21) Retirement benefits
UBS sponsors a number of retirement benefit plans for its
employees worldwide. These plans include both defined
benefit and defined contribution plans and various other
retirement benefits such as post-employment medical
benefits. Contributions to defined contribution plans are
expensed when employees have rendered services in ex-
change for such contributions, generally in the year of con-
tribution.
95
Financial Statements
Notes to the Financial Statements
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
service cost.
The principal actuarial assumptions used by the actuary
are set out in Note 31.
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
reporting period are outside the corridor defined as the
greater of:
a) 10% of present value of the defined benefit obligation at that date
a) (before deducting plan assets); and
b) 10% of the fair value of any plan assets at that date.
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
recovered fully through refunds or reductions in future con-
tributions, 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
actuarial gain in the current period.
22) Equity participation plans
UBS provides various equity participation plans in the form
of share plans and share option plans. UBS recognizes the
fair value of share and share 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 share awards is equal to the market price at
the date of grant. For share options, fair value is determined
using a Monte Carlo valuation model which takes into ac-
count the specific terms and conditions under which the
share options are granted. Equity settled awards are classi-
fied as equity instruments and are not re-measured subse-
quent to the grant date, unless an award is modified such
that its fair value immediately after modification exceeds its
fair value immediately prior to modification. Any increase in
fair value resulting from a modification is recognized as com-
pensation 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 outstanding. Decreases in fair value reduce com-
pensation expense, and no compensation expense, on a cu-
mulative basis, is recognized for awards that expire worth-
less or remain unexercised. Up to and including 2004, certain
plans gave participants the ability to roll their share-based
awards into alternative investments. These plans are treated
as cash-settled. UBS no longer provides this roll-over option
to its employees.
23) Equity, treasury shares and contracts on UBS shares
UBS AG shares held by the Group are classified in Equity 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 and reported as Share premi-
um. Upon settlement of such contracts, the proceeds re-
ceived – 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 the counterparty with a choice of settle-
ment are classified as trading instruments, with changes in
fair value reported in the income statement.
An exception to this treatment is physically settled written
put options and forward share purchase contracts, including
contracts where physical settlement is a settlement alter-
native. In both cases, the present value of the obligation to
purchase own shares in exchange for cash is transferred out
of Equity and recognized as a liability at inception of a con-
tract. The liability is subsequently accreted, using the effec-
tive interest rate method, over the life of the contract to the
nominal purchase obligation by recognizing interest ex-
pense. Upon settlement of a contract, the liability is derecog-
nized, and the amount of equity originally transferred to li-
ability is reclassified within Equity to Treasury shares. The
premium received for writing put options is recognized di-
rectly in Share premium.
UBS has issued trust preferred securities through consoli-
dated preferred funding trusts, which hold debt issued by
UBS. UBS AG has fully and unconditionally guaranteed all of
these securities. UBS’s obligations under these guarantees
are subordinated to the prior payment in full of the deposit
liabilities of UBS and all other liabilities of UBS. The trust pre-
ferred securities represent equity instruments which are
owned by third parties. They are presented as minority inter-
ests in UBS’s consolidated financial statements with divi-
dends paid also reported under Equity attributable to minor-
ity interests. UBS bonds held by preferred funding trusts are
eliminated in consolidation.
24) Discontinued operations and non-current assets
held for sale
UBS classifies non-current non-financial assets (or disposal
groups) as held for sale, e.g. properties, if their carrying
amount will be recovered principally through a sale transac-
tion rather than through continuing use – see part 17). Such
assets (or disposal groups) are available for immediate sale in
96
their present condition subject to terms that are usual and
customary for sales of such assets (or disposal groups) and
their sale is considered highly probable. These assets are mea-
sured at the lower of their carrying amount and fair value less
costs to sell.
UBS presents discontinued operations under a separate
line in the income statement if an entity or a component of
an entity has been disposed of or is classified as held for sale
and a) represents a separate major line of business or geo-
graphical area of operations, or b) is a subsidiary acquired
exclusively with a view to resale (e.g. certain private equity
investments). A component of an entity comprises opera-
tions and cash flows that can be clearly distinguished, opera-
tionally and for financial reporting purposes, from the rest of
UBS’s operations and cash flows. If an entity or a component
of an entity is classified as a discontinued operation, UBS
restates prior periods in the income statement – see part 3).
25) Leasing
UBS enters into lease contracts, predominately of premises
and equipment, as a lessor as well as a lessee. The terms and
conditions of these contracts are assessed and the leases are
classified as operating leases or finance leases according to
their economic substance. When making such an assess-
ment, the Group focuses on the following aspects: a) Is own-
ership of the asset transferred to the lessee by the end of the
lease term?; b) Is a bargain purchase option held by the les-
see?; c) Is the lease term for the major part of the economic
life of the asset?; d) Does the present value of the minimum
lease payments amount to at least substantially all of the fair
value of the leased asset at inception of the lease term? The
existence of such conditions, individually or in combination
with others, normally leads to a lease being classified as a
finance lease, while the non-existence normally leads to a
lease being classified as an operating lease.
Lease contracts classified as operating leases where UBS
is the lessee are disclosed in Note 27 Operating Lease Com-
mitments. These contracts include non-cancellable long-
term leases of office buildings in most UBS locations. Lease
contracts classified as operating leases where UBS is the les-
sor, and finance lease contracts where UBS is the lessor or
the lessee, are not material.
26) 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
recognition 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.
27) Foreign currency translation
Foreign currency transactions are recorded at the rate of
exchange 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 com-
ponent of the change in their entire fair value. For a non-
monetary financial asset held for trading and for non-
monetary financial assets designated at fair value through
profit or loss, unrealized exchange differences are recog-
nized in the income statement. For non-monetary financial
investments 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, as-
sets 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 net asset balance at the closing rate are
recognized directly in Foreign currency translation within
Equity.
28) 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,
warrants, convertible debt securities or other contracts to
issue ordinary shares were converted or exercised into ordi-
nary shares.
97
Financial Statements
Notes to the Financial Statements
29) Segment reporting
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 Business Groups Investment Bank and
Global Asset Management constitute one segment each.
The Corporate Center represents one segment in 2006, as
Private Banks & GAM was sold on 2 December 2005. Addi-
tionally, the Industrial Holdings segment holds all industrial
operations controlled by the Group. In total, UBS reports sev-
en business segments.
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.
30) Revenues from Industrial Holdings and Goods and
materials purchased
Revenues from Industrial Holdings include sales of goods
and services from three consolidated entities and are derived
from various businesses. Revenue is generally recognized
upon customer acceptance of goods delivered and when
services have been rendered. Expenses from Goods and
materials purchased include costs for raw materials, parts
and finished goods purchased from third-party suppliers to
produce the goods and services sold.
b) Changes in accounting policies, comparability
and other adjustments
Effective in 2006
IAS 39 Financial Instruments: Recognition and Measure-
ment – Amendment to the fair value option
In June 2005, the IASB issued amendments to IAS 39 Finan-
cial Instruments: Recognition and Measurement in regard to
the fair value option. UBS adopted the revised IAS 39 fair
value option on 1 January 2006. Under the amended guid-
ance, the use of the fair value option requires that at least
one of three defined criteria is satisfied, which is more restric-
tive than the previous guidance. All financial instruments
designated at fair value through profit or loss at 31 Decem-
ber 2005 continued to qualify for the use of the fair value
option under the revised fair value option. On transition date
of the revised standard, 1 January 2006, UBS did not apply
the fair value option to any previously recognized financial
asset or financial liability, for which the fair value option had
not been used under the previous fair value option guidance.
Therefore, the initial adoption of the revised standard did not
have an impact on UBS’s financial statements. See part 7) for
details on the use of the revised fair value option during the
year 2006. In addition, effective 1 January 2006, the disclo-
sure requirements for financial instruments designated at fair
value through profit or loss have been amended due to the
revision of IAS 32 Financial Instruments: Presentation.
Prime Brokerage
UBS has reclassified certain receivables and payables resulting
from its Prime Brokerage business for the years ended 2002
through 2006 to ensure consistent presentation of identical
items throughout UBS. See the next page for reclassifications
that have been made to previously disclosed amounts.
The adjustments had no effect on Net profit, Basic earn-
ings per share and Diluted earnings per share in all years
presented. UBS’s internal measures of credit exposure and
regulatory capital are unaffected by the reclassification.
Cash collateral on securities borrowed
Counterparty information on receivables resulting from cash
paid as collateral in securities borrowing transactions is
disclosed in Note 11. For comparability reasons, UBS reclas-
sified CHF 183 billion from receivables against banks to re-
ceivables against customers on 31 December 2005.
Staff Accounting Bulletin (SAB) 108
In response to the release of the Securities and Exchange
Commission (SEC) Staff Accounting Bulletin (SAB) 108, Con-
sidering the Effects of Prior Year Misstatements when Quan-
tifying Misstatements in Current Year Financial Statements,
UBS elected to adopt a modified quantitative framework for
assessing whether the financial statement effect of a mis-
statement is material because it renders a better evaluation of
those effects. The new method, which UBS adopted in De-
cember 2006, uses a dual approach for quantifying the effect
of a misstatement. Prior to 2006, UBS applied only one of
those methods, the “roll-over” method, which focused on
the current-year income-statement impact of a misstatement.
Under the new policy, UBS applies a dual approach that con-
siders both the carryover and reversing effects of prior year
misstatements. As a result of the new policy, the opening bal-
ance of Accrued expenses and deferred income at 1 January
2002 was increased by CHF 399 million, Retained earnings
were reduced by CHF 309 million and Deferred taxes of CHF
90 million were recognized on balance sheet. The adjust-
ments relate to the under-accrual of unused vacation, sab-
batical leave and service anniversary awards. The restatement
impact of adopting this new policy is immaterial to all quar-
terly and annual income statements, earnings per share
amounts, and balance sheets since 1 January 2002.
Amendments to existing standards and new interpretations
Minor amendments have been made to the following exist-
ing International Accounting Standards, which were effec-
tive and have been adopted by UBS at 1 January 2006.
98
Prime Brokerage Reclassification
Balance sheet
CHF million
Assets
Cash collateral on securities borrowed
Loans
Total
Liabilities
Cash collateral on securities lent
Due to customers
Total
Off-Balance Sheet
CHF million
Fair value of securities sold or repledged in connection with financing activities,
disclosed in Note 24
31.12.05
31.12.04
31.12.03
31.12.02
(11,896)
9,941
(1,955)
(17,329)
15,374
(1,955)
(9,636)
9,636
0
(10,244)
10,244
0
(7,413)
7,413
0
(5,006)
5,006
0
0
0
0
0
0
0
31.12.05
31.12.04
31.12.03
31.12.02
20,769
14,338
0
0
In addition, the following reclassifications have been made within interest income and expense:
Income statement
CHF million
Interest income
Interest earned on loans and advances
Interest earned on securities borrowed and reverse repurchase agreements
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
Total
31.12.05
31.12.04
31.12.03
31.12.02
290
(279)
(11)
0
146
(146)
0
313
(307)
(6)
0
108
(108)
0
30
(25)
(5)
0
(1)
1
0
120
(115)
(5)
0
92
(92)
0
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 part a 21). Other
amendments made to IAS 19 have no impact on UBS.
IAS 39 Financial Instruments: Measurement and Recognition
and IFRS 4 Insurance Contracts have been amended in rela-
tion 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 did not have a material impact on UBS’s
Financial Statements.
IAS 21 The Effects of Changes in Foreign Exchange Rates has
been amended to require that exchange differences arising
in consolidation on loan financings that form part of a net
investment in a foreign operation and are denominated in a
currency other than the functional currencies of both the
reporting 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 con-
tains, a lease should be made; and c) if an arrangement is, or
contains, a lease, how the payments for the lease should be
separated from payments for any other elements in the ar-
rangement. If an arrangement contains a lease element, the
interpretation requires that the payments for the lease ele-
ment are accounted for in accordance with IAS 17 Leases.
UBS adopted the interpretation on 1 January 2006, its effec-
tive date. The interpretation had no material effect on UBS’s
Financial Statements.
99
Financial Statements
Notes to the Financial Statements
Effective in 2005 and earlier
Private equity investments
On 1 January 2005, UBS adopted revised IAS 27 Consoli-
dated and Separate Financial Statements and revised IAS 28
Investments in Associates.
cussed on the next page. Gains on sale of CHF 90 million
were reported in 2004 in connection with private equity in-
vestments sold. On a restated basis, the Net profit from dis-
continued operations related to these entities was CHF145
million in 2004.
IAS 27 was amended to eliminate the exemption from
consolidating a subsidiary where control is exercised tempo-
rarily. UBS has several private equity investments where it
owns a controlling interest that used to be classified and
accounted for as Financial investments available-for-sale.
UBS adopted IAS 27 on 1 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 inter-
ests was reduced by CHF 723 million, representing the dif-
ference between the carrying value as Financial investments
available-for-sale and the book value on a consolidated
basis. Consolidation led to recognition of total assets in the
amount of CHF 1.7 billion and CHF 2.9 billion at 31 Decem-
ber 2004 and 2003 respectively. Significant balance sheet
line items affected include Property and equipment, Intan-
gible assets, Goodwill and Other assets. These investments
generated additional operating income of CHF 2.5 billion
and additional Net profit attributable to UBS shareholders of
CHF 142 million in 2004.
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 equity 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 meth-
od of accounting for these investments had the following
effects: on 1 January 2003, opening equity was debited by
CHF 266 million, 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 mil-
lion and CHF 393 million at 31 December 2004 and 2003
respectively, which includes equity in losses of CHF 55 million
recognized in the income statement in 2004. Gains on sale
recognized in 2004 were CHF 1 million. When accounted for
as Financial investments available-for-sale, gains on sale
recognized were CHF 70 million in 2004.
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 seg-
ment effective 1 January 2005. In addition, nine of the
newly consolidated investments held at 1 January 2003 were
sold after that date (but before 1 January 2006) and are pre-
sented as Discontinued operations in the restated compara-
tive prior periods in accordance with IFRS 5, which is dis-
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 financial
statements based on the fair value of these awards mea-
sured 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
requirements of the standard to all prior period awards
that affect income statements commencing 1 January 2003.
This includes all unvested equity-settled awards and all out-
standing cash-settled awards on 1 January 2003. The effects
of restatement were as follows: the opening balance of
retained earnings at 1 January 2003 was credited by CHF
559 million. Additional compensation expense of zero was
recognized in 2004. 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 com-
pensation expense in the performance year, which is gener-
ally the year prior to grant. The reason for the zero impact in
2004 was that a significantly higher amount of bonus pay-
ments were made in the form of share awards rather than
cash. The reversal of compensation expense 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
options 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
models. As a result of this review, a valuation model was
identified that better reflects the exercise behavior of em-
ployees and the specific terms and conditions under which
the share options are granted. Concurrent with the introduc-
tion 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 en-
100
tity that controls an employee benefit trust (or similar entity)
set up for the purpose of a share-based payment arrange-
ment 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 liabilities of the trusts were equal. Consolidation led to
recognition of total assets in the amount of CHF 1.1 billion
and CHF1.3 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 45,991,908 in 2004, 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
standards for goodwill and intangible assets existing at
31 March 2004 on 1 January 2005,whereas goodwill and
intangible assets recognized from business combinations
entered into after 31 March 2004 were accounted for im-
mediately in accordance 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.
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 re-
classified 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 stan-
dard requires that non-current assets or disposal groups be
classified as held for sale if their carrying amount is recov-
ered principally through a sale transaction rather than
through continuing use. Such assets are measured at the
lower of carrying amount and fair value less costs to sell and
are classified separately from other assets in the balance
sheet. Netting of assets and liabilities is not permitted. Dis-
continued operations are presented on the face of the in-
come statement as a single 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 measure-
ment to fair value less costs to sell of the net assets constitut-
ing the discontinued operations. In the period where an op-
eration is presented for the first time as discontinued, the
income statements for all comparative prior periods present-
ed 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.
Private Banks & GAM, Motor-Columbus and certain private
equity investments meet this definition and were reclassified
to Discontinued operations. UBS adopted the new standard
on 1 January 2005 and restated the comparative prior year
2004. The income statement is now divided into two sec-
tions: Net profit from continuing operations and Net profit
from discontinued operations. Refer to Note 38 Discontin-
ued Operations for details.
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
presented including minority interests. Net profit is split into
Net profit attributable to UBS shareholders and Net profit at-
tributable to minority interests. Earnings per share continue
to be calculated based on Net profit attributable to UBS
shareholders, but they are split into Earnings per share from
continuing operations and from discontinued operations.
Minority interests 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.
101
Financial Statements
Notes to the Financial Statements
Revised IAS 32 amended the accounting for certain de-
rivative contracts linked to an entity’s own shares. Physically
settled written put options and forward purchase contracts
with UBS shares as their underlying are recorded as liabili-
ties – see part a 23). UBS currently has physically settled
written put options linked to own shares. The present value
of the contractual 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 at-
tributable to UBS shareholders due to written put options.
The impact on the income statement of all periods present-
ed is insignificant. All other existing derivative contracts
linked to own shares are accounted for as derivative instru-
ments and are carried at fair value on the balance sheet
under Positive replacement values or Negative replacement
values.
instruments
its compound
Revised IAS 39 permits any financial instrument to be des-
ignated at inception, or at adoption of revised IAS 39, as
carried at fair value through profit or loss. Upon adoption of
revised IAS 39, UBS made that designation for the majority
of
issued. Previously, UBS
separated the embedded derivative from the host contract
and accounted 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 re-
ported in that line. Also, at 31 December 2005 and 2004
assets in the amount of CHF 1,153 million and CHF 653 mil-
lion 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 pro-
cess to determine whether derecognition is appropriate. See
part a 4) for a discussion of the accounting policies regarding
derecognition. As a result, certain transactions are now ac-
counted for as secured financing transactions instead of pur-
chases or sales of trading portfolio assets with an accompa-
nying swap derivative. The provisions of this guidance were
applied prospectively from 1 January 2004.
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 changed. All such credit losses are now reported in Net
trading 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 de-
ferred over a three-year period in the Business Group seg-
ment reporting, whereas, under the changed method of
102
accounting, losses in trading income are not subject to such
a deferral. In the segment report, therefore, losses on OTC
derivatives are now reported as they are incurred.
Segment reporting
On 1 July 2005, UBS integrated its two wealth management
businesses into one Business Group, Global Wealth Manage-
ment & Business Banking. As part of the integration, the
municipal securities unit within the former Wealth Manage-
ment US was transferred into the Investment Bank. The inte-
gration had no effect on the presentation of segments in
Note 2a, and Wealth Management US continues to be re-
ported as a separate 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 securities unit. In 2005 and 2004, the munici-
pal 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 was consolidated on
1 July 2004, when UBS gained control over the company.
Due to its size and the nature of its business (production,
distribution and trading of electricity) a new business seg-
ment, Industrial Holdings, was added in which Motor-Co-
lumbus was reported. Motor-Columbus is presented as a
discontinued operation in these Financial Statements due
to the sale on 23 March 2006. Also included in the Indus-
trial Holdings segment are all private equity investments,
which comprise businesses of a predominantly industrial
nature.
c) International Financial Reporting Standards and
Interpretations to be adopted in 2007 and later
IFRS 7 Financial Instruments: Disclosures
Effective 1 January 2007, UBS will adopt the disclosure re-
quirements for financial instruments under IFRS 7. The new
standard has no impact on recognition, measurement and
presentation of financial instruments. Accordingly, it will
have no effect on Net profit and Equity. Rather, it requires
entities to provide disclosures in their financial statements
that enable users to evaluate: a) the significance of financial
instruments for the entity’s financial position and perfor-
mance; and b) the nature and extent of the credit, market
and liquidity risks arising from financial instruments during
the period and at the reporting date, and how the entity
manages those risks. The principles of IFRS 7 complement
the principles for recognizing, measuring and presenting
financial assets and financial liabilities in IAS 32 Financial
Instruments: Presentation and IAS 39 Financial Instruments:
Recognition and Measurement.
UBS has entered into transactions for which fair value is
determined using valuation models for which not all inputs
are market-observable prices or rates. Such financial instru-
ments are initially recognized in UBS’s Financial Statements at
the transaction price, which is generally the best indicator of
fair value, although the value obtained from the relevant val-
uation model may differ. Where such differences arise, UBS
will be required by IFRS 7 to disclose, by class of financial in-
strument: (a) its accounting policy for recognizing that differ-
ence in profit or loss to reflect a change in factors (including
time) that market participants would consider in setting a
price, and (b) the aggregate difference yet to be recognized
in profit or loss at the beginning and end of the period and a
reconciliation of changes in the balance of this difference.
IFRS 8 Operating Segments
The new standard on segment reporting, IFRS 8 Operating
Segments, comes into force on 1 January 2009, replacing
IAS 14 Segment Reporting. It sets out requirements for dis-
closure of information about a firm’s operating segments, its
products and services, the geographical areas in which it
operates, and its major customers. The new standard intro-
duces changes to previous requirements for identification of
segments, measurement of segment information and disclo-
sures. Specifically, it requires a firm to provide financial and
descriptive information about its reportable segments – the
operating segments or aggregations of operating segments
based on which the senior management of the firm (the
“chief operating decision maker”) regularly evaluates sepa-
rate financial information in deciding how to allocate re-
sources and how to assess performance. Generally, under
IFRS 8, the information to be reported will be the same infor-
mation that is used internally, which might differ from
amounts reported in the financial statements. The new stan-
dard therefore requires an explanation of the basis on which
the segment information is prepared, and reconciliations to
the amounts presented in the income statement and the bal-
ance sheet. UBS is currently assessing the impact of IFRS 8 on
the structure and content of the segment reporting in its
financial statements, and whether, as permitted by the stan-
dard, to apply it from 1 January 2008.
IFRIC 7 Applying the Restatement Approach under IAS 29
Financial Reporting in Hyperinflationary Economies will be
applied on 1 January 2007. This Interpretation provides guid-
ance on how to apply the requirements of IAS 29 in a report-
ing period in which an entity (this could be a subsidiary)
identifies the existence of hyperinflation in the economy of
its functional currency, when that economy was not hyperin-
flationary in the prior period, and the entity therefore restates
its financial statements in accordance with IAS 29. It is not
expected that this guidance will have an impact on UBS’s
Financial Statements.
IFRIC 8 Scope of IFRS 2
IFRIC 8 was issued in January 2006. This IFRIC addresses
whether IFRS 2 applies to transactions in which the entity
cannot identify specifically some or all of the goods or ser-
vices received. The Interpretation requires that IFRS 2 be ap-
plied to transactions in which goods or services are received,
such as transactions in which an entity receives goods or ser-
vices as consideration for equity instruments of the entity.
This includes transactions in which the entity cannot identify
specifically some or all of the goods or services received. The
unidentifiable goods or services received (or to be received)
should be measured as the difference between the fair value
of the share-based payment and the fair value of any identi-
fiable goods or services received (or to be received). Mea-
surement of the unidentifiable goods or services received
should take place at the grant date. However, for cash-
settled transactions, the liability should be re-measured at
each reporting date until it is settled. UBS will adopt the
Interpretation on 1 January 2007. This Interpretation will
have no significant impact on UBS’s Financial Statements.
IFRIC 9 Reassessment of Embedded Derivatives
The Interpretation clarifies that an entity should not reassess
whether an embedded derivative needs to be separated from
the host contract after the initial hybrid contract is recog-
nized, unless there is a change in the terms of the contract
that significantly modifies the cash flows that otherwise
would be required under the contract, in which case reas-
sessment is required. UBS will adopt this Interpretation of
IAS 39 on 1 January 2007. It is not expected that this Inter-
pretation will have a significant impact on UBS’s Financial
Statements.
IFRIC 10, Interim Financial Reporting and Impairment
The new Interpretation of IAS 39 requires that impairment
losses recognized in a previous interim period in respect of
goodwill or an investment in either an equity instrument or
a financial asset carried at cost must not be reversed at a
subsequent balance sheet date. UBS will adopt this Inter-
pretation from 1 January 2007 onwards. It is not expected
that this interpretation will have a significant impact on UBS’s
Financial Statements.
IFRIC 11, IFRS 2: Group and Treasury Share Transactions
IFRIC 11 was issued in November 2006 and provides guid-
ance on (a) how to account for share-based payment ar-
rangements between entities within the same group; (b) de-
termining whether a transaction should be accounted for as
equity-settled or cash-settled when an entity either chooses
or is required to buy equity instruments (i.e. treasury shares)
from another party, to satisfy its obligations to its employees;
and (c) determining whether a transaction should be ac-
counted for as equity-settled or cash-settled when an entity’s
103
Financial Statements
Notes to the Financial Statements
employees are granted rights to equity instruments of the
entity (e.g. share options), either by the entity itself or by its
shareholders, and the shareholders of the entity provide the
equity instruments needed. The Interpretation requires that
share-based payment transactions in which an entity receives
services as consideration for its own equity instruments be
accounted for as an equity-settled transaction. This applies
regardless of whether the entity chooses or is required to
buy those equity instruments from another party to satisfy its
obligations to its employees under the share-based payment
arrangement. UBS will adopt the interpretation on 1 January
2007. It is not expected to have a significant impact on UBS’s
Financial Statements.
104
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 & Swit-
zerland, Wealth Management US and Business Banking
Switzerland. The Business Groups Investment Bank and
Global Asset Management constitute one segment each.
The Corporate Center is now comprised of only one seg-
ment, after the sale of Private Banks & GAM on 2 Decem-
ber 2005. Prior to this, Corporate Center consisted of two
segments, Corporate Functions and Private Banks & GAM.
In addition, the Industrial Holdings segment holds all indus-
trial operations controlled by the Group. In total, UBS now
reports seven 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
services individually tailored to affluent international and
Swiss clients and operates from offices around the world.
Wealth Management US is a US financial services firm pro-
viding sophisticated wealth management services to afflu-
ent US clients through a highly trained financial advisor
network. Business Banking Switzerland provides individual
and corporate clients in Switzerland with a complete port-
folio of banking and securities services, focused on cus-
tomer service excellence, profitability and growth, using a
multi-channel distribution. The segments share technologi-
cal and physical infrastructure, and have joint departments
supporting major functions such as e-commerce, financial
planning and wealth management, 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, charities, foundations and individual investors.
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 ensures that the Business Groups operate
as a coherent and effective whole with a common set of val-
ues and principles in such areas as risk management and
control, financial reporting, marketing and communications,
funding, capital and balance sheet management, manage-
ment of foreign currency earnings, information technology
infrastructure and service centers. Private Banks & GAM,
which was shown as a separate segment within Corporate
Center in prior years, was sold on 2 December 2005 and is
presented as discontinued operations.
Industrial Holdings
The Industrial Holdings segment comprises the non-financial
businesses of UBS, including the private equity business
which primarily invests UBS and third-party funds in unlisted
companies. The most significant business in this segment,
Motor-Columbus, was sold on 23 March 2006 and is pre-
sented as discontinued operations. Additionally, certain
private equity investments sold in 2006 and prior years are
presented as discontinued operations.
105
Financial Statements
Notes to the Financial Statements
Note 2a Reporting by Business Group (continued)
For the year ended 31 December 2006
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, credit loss is measured using an
expected loss concept. This table shows Business Group performance consistent
with the way the businesses are managed and the way Business Group perfor-
mance 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
expected 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 Center as Adjusted
expected credit loss.
106
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 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 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
Corporate
Center
Financial Businesses
Industrial
Holdings
UBS
Wealth Management
International &
Switzerland
Management
Business Banking
Switzerland
5,233
581
2,280
1,392
5,929
Wealth
US
5,863
(1)
5,862
3,800
1,073
281
74
53
5,281
581
63,249
57,681
273
5,863
0
5,863
3,800
1,073
281
74
53
5,281
582
10,827
1
10,828
3,137
885
1,479
84
10
5,595
5,233
286,241
281,327
257
10,827
(29)
10,798
3,137
885
1,479
84
10
5,595
5,203
5,085
109
5,194
2,412
1,070
(642)
74
0
2,914
2,280
5,085
185
5,270
2,412
1,070
(642)
74
0
2,914
2,356
3,220
0
3,220
1,503
399
(105)
27
4
1,828
1,392
3,220
0
3,220
1,503
399
(105)
27
4
1,828
1,392
21,726
47
21,773
11,353
3,260
956
203 4
72
15,844
5,929
21,726
61
21,787
11,353
3,260
956
203 4
72
15,844
5,943
5,203
582
2,356
1,392
5,943
294
0
294
1,264
1,242
(1,978)
783
9
1,320
(1,026)
4
(1,022)
294
(61)
233
1,264
1,242
(1,978)
783
9
1,320
(1,087)
4
(1,083)
994
0
994
202
187
9
18
5
295
716
278
852
1,130
994
0
994
202
187
9
18
5
295
716
278
852
1,130
211,123
205,747
14
48,616
46,589
498
2,108,828
2,089,140
593
(323,434)
(343,152)
1,385
1,888
3,404
97
2,396,511
2,340,736
3,117
48,009
156
48,165
23,671
8,116
0
1,263
153
295
33,498
14,667
856
15,523
2,786
(13)
12,750
48,009
156
48,165
23,671
8,116
0
1,263
153
295
33,498
14,667
856
15,523
2,786
(13)
12,750
1 Impairments of financial investments available-for-sale for the year ended 31 December 2006 were as follows: Global Wealth Management & Business Banking CHF 8 million; Global Asset Management
CHF 1 million; Investment Bank CHF 5 million; Corporate Center CHF (2) million and Industrial Holdings CHF 23 million. 2 For further information regarding goodwill and other intangible assets by
Business Group, please see Note 16: Goodwill and Other Intangible Assets. 3 The funding surplus or requirement is reflected in each Business Group and adjusted in Corporate Center. 4 Includes a
CHF 34 million software impairment.
Note 2a Reporting by Business Group (continued)
For the year ended 31 December 2006
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, credit loss is measured using an
expected loss concept. This table shows Business Group performance consistent
with the way the businesses are managed and the way Business Group perfor-
mance 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
expected 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 Center as Adjusted
expected credit loss.
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 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 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
Corporate
Center
Financial Businesses
Industrial
Holdings
UBS
Wealth Management
International &
Switzerland
Wealth
Management
US
Business Banking
Switzerland
10,827
1
10,828
3,137
885
1,479
84
10
5,595
5,233
5,863
(1)
5,862
3,800
1,073
281
74
53
5,281
581
5,085
109
5,194
2,412
1,070
(642)
74
0
2,914
2,280
3,220
0
3,220
1,503
399
(105)
27
4
1,828
1,392
21,726
47
21,773
11,353
3,260
956
203 4
72
15,844
5,929
5,233
581
2,280
1,392
5,929
294
0
294
1,264
1,242
(1,978)
783
9
1,320
(1,026)
4
(1,022)
994
0
994
202
187
9
18
5
295
716
278
852
1,130
48,009
156
48,165
23,671
8,116
0
1,263
153
295
33,498
14,667
856
15,523
2,786
(13)
12,750
211,123
205,747
14
48,616
46,589
498
2,108,828
2,089,140
593
(323,434)
(343,152)
1,385
1,888
3,404
97
2,396,511
2,340,736
3,117
286,241
281,327
257
10,827
(29)
10,798
3,137
885
1,479
84
10
5,595
5,203
63,249
57,681
273
5,863
0
5,863
3,800
1,073
281
74
53
5,281
582
5,085
185
5,270
2,412
1,070
(642)
74
0
2,914
2,356
3,220
0
3,220
1,503
399
(105)
27
4
1,828
1,392
21,726
61
21,787
11,353
3,260
956
203 4
72
15,844
5,943
5,203
582
2,356
1,392
5,943
294
(61)
233
1,264
1,242
(1,978)
783
9
1,320
(1,087)
4
(1,083)
994
0
994
202
187
9
18
5
295
716
278
852
1,130
48,009
156
48,165
23,671
8,116
0
1,263
153
295
33,498
14,667
856
15,523
2,786
(13)
12,750
1 Impairments of financial investments available-for-sale for the year ended 31 December 2006 were as follows: Global Wealth Management & Business Banking CHF 8 million; Global Asset Management
CHF 1 million; Investment Bank CHF 5 million; Corporate Center CHF (2) million and Industrial Holdings CHF 23 million. 2 For further information regarding goodwill and other intangible assets by
Business Group, please see Note 16: Goodwill and Other Intangible Assets. 3 The funding surplus or requirement is reflected in each Business Group and adjusted in Corporate Center. 4 Includes a
CHF 34 million software impairment.
107
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, credit loss is measured using an
expected loss concept. This table shows Business Group performance consistent
with the way the businesses are managed and the way Business Group perfor-
mance 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
expected 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 as Adjusted
expected credit loss.
108
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 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 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
Corporate
Center
Financial Businesses
Wealth Management
Wealth
International &
Switzerland
Management
Business Banking
Switzerland
Private Banks
& GAM
Corporate
Functions
Industrial
Holdings
UBS
4,166
314
2,298
1,057
5,297
4,556
4,556
9,024
(8)
9,016
2,579
804
1,371
89
7
4,850
4,166
9,024
(13)
9,011
2,579
804
1,371
89
7
4,850
4,161
5,158
US
0
5,158
3,460
1,047
223
65
49
4,844
314
5,158
(2)
5,156
3,460
1,047
223
65
49
4,844
312
4,949
231
5,180
2,450
994
(634)
72
0
2,882
2,298
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
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
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
0
455
1,167
1,084
(1,730)
857
17
1,395
(940)
8
(932)
455
232
687
1,167
1,084
(1,730)
857
17
1,395
(708)
56
(652)
1,236
0
1,236
245
184
14
21
4
283
751
485
496
981
11,549
11,814
299
1,236
0
1,236
245
184
14
21
4
283
751
485
496
981
223,790
219,140
81
64,896
59,567
84
176,837
170,668
58
40,782
39,191
16
1,766,563
1,748,934
138
(226,069)
(242,600)
1,264
25
2,058,348
2,006,714
1,965
40,757
375
41,132
20,148
6,632
0
1,261
131
283
28,455
12,677
5,060
17,737
2,471
576
14,690
40,757
375
41,132
20,148
6,632
0
1,261
131
283
28,455
12,677
5,060
17,737
2,471
576
14,690
1 Impairments of financial investments available-for-sale for the year ended 31 December 2005 were as follows: Global Wealth Management & Business Banking CHF 10 million; Global Asset Manage-
ment 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 16: Goodwill and Other Intangible Assets. 3 The funding surplus or requirement is reflected in each Business Group and adjusted in Corporate Center.
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, credit loss is measured using an
expected loss concept. This table shows Business Group performance consistent
with the way the businesses are managed and the way Business Group perfor-
mance 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
expected 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 as Adjusted
expected credit loss.
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 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 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
Corporate
Center
Financial Businesses
Wealth Management
International &
Switzerland
Wealth
Management
US
Business Banking
Switzerland
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)
223,790
219,140
81
64,896
59,567
84
176,837
170,668
58
40,782
39,191
16
1,766,563
1,748,934
138
(226,069)
(242,600)
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)
1,236
0
1,236
245
184
14
21
4
283
751
485
496
981
11,549
11,814
299
1,236
0
1,236
245
184
14
21
4
283
751
485
496
981
40,757
375
41,132
20,148
6,632
0
1,261
131
283
28,455
12,677
5,060
17,737
2,471
576
14,690
2,058,348
2,006,714
1,965
40,757
375
41,132
20,148
6,632
0
1,261
131
283
28,455
12,677
5,060
17,737
2,471
576
14,690
1 Impairments of financial investments available-for-sale for the year ended 31 December 2005 were as follows: Global Wealth Management & Business Banking CHF 10 million; Global Asset Manage-
ment 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 16: Goodwill and Other Intangible Assets. 3 The funding surplus or requirement is reflected in each Business Group and adjusted in Corporate Center.
109
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, credit loss is measured using an
expected loss concept. This table shows Business Group performance consistent
with the way the businesses are managed and the way Business Group perfor-
mance 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
expected 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 as Adjusted
expected credit loss.
110
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 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 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
Wealth Management
Wealth
International &
Switzerland
Management
Business Banking
Switzerland
Financial Businesses
Global Asset
Management
Investment
Bank
Corporate
Center
Private Banks
& GAM
Corporate
Functions
Industrial
Holdings 1
UBS
7,701
(1)
7,700
2,119
642
1,395
66
67
8
4,297
3,403
3,403
7,701
(8)
7,693
2,119
642
1,395
66
67
8
4,297
3,396
3,396
4,741
US
3
4,744
3,320
767
275
67
171
107
4,707
37
37
4,741
(5)
4,736
3,320
767
275
67
171
107
4,707
29
29
2,130
552
4,764
386
386
5,064
92
5,156
2,426
1,064
(533)
69
0
0
3,026
2,130
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
29,698
28,311
8
0
2,022
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
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
0
112
796
794
1
17
1,077
(1,509)
1,176
(1,064)
10
(1,054)
112
286
398
796
794
1
17
1,077
(1,509)
1,176
(778)
(42)
(820)
915
0
915
185
176
20
22
27
2
263
695
220
385
605
915
0
915
185
176
20
22
27
2
263
695
220
385
605
36,645
241
36,886
17,891
6,563
0
1,284
673
170
263
26,844
10,042
781
10,823
2,155
198
8,470
36,645
241
36,886
17,891
6,563
0
1,284
673
170
263
26,844
10,042
781
10,823
2,155
198
8,470
164,716
161,042
304
48,058
43,879
48
210,223
204,569
212
1,477,402
1,463,596
415
8,043
7,480
19
(210,363)
(220,730)
599
9,394
9,966
1,484
1,737,171
1,698,113
3,089
1 Results for Motor-Columbus include the six month period beginning on 1 July 2004. 2 Impairments of financial investments available-for-sale 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 16: Goodwill and Other Intangible Assets. 4 The funding surplus or
requirement is reflected in each Business Group and adjusted in Corporate Center.
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, credit loss is measured using an
expected loss concept. This table shows Business Group performance consistent
with the way the businesses are managed and the way Business Group perfor-
mance 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
expected 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 as Adjusted
expected credit loss.
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 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 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
Wealth Management
International &
Switzerland
Wealth
Management
US
Business Banking
Switzerland
Financial Businesses
Global Asset
Management
Investment
Bank
Corporate
Center
Private Banks
& GAM
Corporate
Functions
Industrial
Holdings 1
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)
915
0
915
185
176
20
22
27
2
263
695
220
385
605
36,645
241
36,886
17,891
6,563
0
1,284
673
170
263
26,844
10,042
781
10,823
2,155
198
8,470
164,716
161,042
304
48,058
43,879
48
210,223
204,569
212
29,698
28,311
8
1,477,402
1,463,596
415
8,043
7,480
19
(210,363)
(220,730)
599
9,394
9,966
1,484
1,737,171
1,698,113
3,089
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)
915
0
915
185
176
20
22
27
2
263
695
220
385
605
36,645
241
36,886
17,891
6,563
0
1,284
673
170
263
26,844
10,042
781
10,823
2,155
198
8,470
1 Results for Motor-Columbus include the six month period beginning on 1 July 2004. 2 Impairments of financial investments available-for-sale 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 16: Goodwill and Other Intangible Assets. 4 The funding surplus or
requirement is reflected in each Business Group and adjusted in Corporate Center.
111
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, is a more meaningful represen-
tation of the way in which the Group is managed.
For the year ended 31 December 2006
Switzerland
Rest of Europe / Middle East / Africa
Americas
Asia Pacific
Total
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
Total operating income
Total assets
Capital expenditure
CHF million
Share % CHF million
Share % CHF million
Share %
12,987
12,771
18,367
4,040
48,165
27
27
38
8
211,565
734,986
1,243,933
206,027
100
2,396,511
9
31
51
9
100
650
385
1,754
328
3,117
21
12
56
11
100
Total operating income
Total assets
Capital expenditure
CHF million
Share % CHF million
Share % CHF million
Share %
13,793
9,236
15,293
2,810
41,132
34
22
37
7
203,907
687,963
1,004,230
162,248
10
33
49
8
973
467
386
139
100
2,058,348
100
1,965
49
24
20
7
100
Total operating income
Total assets
Capital expenditure
CHF million
Share % CHF million
Share % CHF million
Share %
13,438
7,535
13,787
2,126
36,886
37
20
37
6
193,464
561,390
830,350
151,967
11
32
48
9
1,993
556
376
164
100
1,737,171
100
3,089
65
18
12
5
100
112
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 tables below and
on the next page). This required disclosure, however, does not
take into account that net interest and trading income are
generated by a range of different business activities. In many
cases, a particular business activity can generate both net in-
terest and trading income. Fixed income trading activity, for
example, generates both trading profits and coupon income.
UBS management therefore analyzes net interest and trading
income according to the business activity generating it. The
second 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
income, Foreign exchange and Other. These activities generate
both types of income (interest and trading revenue) and there-
fore this analysis is not comparable with the breakdown pro-
vided in the third table below and the table on the next page.
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 1
CHF million
Interest income
Interest earned on loans and advances 2
Interest earned on securities borrowed and reverse repurchase agreements
Interest and dividend income from trading portfolio
Interest income on financial assets designated at fair value
Interest and dividend income from financial investments available-for-sale
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
31.12.06
6,521
13,318
19,839
For the year ended
31.12.05
9,528
7,996
17,524
31.12.06
4,759
6,204
1,745
411
13,119
5,829
891
19,839
For the year ended
31.12.05
3,928
5,741
1,458
292
11,419
5,355
750
17,524
31.12.04
11,744
4,902
16,646
31.12.04
3,098
6,264
1,467
203
11,032
5,070
544
16,646
% change from
31.12.05
(32)
67
13
% change from
31.12.05
21
8
20
41
15
9
19
13
31.12.06
For the year ended
31.12.05
31.12.04
% change from
31.12.05
15,266
39,771
32,211
25
128
87,401
20,024
34,021
14,533
4,757
7,545
80,880
6,521
11,678
23,362
24,134
26
86
59,286
11,226
20,480
10,736
2,390
4,926
49,758
9,528
9,220
10,699
19,271
0
38
39,228
5,583
9,906
7,993
1,168
2,834
27,484
11,744
31
70
33
(4)
49
47
78
66
35
99
53
63
(32)
1 Figures in comparative periods reflect the prime brokerage reclassification as explained in Note 1. 2 Includes interest income on impaired loans and advances of CHF 158 million for 2006,
CHF 123 million for 2005 and CHF 172 million for 2004.
Interest includes forward points on foreign exchange swaps used to manage short-term interest rate risk on foreign currency
loans and deposits.
113
Financial Statements
Notes to the Financial Statements
Note 3 Net Interest and Trading Income (continued)
Net trading income 1
CHF million
Equities
Fixed income 2
Foreign exchange and other
Net trading income
Thereof:
Net gains / (losses) from financial assets designated at fair value
Net gains / (losses) from financial liabilities designated at fair value
For the year ended
% change from
31.12.06
31.12.05
31.12.04
31.12.05
7,064
2,945
3,309
13,318
(397)
(3,869)
3,900
1,256
2,840
7,996
70
(4,024)
2,254
131
2,517
4,902
0
(1,203)
81
134
17
67
1 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.
Financial liabilities designated at fair value include the impact
of UBS’s own credit where market information indicates that it
is reflected in the price at which UBS transacts with third par-
ties. Products with UBS’s own credit as a valuation input
include certain structured debt instruments where either at
inception or over their life, UBS receives cash flows that pro-
vide funding and thereby expose the counterparty to UBS
credit risk. In all periods presented, for counterparties entering
into products which are financial liabilities from UBS’s perspec-
tive, the perception of UBS’s credit risk has remained stable.
Note 4 Net Fee and Commission Income
CHF million
Equity underwriting fees
Debt 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
31.12.06
31.12.05
31.12.04
31.12.05
1,834
1,704
3,538
1,852
8,053
5,858
252
1,266
6,622
449
27,890
269
1,064
29,223
1,904
1,438
3,342
25,881
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
37
12
24
27
20
23
19
8
25
21
22
(12)
4
21
17
28
21
21
114
Note 5 Other Income
CHF million
Associates and subsidiaries
Net gains / (losses) 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
31.12.06
31.12.05
31.12.04
31.12.05
(11)
21
10
921
(12)
909
61
106
5
204
1,295
301
1,596
1
26
27
231
(26)
205
42
57
12
218
561
561
1,122
83
1
84
132
(34)
98
65
43
11
277
578
275
853
(19)
(63)
299
54
343
45
86
(58)
(6)
131
(46)
42
1 Includes net rent received from third parties and net operating expenses. 2 Includes unrealized and realized gains 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
31.12.06
19,076
822
1,376
802
1,595
23,671
For the year ended
31.12.05
15,930
823
1,257
713
1,425
20,148
31.12.04
14,254
567
1,025
652
1,393
17,891
% change from
31.12.05
20
0
9
12
12
17
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
Total general and administrative expenses
For the year ended
31.12.06
1,435
31.12.05
1,278
31.12.04
1,256
653
907
861
653
937
924
1,095
651
8,116
602
840
758
576
737
625
871
345
653
812
634
488
614
683
919
504
6,632
6,563
% change from
31.12.05
12
8
8
14
13
27
48
26
89
22
115
Financial Statements
Notes to the Financial Statements
Note 8 Earnings per Share (EPS) and Shares Outstanding
For the year ended
% change from
31.12.06
31.12.05
31.12.04
31.12.05
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
12,257
11,491
766
12,257
(8)
12,249
11,483
766
14,029
9,776
4,253
14,029
(22)
14,007
9,777
4,230
8,016
7,547
469
8,016
(5)
8,011
7,550
461
Weighted average shares outstanding
Weighted average shares outstanding 1
Potentially dilutive ordinary shares resulting from unvested exchangeable shares,
options and warrants outstanding 2
Weighted average shares outstanding for diluted EPS
1,976,405,800
2,013,987,754
2,059,836,926
82,429,012
83,203,786
104,085,794
2,058,834,812
2,097,191,540
2,163,922,720
Earnings per share (CHF)
Basic
from continuing operations
from discontinued operations
Diluted
from continuing operations
from discontinued operations
6.20
5.81
0.39
5.95
5.58
0.37
6.97
4.85
2.12
6.68
4.66
2.02
3.89
3.66
0.23
3.70
3.49
0.21
(13)
18
(82)
(13)
64
(13)
17
(82)
(2)
(1)
(2)
(11)
20
(82)
(11)
20
(82)
1 Includes an average of 143,809 exchangeable shares for the year ended 31 December 2006 that can be exchanged into the same number of UBS shares. 2 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 37,229,136; 29,117,750; and 37,956,398 for the years ended 31 Decem-
ber 2006, 31 December 2005 and 31 December 2004 respectively.
Shares outstanding
Total ordinary shares issued
Second trading line treasury shares
2004 program
2005 program
2006 program
Other treasury shares
Total treasury shares
Shares outstanding
As of
% change from
31.12.06
31.12.05
31.12.04
31.12.05
2,105,273,286
2,177,265,044
2,253,716,354
(3)
79,870,188
67,770,000
140,749,748
208,519,748
169,456,432
249,326,620
22,600,000
141,875,699
164,475,699
1,940,797,587
1,968,745,296
2,004,389,734
1
(21)
(1)
All shares and earnings per share figures reflect the 2-for-1 share split made on 10 July 2006.
116
Balance Sheet: Assets
Note 9 Financial Assets Designated at Fair Value
CHF million
Loans
Structured loans
Reverse repurchase agreements
Banks
Customers
Other financial assets
Total financial assets designated at fair value
31.12.06
31.12.05
2,104
148
2,942
307
429
5,930
737
229
0
0
187
1,153
The maximum exposure to credit loss of all items in the
above table except for Other financial assets is equal to the
fair value (CHF 5,501 million at 31 December 2006). Other
financial assets are generally comprised of equity invest-
ments and are not directly exposed to credit risk. The maxi-
mum exposure to credit loss at 31 December 2006 is miti-
gated by collateral of CHF 3,712 million.
The amount by which credit derivatives or similar instru-
ments mitigate the maximum exposure to credit loss of loans
and structured loans designated at fair value is as follows:
CHF million
Notional amount of loans and structured loans
Credit derivatives related to loans and structured loans – notional amounts1
Credit derivatives related to loans and structured loans – fair value1
Additional information
CHF million
Change in fair value of loans and structured loans designated at fair value, attributable to changes in credit risk3
Change in fair value of credit derivatives and similar instruments which mitigate the maximum exposure to
credit loss of loans and structured loans designated at fair value3
31.12.06
2,348
663
2
For the year ended 2
31.12.06 2
(8)
2
1 Credit derivatives and similar instruments include credit default swaps, credit linked notes, total return swaps, put options, and similar instruments. These are generally used to manage credit risk when
UBS has a direct credit exposure to the counterparty, which has not otherwise been collateralized. 2 Also equals the cumulative amount from inception for the year ended 31 December 2006.
3 Current and cumulative changes in the fair value of loans attributable to changes in their credit risk are only calculated for those loans oustanding at balance sheet date. Current and cumulative
changes in the fair value of credit derivatives hedging such loans include all the derivatives which have been used to mitigate credit risk of these loans since designation at fair value. For loans reported
under the fair value option, changes in fair value due to changes in the credit standing of the borrower are calculated using counterparty credit information obtained from independent market sources.
117
Financial Statements
Notes to the Financial Statements
Note 10a Due from Banks and Loans (Held at Amortized Cost)
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 (held at amortized cost)
1 Includes due from banks and loans from Industrial Holdings in the amount of CHF 93 and CHF 728 million for 2006 and 2005 respectively.
Additional information about due from banks, loans (held at amortized cost)
and loans designated at fair value
CHF million
Net due from banks and loans (held at amortized cost)
Loans designated at fair value 2
Total
2 Equals the sum of Loans and Structured loans in Note 9.
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, loans (held at amortized cost) and loans designated at fair value
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, loans (held at amortized cost) and loans designated at fair value
31.12.06
50,456
(30)
50,426
124,548
19,989
169,210
313,747
(1,226)
312,521
362,947
31.12.06
362,947
2,252
365,199
31.12.06
163,090
67,584
117,447
18,334
366,455
(1,256)
365,199
31.12.06
146,518
99,879
27,000
93,058
366,455
(1,256)
365,199
31.12.05
33,689
(45)
33,644
127,990
18,509
135,022
281,521
(1,611)
279,910
313,554
31.12.05
313,554
966
314,520
31.12.05
158,465
50,898
94,192
12,621
316,176
(1,656)
314,520
31.12.05
148,412
55,334
24,567
87,863
316,176
(1,656)
314,520
118
Note 10b Allowances and Provisions for Credit Losses
CHF million
Balance at the beginning of the year
Write-offs
Recoveries
Increase / (decrease) in credit loss allowances and provisions
Acquisitions
Foreign currency translation and other adjustments
Balance at the end of the year 1
Specific allowances
and provisions
Collective loan
loss allowances
and provisions
Total 31.12.06
Total 31.12.05
1,690
(363)
62
(108)
3
10
1,294
86
0
0
(48)
0
0
38
1,776
(363)
62
(156)
3
10
1,332
2,802
(651)
63
(374)
(61)
(3)
1,776
1 Includes country provisions of CHF 65 million at 31 December 2005. During 2006, all country provisions were released.
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 allowances
and provisions
Total 31.12.06
Total 31.12.05
30
1,188
0
1,218
76
1,294
0
38
0
38
0
38
30
1,226
0
1,256
76
1,332
45
1,611
11
1,667
109
1,776
Note 10c Impaired Due from Banks and Loans
CHF million
Total gross impaired due from banks and loans 1
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 2
1 All impaired due from banks and loans have a specific allowance for credit losses. 2 Average balances are calculated from quarterly data.
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
31.12.06
31.12.05
2,628
30
1,188
1,218
3,003
3,434
32
1,561
1,593
4,089
31.12.06
31.12.05
2,628
(1,059)
1,569
1,218
3,434
(1,366)
2,068
1,593
119
Financial Statements
Notes to the Financial Statements
Note 10d 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 it will be made good by later payments or the
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
Secured by real estate
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
liquidation of collateral; or 2) when insolvency proceedings
have commenced; or 3) when obligations have been restruc-
tured on concessionary terms.
31.12.06
31.12.05
1,918
1,112
2,135
2,363
1,393
3,082
31.12.06
31.12.05
2,363
(157)
(288)
1,918
31.12.06
29
561
1,328
1,889
1,918
3,555
(515)
(677)
2,363
31.12.05
27
621
1,715
2,336
2,363
31.12.06
31.12.05
1,744
106
62
6
1,918
2,106
155
94
8
2,363
Note 11 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 cred-
it 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
returned to the Group when deemed necessary.
Balance sheet assets
CHF million
By counterparty
Banks
Customers
Total
120
Cash collateral on
Reverse repurchase
securities borrowed
31.12.06
agreements
31.12.06
Cash collateral on
securities borrowed
31.12.05
Reverse repurchase
agreements
31.12.05
53,538
298,052
351,590
209,606
196,228
405,834
52,814
235,621
288,435
259,608
144,824
404,432
Note 11 Securities Borrowing, Securities Lending, Repurchase and Reverse Repurchase Agreements (continued)
Balance sheet liabilities
CHF million
By counterparty
Banks
Customers
Total
Note 12 Trading Portfolio
Cash collateral on
securities lent
31.12.06
Repurchase
agreements
31.12.06
Cash collateral on
securities lent
31.12.05
Repurchase
agreements
31.12.05
44,118
18,970
63,088
274,910
270,570
545,480
46,766
13,172
59,938
278,287
200,221
478,508
The Group trades in debt instruments (including money mar-
ket paper and tradable loans), equity instruments, precious
metals, other commodities and derivatives to meet the fi-
nancial needs of its customers and to generate revenue.
Note 23 provides a description of the various classes of de-
rivative instruments.
CHF million
Trading portfolio assets
Money market paper
thereof pledged as collateral with central banks 1
thereof pledged as collateral (excluding central banks) 1
thereof pledged as collateral and can be repledged or resold by counterparty 2
Debt instruments
Swiss government and government agencies
US Treasury and government agencies
Other government agencies
Corporate listed
Other – unlisted
Total
thereof pledged as collateral 1
thereof can be repledged or resold by counterparty 2
Equity instruments
Listed
Unlisted
Total
thereof pledged as collateral 1
thereof can be repledged or resold by counterparty 2
Traded loans
Precious metals and other commodities 3
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
31.12.06
31.12.05
86,790
20,053
45,356
38,173
340
114,714
71,170
214,129
111,001
511,354
190,153
158,549
183,731
27,938
211,669
56,760
54,756
47,630
21,071
878,514
129
81,385
58,538
21,788
2,101
163,941
40,832
204,773
57,685
11,717
16,307
11,563
589
77,569
64,823
169,841
74,253
387,075
170,917
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
1 Financial assets pledged to third parties for liabilities with and without the right of rehypothecation are CHF 312 billion at 31 December 2006 and CHF 233 billion at 31 December 2005. 2 Financial
assets pledged to third parties with right of rehypothecation of CHF 251 billion at 31 December 2006 and CHF 155 billion at 31 December 2005 are presented on the balance sheet in the line Trading
portfolio assets pledged as collateral. 3 Other commodities predominantly consist of energy.
121
Financial Statements
Notes to the Financial Statements
Note 13 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 available-for-sale
thereof eligible for discount at central banks
31.12.06
31.12.05
354
260
261
521
5,880
819
6,699
1,363
8,937
41
141
587
91
678
2,548
1,738
4,286
1,446
6,551
40
The following tables show the unrealized gains and losses recognized directly in Equity in 2006 and 2005:
CHF million
31 December 2006
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 instruments
Equity instruments
Private equity investments
Total
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 instruments
Equity instruments
Private equity investments
Total
Unrealized gains / (losses) recognized directly in Equity
Fair value
Gross gains
Gross losses
Net,
before tax
Tax effect
Net,
after tax
354
3
0
0
97
28
160
233
6,699
1,363
8,937
0
0
0
0
0
0
0
5
3,102
634
3,741
0
0
0
0
0
0
(3)
0
(2)
(13)
(18)
0
0
0
0
0
0
(3)
5
0
0
0
0
0
0
0
0
0
0
0
0
0
0
(3)
5
3,100
621
3,723
(636)
(182)
(818)
2,464
439
2,905
Unrealized gains / (losses) recognized directly in Equity
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
122
Note 13 Financial Investments Available-for-Sale (continued)
The unrealized losses recognized directly in Equity are con-
sidered to be temporary on the basis that the investments
are intended to be held for a period of time sufficient to re-
cover their cost, and UBS believes that the evidence indicat-
ing that the cost of the investments should be recoverable
within a reasonable period of time outweighs the evidence
to the contrary. Factors considered include the nature of the
investments, valuations and research undertaken by UBS,
the current outlook for each investment, offers under nego-
tiation at favorable prices and the duration of the unrealized
losses.
The following table shows the duration of unrealized
losses recognized directly in Equity in 2006 and 2005:
CHF million
31 December 2006
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 instruments
Equity instruments
Private equity investments
Total
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 instruments
Equity instruments
Private equity investments
Total
Fair value
Investments
with unrealized
loss less than
12 months
Investments
with unrealized
loss more than
12 months
Unrealized losses
Investments
with unrealized
loss less than
12 months
Investments
with unrealized
loss more than
12 months
Total
0
0
0
0
0
0
28
0
2
74
104
0
0
0
0
0
0
132
0
25
123
280
Fair value
Investments
with unrealized
loss less than
12 months
Investments
with unrealized
loss more 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
0
0
0
0
0
0
160
0
27
197
384
Total
0
0
0
55
0
272
143
0
2,048
151
2,669
0
0
0
0
0
0
0
0
0
(3)
(3)
0
0
0
0
0
0
(3)
0
(2)
(10)
(15)
Unrealized losses
Investments
with unrealized
loss less than
12 months
Investments
with unrealized
loss more 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
0
0
0
(3)
0
(2)
(13)
(18)
Total
0
0
0
(1)
0
(11)
(3)
0
(16)
(15)
(46)
123
Financial Statements
Notes to the Financial Statements
Note 13 Financial Investments Available-for-Sale (continued)
Contractual maturities of the investments in debt instruments1
CHF million, except percentages
31 December 2006
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 instruments
Total fair value
Within 1 year
1-5 years
5-10 years
Over 10 years
Amount Yield (%)
Amount Yield (%)
Amount Yield (%)
Amount Yield (%)
2.22
0.00
0.00
1.48
7.00
0.00
0.00
2
0
0
38
26
0
0
66
0.00
0.00
0.00
1.89
0.00
0.00
9.28
0
0
0
2
0
0
233
235
0.00
0.00
0.00
4.47
0.00
4.48
0.00
0
0
0
57
2
10
0
69
1
0
0
0
0
150
0
151
4.00
0.00
0.00
0.00
0.00
5.10
0.00
1 Money market paper has a contractual maturity of less than one year.
Proceeds from sales of Financial investments available-for-sale, excluding private equity, were as follows:
CHF million
Proceeds
Gross realized gains
Gross realized losses
Note 14 Investments in Associates
CHF million
Carrying amount at the beginning of the year
Additions
Disposals
Transfers
Income 1
Impairments 2
Dividend paid
Foreign currency translation
Carrying amount at the end of the year
31.12.06
31.12.05
1,380
832
5
298
60
1
31.12.06
31.12.05
2,956
542
(2,043)
13
156
(27)
(33)
(41)
2,675
938
(935)
(13)
156
(4)
(59)
198
1,523
2,956
1 Income of CHF 50 million and CHF 99 million is related to Industrial Holdings for 2006 and 2005 respectively, of which CHF 11 million and CHF 70 million is related to discontinued operations for 2006
and 2005 respectively. 2 Impairments of CHF 27 million and CHF 4 million are related to Industrial Holdings for 2006 and 2005 respectively.
At 31 December 2006, significant associated companies of
the Group had the following balance sheet and income
statement totals on an aggregated basis, not adjusted for
the Group’s proportionate interest: assets CHF 27 billion;
liabilities CHF 23 billion; revenues CHF 1.9 billion; and net
profit CHF 318 million. See Note 35 for a list of significant
associates.
124
Note 15 Property and Equipment
At historical cost less accumulated depreciation
CHF million
Historical cost
Own-used
properties
Leasehold
improve-
ments
IT, software
and com-
munication
Other
machines
and
equipment
Plant and
manu-
facturing
equipment
Projects in
progress
31.12.06
31.12.05
Balance at the beginning of the year
9,446
3,050
4,261
1,596
2,904
Additions
Additions from acquired companies
Disposals / write-offs 1
Reclassifications
Foreign currency translation
Balance at the end of the year
Accumulated depreciation
Balance at the beginning of the year
Depreciation 2
Disposals / write-offs 1
Reclassifications
Foreign currency translation
Balance at the end of the year
Net book value at the end of the year 3
140
0
(407)
102
5
206
5
(110)
119
(60)
662
19
(539)
116
(42)
9,286
3,210
4,477
4,781
244
(108)
11
2
4,930
4,356
1,999
237
(86)
(18)
(36)
2,096
1,114
3,474
676 4
(225)
0
(38)
3,887
590
240
4
(817)
(97)
(33)
893
1,349
103
(807)
(3)
(19)
623
270
36
1
(2,960)
18
54
53
672
65
(716)
0
21
42
11
413
509
0
(82)
(284)
2
558
0
0
0
0
0
0
558
21,670
1,793
29
21,428
1,865
116
(4,915)
(2,363)
(26)
(74)
50
574
18,477
21,670
12,275
1,325
11,998
1,556
(1,942)
(1,702)
(10)
(70)
11,578
6,899
32
391
12,275
9,395
1 Includes write-offs of fully depreciated assets. 2 Depreciation expense of CHF 62 million and CHF 295 million is related to discontinued operations for 2006 and 2005 respectively. 3 Fire insurance
value of property and equipment is CHF 13,596 million (2005: CHF 16,050 million). 4 Includes a CHF 34 million software impairment.
At fair value
CHF million
Balance at the beginning of the year
Additions
Sales
Revaluations
Reclassifications
Foreign currency translation
Balance at the end of the year
31.12.06
31.12.05
28
0
(14)
0
0
0
14
80
26
(25)
0
(55)
2
28
125
Financial Statements
Notes to the Financial Statements
Note 16 Goodwill and Other Intangible Assets
At year-end 2006, five out of seven segments carry goodwill,
of which Industrial Holdings has less than 1% of the total
balance. Business Banking Switzerland and Corporate Cen-
ter carry no goodwill. 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 recov-
erable amount is determined by estimating streams of earn-
ings available to shareholders in the next four quarters based
on a rolling forecast process, discounted to their present val-
ues. The terminal value reflecting all periods beyond the first
year is calculated on the basis of the estimated individual
return on equity for each segment, which is derived from the
forecast first-year profit, the underlying equity, the cost of
equity and the long-term growth rate. The recoverable
amount of the segments is the sum of earnings available to
shareholders from the first year and the terminal value. The
model is most sensitive to changes in the forecast earnings
available to shareholders in year one, the estimated return
on equity, the underlying equity, the cost of equity and to
changes in the long-term growth rate. The applied long-
term growth rate is based on long-term risk free interest
rates. Earnings available to shareholders are estimated based
on forecast results, business initiatives and planned capital
investments and returns to shareholders. Validation param-
eters used within the Group’s impairment test model are
linked to external market information, where applicable. Dis-
count rates applied range from 8% for Wealth Management
International & Switzerland and for Business Banking Swit-
zerland 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
Balance at the beginning of the year
Amortization 2
Reallocations
Disposals
Write-offs 1
Foreign currency translation
Balance at the end of the year
Goodwill
Other intangible assets
Customer
relationships,
contractual
rights and other
Total
Infrastructure
Total
31.12.06
31.12.05
11,313
2,015
(142)
0
(722)
12,464
1,016
0
0
0
(74)
942
263
48
0
0
0
(20)
291
651
2,056
1,321
(1,231)
(28)
(31)
2,087
636
148
0
(301)
(28)
(26)
429
3,072
1,321
(1,231)
(28)
(105)
3,029
899
196
0
(301)
(28)
(46)
720
14,385
3,336
(1,373)
(28)
(827)
15,493
899
196
0
(301)
(28)
(46)
720
13,096
92
(395)
(112)
1,704
14,385
895
340
(307)
(30)
(112)
113
899
1,658
2,309
14,773
13,486
Net book value at the end of the year
12,464
1 Represents write-offs of fully amortized other intangible assets. 2 Amortization expense of CHF 43 million and CHF 209 million is related to discontinued operations for 2006 and 2005,
respectively.
126
Note 16 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 2006.
Balance at
the beginning
of the year
Additions and
reallocations
Disposals
Amortization
Foreign currency
translation
Balance at
the end
of the year
CHF million
Goodwill
Wealth Management International & Switzerland
Wealth Management US
Business Banking Switzerland
Global Asset Management
Investment Bank
Corporate Center
Industrial Holdings
UBS
Other intangible assets
Wealth Management International & Switzerland
Wealth Management US
Business Banking Switzerland
Global Asset Management
Investment Bank
Corporate Center
Industrial Holdings
UBS
1,566
3,841
0
1,438
4,309
0
159
116
444
0
190
1,260
0
5
11,313
2,015
141
753
0
8
296
9
966
184
148
0
488
483
0
18
2,173
1,321
0
0
0
0
0
0
(142)
(142)
0
0
0
0
0
0
(930)
(930)
(10)
(53)
0
(4)
(72)
(9)
(48)
(196)
The estimated, aggregated amortization expenses for other intangible assets are as follows:
CHF million
Estimated, aggregated amortization expenses for:
(37)
(279)
0
(97)
(307)
0
(2)
(722)
10
(55)
0
6
(19)
0
(1)
(59)
1,645
4,006
0
1,531
5,262
0
20
12,464
325
793
0
498
688
0
5
2,309
Other intangible assets
334
238
238
219
187
1,093
2,309
2007
2008
2009
2010
2011
2012 and thereafter
Total
Note 17 Other Assets
CHF million
Deferred tax assets
Settlement and clearing accounts
VAT and other tax receivables
Prepaid pension costs
Properties held for sale
Accounts receivable trade
Inventory – Industrial Holdings
Other receivables
Total other assets
Note
22
31.12.06
31.12.05
3,686
3,159
318
814
1,254
114
68
7,836
17,249
2,811
3,528
312
832
578
364
2,007
5,811
16,243
127
Financial Statements
Notes to the Financial Statements
Balance Sheet: Liabilities
Note 18 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
31.12.06
203,689
114,264
456,301
570,565
774,254
31.12.05
124,328
113,889
353,018
466,907
591,235
Note 19 Financial Liabilities Designated at Fair Value and Debt Issued
The Group issues both CHF and non-CHF denominated
fixed-rate and floating-rate debt.
Subordinated debt securities are unsecured obligations of
the Group that are subordinated in right of payment to all
present and future senior
indebtedness and certain
other obligations of the Group. At 31 December 2006 and
31 December 2005, the Group had CHF 14,774 million and
CHF 10,001 million, respectively, in subordinated debt. Sub-
ordinated debt usually pays fixed interest annually or float-
ing rate interest based on three-month or six-month London
Interbank Offered Rate (LIBOR) and provides for single prin-
cipal payments upon maturity.
At 31 December 2006 and 31 December 2005, the
Group had CHF 191,431 million and CHF 157,771 million,
respectively, in unsubordinated debt (excluding money mar-
ket paper, compound debt instruments – OTC and loan
commitments designated at fair value).
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 discussed in Note 1 a14) and Note 23 – Derivative Instru-
ments and Hedge Accounting. As a result of applying hedge
accounting, at 31 December 2006 and 31 December 2005,
the carrying value of debt issued was CHF 256 million higher
and CHF 294 million higher, respectively, reflecting changes
in fair value due to interest rate movements.
The contractual redemption amount at maturity of Finan-
cial liabilities designated at fair value through profit or loss
approximates the carrying value at 31 December 2006 and
31 December 2005.
128
Note 19 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
Loan commitments 1
Total
31.12.06
135,646
9,967
74
145,687
31.12.05
109,724
7,677
0
117,401
1 Loan commitments recognized as Financial liabilities designated at fair value, until drawn down and recognized as loans. See Note 1 a7) for additional information.
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
31.12.06
119,584
31.12.05
102,662
53,509
14,774
38
2,238
70,559
190,143
46,545
10,001
38
1,464
58,048
160,710
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 dates1
CHF million, except where indicated
2007
2008
2009
2010
2011 2012–2016
Thereafter
31.12.06
Total
Total
31.12.05
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 %)
64,379
0–27
38,947
1,402
0–8
0
8,307
0–20
17,589
0
0
9,279
0–13.5
6,717
511
5.875
0
6,173
6,277
0–13.25
0–10.25
4,835
2,444
7,391
0–12
6,139
103,700
128,504
1,894
0–10
14,513
91,184
25,300
0
0
0
0
4,946
2,555
9,414
7,658
0–7.375 4.125–8.75
5,360
23,836
0
5,360
2,326
18,962
209,658
163,788
104,728
25,896
16,507
11,008
8,721
48,728
0–15
2,666
1,265
0–8.5
3,655
1,696
0–18.5
3,785
1,946
0–8
5,822
494
0–20
4,449
2,037
0–35
4,745
29,662
85,828
93,332
0–35
5,181
30,303
13,297
0
0
0
0
0
0
0
0
17
Subtotal
Total
51,394
156,122
4,920
30,816
5,481
21,988
7,768
18,776
4,943
13,664
6,782
30,618
34,843
53,805
116,131
325,789
106,646
270,434
1 Compound debt instruments – OTC designated at fair value and loan commitments designated at fair value are excluded from the table.
The table above indicates fixed interest rate coupons
ranging from 0 up to 35% on the Group’s bonds. The high
or low coupons generally relate to structured debt issues pri-
or to the separation of embedded derivatives. As a result,
the stated interest 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 sep-
arated and, where applicable, the application of hedge ac-
counting.
129
Financial Statements
Notes to the Financial Statements
Note 20 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 21 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 subsidiaries
Reclassifications
Foreign currency translation
Balance at the end of the year
Note
21
10b
22
Other 1
1,146
1
233
22
0
(113)
(607) 2
108
(2)
788
31.12.06
31.12.05
1,672
76
4,258
2,674
931
3,715
33,645
91
16,189
63,251
2,072
109
3,592
2,596
712
2,707
30,224
1,425
10,400
53,837
Total
31.12.06
2,072
Total
31.12.05 2
2,020
26
630
22
5
(466)
(607)
36
(46)
1,672
1
520
3
25
(588)
(11)
0
102
2,072
Operational
Litigation
334
0
(7)
0
3
(63)
0
(72)
(10)
185
592
25
404
0
2
(290)
0
0
(34)
699
1 In 2006, in connection, with a strategy review of its business and a review of its office space planning, Wealth Management US decided not to use office space rented by UBS under a long-term contract
in a new building in New Jersey. Senior management approved a proposal to enter into a 10-year sublease contract with an external party for the unused office space. Under the terms of this contract,
the sublease income is not sufficient to cover the rent UBS pays under its original contract and costs incurred for arranging the sublease. UBS recorded a provision to cover the shortfall of this onerous
lease contract which amounted to CHF 185 million on 31 December 2006. 2 Comprises provisions mainly for annual cost liabilities related to power purchases from joint venture companies where
production costs exceed market prices; reinstatement costs; subleases.
Legal Proceedings
UBS Group operates in a legal and regulatory environment
that exposes it to potentially significant litigation risks. As a
result, UBS is involved in various disputes and legal proceed-
ings, including litigation, arbitration, and regulatory and
criminal investigations. Such cases are subject to many un-
certainties, and their outcome is often difficult to predict,
particularly in the earlier stages of a case. In certain circum-
stances, to avoid the expense and distraction of legal pro-
ceedings, UBS may, based on a cost benefit analysis, enter a
settlement even though UBS denies any wrongdoing. The
Group makes provisions for cases brought against it only
when after seeking legal advice, in the opinion of manage-
ment, it is probable that a liability exists, and the amount can
be reasonably estimated (see table above). No provision is
made for claims asserted against the Group that in the opin-
ion of management are without merit and where it is not
likely that UBS will be found liable.
At 31 December 2006, UBS is involved in the following
legal proceedings which could be material to the Group in a
given reporting period:
(a) InsightOne: In December 2006, the New York State
Attorney General (NYAG) filed a civil complaint regard-
ing InsightOne, the Firm’s fee-based brokerage program
for private clients in the United States. The InsightOne
program is a fee-based brokerage program, in which
clients pay an asset-based fee for trading activity rather
than commissions on a per trade basis and was designed
to align more closely the interests of financial advisors
and clients. UBS denies that the program was part of a
scheme to disadvantage clients and intends to defend
itself vigorously in this matter.
(b) Tax Shelter: In connection with a criminal investigation
of tax shelters, the United States Attorney’s Office for
the Southern District of New York (U.S. Attorney’s Of-
fice) is examining UBS’s conduct in relation to certain
tax-oriented transactions in which UBS and others en-
gaged during the years 1996–2000. Some of these
transactions were a subject of the Deferred Prosecution
Agreement which the accounting firm KPMG LLP en-
tered into with the U.S. Attorney’s Office in August
2005, and are at issue in United States v. Stein, S1 05 Cr.
130
Note 21 Provisions (continued)
888 (LAK). UBS is cooperating with the government’s
investigation.
(c) Municipal Bonds: In November 2006, UBS and others re-
ceived subpoenas from the U.S. Department of Justice,
Antitrust Division, and the U.S. Securities and Exchange
Commission. These subpoenas concern UBS’s conduct
relating to derivative transactions entered into with mu-
nicipal bond issuers, and to the investment of proceeds
of municipal bond issuances. UBS is cooperating with
these investigations.
(d) HealthSouth: UBS is defending itself in two purported
securities class actions brought in the U.S. District Court
of the Northern District of Alabama by holders of stock
and bonds in HealthSouth Corp. UBS also is a defendant
in HealthSouth derivative litigation in Alabama state
court and has responded to an SEC investigation relating
to UBS’s role as a banker for HealthSouth.
(e) Bankruptcy Estate of Enron: In November 2003, Enron
brought adversarial proceedings against UBS and others
in the U.S. Bankruptcy Court for the Southern District of
New York seeking avoidance and recovery of payments
that Enron made prior to filing for bankruptcy in connec-
tion with equity forward and swap transactions The
Bankruptcy Court dismissed UBS’s motion for summary
judgment in August 2005. Discovery is ongoing.
(f) Parmalat: UBS is involved in a number of proceedings in
Italy related to the bankruptcy of Parmalat. These pro-
ceedings include, inter alia, clawback proceedings against
UBS Limited in connection with a structured finance
transaction. Further, UBS is a defendant in two civil dam-
ages claims brought by Parmalat, of which one relates to
the same structured finance transaction against UBS Lim-
ited, while the other against UBS AG relates to certain
derivative transactions. In addition, UBS Limited and two
UBS employees are the subject of criminal proceedings in
Milan. Finally, UBS is a defendant in civil actions brought
by individual investors in those criminal proceedings. All
proceedings still are in an early stage. UBS denies the al-
legations made against itself and against its employees
in these matters, and is defending itself vigorously.
Note 22 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
31.12.06
31.12.05
31.12.04
1,758
(87)
1,545
(430)
2,786
(12)
(1)
(13)
2,773
1,403
87
1,428
(447)
2,471
554
22
576
3,047
1,184
5
815
151
2,155
156
42
198
2,353
The Group made net tax payments, including domestic and foreign taxes, of CHF 2,607 million, CHF 2,394 million and
CHF 1,345 million for the full years 2006, 2005 and 2004 respectively.
131
Financial Statements
Notes to the Financial Statements
Note 22 Income Taxes (continued)
The components of operating profit before tax, and 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 2006 and 2005 and 24% for 2004
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
Change in deferred tax valuation allowance
Other items
Income tax expense from continuing operations
31.12.06
14,667
5,564
9,103
3,227
For the year ended
31.12.05
12,677
5,854
6,823
2,789
829
21
(680)
(941)
21
183
316
(548)
358
2,786
388
71
(97)
(555)
22
212
(283)
(156)
80
2,471
31.12.04
10,042
5,675
4,367
2,410
128
103
(249)
(657)
262
215
(98)
239
(198)
2,155
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
Financial investments and associates
Trading assets
Intangible assets
Other
Total deferred tax liabilities
31.12.06
31.12.05
2,611
1,508
768
598
5,485
(1,799)
3,686
122
201
1,221
684
55
391
2,674
1,904
2,235
586
804
5,529
(2,718)
2,811
55
515
633
448
264
681
2,596
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 effects of exchange rate changes on tax assets and liabilities denominated in curren-
cies other than CHF and the booking of some of the tax benefits related to deferred compensation through Equity. For the
above purposes, the valuation allowance represents amounts that are not expected to provide future benefits, either be-
cause they are offset against tax contingencies or due to insufficiency of future taxable income.
132
Note 22 Income Taxes (continued)
Certain branches and subsidiaries of the Group have de-
ferred 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
1,799 million (CHF 2,718 million at 31 December 2005).
For companies that suffered tax losses in either the cur-
rent or preceding years, an amount of CHF 212 million (CHF
442 million at 31 December 2005) has been recognized as
deferred tax assets based on expectations that sufficient tax-
able income will be generated in future years to utilize the
tax loss carry-forwards.
The carry-forwards expire as follows:
Within 1 year
From 2 to 4 years
After 4 years
Total
The Group provides deferred income taxes on undistrib-
uted earnings of non-Swiss subsidiaries except to the extent
that such earnings are indefinitely invested. In the event that
these earnings were distributed, additional taxes of approxi-
mately CHF 18 million would be due.
At 31 December 2006, net operating loss carry-forwards
totaling CHF 4,140 million (not recognized as a deferred tax
asset) are available to be offset against tax contingencies or
future taxable income.
31.12.06
3
181
3,956
4,140
Note 23 Derivative Instruments and Hedge Accounting
A derivative is a financial instrument, the value of which is
derived from the value of another (“underlying”) financial
instrument, an index or some other variable. Typically, the
underlying 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 mar-
kets (exchange-traded contracts).
The notional amount of a derivative is generally the quan-
tity of the underlying instrument on which the derivative
contract 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
replaced instantaneously. Negative replacement values rep-
resent 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 replace-
ment values of derivative instruments are recognized in the
income statement unless they meet the criteria for certain
hedge accounting relationships, as explained in Note 1a14)
Derivative instruments and hedge accounting.
Types of derivative instruments
The Group uses the following derivative financial instru-
ments 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
payments based on two different currency principal bal-
ances and reference interest rates and generally also
133
Financial Statements
Notes to the Financial Statements
Note 23 Derivative Instruments and Hedge Accounting (continued)
entail exchange 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 pro-
tection makes one or more payments to the party selling
protection 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 obli-
gations of the credit entity and is made regardless of
whether the protection 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
exposure 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, typi-
cally, 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 struc-
tures 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 arbi-
trage activities. Market making involves quoting bid and of-
fer prices to other market participants with the intention of
generating revenues based on spread and volume. Position-
ing means managing market risk positions with the expecta-
tion of profiting from favorable movements in prices, rates
or indices. Arbitrage activities involve identifying and profit-
ing from price differentials between the same product in dif-
ferent markets or the same economic factor in different
products.
of hedge transactions varies according to the nature of the
instrument hedged and whether the hedge qualifies as such
for accounting purposes.
Derivative transactions may qualify as hedges for account-
ing purposes. These are described under the corresponding
headings in this note. The Group’s accounting policies for de-
rivatives designated and accounted for as hedging instru-
ments are explained in Note 1a14) Derivative instruments
and hedge accounting, 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
accounting 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
accounting. The fair value changes of such swaps are booked
to Net trading income. The Group limits the resultant in-
come volatility by selecting short- to medium-term swaps
only. Longer term swaps continue to be supported by the
cash flow hedging model explained in a subsequent section
of this note.
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 2006,
the Group recognized a net loss of CHF 18 million, for the
year ended 31 December 2005 a net loss of CHF 22 million
and for the year ended 31 December 2004 a net gain of CHF
22 million, representing the ineffective portions, as defined
in Note 1a14), of fair value hedges. The fair values of out-
standing derivatives designated as fair value hedges were a
CHF 222 million net positive replacement value at 31 De-
cember 2006 and a CHF 380 million net positive replace-
ment value at 31 December 2005.
In addition, the Group has entered into a fair value hedge
accounting relationship to protect a certain portion of avail-
able-for-sale equity investments from foreign currency expo-
sure using FX derivatives. For the year ended 31 December
2006, the Group recognized a net gain of CHF 5 million as
hedge ineffectiveness. The time value associated with the
FX derivatives is excluded from the evaluation of hedge inef-
fectiveness. The fair value of outstanding FX derivatives des-
ignated as fair value hedges was a CHF 1 million net positive
replacement value at 31 December 2006.
Derivatives transacted for hedging purposes
The Group enters into derivative transactions for the pur-
poses of hedging assets, liabilities, forecast transactions,
cash flows and credit exposures. The accounting treatment
Fair value hedge of portfolio of interest rate risk
The Group has applied fair value hedge accounting of port-
folio interest rate risk since September 2005. For the year
134
Note 23 Derivative Instruments and Hedge Accounting (continued)
ended 31 December 2006, the Group recognized a net loss
of CHF 8 million and for the year ended 31 December 2005
a net loss of CHF 22 million, representing the ineffective por-
tions of fair value hedges. The change in fair value of the
hedged items is recorded separately from the hedged item
on the balance sheet. The fair value of derivatives designated
for this hedge method at 31 December 2006 was a CHF 8
million net positive replacement value. There were no deriva-
tive contracts designated as hedges under this method at
31 December 2005, as all the hedges had become ineffec-
tive and the hedge relationships were de-designated at the
end of 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
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 of 31 December 2006 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
228
88
140
420
156
264
294
109
185
267
151
116
7
41
(34)
Gains and losses on the effective portions of derivatives des-
ignated as cash flow hedges of forecast transactions are ini-
tially recorded in Equity as Net income recognized directly in
equity 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 rec-
ognized immediately in the income statement. A CHF 36
million loss, CHF 35 million gain and a CHF 13 million gain
were recognized in 2006, 2005 and 2004, respectively, due
to hedge ineffectiveness.
As of 31 December 2006 and 2005, the fair values of
outstanding derivatives designated as cash flow hedges of
forecast transactions were a CHF 462 million net negative
replacement value and a CHF 1,124 million net negative
replacement value, respectively. Swiss franc hedging interest
rate swaps terminated during 2006 and 2005 had a replace-
ment value of CHF 0 million and a positive replacement val-
ue of CHF 80 million, respectively. At the end of 2006 and
2005, unrecognized income of CHF 214 million and CHF
346 million associated with terminated swaps 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 Net income recognized directly in
Equity to current period earnings due to discontinuation of
hedge accounting were a CHF 132 million net gain in 2006,
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 port-
folios, which generally include several types of instruments,
not just derivatives. The market risk of derivatives is man-
aged and controlled as an integral part of the market risk of
these portfolios. The Group’s approach to market risk is de-
scribed in Note 29, Financial Instruments Risk Position, part
b) Market Risk.
Derivative instruments are transacted with many differ-
ent counterparties, most of whom are also counterparties
for other types of business. The credit risk of derivatives is
managed and controlled in the context of the Group’s over-
all credit exposure to each counterparty. The Group’s ap-
proach to credit risk is described in Note 29, Financial Instru-
ments Risk Position, part c) Credit Risk. It should be noted
that, although 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 counterparty 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 increase over time (“potential fu-
ture exposure”), while on the other hand, exposure may be
mitigated by entering into master netting agreements and
bilateral collateral arrangements with counterparties. Both
the exposure measures used by the Group internally to con-
trol credit risk and the capital requirements imposed by reg-
ulators reflect these additional factors. There are additional
135
Financial Statements
Notes to the Financial Statements
capital requirements shown in Note 29 e) Capital Adequacy
under Off-balance sheet and other positions as Forward and
swap contracts and Purchased options, which reflect the
additional potential future exposure. In Note 29 c) Credit
Risk, the Derivatives positive replacement values shown un-
der Traded products, and in Note 29 part e) Capital Adequa-
cy, the Positive replacement values shown under balance
sheet assets are lower than those shown in the balance
sheet because they reflect close-out netting arrangements
accepted by the Swiss Federal Banking Commission (SFBC)
as being enforceable in insolvency. The impact of such net-
ting agreements on the gross replacement values shown in
the tables on the next two pages is to reduce both positive
and negative replacement values by CHF 219,820 million
and CHF 252,192 million at 31 December 2006 and 2005
respectively. As a result, positive replacement values after
netting for UBS Group were CHF 108,625 million at 31 De-
cember 2006 and CHF 81,590 million at 31 December
2005. These figures differ from those shown in Note 29 e)
because they cover the whole UBS Group, whereas the rel-
evant tables in Note 29 cover only those entities which are
subject to consolidation for regulatory capital purposes.
136
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
Over-the-counter (OTC) contracts
Forward contracts
Options
Exchange-traded contracts 3
Futures
Options
Total
Note 23 Derivative Instruments and Hedge Accounting (continued)
As of 31 December 2006
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
CHF bn
1,001
5,629
273
764
4,784
308
172
177
38
34
9,891
10,134
46,690
47,128
127
440
2,252
3,563
1,211
975
1,848.0
87,079
13,529
81,719 149,289 143,765
22,643.4
15,148
16,181
19,459
1,432.5
406
438
474
485
96
96
976
1,019
2,904.4
34.7
7,309
6,294
10,664
11,236
49,076
50,821 100,608
96,867 167,657 165,218 28,863.0
35
54
89
54
63
117
363
100
463
673
74
747
12,874
14,035
583
1,606
7,425
4,284
7,953
3,512
20,697
22,715
2,536.6
5,021
5,255
103.0
13,457
15,641
11,709
11,465
25,718
27,970
2,639.6
Forward contracts
4,565
4,322
1,765
1,968
827
531
17
103
7,174
6,924
Interest and currency swaps
24,724
22,977
10,363
10,599
14,641
12,366
12,821
11,831
62,549
57,773
2,877
2,624
2,987
3,042
828
1,041
51
49
6,743
6,756
12
16
2
2
14
18
32,178
29,939
15,117
15,611
16,296
13,938
12,889
11,983
76,480
71,471
6,145.7
348
293
333
974
339
580
573
676
355
784
757
1,554
371
1,281
37
118
48
68
1,715
2,641
1,113
2,713
400
427
381
1,319
1,676
1,520
1,050
3,361
1,087
2,739
155
116
1,810
6,166
1,868
5,694
1,179
1,073
1,464
3,485
386
3,702
1,217
5,655
506
6,121
8
14
103
2,085
2,792
8,821
1,605
2,795
12,501
20,756
4,277
6,529
4,602
8,238
8,396
9,978
10,458
453
433
22,946
23,889
9,551
12,326
15,268
16,605
19,287
2,072
3,331
37,532
47,437
3,254
221
3,223
236
2,894
447
3,155
368
1,724
595
1,579
654
766
1
840
27
8,638
1,264
8,797
1,285
Commodities contracts, excluding precious metals contracts
784.0
4,064.6
1,276.2
20.8
0.1
25.6
70.6
1.0
23.9
121.1
107.8
258.0
72.4
270.7
708.9
86.3
13.0
236.7
67.1
403.1
Total derivative instruments
52,180
52,316
45,751
1,626
5,101
1,637
5,096
2,164
5,505
1,967
1,200
1,057
4,990
4,661
5,490
14,743
767
49,872 102,314 105,716 128,200 124,629 328,4454 332,5335
14,892
3,519
3,290
867
1 PRV: Positive replacement value. 2 NRV: Negative replacement value. 3 Exchange-traded products include own account trades only. 4 The impact of netting agreements accepted by the Swiss
Federal Banking Commission (SFBC) for capital adequacy calculations is to reduce positive replacement values to CHF 108,625 million. 5 The impact of netting agreements accepted by the SFBC for
capital adequacy calculations is to reduce negative replacement values to CHF 112,713 million.
137
Financial Statements
Notes to the Financial Statements
Note 23 Derivative Instruments and Hedge Accounting (continued)
As of 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
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
2,418.3
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
13
50
63
21
74
95
290
30
320
195
143
338
7,911
10,691
757
778
8,668
11,469
4,247
713
4,960
2,472
12,461
13,379
1,481.0
820
1,550
1,815
44.4
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
2,146
164
2,099
185
4,208
354
3,908
300
2,301
599
2,488
457
3
1
0
4
8,658
1,118
8,495
946
28
42
64
47
26
23
118
112
17.4
56.9
1.6
4.4
80.3
101.8
204.7
59.5
345.3
711.3
70.7
6.8
105.4
12.2
195.1
Total derivative instruments
39,905
40,293
41,327
2,338
2,326
4,626
4,255
9,553
42,056 127,198 130,144 125,352 125,170 333,7824 337,6635
9,894
2,968
2,926
4
4
1 PRV: Positive replacement value. 2 NRV: Negative replacement value. 3 Exchange-traded products include own account trades only. 4 The impact of netting agreements accepted by the Swiss
Federal Banking Commission (SFBC) for capital adequacy calculations is to reduce positive replacement values to CHF 81,590 million. 5 The impact of netting agreements accepted by the SFBC for
capital adequacy calculations is to reduce negative replacement values to CHF 85,471 million.
138
Commodities contracts, excluding precious metals contracts
Off-Balance Sheet Information
Note 24 Pledgeable Off-Balance Sheet Securities
The Group obtains securities which are not recorded on the balance sheet 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
thereof sold or repledged
in connection with financing activities
to satisfy commitments under short sale transactions
in connection with derivative and other transactions
Note 25 Fiduciary Transactions
31.12.06
1,436,827
1,342,733
94,094
1,069,795
969,608
87,288
12,899
31.12.05
1,255,176
1,183,238
71,938
1,023,192
939,571
70,174
13,447
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
Total fiduciary transactions
31.12.06
43,366
43,366
31.12.05
40,603
40,603
The Group also acts in its own name as trustee or in fidu-
ciary capacities for the account of third parties. The assets
managed in such capacities are not reported on the balance
sheet unless they are invested with UBS. UBS earns commis-
sion and fee income from such transactions and assets.
These activities potentially expose UBS to liability risks in cas-
es of gross negligence with regard to non-compliance with
its fiduciary and contractual duties. UBS has policies and pro-
cesses in place to control these risks.
139
Financial Statements
Notes to the Financial Statements
Note 26 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 assurances, subject to the satisfaction of certain
conditions, that the Group will make payment in the event
that customers fail to fulfill their obligations to third parties.
The Group also enters into commitments to extend credit in
the form of credit lines that are available to secure the liquid-
ity needs of customers but have not yet been drawn on by
them, the majority of which range in maturity from one
month to five years. The maximum amount at risk for the
Group if customers fail to meet their obligations is the con-
tractual amount of these instruments. 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 2006, 2005 and 2004 the Group
recognized net credit loss recoveries of CHF 10 million, CHF
39 million and CHF 31 million respectively, related to obliga-
tions incurred for contingencies and commitments. Provi-
sions recognized for guarantees, documentary credits and
similar instruments were CHF 76 million at 31 December
2006 and CHF 109 million at 31 December 2005. See also
Note 21 Provisions.
The Group generally enters into sub-participations to
mitigate 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 obligation is not
fulfilled by the obligor and, where applicable, to fund a part
of the credit facility. The Group retains the contractual rela-
tionship with the obligor, and the sub-participant has only
an indirect relationship. The Group will only enter into sub-
participation agreements with banks to which UBS ascribes
a credit rating equal to or better than that of the obligor.
Effective 1 January 2006, Swiss Banking Law and the
newly established deposit insurance system require Swiss
banks and securities dealers to jointly guarantee an amount
of up to CHF 4 billion for privileged client deposits in the
event that another Swiss bank or securities dealer becomes
insolvent. For the period from 1 January 2006 to 30 June
2007, the Swiss Federal Banking Commission estimates
UBS´s share in the deposit insurance system to be CHF 953
million. The deposit insurance is a guarantee and exposes
UBS to additional credit risk which is not reflected in the ta-
ble on the next page. UBS considers the probability of a loss
due to this contingency to be remote.
UBS is a member of numerous securities and futures ex-
changes and clearinghouses. Associated with some of
those memberships, UBS may be required to pay a share of
the financial obligations of, or otherwise be exposed to ad-
ditional financial obligations as a result of, another mem-
ber who defaults. While the membership rules vary, obliga-
tions generally would arise only if the exchange or
clearinghouse had exhausted its resources. The maximum
exposure to credit loss is not reflected in the table on the
next page. UBS considers the probability of a material loss
due to such obligations to be remote.
As part of its trading and market making activities, UBS
writes put options on a broad range of underlyings. The
writing of put options is subject to UBS‘s risk control frame-
work. For writing put options, UBS receives a premium, re-
presenting the fair value of the option at inception, which is
recognized as negative replacement value on the balance
sheet. A written put option is considered a market price
guarantee issued, because the option holder is entitled to
make UBS purchase the underlying at the stated exercise
price. The contract volume, which is the number of units of
the underlying multiplied by the exercise price per unit,
therefore represents the maximum potential payment UBS
could be required to make upon exercise of the puts. The
total negative replacement value of written put options is
significantly lower than the underlying total contract vol-
ume. It changes over time with changes in market parame-
ters. Accordingly, neither the underlying total contract vol-
ume nor the negative replacement value is indicative of the
actual risk exposure arising from written put options. The
market value of guarantees in the form of written put op-
tions and other forms of market value guarantees amounted
to CHF 481,656 million at 31 December 2006 and CHF
317,973 million at 31 December 2005.
140
Note 26 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
Contingent liabilities and irrevocable commitments
Gross contingent liabilities and irrevocable commitments
Sub-participations
Net contingent liabilities and irrevocable commitments
31.12.06
31.12.05
Guaranteed amounts
12,142
(813)
11,329
3,199
(333)
2,866
2,567
(238)
2,329
17,908
(1,384)
16,524
11,526
(719)
10,807
2,805
(335)
2,470
2,235
(207)
2,028
16,566
(1,261)
15,305
Committed amounts
97,287
(2)
97,285
20
97,307
(2)
97,305
115,215
(1,386)
113,829 3
72,905
(2)
72,903
20
72,925
(2)
72,923
89,491
(1,263)
88,228
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. 3 Includes CHF 11,816 million of loan commitments designated at fair value. The fair value of CHF 74 million is shown as Financial liabilities designated at fair value until drawn down. See
Note 19 for details.
CHF million
Overview of collateral
Gross contingent liabilities
Gross irrevocable commitments
Liabilities for calls on shares and other equities
Total 31.12.06
Total 31.12.05
Mortgage collateral
Other collateral
Unsecured
Total
318
6,817
0
7,135
3,688
10,257
43,412
0
53,669
43,280
7,333
47,058
20
54,411
42,523
17,908
97,287
20
115,215
89,491
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 committed to fund these investments
at 31 December 2006 and 31 December 2005 was CHF
766 million and CHF 884 million respectively.
141
Financial Statements
Notes to the Financial Statements
Note 27 Operating Lease Commitments
At 31 December 2006, UBS was obligated under a number
of non-cancellable operating leases for premises and equip-
ment used primarily for banking purposes. The significant
premises leases usually include renewal options and escala-
tion clauses in line with general office rental market condi-
tions 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 restrictions on UBS’s ability to pay divi-
dends, engage in debt financing transactions or enter into
further lease agreements.
The minimum commitments for non-cancellable leases of
premises and equipment are presented as follows:
CHF million
Operating leases due
2007
2008
2009
2010
2011
2012 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
31.12.06
1,003
995
924
839
722
4,280
8,763
849
7,914
31.12.06
31.12.05
31.12.04
1,178
1,165
13
56
1,122
1,109
13
1,232
1,092
140
51
1,181
1,041
140
1,309
1,197
112
43
1,266
1,154
112
Operating lease contracts include non-cancellable long-term
leases of office buildings in most UBS locations. At 31 De-
cember 2006, the minimum lease commitments for sixteen
office locations each exceeded CHF 100 million. Non-cancel-
lable minimum lease commitments for four office locations
in New Jersey, London, Zurich and New York each exceeded
CHF 500 million.
142
Additional Information
Note 28 Pledged Assets
Financial assets are pledged in securities borrowing and lending transactions, in repurchase and reverse repurchase transac-
tions, under collateralized credit lines with central banks, against loans from mortgage institutions and for security deposits
relating to stock exchange and clearinghouse memberships.
CHF million
Financial assets pledged 1
Mortgage loans
Other financial assets
Total financial assets pledged
Other assets pledged
Property and equipment
Carrying amount
31.12.06
31.12.05
81
0
81
0
64
474
538
520
1 Securities pledged to third parties with and without the right of rehypothecation are disclosed in footnote 1 of Note 12 and are not included in the table above.
Note 29 Financial Instruments Risk Position
This Note presents information about UBS’s management
and control of risks from financial instruments.
Part a) presents an overview of UBS’s risk management
– liquidity risk – part d) – is the risk that UBS is unable to
meet its payment obligations when due.
Part e) presents and explains the Group’s regulatory capi-
and control objectives.
tal position.
Parts b) to d) provide more detailed explanations of the pri-
mary risks associated with UBS’s use of financial instruments:
– market risk – part b) – is exposure to market variables in-
cluding general market risk factors such as interest rates,
exchange rates, equity market indices and commodity
prices, and factors specific to individual names affecting
the values of securities and other obligations in tradable
form, and derivatives referenced to these names
– credit risk – part c) – is the risk of loss as a result of failure
by a client or counterparty to meet its contractual obliga-
tions
This Note generally refers only to UBS’s Financial Business-
es, and those tables which are based on risk information in-
clude only the Financial Businesses of the Group. Those
which present an analysis of the whole balance sheet also
cover the positions of the Industrial Holdings segment which,
for the 2005 tables, includes Motor-Columbus.
Any representation of risk at a specific date offers only a
snapshot of the risks taken, since both trading and non-trading
positions can vary significantly on a daily basis, for a variety of
reasons, including active risk management. As such, it may
not be representative of the level of risk at other times.
a) Risk Management & Control Objectives
Taking risk is core to a financial services business. UBS’s risk
management and control objective is not, therefore, to elim-
inate all risks but to achieve an appropriate balance between
risk and return. In day-to-day business and in the strategic
management of the balance sheet and capital position, UBS
seeks, through its risk management and control framework,
to limit the scope for adverse variations in earnings and ex-
posure to “stress” events.
The underlying objective is the creation and protection
of shareholder value and the framework is built around the
following principles:
– business management is accountable for all risks assumed
and is responsible for their continuous and active man-
agement
– an independent control process is implemented to pro-
vide an objective check on risk-taking activities when re-
quired by the nature of the risks, in particular to balance
short term profit incentives and the long term interests of
UBS. All exposures are independently monitored and re-
viewed and, depending on the nature of the risks, may
also require pre-approval
143
Financial Statements
Notes to the Financial Statements
Note 29 Financial Instruments Risk Position (continued)
a) Risk Management & Control Objectives (continued)
– comprehensive, transparent and objective risk disclosure
to senior management, the Board of Directors, share-
holders, regulators, rating agencies and other stake-
holders is the cornerstone of the risk control process
– risks are controlled at the level of individual exposures, at
a portfolio level, and in aggregate across all businesses
and risk types to protect the Group’s earnings
– managing and controlling risks, and in particular avoiding
undue concentrations of exposure, limiting potential
losses from stress events, and restricting significant posi-
tions in less quantifiable risk areas, are essential elements
b) Market Risk
of the risk management and control framework and the
protection of UBS’s reputation.
Excellence in risk management is fundamentally based
upon a management team that makes risk identification and
control critical components of its processes and plans.
The Group Chief Risk Officer (CRO) has overall responsi-
bility for the development and implementation of the Group’s
risk control principles, frameworks, limits and processes, in-
cluding formulation of risk policies and risk measurement
and assessment methodologies.
(i) Overview
Market risk is exposure to market variables including general
market risk factors such as interest rates, exchange rates,
equity indices, and commodity prices, and factors specific to
individual names affecting the values of securities and other
obligations in tradable form, and derivatives referenced to
those names (“issuer risk”).
Market risk arises primarily in UBS’s trading activities,
which are mainly in the Investment Bank, with limited activity
in wealth management to facilitate private client business,
and in asset management in support of the alternative and
quantitative investments area. Additionally the Treasury
department (part of Corporate Center) assumes market risk
through its balance sheet and capital management activi-
ties.
The trading activities of the Investment Bank include mar-
ket making, facilitation of client business and proprietary
position taking. UBS is active in cash and derivatives markets
for equities, fixed income and interest rate products, and for
foreign exchange, energy, metals and commodities. Treasury
assumes non-trading market risks. Interest rate risk arises
from the funding of non-business items such as property
and investments and from long-term interest rate risk trans-
ferred from other Business Groups. Foreign exchange risk
arises from the management of foreign currency profits and
losses. Treasury also manages the Group’s consolidated
equity in such a way as to protect UBS’s capital ratios and to
generate a stable interest income flow. Other market risks
from non-trading activities, predominantly interest rate risk,
arise in all Business Groups, but they are not significant.
The Group Head of Market Risk, reporting to the Group
CRO, has overall responsibility for formulating the Group’s
market risk control framework. There is a CRO in each Busi-
ness Group and a designated CRO for Treasury. The Group
Head of Market Risk, the Business Group CROs and their
teams are responsible for the independent control of market
risk. They ensure that all market risks are identified and cap-
tured in risk systems. They establish the necessary controls,
including limits, and monitor positions and exposures. An
important element of the CRO’s role is the assessment of
market risk in new businesses and products, and in struc-
tured transactions.
Market risk authority is vested in the Chairman’s Office
and is further delegated to the GEB and ad personam to the
Group CRO, the Group Head of Market Risk and CROs 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
applied 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. The
VaR measure captures both “general” and “idiosyncratic”
market risks. General market risk factors are variables which
are driven by macroeconomic, geopolitical and other market-
wide considerations, independent of any instrument or single
name. They include movements in interest rates, widening or
tightening of general spread levels and directional move-
ments in equity market indices, exchange rates, and energy,
metal and commodity prices. Changes in associated volatili-
ties, and correlations between these risk factors – some of
which may be unobservable or only indirectly observable –
are also general market risks. Idiosyncratic components are
those that cannot be explained by general market moves –
broadly, changes in the prices of debt and equity instruments
and derivatives linked to them, resulting from factors and
events specific to individual names.
144
Note 29 Financial Instruments Risk Position (continued)
b) Market Risk (continued)
VaR expresses potential loss, but only to a certain level
of confidence (99%), and there is therefore a specified statisti-
cal probability (1%) that actual loss could be greater than the
VaR estimate. UBS’s VaR model measures risk over a 10-day
time horizon and it assumes that market moves occurring over
this horizon will follow a similar pattern to those that have
occurred over 10-day periods in the past. For general market
risk, 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. For idio-
syncratic risk, including event risk, the methods and time hori-
zons are adjusted to most appropriately capture the risks.
Stress loss measures are run daily. They 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 and restrictions are placed on risk concentra-
tions in trading books, taking into account variations in price
volatility and market liquidity. They include measures of
exposure to individual market risk variables, such as the
exchange rates and interest rates of particular currencies
(“market risk factors”), and on positions in the securities and
other tradable obligations of individual names or groups, or
derivatives referenced to such names (“issuer risk” – see
section b)(v)).
(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
section b)(i). Interest rate sensitivity is one of the key inputs to
VaR. One way of expressing this sensitivity for all interest rate
sensitive positions, whether marked to market or subject to
amortized cost accounting, is the impact on their fair values of
a one basis point (0.01%) change in interest rates. This sensi-
tivity, analyzed by time band, is set out in the table below.
Interest rate sensitivity position1
CHF thousand, gain / (loss) per basis point increase
CHF
USD
EUR
GBP
JPY
Other
Trading
Non-trading
Trading
Non-trading
Trading
Non-trading
Trading
Non-trading
Trading
Non-trading
Trading
Non-trading
CHF thousand, gain / (loss) per basis point increase
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.
Interest rate sensitivity by time band at 31.12.06
within 1
month
1 to 3
months
3 to 12
months
1 to 5 years
over 5 years
183
(47)
13
68
(261)
(16)
123
0
46
1
47
(3)
(256)
(16)
(202)
30
648
(5)
(93)
(7)
386
1
469
1
(377)
(206)
(716)
(208)
(409)
(31)
(272)
(142)
(117)
2
(209)
1
202
(3,677)
(602)
(2,896)
(6,707)
(359)
(194)
(266)
(118)
(7)
(708)
(1)
(116)
(3,524)
(1,663)
(5,452)
5,756
(333)
141
256
4
0
(10)
(4)
Interest rate sensitivity by time band at 31.12.05
within 1
month
1 to 3
months
3 to 12
months
1 to 5 years
over 5 years
167
(258)
(306)
70
536
(2)
169
(1)
194
(0)
2
(3)
(526)
(57)
(103)
(159)
(344)
(33)
(653)
(8)
367
(0)
(48)
(1)
120
(883)
122
(546)
(302)
(18)
131
(78)
(435)
(3)
69
(0)
213
(6,514)
(3,238)
(7,847)
(2,792)
(271)
(310)
(437)
406
(4)
(125)
(1)
(322)
(287)
3,329
35
2,725
1,174
(9)
536
(704)
0
(371)
(3)
Total
(364)
(7,470)
(3,170)
(8,458)
(973)
(744)
(295)
(159)
201
(3)
(411)
(6)
Total
(349)
(7,998)
(196)
(8,447)
(178)
850
(672)
12
(172)
(7)
(473)
(8)
145
Financial Statements
Notes to the Financial Statements
Note 29 Financial Instruments Risk Position (continued)
b) Market Risk (continued)
The table sets out the extent to which UBS was exposed
to interest rate risk at 31 December 2006 and 2005. 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
interest rate sensitive positions, both on- and off-balance
sheet. The impact of such an increase in interest rates de-
pends on UBS’s net asset or net liability position in each
category, currency and time band in the table. A negative
amount in the table reflects a potential reduction in fair
value, while a positive 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 part e).
“Non-trading” includes all other interest rate sensitive as-
sets and liabilities including derivatives designated as hedg-
es for accounting purposes (as explained in Note 23) and
off-balance sheet commitments on which an interest rate
has been fixed. The regulatory capital definition of the trad-
ing book is broadly consistent with, but not identical to, the
accounting definition of the trading portfolio. Most notably,
loans originated by UBS for distribution in the cash markets
are classified as held for trading for accounting purposes,
but are risk controlled under the credit risk framework – see
part c) – and are not eligible for trading book regulatory
capital treatment.
Information about money market paper and debt instru-
ments classified as trading portfolio for accounting purposes is
included in Note 12 and of debt instruments defined as
financial investments available-for-sale for accounting purpos-
es in Note 13. Information about derivatives is shown in Note
23. 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 commitments on which an interest rate has
been fixed are primarily forward starting fixed-term loans.
Trading
The major part of this risk arises in the Investment Bank in par-
ticular in the Fixed Income, Rates and Currencies business area,
which includes the Cash and Collateral Trading unit (CCT).
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 are transferred from the originating business units to
one of the two core interest rate risk management units –
Treasury and CCT. The risks are then managed within the
market risk limits and controls described in section b)(i).
146
The largest non-trading interest rate exposures arise in
the Global Wealth Management & Business Banking Busi-
ness Group. Many of their retail banking products have no
contractual maturity date or directly market-linked rate.
Their interest rate risk is transferred on a pooled basis
through “replicating” portfolios. A replicating portfolio is a
series of loans or deposits at market rates and fixed terms
between the originating business unit and Treasury, struc-
tured to approximate – on average – the interest rate cash
flow and re-pricing behaviour of the pooled client transac-
tions. The portfolios are rebalanced monthly. Their structure
and parameters are based on long-term market observations
and client behavior, and are reviewed periodically. Product
margin remains with, and is subject to additional analysis
and control by the originating business units.
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 transferred to Treasury through replicating
portfolios which, in this case, are designed to approximate
the mandated funding profile.
The Group’s consolidated equity is managed in accor-
dance with strategic targets set by senior management and
is placed at fixed interest rates in Swiss franc, US dollar, euro
and UK sterling with an average duration of between three
and four years. These positions account for CHF 17.1 million
of the non-trading interest rate sensitivity shown in the table
on the previous page, with CHF 7.4 million arising in Swiss
franc, CHF 8.4 million in US dollar and the remainder in euro
and UK sterling. The interest rate sensitivity of the positions
is directly related to the chosen duration, and although
adopting significantly shorter maturities would lead to a re-
duction in apparent interest rate sensitivity, it would lead to
higher volatility in interest earnings.
The economic value sensitivity of non-trading interest
rate positions is defined as the impact of a large (100 basis
point) instantaneous rise in interest rates across all curren-
cies, on the net present value of all future cashflows from
these positions. At 31 December 2006 the economic value
sensitivity was a loss of CHF 1,771 million.
(iii) Currency risk
Currency risk is the risk of loss resulting from changes in
exchange 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
section b)(i). Information about foreign exchange contracts,
Note 29 Financial Instruments Risk Position (continued)
b) Market Risk (continued)
most of which arise from trading activities and contribute to
currency risk, is provided in Note 23.
Non-trading
UBS’s reporting currency is the Swiss franc, but its assets, li-
abilities, income and expense are denominated in many cur-
rencies, with significant amounts in US dollar, euro and UK
sterling, as well as Swiss franc.
Reported profits or losses are exchanged monthly, and in
some cases more frequently, into Swiss francs, reducing volatil-
ity in the Group’s earnings from subsequent changes in ex-
change rates. Treasury also, from time to time, proactively
hedges significant expected foreign currency earnings/costs
(mainly US dollar, euro and UK sterling) in accordance with the
instructions of the Group Executive Board. Economic hedging
strategies employed include a cost-efficient options purchase
program, which provides protection against unfavorable cur-
rency fluctuations while preserving some upside potential. Al-
though these positions are intended to economically hedge
future earnings, they can cause volatility in financial results be-
cause they are marked to market. Within clearly defined toler-
ances, such fluctuations are accepted. The positions are, how-
ever, treated as currency exposure, are subject to Treasury’s
VaR limit and are included in VaR for regulatory capital pur-
poses. The hedge program has a time horizon of up to twelve
months and is not restricted to the current financial year.
The Group’s consolidated equity is managed – as de-
scribed in section b)(ii) – in such a way as to protect UBS’s
capital ratios from exchange rate movements, based on a tar-
get profile that broadly reflects the currency distribution of its
risk-weighted assets. This creates structural foreign currency
exposures. Exchange rate movements lead to increases or de-
creases in the Swiss franc value of the Group’s risk-weighted
assets. They also generate translation gains or losses on the
structural foreign currency exposures. These are recorded in
Equity in the Group’s Financial Statements, thereby protect-
ing the BIS Tier 1 capital ratio – see part e).
At 31 December 2006, the largest combined trading and
non-trading currency exposures against the Swiss franc were
short USD 436 million, short EUR 195 million and long AUD
128 million. At 31 December 2005, the largest exposures
were short USD 695 million, short EUR 36 million and long
GBP 6 million.
(iv) Equity risk
Equity risk is the risk of loss resulting from changes in the
levels of equity indices and values of individual stocks.
The Investment Bank is a significant player in major equity
markets and is increasingly active in the newer markets. It
carries equity risk from these activities. These exposures are
subject to the VaR, stress and concentration limits described
in section b)(i) and, in the case of individual stocks, to the
issuer risk controls described in section b)(v).
Information about equities held for trading for account-
ing purposes is given in Note 12. Information about equity
derivatives contracts (on indices and individual equities),
which arise primarily from the Investment Bank’s trading ac-
tivities, is provided in Note 23.
(v) Issuer risk
Issuer risk is the risk of loss on securities and other obliga-
tions in tradable form (including traded loans), and on de-
rivatives based on such assets. It arises from credit-related
and other events and, ultimately, default of the issuer, obli-
gor or reference name.
As an active trader and market maker, the Investment
Bank holds positions in these instruments, which are includ-
ed in VaR and are also subject to controls on concentrated
exposure to individual names and groups.
Exposures arising from security underwriting commit-
ments are, additionally, subject to targeted processes prior to
commitment, generally including review by a commitment
committee with representation from both business manage-
ment and the control functions. All commitments are ap-
proved under specific delegated authorities.
(vi) Investment positions
UBS makes equity investments for a variety of purposes.
Some are made for revenue generation or as part of strate-
gic initiatives, while others, such as exchange and clearing-
house memberships, are held in support of other business
activities. Private equity positions were, in the past, the ma-
jor component of equity investments but the portfolio is be-
ing managed down. UBS made an investment in Bank of
China as part of a major strategy initiative, and acquired a
stake in Julius Baer when Private Banks & GAM was sold to
them in December 2005. Most seed money and co-invest-
ments in UBS funds are considered investment positions.
Many equity investments are unlisted and therefore
illiquid. Others are intended to be held medium- or long-
term. The fair values are often driven more by factors spe-
cific to the individual companies than movements in general
equity markets. For these reasons, equity investments are
controlled outside the market risk measures and controls de-
scribed in sections b)(iv) and b)(v). Instead they are subject to
control and reporting processes, including pre-approval of
new investments by business management and risk control.
Where investments are made as part of an ongoing business
they are also subject to portfolio and concentration limits.
Debt investments, including money market paper, are not
significant in amount. They are included in the measures of
interest rate risk described in section b)(ii).
147
Financial Statements
Notes to the Financial Statements
Note 29 Financial Instruments Risk Position (continued)
c) 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 Fi-
nancial Statements at fair value. Banking products are gen-
erally carried at amortized cost, but loans are carried at fair
value if they have been originated by the Group for subse-
quent syndication or distribution through the cash markets
or (with effect from June 2006) are to be substantially
hedged. OTC derivatives are carried at fair value. Repos and
securities borrowing and lending transactions are accounted
for on an amortized cost basis. All banking and traded prod-
ucts are governed by the same credit risk management and
control framework, regardless of accounting treatment.
The Group Chief Credit Officer (CCO), reporting to the
Group CRO, has overall responsibility for formulating the
Group’s credit risk control framework. Global Wealth Man-
agement & Business Banking and the Investment Bank,
which take material credit risk, have independent credit risk
control units, headed by CCOs reporting functionally to the
Group CCO. They are responsible for the rating of counter-
parties, for credit risk assessment and for the continuous
monitoring of counterparty and portfolio credit exposures.
Credit risk authority, including authority to establish allow-
ances, provisions and credit valuation adjustments for im-
paired claims, is vested in the Chairman’s Office and is fur-
ther delegated to the GEB and ad personam to the Group
CCO and to the Business Group CCOs and credit officers.
For credit risk control purposes, credit exposure is mea-
sured for banking products as the nominal amount. For trad-
ed products, credit exposure is based on the replacement
value of contracts, taking account of master netting agree-
ments with individual counterparties where they are consid-
ered enforceable in insolvency. The potential replacement
value is projected over the life of the contracts (or over a
shorter time frame where UBS has the ability to reduce expo-
sure or close out, for example by calling or liquidating col-
lateral) reflecting changes in credit exposure resulting from
market movements and from maturing contracts. UBS ac-
tively uses credit risk mitigation techniques to manage credit
exposure. These include risk transfers and participations,
hedging with credit derivatives, taking of security in the form
of financial collateral (cash or marketable securities) or other
assets such as real estate, and guarantees and other third
party support. For internal credit risk control, credit risk miti-
gation is reflected – depending on the product and type of
148
mitigation – by recognizing its existence in determining the
exposure UBS is prepared to carry or by reflecting its risk-
reducing effect in the reported credit exposure.
In the table, the amounts shown as credit exposure for
banking products are based on accounting classification and
include some items which are not considered to be credit
exposures for internal purposes, notably cash collateral post-
ed by UBS with market counterparties against negative re-
placement values on derivatives. Credit risk mitigation is
recognized only to the extent that assets are derecog-
nized for accounting purposes, as explained in Note 1a4).
The amounts shown in the table for traded products are
based on regulatory capital treatment, as shown in the table
in part e). It should be noted that, for regulatory capital pur-
poses, netting of positive and negative replacement values
on derivatives is permitted for counterparties with whom
UBS has a master netting agreement that is enforceable in
insolvency, but netting is not permitted for accounting pur-
poses unless the cash flows will actually be settled net, which
is not generally the case – for details see Note 23. The regu-
latory capital treatment of securities borrowing and lending
transactions and repo and reverse repo transactions is based
on the net positive value of cash or securities given by UBS
to the counterparty. These values are included in the table in
part e) in Due from banks and other collateralized lendings.
They are only a small percentage of the balance sheet
amounts which are based on the full value of transactions –
for details see Note 11. The amounts shown in the table for
traded products do not include any estimate of the potential
future exposure which is included in the internal credit risk
control view.
UBS manages, limits and controls concentrations of cred-
it 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 cli-
ents are engaged in similar activities, or are located in the
same geographic region or have comparable economic char-
acteristics such that their ability to meet contractual obliga-
tions would be similarly affected by changes in economic,
political or other conditions. UBS sets limits on its credit ex-
posure to both individual counterparties and counterparty
groups.
UBS’s credit portfolio is heterogeneous, varying signifi-
cantly in terms of client type, sector, geographical diversity
and the size of exposures. Limits take a variety of forms such
as nominal values, statistical measures and scenario-based
stress loss. They are applied to individual portfolios or sectors
where appropriate, to restrict credit risk concentrations or
areas of higher risk, or to control the rate of portfolio growth.
Stress loss limits are applied to exposures to all but the best-
rated countries.
Note 29 Financial Instruments Risk Position (continued)
c) Credit Risk (continued)
Aggregate risk across portfolios is measured using a pro-
prietary statistical methodology which provides an indication
of risk in the portfolio and the way it changes over time.
Stress loss measures are applied to all significant portfolios to
assess the impact of variations in default rates and asset val-
ues, taking into account risk concentrations in each portfo-
lio. These measures include an analysis of contribution by
industry and geography.
The Group's gross lending portfolio of CHF 364 billion is
widely diversified across industry sectors with no significant
concentrations of credit risk. CHF 153 billion (42% of the
total) consists of loans to thousands of private households,
predominantly in Switzerland, and mostly secured by mort-
gages, financial collateral or other assets. Exposure to banks
and financial institutions amounted to CHF 138 billion (38%
of the total). This includes cash posted as collateral by UBS
against negative replacement values on derivatives or other
positions, which, from a risk perspective is not considered
lending but is a key component of the measurement of
counterparty risk taken in connection with the underlying
products. Exposure to banks includes money market depos-
its with highly rated institutions. Excluding financial institu-
tions, the largest industry sector exposure is CHF 25 billion
(7% of the total) to the services sector.
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
inability to meet its commitments (including interest pay-
ments, principal repayments or other payments due, for ex-
ample on a derivative product or under a guarantee) accord-
ing to the contractual terms, and after realization of any
available collateral. Loans carried at amortized cost are
classified as non-performing 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 pay-
ments or the liquidation of collateral, or where insolvency
proceedings have commenced or obligations 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 or off-balance
sheet items, impairment is recognized through the creation
of an allowance or a provision respectively which is charged
to the income statement as Credit loss expense. 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, impairment is recognized
through a credit valuation adjustment, which is charged to
the income statement through the Net trading income line.
For products carried at amortized cost, UBS also assesses
portfolios of claims with similar credit risk characteristics for
collective impairment in accordance with IAS 39. A portfolio
is considered impaired on a collective basis if there is
objective evidence to suggest that it contains impaired
obligations but the individual impaired items cannot yet be
identified.
For further information about accounting policy for al-
lowances and provisions for credit losses, see Note 1 a10).
For the amounts of allowance and provision for credit losses
and amounts of impaired and non-performing loans, see
Note 10 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 below, and in
Breakdown of credit exposure 1
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
31.12.06
31.12.05
364,110
17,908
97,287
110,732
47,870
(1,332)
636,575
314,482
16,566
72,905
86,950
40,765
(1,776)
529,892
1 Positions in Industrial Holdings are excluded. 2 See Note 10a – Due from Banks and Loans for further information. 3 See Note 26 – 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. 5 Replacement values are shown net where netting is permitted for regulatory capital purposes. See also Note 29e) – Capital
Adequacy. 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 securities borrowing / lending and repo / reverse repo transactions. 7 See Note 11 – Securities Borrowing, Securities Lending, Repurchase and Reverse Repurchase
Agreements for further information about these types of transactions. 8 See Note 10b - Allowances and Provisions for Credit Losses for further information.
149
Financial Statements
Notes to the Financial Statements
Note 29 Financial Instruments Risk Position (continued)
c) Credit Risk (continued)
Notes 10a) and b), but that portfolios against which
collective loan loss provisions have been established are not
included in the totals of impaired loans in Note 10c).
The occurrence of credit losses is erratic in both timing
and amount and those that arise usually relate to trans-
actions entered 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 statistically based concept which is used to
estimate the annual costs that will arise, on average, from
positions in the current portfolio that become impaired. It is
derived from the probability of default (given by the counter-
party rating), current and likely future exposure to the coun-
terparty and the likely severity of the loss should default
occur. Note 2a) 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
expected credit loss on its portfolio, plus the difference be-
tween Credit loss expense and expected credit loss, amor-
tized over a three-year period. The difference between the
total of these Adjusted expected credit loss figures and the
Credit loss expense recorded at Group level for financial re-
porting is reported in Corporate Center.
d) Liquidity Risk
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. Treasury, which is
part of Corporate Center, is responsible for the liquidity con-
trol framework while the Investment Bank Cash and Collat-
eral Trading unit is responsible for day-to-day operations.
The approach is based on a comprehensive assessment of all
material known and expected cash flows of the Group and
the availability of high-grade collateral which could be used
to secure additional funding if required. The framework en-
tails careful monitoring and control of the daily liquidity posi-
tion, and regular liquidity stress testing under a variety of
scenarios. Scenarios encompass both normal and stressed
market conditions, including general market crises and the
possibility that access to markets could be impacted by a
stress event affecting some part of UBS’s business 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 2006, which is the starting point for
the liquidity analyses, is shown in the table on the next page.
150
Note 29 Financial Instruments Risk Position (continued)
d) 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 available-for-sale
Accrued income and prepaid expenses
Investments in associates
Property and equipment
Goodwill and other intangible assets
Other assets
Total 31.12.06
Total 31.12.05
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 31.12.06
Total 31.12.05
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
3.5
27.2
0.0
0.0
627.0
251.5
328.4
5.9
42.9
8.1
10.4
0.0
0.0
0.0
17.4
1,322.3
1084.2
41.4
0.0
0.0
204.8
332.5
0.0
157.0
21.5
0.0
29.6
786.8
732.7
0.0
0.0
239.6
67.1
0.0
0.0
0.0
0.0
44.7
0.0
0.0
0.0
0.0
0.0
0.0
351.4
289.8
4.4
55.5
30.9
0.0
0.0
0.0
130.2
0.0
0.0
33.6
254.6
244.7
0.0
19.5
102.7
278.5
0.0
0.0
0.0
0.0
89.0
0.3
0.0
0.0
0.0
0.0
0.0
490.0
452.6
151.9
7.6
425.1
0.0
0.0
7.8
268.5
0.0
101.1
0.0
962.0
791.5
0.0
1.2
9.3
49.2
0.0
0.0
0.0
0.0
32.2
0.1
0.0
0.0
0.0
0.0
0.0
92.0
98.2
5.2
0.0
81.8
0.0
0.0
28.0
13.7
0.0
21.9
0.0
150.6
90.1
0.0
2.3
0.0
10.9
0.0
0.0
0.0
0.0
79.5
0.2
0.0
0.0
0.0
0.0
0.0
92.9
87.9
0.3
0.0
7.7
0.0
0.0
79.2
1.0
0.0
9.3
0.0
97.5
74.8
0.0
0.2
0.0
0.1
0.0
0.0
0.0
0.0
24.2
0.2
0.0
1.5
6.9
14.8
0.0
47.9
45.6
0.5
0.0
0.0
0.0
0.0
30.7
0.2
0.0
57.9
0.0
89.3
72.9
Total
3.5
50.4
351.6
405.8
627.0
251.5
328.4
5.9
312.5
8.9
10.4
1.5
6.9
14.8
17.4
2,396.5
2,058.3
203.7
63.1
545.5
204.8
332.5
145.7
570.6
21.5
190.1
63.2
2,340.7
2,006.7
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
of notice). 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
the instruments may however extend over significantly longer periods.
151
Financial Statements
Notes to the Financial Statements
Note 29 Financial Instruments Risk Position (continued)
e) Capital Adequacy
The adequacy of UBS’s capital is monitored using, among
other measures, the framework 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 BIS capital ratios, 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 business. On bal-
ance, this results in higher RWAs than under the BIS rules
and UBS’s ratios are lower when calculated under the SFBC
regulations than under the BIS framework.
UBS’s capital requirements are based on its consolidated
Financial Statements prepared under IFRS. Adjustments are
made to exclude IFRS consolidated entities that are not ac-
tive in the areas of banking, finance or real estate – mainly
securitization and collective investment vehicles and indus-
trial holdings (including Motor-Columbus in 2005). Adjust-
ments are also made to IFRS-based profit and reserves, in line
with BIS recommendations, as prescribed by the SFBC, pri-
marily in relation to gains and losses recognized under the
fair value option and unrealized gains on available-for-sale
financial investments.
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 dif-
ferences not recognized in the income statement and hybrid
Tier 1 capital (part of Equity attributable to minority inter-
ests) less accrued expected dividend, net long positions in
own shares, and goodwill. Tier 2 capital includes subordi-
nated long-term debt. Additionally certain non-trading ex-
posures to other financial institutions are required to be de-
ducted from capital. 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, mar-
ket risk, and other risk, each of which is described below.
The credit risk component consists of on- and off-balance
sheet claims, measured according to regulatory formulas
outlined below, and weighted according to type of counter-
party and collateral. The least risky claims, such as claims on
OECD governments and claims collateralized by cash, are
weighted at 0%, meaning that no regulatory 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 re-
quired.
152
Securities not held for trading are included as claims,
based on the net long position in the securities of each is-
suer, including both physical holdings and positions derived
from other transactions such as options. UBS’s investments
in IFRS consolidated industrial holdings (which for 2005 in-
cludes Motor-Columbus) are treated for regulatory capital
purposes as positions in securities 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
accepted by the SFBC as being legally enforceable in insol-
vency, positive and negative replacement values with indi-
vidual counterparties can be netted and therefore the on-
balance sheet component of RWAs for derivatives trans-
actions shown in the table on the next page (Positive
replacement values) is less than the balance sheet value of
Positive replacement values. The add-ons component of the
RWAs is shown in the table under Off-balance sheet expo-
sures 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 percentages of nominal value specified
by the regulators.
Regulatory capital is required to support market risk aris-
ing on all foreign exchange, and energy, metals and com-
modity positions, and on all positions held for trading, and
meeting the regulatory definition of trading book, in interest
rate instruments and equities, including risks on individual
equities and traded debt obligations such as bonds. For most
market risk positions, UBS derives its regulatory capital re-
quirement from its internal Value at Risk (VaR) model – see
section b)(i) – which is approved by the SFBC. For some small
positions market risk regulatory capital is computed using
the standardized method defined by the regulators. Unlike
the calculations for credit risk and other risks, this produces
the capital requirement itself rather than the RWA amount.
In order to compute a total capital ratio, the total market risk
capital requirement is converted 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
total market risk capital requirement is multiplied by 12.5.
Other risks consist of other types of asset, most notably
property and equipment, and intangibles (included in the
table on the next page within Other assets). These assets are
not subject to credit or market risk, but they represent a risk
to the Group in respect of their potential for write-down and
impairment and therefore require capital underpinning in ac-
cordance with regulatory formulas.
Note 29 Financial Instruments Risk Position (continued)
e) 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
Positive replacement values 3
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 4
Purchased options 4
Market risk positions 5
Total risk-weighted assets
Exposure
31.12.06
Risk-weighted
amount
31.12.06
452,821
10,262
110,732
887,694
9,302
8,436
15,976
17,908
98,439
31,522,982
1,913,971
10,438
8,447
24,161
206,359
4,920
8,436
10,827
7,842
23,592
16,599
411
19,860
341,892
Exposure
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
Risk-weighted
amount
31.12.05
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
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 the Market risk positions. 2 Includes industrial holdings, which are not consolidated for capital adequacy. Excludes positions in the trading book, which are included in Market risk
positions. 3 Represents the mark to market values of Forward and swap contracts and Purchased options, where positive but after netting, where applicable. 4 Represents the add-ons for these
contracts. 5 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.
BIS capital ratios
Tier 1
of which hybrid Tier 1
Tier 2
Total BIS
Capital
CHF million
31.12.06
40,528
5,633
9,836
50,364
Ratio
%
31.12.06
11.9
1.6
2.9
14.7
Capital
CHF million
31.12.05
39,834
4,975
3,974
43,808
Ratio
%
31.12.05
12.8
1.6
1.3
14.1
The Tier 1 capital includes preferred securities of CHF 5,633 million (USD 3,300 million and EUR 1,000 million) at 31 Decem-
ber 2006 and CHF 4,975 million (USD 2,600 million and EUR 1,000 million) at 31 December 2005.
153
Financial Statements
Notes to the Financial Statements
Note 30 Fair Value of Financial Instruments and Continued Recognition of Transferred Financial Assets
a) 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 available-for-sale
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 available-for-sale
Derivative instruments designated as cash flow hedges
Net unrealized gains and losses recognized directly in equity
Carrying
value
31.12.06
Fair value
31.12.06
Unrealized
gain / (loss)
31.12.06
Carrying
value
31.12.05
Fair value
31.12.05
Unrealized
gain / (loss)
31.12.05
3.5
50.4
351.6
405.8
627.0
251.5
328.4
5.9
312.5
8.9
203.7
63.1
545.5
204.8
332.5
145.7
570.6
190.1
3.5
50.4
351.6
405.7
627.0
251.5
328.4
5.9
311.3
8.9
203.7
63.1
545.5
204.8
332.5
145.7
570.6
191.1
5.4
33.6
288.4
404.4
499.3
154.8
333.8
1.2
279.9
6.6
124.3
59.9
478.5
188.6
337.7
117.4
466.9
160.7
5.4
33.6
288.3
404.5
499.3
154.8
333.8
1.2
280.5
6.6
124.3
59.9
478.5
188.6
337.7
117.4
466.9
162.0
0.0
0.0
0.0
(0.1)
0.0
0.0
0.0
0.0
(1.2)
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
(1.0)
(2.3)
3.7
(0.6)
0.8
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)
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 in-
struments 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 evi-
dence of the fair value of a financial instrument.
Market prices and rates are not, however, available for
certain 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 and financial assets and liabilities held for trading and
designated at fair value. The most frequently applied pricing
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
significantly 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, dis-
count rates, volatility, and credit risk.
The following methods and significant assumptions have
been applied in determining the fair values of financial in-
struments presented in the 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
assets pledged as collateral, financial assets and liabilities
designated at fair value through profit or loss, deriva-
tives, and other transactions undertaken for trading
154
Note 30 Fair Value of Financial Instruments and Continued Recognition of Transferred Financial Assets (cont.)
a) Fair Value of Financial Instruments (continued)
purposes are measured at fair value by reference to quot-
ed 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;
(b) financial investments 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 un-
realized gains and losses, excluding impairment write-
downs, are recorded in Equity until an asset is sold, col-
lected 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 impair-
ment is recognized 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 quality of loans within the portfolio are not taken
into account in determining gross fair values, as the
impact of impairment is recognized separately by
deducting the amount of the allowance for credit losses
from both carrying and fair values.
Where applicable, the interest accrued to date on finan-
cial instruments is included in the carrying value of the finan-
cial instruments mentioned in the table.
These valuation techniques and assumptions provide a
consistent measurement of fair value for UBS’s assets and
liabilities as shown in the table. However, because other in-
stitutions may use different methods and assumptions when
estimating fair value using a valuation technique, and when
estimating 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. Fair values of physi-
cal commodities are reflected in the table under trading
portfolio assets.
Substantially all of UBS’s undrawn commitments to ex-
tend credit are at variable rates. Accordingly, UBS has no
significant exposure to fair value fluctuations resulting from
interest rate movements related to these commitments.
The fair values of UBS’s fixed-rate loans, long- and medi-
um-term notes and bonds issued are predominantly hedged
by derivative instruments, mainly interest rate swaps, as ex-
plained in Note 23. The interest rate risk inherent in balance
sheet positions with no specific maturity is also hedged with
derivative instruments based on management’s view of 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 interest rate risk on a fixed-rate financial instrument is
hedged with a derivative in a fair value hedge, the fixed-rate
financial instrument (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 des-
ignated as cash flow hedges is explained in Note 1 a14). The
amount shown in the table as Derivative instruments desig-
nated as cash flow hedges is the net change in fair values on
such derivatives that is recorded in Equity and not yet trans-
ferred to income or expense.
155
Financial Statements
Notes to the Financial Statements
Note 30 Fair Value of Financial Instruments and Continued Recognition of Transferred Financial Assets (cont.)
b) Determination of Fair Values from Quoted Market Prices or Valuation Techniques
For trading portfolio assets and liabilities, financial assets and
liabilities designated at fair value and financial investments
available-for-sale which are listed or otherwise traded in an
active market, for exchange traded derivatives, and for other
financial instruments for which quoted prices in an active
market are available, fair value is determined directly from
those quoted market prices.
For financial instruments which do not have quoted market
prices directly available, fair values are estimated using valua-
tion techniques or models, based wherever possible on as-
sumptions supported by observable market prices or rates pre-
vailing at the balance sheet date. This is the case for the
majority 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
cannot be obtained directly from quoted market prices,
or indirectly using valuation techniques or models sup-
ported by observable market prices or rates. This is gener-
ally the case for private equity investments in unlisted secu-
rities, and for certain complex or structured financial
instruments. In these cases, fair value is estimated indirect-
ly using valuation techniques or models for which the in-
puts are reasonable assumptions, based on market con-
ditions.
The following table presents the valuation methods used
to determine fair values of financial instruments carried at
fair value:
CHF billion
Trading portfolio assets
Trading portfolio assets pledged as collateral
Positive replacement values
Financial assets designated at fair value
Financial investments available-for-sale
Total assets
Trading portfolio liabilities
Negative replacement values
Financial liabilities designated at fair value
Total liabilities
31.12.06
Valuation
technique –
market-
observable
Valuation
technique –
non-market
observable
inputs
411.8
8.0
285.6
5.1
4.6
715.1
34.9
290.6
80.0
405.5
inputs
0.1
0.0
11.5
0.8
1.8
14.2
0.0
9.2
65.7
74.9
Total
627.0
251.5
328.4
5.9
8.9
1,221.7
204.8
332.5
145.7
683.0
Quoted
market
price
215.1
243.5
31.3
0.0
2.5
492.4
169.9
32.7
0.0
202.6
31.12.05
Valuation
technique –
market-
observable
inputs
Valuation
technique –
non-market
observable
inputs
Quoted
market
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
Total
499.3
154.8
333.8
1.2
6.6
995.7
188.6
337.7
117.4
643.7
156
Note 30 Fair Value of Financial Instruments and Continued Recognition of Transferred Financial Assets (cont.)
c) 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.
All models used for valuation undergo an internal validation
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 pa-
rameters it employs, and the extent to which inputs are not
market observable, or as a result of other elements affecting
the valuation. Valuation adjustments are made to reflect
such uncertainty and deducted from the fair values produced
by the models or other valuation techniques.
Based on UBS’s established fair value and model gover-
nance policies and the related controls and procedural safe-
guards the Group employs, management believes the result-
ing 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 alter-
native 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 1,038 million using less favorable assumptions and an
increase of approximately CHF 955 million using more favor-
able assumptions at 31 December 2006; and a reduction of
approximately CHF 1,094 million using less favorable assump-
tions and an increase of approximately CHF 1,176 million us-
ing more favorable assumptions at 31 December 2005.
The determination of reasonably possible alternative as-
sumptions is itself subject to considerable judgment. For val-
uations based on models, reasonably possible alternatives
have been estimated using the same techniques as are used
to determine model valuation adjustments, by increasing
(for less favorable assumptions) and decreasing (for more
favorable assumptions) the confidence level applied. In
changing the assumptions, it is assumed that the impact of
correlation between different financial instruments and
models is minimal. A similar approach is used for valuation
techniques other than those based on models.
d) 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
2006 and 31 December 2005 was CHF 13,318 million and
CHF 7,996 million, respectively, which represents the net re-
sult from a range of products traded across different busi-
ness activities, including the effect of the foreign currency
translation of monetary assets and liabilities and including
both realized and unrealized income. Unrealized income is
determined from changes in fair values, using quoted prices
in active markets when available, and otherwise estimated
using valuation techniques.
Included in the unrealized portion of Net trading income
are net losses from changes in fair value of CHF 8,284 mil-
lion and CHF 2,286 million for the years ended 31 December
2006 and 31 December 2005, respectively, on financial in-
struments for which fair values were estimated using
valuation techniques. These valuation techniques include
models such as those described in previous sections, which
range from relatively simple models with market-observable
inputs, to those which are more complex and require the use
of assumptions or estimates based on market conditions.
Net trading income is often generated from transactions
involving several financial instruments or subject to hedging
or other risk management techniques. This may result in
different portions of the transaction being priced using dif-
ferent methods. In many cases, the amounts estimated using
valuation techniques were offset by changes in fair value of
other financial instruments or transactions, for which quoted
market prices or rates were available, or on which the gain
or loss has been realized. Consequently, the changes in fair
value which were estimated using valuation techniques and
have been recognized in profit or loss during the period rep-
resent only a portion of Net trading income.
The amount of realized income and unrealized income
from changes in fair values estimated using quoted market
prices, including the effect of foreign currency translation on
unrealized gains or losses, was a gain of CHF 21,602 million,
CHF 10,282 million and CHF 12,025 million for the years end-
ed 31 December 2006, 31 December 2005 and 31 December
2004, respectively.
Changes in fair value estimated using valuation techniques
are also recognized in net profit in situations of unrealized
impairments on financial investments available-for-sale. The
total of such impairment amounts recognized in Net profit
was CHF 10 million for the year ended 31 December 2006,
CHF 3 million for the year ended 31 December 2005 and CHF
218 million for the year ended 31 December 2004.
157
Financial Statements
Notes to the Financial Statements
Note 30 Fair Value of Financial Instruments and Continued Recognition of Transferred Financial Assets (cont.)
e) Transferred Financial Assets which do not Qualify for Derecognition
The following table presents details of financial assets which have been sold or otherwise transferred, but which do not
qualify for derecognition. Criteria for derecognition are discussed in Note 1 a4).
CHF billion
Nature of transaction
Securities lending agreements
Repurchase agreements
Other financial asset transfers
Total
Continued asset recognition in full –
Total assets
31.12.06
31.12.05
98.9
146.5
69.8
315.2
50.5
100.0
85.0
235.5
The transactions are mostly conducted under standard
agreements employed by financial market participants and
are undertaken with counterparties subject to UBS’s normal
credit risk control processes. The resulting credit exposures
are controlled by daily monitoring and collateralization of
the positions. The financial assets which continue to be rec-
ognized are typically transferred in exchange for cash or oth-
er financial assets. The associated liabilities can therefore be
assumed to be approximately the carrying amount of the
transferred financial assets.
UBS retains substantially all risks and rewards of the trans-
ferred assets in each situation of continued recognition in
full. These include credit risk, settlement risk, country risk
and market risk.
Repurchase agreements and securities lending agree-
ments are discussed in Notes 1 a12) and 1 a13). Other
financial asset transfers include sales of financial assets while
concurrently entering into a total rate of return swap with
the same counterparty and sales of financial assets involving
guarantees.
Transferred financial assets which are subject to partial
continued recognition were immaterial in 2006 and 2005.
The carrying amounts of the partially recognized transferred
financial assets are included in the table.
158
Note 31 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
companies in Switzerland and Germany are included in the
disclosure up to 31 December 2005 but are not included in
the 31 December 2006 disclosure since these companies
were sold on 23 March 2006.
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
contributions paid, is sufficient to maintain reasonable con-
trol over the various funding risks of the plans. The invest-
ment 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 allocation is determined by a variety of current
economic and market 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
actuarial advisors.
Swiss pension plans
The pension plan of UBS covers practically all UBS em-
ployees in Switzerland and exceeds the minimum benefit
requirements under Swiss law. The Swiss plan was amended
on 1 January 2007 to change the definition of retirement
benefits from a final covered salary to a retirement savings
approach. The pension plan provides benefits which are
based on annual contributions as a percentage of salary and
accrue at an interest rate that is defined annually by the
plan trustees.
Contributions to the pension plan of UBS are paid by em-
ployees and the employer. The employee contributions are
calculated as a percentage of covered salary and are deduct-
ed monthly. The percentages deducted from salary for full
benefit coverage (including risk benefits) depend on age and
vary between 1% and 10% of covered base salary and 3%
and 8% of covered bonus. The employer pays a contribution
that ranges between 100% and 350%, or approximately
230%, on average, of the sum of employees’ contributions.
The benefits covered include retirement benefits, disability,
death and survivor pensions, and employment termination
benefits.
The employer contributions expected to be made in 2007
to the Swiss pension plan are CHF 520 million. The accumu-
lated benefit obligation (which is the current value of ac-
crued benefits without allowance for future salary increases)
for the Swiss pension plan was CHF 19,094 million as of 31
December 2006 (2005: CHF 18,863 million, 2004: CHF
18,566 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
benefit plans. The locations with defined benefit plans of a
material 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 2007 to these pension plans are CHF 76 million.
The funding policy for these plans is consistent with local
government and tax requirements.
The assumptions used in foreign plans take into account
local economic conditions. The accumulated benefit obli-
gation for these pension plans was CHF 5,142 million as of
31 December 2006 (2005: CHF 4,992 million, 2004: CHF
4,118 million). For pension plans with an accumulated ben-
efit obligation in excess of plan assets, the aggregate pro-
jected benefit obligation and accumulated benefit obligation
was CHF 4,710 million and CHF 4,683 million as of 31 De-
cember 2006 (2005: CHF 4,521 million and CHF 4,497 mil-
lion, 2004: CHF 3,755 million and CHF 3,735 million). The
fair value of plan assets for these plans was CHF 4,092 mil-
lion as of 31 December 2006 (2005: CHF 3,789 million,
2004: CHF 3,166 million).
159
Financial Statements
Notes to the Financial Statements
Note 31 Pension and Other Post-Retirement Benefit Plans (continued)
a) Defined benefit plans
CHF million
For the year ended
Swiss
Foreign
31.12.06
31.12.05
31.12.04
31.12.06
31.12.05
31.12.04
Defined benefit obligation at the beginning of the year
(20,972)
(20,225)
(18,216)
(5,020)
(4,142)
(3,663)
(347)
(611)
(221)
(125)
(265)
723
(17)
329
(21,506)
20,229
998
447
492
221
(723)
(328)
21,336
(170)
2,123
(353)
(660)
(219)
(345)
(672)
(203)
(713)
(1,392)
866
(37)
369
(20,972)
18,575
925
1,284
468
219
(866)
(376)
20,229
(743)
2,334
910
(35)
(272)
(20,225)
17,619
878
102
411
203
(910)
272
18,575
(1,650)
3,006
(76)
(242)
(120)
(84)
149
186
(5,207)
4,288
283
40
74
66
(82)
(236)
(416)
(280)
144
(2)
(6)
(5,020)
3,580
263
247
253
89
(83)
(212)
(296)
146
125
(159)
(4,142)
3,402
248
122
(132)
65
(149)
(144)
(125)
4,602
(605)
1,237
1
4,288
(732)
1,222
1
3,580
(562)
1,046
1
(1,953)
(1,591)
(1,356)
0
0
0
633
491
485
(492)
492
(468)
468
(411)
411
0
0
0
0
0
0
491
(103)
66
170
9
633
815
(182)
633
485
(125)
89
(6)
48
491
832
(341)
491
710
(105)
65
(159)
(26)
485
805
(320)
485
Service cost
Interest cost
Plan participant contributions
Amendments
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 past 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
Settlement
Foreign currency translation
(Accrued) / prepaid pension cost
Amounts recognized in the balance sheet
Prepaid pension cost
Accrued pension liability
(Accrued) / prepaid pension cost
160
Note 31 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
Defined benefit obligation from funded plans
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
Swiss
Foreign
31.12.06
31.12.05
31.12.04
31.12.06
31.12.05
31.12.04
347
611
(998)
125
25
17
365
492
353
660
(925)
(3)
101
37
10
235
468
345
672
(878)
35
237
411
Swiss
76
242
(283)
68
82
236
(263)
68
2
83
212
(248)
58
103
125
105
31.12.06
31.12.05
31.12.04
31.12.03
31.12.02
(20,225)
18,575
(1,650)
(18,216)
17,619
(597)
(19,204)
16,566
(2,638)
(21,506)
21,336
(170)
(265)
447
(20,972)
20,229
(743)
(77)
1,284
31.12.06
31.12.05
31.12.04
31.12.03
31.12.02
Foreign
(5,002)
(205)
4,602
(605)
(11)
40
(4,635)
(385)
4,288
(732)
7
247
Swiss
(3,815)
(327)
3,580
(562)
(3,509)
(154)
3,402
(261)
(3,295)
(141)
2,382
(1,054)
Foreign
31.12.06
31.12.05
31.12.04
31.12.06
31.12.05
31.12.04
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
3.0
5.0
2.5
0.8
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
5.2
4.6
2.1
5.0
6.7
4.4
1.9
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
161
Financial Statements
Notes to the Financial Statements
Note 31 Pension and Other Post-Retirement Benefit Plans (continued)
a) Defined benefit plans (continued)
CHF million, exept where indicated
Expected future benefit payments
2007
2008
2009
2010
2011
2012–2016
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
31.12.06
31.12.05
31.12.04
31.12.06
31.12.05
31.12.04
157
150
160
171
183
1197
53
38
4
5
100
49–53
37–44
4–6
1–5
7.8
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
976
992
1,013
1,008
1,022
5,307
41
45
11
3
100
33–51
31–50
10–19
0
7.2
684
193
7,169
69
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
1 The number of UBS AG shares was 2,600,417; 3,589,152; and 4,986,346 as of 31 December 2006, 31 December 2005 and 31 December 2004, respectively.
162
Note 31 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 ben-
efits that contribute to the health care coverage of employ-
ees and beneficiaries after retirement. In addition to retiree
medical benefits, the Group in the US also provides retiree
life insurance benefits. The UK plan is closed to new en-
trants.
The benefit obligation in excess of fair value of plan assets
for those plans amounts to CHF 219 million as of 31 Decem-
ber 2006 (2005: CHF 216 million, 2004: CHF 166 million)
and the total accrued post-retirement cost amounts to CHF
176 million as of 31 December 2006 (2005: CHF 168 million,
2004: CHF 136 million). The net periodic post-retirement
costs for the years ended 31 December 2006, 31 December
2005 and 31 December 2004 were CHF 24 million, CHF
21 million and CHF 16 million, respectively.
The employer contributions expected to be made in 2007
to the post-retirement medical and life plans are CHF 9 mil-
lion. The expected future benefit payments are CHF 9 mil-
lion for the years 2007 and 2008, CHF 10 million for the
years 2009 and 2010, CHF 11 million for the year 2011,
CHF 64 million in total for the years 2012 to 2016.
b) Post-retirement medical and life plans
CHF million
Post-retirement benefit obligation at the beginning of the year
31.12.06
(216)
31.12.05
(166)
31.12.04
(179)
Service cost
Interest cost
Plan participant contribution
Actuarial gain / (loss)
Foreign currency translation
Amendments
Benefits paid
(10)
(11)
(1)
1
10
(1)
9
(8)
(11)
0
(17)
(22)
0
8
(6)
(9)
0
8
12
0
8
Post-retirement benefit obligation at the end of the year
(219)
(216)
(166)
Fair value of plan assets at the beginning of the year
Employer contributions
Plan participant contribution
Benefits paid
Fair value of plan assets at the end of the year
0
8
1
(9)
0
0
8
0
(8)
0
0
8
0
(8)
0
Defined benefit obligation
Plan asset
Surplus / (deficit)
Experience gains / (losses) on plan liabilities
31.12.06
31.12.05
31.12.04
31.12.03
31.12.02
(219)
0
(219)
1
(216)
0
(216)
(3)
(166)
0
(166)
0
(179)
0
(179)
0
(166)
2
(164)
0
The assumed average health care cost trend rate used in
determining post-retirement benefit expense is assumed to
be 11% for 2006 and to decrease to an ultimate trend rate
of 5% in 2013. On a country-by-country basis, the same
discount rate is used for the calculation of the post-retire-
ment benefit obligation from medical and life plans as for
the defined benefit obligations arising from pension plans.
Assumed health care cost trend rates have a significant ef-
fect on the amounts reported for health care plans. 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)
(19)
163
Financial Statements
Notes to the Financial Statements
Note 31 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 em-
ployees 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 2006, 31 December 2005 and 31 December 2004 were CHF 229
million, CHF 184 million and CHF 187 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
borrowing. All transactions have been executed at arm’s length conditions.
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 following fees and interest have been received or paid by UBS:
CHF million
Received by UBS
Fees
Paid by UBS
Interest
Dividends and capital repayments
The transaction volumes in UBS shares and other UBS securities are as follows:
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
31.12.06
31.12.05
31.12.04
53
2
33
48
4
7
42
4
7
For the year ended
31.12.06
31.12.05
31.12.04
1,793
8
2,752
14
2,774
0
4,526
45
5,644
47
7,426
18
UBS has also leased buildings from its pension funds. The
rent paid by UBS under these leases amounted to CHF 4 mil-
lion in 2006, CHF 4 million in 2005 and CHF 5 million in
2004.
There were financial instruments in the amount of CHF
120 million due from UBS pension plans outstanding as of
31 December 2006 (2005: CHF 163 million, 2004: 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 14,158,961 UBS shares with a market value of CHF
1,043 million as of 31 December 2006 (2005: 14,128,558
shares with a market value of CHF 885 million, 2004:
14,460,628 shares with a market value of CHF 691 million).
164
Note 32 Equity Participation and Other Compensation Plans
a) Plans offered
UBS has established several equity participation plans to
further align the long-term interests of executives, managers
and staff with the interests of shareholders. The plans are
offered to eligible employees in approximately 50 countries
and are designed to meet the complex legal, tax and regula-
tory requirements of each country in which they are offered.
The explanations below describe the most significant plans
in general, but specific plan rules may vary by country.
Equity Plus Plan (Equity Plus): This voluntary plan gives
eligible employees the opportunity to purchase UBS shares
at fair market value on the purchase date and generally re-
ceive 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 shares on
the date the option is granted and are forfeitable in certain
circumstances. Share purchases can be made annually from
bonus compensation and/or quarterly based on regular de-
ductions 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 period and
generally expire ten years from the date of grant.
Discounted purchase plan: Up to and including 2005,
selected employees in Switzerland were entitled to purchase
a specified number of UBS shares, which must be held for a
specified period of time, at a predetermined discounted
price each year. No new awards are made under this plan.
Equity Ownership Plan (EOP): Selected employees 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, cer-
tain employees were eligible to receive a portion of their EOP
award in Alternative Investment Vehicles (AIVs) or UBS op-
tions. Since 2005, options are not granted as part of EOP
and awards are generally made in UBS shares, with less than
5% being made in AIVs to selected employee groups. EOP
awards vest in one-third increments over a three-year vesting
period. In certain circumstances, these awards are forfeit-
able.
Key Employee Stock Option Plan (KESOP): 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. One option gives the right to ac-
quire one registered UBS share at the option’s strike price.
Options generally vest in one-third increments over a three-
year vesting period and generally expire ten years from the
grant date. In certain circumstances, these awards are for-
feitable.
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 (generally money
market funds, UBS and non-UBS mutual funds and other
UBS sponsored funds). No additional company match is
granted, and the awards are generally not forfeitable. In ad-
dition, 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 trea-
sury or newly issued shares are delivered to the employee
against receipt of the strike price. As of 31 December 2006,
UBS was holding approximately 115 million shares in trea-
sury and an additional 150 million unissued shares in condi-
tional share capital which are available and can be used for
future employee option exercises. The shares available cover
all vested (i.e. exercisable) employee options.
165
Financial Statements
Notes to the Financial Statements
Note 32 Equity Participation and Other Compensation Plans (Continued)
b) UBS share awards
Movements in shares granted under various equity participation plans described in Note 32a) are as follows:
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
31.12.06
53,725,186
26,652,070
(22,712,566)
(1,523,588)
56,141,102
Weighted
average
grant date
fair value
(CHF)
46
69
43
56
58
Number of
shares
31.12.05
49,273,638
27,252,100
(21,991,760)
(808,792)
53,725,186
Weighted
average
grant date
fair value
(CHF)
40
51
39
45
46
Number of
shares
31.12.04
62,767,780
23,426,812
(35,992,996)
(927,958)
49,273,638
Weighted
average
grant date
fair value
(CHF)
38
48
40
39
40
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 1,587 million, CHF 1,083 million and CHF
1,922 million for the years ended 31 December 2006, 31
December 2005 and 31 December 2004, respectively.
c) UBS option awards
Movements in options granted under various equity participation plans described in Note 32a) are as follows:
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
31.12.06
181,765,090
45,517,013
(47,179,386)
(3,303,002)
(20,628)
176,779,087
80,312,503
Weighted 1
average1
exercise price1
(CHF) 1
42
71
36
55
40
50
36
Number of
options
31.12.05
201,814,708
45,202,854
(61,303,418)
(3,810,106)
(138,948)
181,765,090
74,788,838
Weighted1
average1
exercise price1
(CHF) 1
35
55
34
45
34
42
35
Number of
options
31.12.04
218,080,052
48,226,504
(58,793,918)
(5,385,648)
(312,282)
201,814,708
75,882,560
Weighted1
average1
exercise price1
(CHF) 1
32
46
29
33
38
35
33
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 rate for the purposes of this table.
The weighted average share price at the time when the op-
tions were exercised during the year was CHF 71, CHF 53
and CHF 46 for the years ended 31 December 2006, 31 De-
cember 2005 and 31 December 2004, 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)
31.12.06
31.12.05
31.12.04
1,660
12
1,224
8
960
13
In addition, UBS received cash of CHF 1,698 million and CHF
2,018 million and an income tax benefit of CHF 153 million
and CHF 217 million from the exercise of share options for
the years ended 31 December 2006 and 31 December 2005,
respectively.
The intrinsic value of share-based liabilities (shares and
options) paid for the years ended 31 December 2006,
31 December 2005 and 31 December 2004 was CHF 177
million, CHF 87 million and CHF 669 million, respectively.
166
Note 32 Equity Participation and Other Compensation Plans (continued)
c) UBS option awards (continued)
The following table summarizes additional information about options outstanding and options exercisable at 31 Decem-
ber 2006:
Range of exercise price per share
Options outstanding
Weighted
average
exercise
price
(CHF / USD)
Aggregate
intrinsic
value (CHF /
USD million)
Weighted
average
remaining
contractual
term (years)
Options exercisable
Weighted
average
exercise
price
(CHF / USD)
Aggregate
intrinsic
value (CHF /
USD million)
Weighted
average
remaining
contractual
term (years)
Number of
options
exercisable
Number of
options
outstanding
22,771,326
18,173,910
25,666,234
3,100,770
41,726,240
111,438,480
1,196,068
28,759,581
14,070,241
21,314,717
65,340,607
34.56
46.86
51.96
65.95
71.56
55.30
13.75
23.32
36.38
43.76
32.63
899
494
567
25
127
5.7
6.5
8.1
9.4
9.2
22,446,861
11,928,252
3,412,867
5,812
0
34.56
46.74
50.72
63.23
886
326
80
0
2,112
7.8 37,793,792
39.87
1,292
56
1,064
337
353
1,810
0.6
4.6
7.3
8.1
1,196,068
28,759,581
9,199,687
3,363,375
6.2 42,518,711
13.75
23.32
35.89
42.72
27.31
56
1,064
225
59
1,404
5.7
6.1
8.2
8.9
6.1
0.6
4.6
7.2
8.1
5.3
CHF
26.69–40.00
40.01–50.00
50.01–60.00
60.01–70.00
70.01–77.33
26.69–77.33
USD
2.25–20.00
20.01–30.00
30.01–40.00
40.01–53.50
2.25–53.50
d) Valuation
The fair value of options granted from 1 January 2005 has
been determined by means of a Monte Carlo simulation. The
simulation technique uses a mix of implied and historic vola-
tility and specific employee exercise behavior patterns based
on statistical data, taking into account the specific terms and
conditions under which the 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 option is calculated as the probability-weighted
average period of the time between grant and exercise. The
term structure of volatility is derived from the implied vola-
tilities of traded UBS options in combination with the ob-
served 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 2006 and 2005
was determined using the following assumptions:
Expected volatility (%)
Risk-free interest rate (%)
Expected dividend (CHF)
Strike price (CHF)
Share price (CHF)
1 Less than 1% of awards in 2006 were granted in USD. These have been combined with CHF awards for purposes of this disclosure.
CHF awards 1
25.38
2.15
2.26
71.19
70.16
31.12.06
range low
range high
22.51
1.96
1.76
65.13
65.13
27.18
2.68
2.83
77.33
76.25
167
Financial Statements
Notes to the Financial Statements
Note 32 Equity Participation and Other Compensation Plans (Continued)
d) Valuation (continued)
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
2.30
52.08
51.33
12.39
0.62
1.50
48.23
48.23
27.03
2.34
3.89
63.23
63.23
23.36
4.11
1.89
44.11
43.40
15.21
1.91
1.22
39.25
39.25
27.21
4.63
4.12
48.26
48.26
The fair value of options granted during 2004 was determined using a proprietary option pricing model, similar to an
American-style binomial model, using the following assumptions:
31.12.04
Expected volatility (%)
Risk-free interest rate (%)
Expected dividend rate (%)
Strike price (CHF/USD)
Share price (CHF/USD)
Expected life (years)
CHF awards
USD awards
33.66
2.03
3.86
47.80
47.09
5.6
33.45
3.70
3.88
37.56
37.03
5.6
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 recog-
nizes compensation expense over the requisite service period
which is generally equal to the vesting period. Share and op-
tion awards typically have a three-year tiered vesting struc-
ture which means awards vest in one-third increments over
that period. The total share-based compensation expense
recognized for the years ended 31 December 2006, 31 De-
cember 2005 and 31 December 2004 was CHF 2,188 mil-
lion, CHF 1,662 million and CHF 1,406 million, respectively.
The total income taxes recognized in the income statement
in relation to these expenses were a benefit of CHF 491 mil-
lion, CHF 431 million and CHF 64 million for the years ended
31 December 2006, 31 December 2005 and 31 December
2004, respectively. For the years ended 31 December 2006,
31 December 2005 and 31 December 2004, the compensa-
tion expense recognized for share-based payments was pri-
marily related to equity settled plans.
At 31 December 2006, total compensation expense re-
lated to nonvested awards not yet recognized in the income
statement is CHF 1,679 million, which is expected to be rec-
ognized in Personnel expenses over a weighted average pe-
riod of 1.7 years.
168
Note 33 Related Parties
The Group defines related parties as associated companies,
post-employment benefit plans for the benefit of UBS em-
ployees, key management personnel, close family members
of key management personnel and 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. Key management personnel is defined as
members of the Board of Directors (BoD) and Group Execu-
tive Board (GEB). This definition is based on the requirements
of IAS 24 Related Party Disclosures and the “Directive on
Information Relating to Corporate Governance” issued by
the SWX Swiss Exchange.
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)
For the year ended
31.12.06
31.12.05
31.12.04
16
107
1
2
15
90
1
3
15
70
1
2
The non-executive members of the BoD do not have employment 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 5.9 million in 2006, CHF 6.1 million in 2005 and CHF 5.7 million in 2004.
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
31.12.06
10,886,798
7,974,724
31.12.05
10,862,250
8,713,984
31.12.04
12,009,994
7,013,220
Of the share totals above, at 31 December 2006 and 31 De-
cember 2005, respectively, 7,146 shares and 6,538 shares
were held by close family members of key management per-
sonnel and 2,200,000 shares and 2,486,060 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 manage-
ment personnel or their close family members. Further infor-
mation about UBS’s equity participation plans can be found
in Note 32. No member of the BoD or GEB is the beneficial
owner of more than 1% of the Group’s shares at 31 Decem-
ber 2006.
169
Financial Statements
Notes to the Financial Statements
Note 33 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 reduced 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
31.12.06
31.12.06
21
1
(3)
19
16
7
(2)
21
No unsecured loans were granted to key management personnel as of 31 December 2006 and 31 December 2005.
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
Foreign currency translation
Balance at the end of the year
31.12.06
31.12.05
321
116
(48)
1
(15)
375
83
267
(26)
(3)
0
321
All loans to associated companies are transacted at arm’s length. Of the balances above, the amount of unsecured loans
amounted to CHF 177 million and CHF 82 million at 31 December 2006 and 31 December 2005, 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
Note 35 provides a list of significant associates.
For the year ended or as of
31.12.06
31.12.05
31.12.04
58
79
32
397
258
39
248
180
170
Note 33 Related Parties (continued)
e) Other related party transactions
During 2006 and 2005, 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 management
personnel or their close family members. In 2006 and 2005 these companies included BMW Group (Germany), Kedge Capital
Funds Ltd. (Jersey), Löwenfeld AG (Switzerland), Royal Dutch Shell plc (UK), Seromer Biotech SA (Switzerland, previously Ber-
tarelli Biotech SA), Serono Group (Switzerland), Stadler Rail Group (Switzerland), Team Alinghi (Switzerland), and Unisys Cor-
poration (USA). Related parties in 2006 also included Aebi + Co. AG (Switzerland), Bertarelli Family (Switzerland), DKSH Hold-
ing AG (Switzerland), Kedge Capital Selected Funds Ltd. (Jersey), Lista AG (Switzerland), Martown Trading Ltd. (Isle of Man)
and Team Alinghi (Spain).
Movements in loans to other related parties are as follows:
CHF million
Balance at the beginning of the year
Additions
Reductions
Loan at the end of the year 1
31.12.06
31.12.05
919
34
81
872
294
628
3
919
1 In 2006 includes loans, guarantees and contingent liabilities of CHF 128 million and unused committed facilities of CHF 744 million but excludes unused uncommitted working capital facilities and
unused guarantees of CHF 173 million. In 2005 includes loans, guarantees and contingent liabilities of CHF 116 million and unused committed facilities of CHF 804 million but excludes unused uncom-
mitted working capital facilities and unused guarantees of CHF 52 million.
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
31.12.06
31.12.05
31.12.04
8
8
15
1
34
10
As part of its sponsorship of Team Alinghi, defender for the “America’s Cup 2007”, UBS paid CHF 8.7 million (EUR 5.4 mil-
lion) in sponsoring fees for 2006. 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.
Note 34 Post-Balance Sheet Events
There have been no material post-balance sheet events which would require disclosure or adjustment to the 31 Decem-
ber 2006 Financial Statements.
The closing of the acquisition of McDonald Investments’ Branch Network and the announcement of the acquisition of
Standard Chartered’s mutual funds management business in 2007 are discussed in Note 37.
On 8 March 2007, 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 18 April 2007 for
approval.
171
Financial Statements
Notes to the Financial Statements
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, regula-
tory and funding framework. Neither the Business Groups
of UBS (namely Investment Bank, Global Wealth Manage-
ment & 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 capital, 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
acquisition, 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 compa-
nies in the Group are listed below:
Significant subsidiaries
Company
Banco UBS Pactual S.A.
Banco UBS S.A.
Crédit Industriel Société Anonyme in Liquidation
Jurisdiction
of incorporation
Rio de Janeiro, Brazil
Rio de Janeiro, Brazil
Zurich, Switzerland
Dillon Read Capital Management (Singapore) Pte. Ltd.
Singapore, Singapore
Dillon Read Capital Management (UK) Ltd
Dillon Read Capital Management LLC
Dillon Read Solutions Pte. Ltd.
Noriba Bank BSC
OOO UBS Bank
PT UBS Securities Indonesia
Thesaurus Continentale Effekten
UBS (Bahamas) Ltd.
UBS (France) S.A.
London, Great Britain
Delaware, USA
Singapore, Singapore
Manama, Bahrain
Moscow, Russia
Jakarta, Indonesia
Zurich, Switzerland
Nassau, Bahamas
Paris, France
Business Group 1
IB
IB
Global WM&BB
Global AM
Global AM
Global AM
Global AM
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) S.p.A.
UBS (Luxembourg) S.A.
UBS (Monaco) S.A.
UBS Advisory and Capital Markets Australia Ltd
UBS Alternative and Quantitative Investments LLC
UBS Americas Inc
UBS Asesores SA
UBS Bank (Canada)
UBS Bank USA
UBS Belgium SA/NV
UBS Capital (Jersey) Ltd
UBS Capital AG
UBS Capital B.V.
UBS Card Center AG
Milan, Italy
Luxembourg, Luxembourg
Monte Carlo, Monaco
Sydney, Australia
Delaware, USA
Delaware, USA
Panama, Panama
Toronto, Canada
Utah, USA
Brussels, Belgium
St. Helier, Jersey
Zurich, Switzerland
Amsterdam, the Netherlands
Global WM&BB
Global WM&BB
Global WM&BB
IB
Global AM
IB
Global WM&BB
Global WM&BB
Global WM&BB
Global WM&BB
IB
IB
IB
Glattbrugg, Switzerland
Global WM&BB
UBS Clearing and Execution Services Limited
London, Great Britain
UBS Commodities Canada Ltd.
UBS Corporate Finance Italia SpA
UBS Derivatives Hong Kong Limited
UBS Deutschland AG
UBS Employee Benefits Trust Limited
UBS Energy LLC
UBS España, S.A.
UBS Factoring AG
Toronto, Canada
Milan, Italy
Hong Kong, China
IB
IB
IB
IB
Frankfurt am Main, Germany
Global WM&BB
St. Helier, Jersey
Delaware, USA
Madrid, Spain
Zurich, Switzerland
CC
IB
Global WM&BB
Global WM&BB
Share
capital
in millions
Equity
interest
accumulated in %
BRL
BRL
CHF
USD
GBP
USD
USD
USD
RUB
IDR
CHF
USD
EUR
USD
EUR
CHF
EUR
AUD
USD
USD
USD
CAD
USD
EUR
GBP
CHF
EUR
CHF
USD
USD
EUR
HKD
EUR
GBP
USD
EUR
CHF
296.7
52.9
0.1
8.6
18.0
12.5
1.1
10.0
1,250.0
100,000.0
0.1
4.0
25.7
25.0
60.0
150.0
9.2
580.8 2
0.1
0.0
0.0
8.5
1,700.0
23.0
181.0
5.0
78.8 2
0.1
50.0
11.3
1.9
60.0
176.0
0.0
0.0
72.2
5.0
100.0
100.0
100.0
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
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.
172
Share
capital
in millions
Equity
interest
accumulated in %
Note 35 Significant Subsidiaries and Associates (continued)
Significant subsidiaries (continued)
Company
UBS Fiduciaria S.p.A.
UBS Fiduciary Trust Company
UBS Finance (Cayman Islands) Ltd.
UBS Finance (Curação) N.V.
UBS Finance (Delaware) LLC
UBS Financial Services Inc.
Jurisdiction
of incorporation
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, L.L.C.
UBS Fund Holding (Luxembourg) S.A.
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
UBS Futures Singapore Ltd.
Delaware, USA
Luxembourg, Luxembourg
Basel, Switzerland
Basel, Switzerland
George Town, Cayman Islands
Dublin, Ireland
Luxembourg, Luxembourg
Singapore, Singapore
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
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
IB
Global AM
Global AM
Global AM
Global AM
UBS Global Asset Management (France) S.A.
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
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 B.V.
UBS International Inc.
UBS International Life Limited
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 Menkul Degerler AS
UBS Mortgage Holdings LLC
UBS New Zealand Limited
UBS O’Connor LLC
UBS Pactual Asset Management S.A. DTVM
UBS Portfolio LLC
UBS Preferred Funding Company LLC I
UBS Preferred Funding Company LLC II
UBS Preferred Funding Company LLC IV
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
Toronto, Canada
Milan, Italy
Zurich, Switzerland
Zurich, Switzerland
California, USA
London, Great Britain
Delaware, USA
Istanbul, Turkey
Delaware, USA
Global WM&BB
Global WM&BB
Global WM&BB
IB
Global WM&BB
Global WM&BB
Global WM&BB
IB
IB
IB
Global WM&BB
Auckland, New Zealand
IB
Delaware, USA
Rio de Janeiro, Brazil
Global AM
Global AM
Delaware, USA
Delaware, USA
Delaware, USA
Delaware, USA
IB
CC
CC
CC
EUR
USD
USD
USD
USD
USD
USD
USD
CHF
CHF
CHF
USD
EUR
CHF
USD
USD
AUD
CAD
EUR
EUR
HKD
EUR
JPY
SGD
TWD
USD
GBP
CHF
CAD
EUR
USD
EUR
CAD
EUR
CHF
CHF
USD
GBP
USD
TRY
USD
NZD
USD
BRL
USD
USD
USD
USD
0.2
4.4 2
0.5
0.1
37.3 2
2,005.8 2
31.0 2
0.0
42.0
18.0
1.0
5.6
1.3
2.5
39.8 2
0.0
8.0
117.0
7.7
2.1
25.0
2.0
2,200.0
4.0
340.0
35.2 2
48.0
5.0
0.1
6.8
44.3 2
1.0
0.0
15.1
10.0
25.0
39.3 2
29.4
16.7
0.4
0.0
7.5
1.0
53.9
0.1
0.0
0.0
0.0
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
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
173
Financial Statements
Notes to the Financial Statements
Note 35 Significant Subsidiaries and Associates (continued)
Significant subsidiaries (continued)
Company
UBS Principal Finance LLC
UBS Real Estate Investments Inc
UBS Real Estate Kapitalanlagegesellschaft mbH
UBS Real Estate Securities Inc
UBS Realty Investors LLC
Jurisdiction
of incorporation
Delaware, USA
Delaware, USA
Munich, Germany
Delaware, USA
Massachusetts, USA
UBS Sauerborn Private Equity Komplementär GmbH
Bad Homburg, Germany
Business Group 1
IB
Global AM
Global AM
IB
Global AM
Global WM&BB
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 S.A.
UBS Securities Hong Kong Limited
UBS Securities India Private Limited
UBS Securities International Limited
UBS Securities Japan Ltd
UBS Securities Limited
UBS Securities LLC
UBS Securities Malaysia Sdn. Bhd.
UBS Securities Philippines Inc
UBS Securities Pte. Ltd.
UBS Securities Pte. Ltd. Seoul Branch
UBS Services USA LLC
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
Delaware, USA
Kuala Lumpur, Malaysia
Makati City, Philippines
Singapore, Singapore
Seoul, South Korea
Delaware, USA
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
UBS Wealth Management Australia Ltd
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
Melbourne, Australia
Global WM&BB
Global WM&BB
IB
IB
Global WM&BB
Global WM&BB
Share
capital
in millions
Equity
interest
accumulated in %
USD
USD
EUR
USD
USD
EUR
THB
HKD
AUD
CAD
EUR
EUR
HKD
INR
GBP
JPY
GBP
USD
MYR
PHP
SGD
KRW
USD
ZAR
CHF
USD
USD
USD
GBP
SGD
GBP
GBP
GBP
AUD
0.1
0.0
7.5
0.4 2
9.3
0.0
400.0
20.0
209.8 2
10.0
15.0
22.9
230.0
237.8
18.0
60,000.0
140.0
2,455.6 2
75.0
190.0
311.5
150,000.0
0.0
87.1 2
1.5
5.0 2
2.0
2.0
0.0
3.3
5.0
100.0
2.5
53.9
100.0
100.0
51.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
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
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.
174
Note 35 Significant Subsidiaries and Associates (continued)
Consolidated companies: changes in 2006
Significant new companies
Banco UBS Pactual S.A. – Rio de Janeiro, Brazil
Dillon Read Capital Management (Singapore) Pte. Ltd. – Singapore, Singapore
Dillon Read Capital Management (UK) Ltd – London, Great Britain
Dillon Read Capital Management LLC – Delaware, USA
Dillon Read Solutions Pte. Ltd. – Singapore, Singapore
OOO UBS Bank – Moscow, Russia
UBS Clearing and Execution Services Limited – London Great Britain
UBS Futures Singapore Ltd. – Singapore, Singapore
UBS Menkul Degerler AS – Instanbul, Turkey
UBS Pactual Asset Management S.A. DTVM – Rio de Janeiro, Brazil
UBS Sauerborn Private Equity Komplementär GmbH – Bad Homburg, Germany
Deconsolidated companies
Significant deconsolidated companies
Aare-Tessin AG für Elektrizität – Olten, Switzerland
Atel Energia S.r.l. – Milan, Italy
Atel Installationstechnik AG – Olten, Switzerland
Entrade GmbH – Schaffhausen, Switzerland
Etra SIM SpA – Milan, Italy
GAH Beteiligungs AG – Heidelberg, Germany
Motor-Columbus AG – Baden, Switzerland
Società Elettrica Sopracenerina SA – Locarno, Switzerland
UBS (Trust and Banking) Limited – Tokyo, Japan
UBS Capital II LLC – Delaware, USA
UBS Preferred Funding Company LLC III – Delaware, USA
Significant associates
Company
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
ATR Acquisition LLC – Texas, USA
Waterside Plaza Holdings LLC – Delaware, USA
Industry
Financial
Financial
Private Investment Company
Private Investment Company
Private Investment Company
Manufacturing
Real Estate
A&Q Select Funds – Euro Limited – George Town, Cayman Islands
Private Investment Company
Williamsburg Edge LLC – Delaware, USA
Real Estate
Dillon Read Financial Products Trading Ltd – George Town, Cayman Islands
Private Investment Company
1 For hedge funds net asset value instead of share capital. 2 UBS has significant influence even though it holds less than 20% of the voting power of the entity.
Reason for deconsolidation
Sold
Sold
Sold
Sold
Merged
Sold
Sold
Sold
Liquidated
Liquidated
Liquidated
Equity interest
in %
Share capital
in millions
32.9
33.3
37.4
21.8
29.9
24.2
50.0
22.0
50.0
7.1 2
CHF 26
CHF 45
USD 896 1
USD 427 1
USD 517 1
USD 314
USD 119
USD 3161
USD 78
USD 542
175
Financial Statements
Notes to the Financial Statements
Note 36 Invested Assets and Net New Money
Invested assets include all client assets managed by or de-
posited with UBS for investment purposes. Invested assets
include, for example, managed fund assets, managed insti-
tutional assets, discretionary and advisory wealth manage-
ment portfolios, fiduciary deposits, time deposits, savings
accounts and wealth management securities or brokerage
accounts. All assets held for purely transactional purposes
and custody-only assets, including corporate client assets
held for cash management and transactional purposes, are
excluded from invested assets as the Group only administers
the assets and does not offer advice 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 UBS de-
cides how a client’s assets are invested. Other invested assets
are those where the client ultimately decides how the assets
are invested. When a single product is created in one Busi-
ness Group and sold in another, it is counted in both the
Business Group that manages the investment 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 in a period is the net amount of invested
assets that are entrusted to UBS by new and existing clients
less those withdrawn by existing clients and clients who ter-
minate their relationship with UBS. Net new money is calcu-
lated using the direct method, by which in and outflows
to/from invested assets are determined at the client level
based on transactions. Interest expenses paid by clients on
their loans are treated as net new money outflows. Interest
and dividend income from invested assets is not counted as
net new money inflow. Market and currency movements as
well as fees and commissions are excluded from net new
money, as are the effects resulting from any acquisition or
divestment of a UBS subsidiary or business. Reclassifications
between invested assets and client assets as a result of a
change in the service level delivered are treated as net new
money flows.
CHF billion
Fund assets managed by UBS
Discretionary assets
Other invested assets
Total invested assets (double counts included)
thereof double count
thereof acquisitions (divestments)
Net new money (double counts included)
As of or for the year ended
31.12.06
31.12.05
439
849
1,701
2,989
371
81.1
151.7
390
716
1,546
2,652
332
(93.9)
148.5
176
Note 37 Business Combinations
Business combinations completed in 2006
During 2006, UBS completed several acquisitions that were
accounted for as business combinations. The acquisition of
Banco Pactual S.A. was individually significant to the Finan-
cial Statements and is therefore presented separately in this
note. The other acquisitions are presented in aggregate per
business group.
Banco Pactual S.A.
On 1 December 2006, UBS completed the acquisition of Bra-
zilian bank Banco Pactual S.A. The bank was merged with
UBS's Brazilian business, and both are now operating under
the name UBS Pactual. The cost of the business combination
is estimated at USD 2,194 million (CHF 2,677 million) but is
still subject to final determination. Of the total consideration,
USD 971 million (CHF 1,164 million) was paid on 1 Decem-
ber 2006 in cash. The residual payment of up to USD 1.6
billion (CHF 1.9 billion) is subject to certain performance
conditions and is due on 30 June 2011. The purchase price
allocation is preliminary and will be finalized in 2007. The
preliminary allocation shows the booking of net assets of
USD 376 million (CHF 459 million), intangible assets of USD
830 million (CHF 1,013 million) and goodwill of USD 988
million (CHF 1,205 million). Identified intangible assets in-
clude client relationships, non-compete agreements, favor-
able contracts, investment banking pipeline, proprietary
software, trademarks and trade names, with an economic
useful life from 1 to 20 years. UBS Pactual offers a broad
range of services in investment banking, asset management
and wealth management. It has offices in São Paolo, Rio de
Janeiro, Belo Horizonte and Recife.
The residual payment obligation is reflected on UBS’s bal-
ance sheet in Other liabilities and is measured at its present
value (USD 1,223 million on acquisition date). It had no ef-
fect on the Statement of Cash Flows for the year ended 31
December 2006.
Book value
Step-up to
fair value
Fair value
CHF million
Assets
Intangible 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
0
9
16
0
11,877
11,902
52
28
11,363
11,443
459
11,902
1,013
0
0
1,205
0
2,218
0
0
0
0
2,218
2,218
1,013
9
16
1,205
11,877
14,120
52
28
11,363
11,443
2,677
14,120
Total
1,013
1,205
On the acquisition date, intangible assets and goodwill were allocated to the Business Groups as follows:
CHF million
Assets
Intangible assets
Goodwill
Global Wealth
Management &
Business Banking
Investment
Bank
Global Asset
Management
176
50
349
962
488
193
Since the acquisition date, UBS Pactual contributed revenues of CHF 102 million to UBS’s results, and an after-tax profit of CHF
28 million after acquisition costs (retention payments and amortization of intangible assets) but excluding finance costs.
177
Financial Statements
Notes to the Financial Statements
Note 37 Business Combinations (continued)
Investment Bank
ABN AMRO’s Global Futures and Options Business
On 30 September 2006, UBS acquired the global futures and
options business of ABN AMRO for USD 704 million (CHF
880 million) in cash. The ABN AMRO futures and options
business provides clearing and execution services on a global
basis. The acquired business has been integrated into the
Prime Services business within the Equities business of the
Investment Bank. The purchase price was allocated to net
assets of USD 362 million (CHF 452 million) and intangible
assets of USD 108 million (CHF 134 million). The difference
of USD 234 million (CHF 294 million) from the purchase
price was recognized as goodwill. The acquired business
contributed CHF 7 million to UBS’s net profit since the date
of acquisition.
Book value
Step-up to
fair value
Fair value
0
13
26
0
11,942
11,981
0
11,574
11,574
407
11,981
134
0
54
294
0
482
9
0
9
473
482
134
13
80
294
11,942
12,463
9
11,574
11,583
880
12,463
CHF million
Assets
Intangible assets
Property and equipment
Financial investments available-for-sale
Goodwill
All other assets
Total assets
Liabilities
Provisions
All other liabilities
Total liabilities
Net assets
Total liabilities and equity
178
Note 37 Business Combinations (continued)
Global Wealth Management & Business Banking
Piper Jaffray Companies’ Private Client Services
Branch Network
On 11 August 2006, UBS completed the acquisition of Pip-
er Jaffray Companies’ Private Client Services branch net-
work. The cost of the business combination consisted of
USD 500 million (CHF 616 million) for the business opera-
tions and of USD 227 million (CHF 280 million) for the
loans to customers portfolio, resulting in a total cash con-
sideration paid of USD 727 million (CHF 896 million). The
purchase price was allocated to net assets of USD 236 mil-
lion (CHF 291 million) and intangible assets of USD 120
million (CHF 148 million) representing client relationships.
The difference of USD 371 million (CHF 457 million) from
the purchase price was recognized as goodwill. The pur-
chase price allocation and cost of the business combination
is in the process of being finalized. Approximately 90 Piper
CHF million
Assets
Intangible assets
Property and equipment
Financial investments available-for-sale
Goodwill
All other assets
Total assets
Liabilities
Provisions
Deferred tax liabilities
All other liabilities
Total liabilities
Net assets
Total liabilities and equity
Jaffray wealth management offices, mainly located in the
Midwest and Western United States, serving 190,000
households, will be renamed and integrated into Wealth
Management US. UBS has retained approximately 700 of
Piper Jaffray’s financial advisors, which corresponds to ap-
proximately 80% of the advisors before the acquisition.
The acquisition is expected to benefit Wealth Management
US’s existing business by expanding the presence in the re-
gions where the acquired branches are located.
Dolfi
On 2 March 2006, UBS acquired Dolfi Finance SAS, a small
wealth management firm based in Strasbourg, France, as
well as certain assets from Mr Dolfi. The company, estab-
lished 18 years ago, serves clients in the North Eastern part
of France and had more than EUR 600 million of invested
assets on the acquisition date. The acquisition complements
UBS’s existing wealth management business in France.
Book value
Step-up to
fair value
Fair value
0
16
1
0
291
308
0
0
2
2
306
308
158
(4)
0
479
0
633
8
3
4
15
618
633
158
12
1
479
291
941
8
3
6
17
924
941
179
Financial Statements
Notes to the Financial Statements
Note 37 Business Combinations (continued)
Acquisitions of minority interests of subsidiaries in 2006
UBS Bunting Limited
On 28 March 2006, UBS acquired the 50% minority interest
in its Canadian institutional securities subsidiary, UBS Bun-
ting Limited. The purchase price consists of a combination of
cash and UBS shares and has been estimated at CAD 163
million (approximately CHF 182 million). Approximately CAD
23 million (CHF 26 million) of the consideration is linked to
the performance of the acquired business in 2006 and 2007
and may be reduced if agreed revenue targets are not
achieved. The difference between the purchase price and
the carrying value of the acquired minority interest of CAD
116 million (CHF 129 million) was reflected in Equity. Through
this transaction UBS now wholly owns the Investment Bank’s
operations in Canada, which continue to operate under the
same leadership team as before this transaction.
Business combinations announced but not yet completed
Beijing Securities Ltd.
In April 2006 UBS entered into a commitment to acquire the
restructured activities of Beijing Securities, a Chinese broker-
age and securities firm. Under the terms of the transaction,
a new company, UBS Securities Co. Limited emerges, in
which UBS is expected to have a 20% capital stake and ob-
tain management and operational control. The cost of the
business combination including capital contributions and
transaction costs is expected to be approximately CHF 278
million (RMB 1.8 billion).
UBS Securities Co. Limited will operate in China on the
basis of a comprehensive set of domestic securities licences
offering corporate finance, equities, fixed income, wealth
management and asset management service.
On 11 December 2006, UBS Securities Co. Limited was of-
ficially established following the registration of the business.
The closing of the transaction, which is subject to final regula-
tory approval, is expected during first half 2007.
Business combinations completed in 2005
During 2005, UBS completed several acquisitions that were
accounted for as business combinations. None of the acqui-
sitions was individually significant to the Financial State-
ments, and therefore they are presented in aggregate
by Business Group for 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 Dresd-
ner Bank Lateinamerika (DBLA).
180
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 ag-
gregate consideration of approximately CHF 76 million. The
business manages over USD 4 billion of client assets, in-
cluding custodial assets, and employs approximately 50
staff in four locations. These operations have been inte-
grated 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
private and institutional clients in Italy and manages approx-
imately EUR 400 million of client assets with 20 staff. The
operations were subsequently 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. On 31 December 2005, the cost of
the acquisition was approximately CHF 136 million, and re-
sulted in the recognition of goodwill of approximately
CHF 133 million. In 2006, additional goodwill of CHF 39 mil-
lion resulted from an adjustment to the purchase price. The
acquired business covers all important Latin American mar-
kets and strengthens UBS’s position 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 manage-
ment activities in Germany by acquiring a 51% stake in the
real estate investment management business of Siemens
Kapitalanlagegesellschaft mbH (SKAG), a subsidiary of Sie-
mens 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 approximately CHF 57 million. The busi-
ness comprises three open-end real estate funds with a
total fund volume of approximately EUR 2 billion (as of 31
December 2004) and has been integrated into the global
real estate business, giving it access to Global Asset
Management’s established distribution network. The
business was renamed UBS Real Estate Kapitalanlagege-
sellschaft mbH.
Note 37 Business Combinations (continued)
Investment Bank – Prediction
On 11 November 2005, UBS acquired the remaining 68.3%
of Prediction LLC (Prediction), a financial engineering and
trading 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 tech-
nology and allows continuous operation and development of
Prediction’s automated trading systems. Furthermore, UBS
secures the know-how available at Prediction and the oppor-
tunity to leverage it across UBS. The purchase price of ap-
proximately CHF 84 million was primarily allocated to intan-
gible assets valued at approximately CHF 26 million and
goodwill of approximately CHF 51 million. Details of assets
and liabilities recognized from the acquisitions made by the
Financial Businesses in 2005 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
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.
On 20 December 2005, Motor-Columbus also acquired
Moravske Teplarny a.s., a power generator in the Czech Re-
public, for approximately CHF 108 million. The purchase
price was predominantly allocated to the power station and
fair value of net assets acquired was equal to the purchase
price. No goodwill was recognized in this acquisition. Motor-
Columbus was sold on 23 March 2006. See Note 38 Discon-
tinued Operations for details.
Details of assets and liabilities recognized from these two
acquisitions in 2005 are as follows (on the next page):
181
Financial Statements
Notes to the Financial Statements
Note 37 Business Combinations (continued)
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
Pro-forma information (unaudited)
The following pro-forma information shows UBS’s total op-
erating income, net profit and basic earnings per share as if
all of the acquisitions completed in 2006 had been made as
of 1 January 2005 and all acquisitions completed in 2005,
had been made as of 1 January 2004. Adjustments have
been made to reflect additional amortization and deprecia-
tion 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)
For the year ended
31.12.06
31.12.05
49,408
12,556
6.35
42,021
14,070
6.99
31.12.04
37,341
8,006
7.77
Business combinations completed in 2007
McDonald Investments’ Branch Network
On 9 February 2007, UBS announced the completion of the
acquisition of the branch network of McDonald Investments,
a unit of KeyCorp. The cost of the business combination
consisted of USD 219 million (CHF 267 million) for the busi-
ness operations and of USD 57 million (CHF 70 million) for
certain assets of McDonald investments, resulting in a total
cash consideration paid of USD 276 million (CHF 337 mil-
lion). The total consideration paid remains subject to adjust-
ment. Based in Cleveland, Ohio, US, McDonald Investments
comprised 51 branch offices throughout the Northeast, Mid-
west, Rocky Mountain and Northwest states, including the
offices of Gradison and Gradison Asset Management, which
will be integrated into Wealth Management US. The unit
provides comprehensive wealth management services to af-
fluent and high net worth individuals, including estate plan-
ning, retirement planning and asset management.
Business combinations announced in 2007
Standard Chartered’s mutual funds management business
in India
On 26 January 2007, UBS announced the acquisition of
Standard Chartered’s mutual funds management business in
India. The cost of the business combination is estimated to
be USD 126 million, and the business will be integrated into
Global Asset Management. The transaction is expected to
close in third quarter 2007.
182
Note 38 Discontinued Operations
2006
2005
Motor-Columbus
On 23 March 2006, UBS sold its 55.6% stake in Motor-Co-
lumbus to a consortium representing Atel’s Swiss minority
shareholders (EBM, EBL, the Canton of Solothurn, IB Aarau,
AIL Lugano and WWZ Zug), EOS Holding and Atel, as well as
to the French utility Electricité de France (EDF) following the
receipt of relevant regulatory approvals by the Swiss and in-
ternational authorities. Motor-Columbus is presented as a
discontinued operation in these Financial Statements. The
income statements for the comparative prior periods have
been restated to reflect that presentation. In total, UBS sold
281,535 Motor-Columbus shares, at a price of CHF 4,600
per share, resulting in a sale price of approximately CHF
1,295 million, which was fully paid in cash. A pre-tax gain on
sale of CHF 364 million is reported in the Industrial Holdings
segment. From 1 January to 23 March 2006, Motor-Colum-
bus had a Net profit from operations of CHF 71 million. To-
gether with the after-tax gain on sale of CHF 387 million, the
Net profit from discontinued operations is CHF 458 million in
2006. For the years ended 31 December 2005 and 31 De-
cember 2004, Motor-Columbus had a Net profit from opera-
tions of CHF 323 million and CHF 159 million, respectively.
Industrial Holdings
In 2006, private equity investments contributed CHF 407 mil-
lion to UBS´s Net profit from discontinued operations, which
includes after-tax gains on sale of CHF 425 million and an
after-tax operating loss of CHF 18 million. In 2005, UBS sold
four of its consolidated private equity investments for an ag-
gregate cash consideration of CHF 179 million, and the sales
of these investments had a positive impact on Net profit from
discontinued operations of CHF 86 million. In 2004, five con-
solidated private equity investments were sold for an aggre-
gate cash consideration of CHF 141 million, and the sales of
these investments had a positive impact on Net profit from
discontinued operations of CHF 125 million. These private
equity investments were all held within the Industrial Hold-
ings 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.
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
million, of which CHF 3,375 million was received in cash,
CHF 225 million in the form of hybrid Tier 1 instruments,
and the remaining CHF 2,083 million representing a 21.5%
stake in the enlarged Julius Baer. As part of the sales agree-
ment, CHF 200 million of cash was retained within UBS. The
gain on sale after taxes from this transaction amounts to
CHF 3,705 million on 31 December 2005. In 2006, UBS re-
ported an additional after-tax gain on sale of CHF 4 million
due to an adjustment to the purchase price.
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 strat-
egy or on its operational business decisions, and has no
right to register its shares with voting rights for a period of
3 years, unless specifically defined events occur that could
materially dilute or otherwise affect UBS’s position as an in-
vestor 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 operation 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 pre-
sented as a separate business segment.
183
Financial Statements
Notes to the Financial Statements
Note 38 Discontinued Operations (continued)
CHF million
Operating income
Operating expenses
Operating profit / (loss) from discontinued operations before tax
Pre-tax gain / (loss) on sale
Profit from discontinued operations before tax
Tax expense / (benefit) on operating profit from discontinued operations before tax
Tax expense / (benefit) on gain on sale
Tax expense / (benefit) from discontinued operations
Net profit / (loss) from discontinued operations
Net cash flows from
operating activities
investing activities
financing activities
1 Pre-tax gain on sale includes CHF 4 million related to Private Banks & GAM, which is included in Corporate Center in Note 2a.
For the year ended 31.12.06
Motor-Columbus
2,494
2,412
82
364
446
11
(23)
(12)
458
1
(52)
(22)
Other 1
Industrial Holdings 1
312
331
(19)
429
410
(1)
0
(1)
411
(7)
76
(88)
CHF million
Operating income
Operating expenses
Operating profit / (loss) from discontinued operations before tax
Pre-tax gain / (loss) on sale
Profit from discontinued operations before tax
Tax expense on operating profit from discontinued operations before tax
Tax expense on gain on sale
Tax expense / (benefit) from discontinued operations
Net profit / (loss) from discontinued operations
Net cash flows from
operating activities
investing activities
financing activities
CHF million
Operating income
Operating expenses
Operating profit / (loss) from discontinued operations before tax
Pre-tax gain / (loss) on sale
Profit from discontinued operations before tax
Tax expense on operating profit from discontinued operations before tax
Tax expense on gain on sale
Tax expense / (benefit) from discontinued operations
Net profit / (loss) from discontinued operations
Net cash flows from
operating activities
investing activities
financing activities
184
For the year ended 31.12.05
Private Banks & GAM
Motor-Columbus
Other
Industrial Holdings
1,102
633
469
4,095
4,564
99
390
489
4,075
(143)
(22)
0
8,711
8,323
388
0
388
65
0
65
323
252
(326)
163
2,111
2,116
(5)
113
108
22
0
22
86
68
(43)
28
For the year ended 31.12.04
Private Banks & GAM
Motor-Columbus
Other
Industrial Holdings
1,086
690
396
0
396
97
0
97
299
(725)
30
3
3,668
3,460
208
0
208
49
0
49
159
75
(71)
112
3,748
3,639
109
68
177
52
0
52
125
(288)
124
34
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 of
Average rate
Year ended
31.12.06
31.12.05
31.12.06
31.12.05
31.12.04
1.22
1.61
2.39
1.02
1.31
1.56
2.26
1.11
1.25
1.58
2.31
1.08
1.25
1.55
2.27
1.13
1.24
1.54
2.27
1.15
185
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 Stan-
dards. Included in this note are the significant differences in
regard to recognition and measurement between IFRS and
the provisions of the Banking Ordinance and the Guidelines
of the Swiss Banking Commission governing financial state-
ment reporting pursuant to Article 23 through Article 27 of
the Banking Ordinance.
1. Consolidation
Under IFRS, all entities which are controlled by the Group are
consolidated.
Under Swiss law, only entities that are active in the field
of banking and finance and real estate entities are subject to
consolidation. Entities which are held temporarily are gener-
ally recorded as Financial investments available-for-sale.
2. Financial investments available-for-sale
Under IFRS, Financial investments available-for-sale are car-
ried at fair value. Changes in fair value are recorded directly
in Equity until an investment is sold, collected or otherwise
disposed of, or until an investment is determined to be im-
paired. At the time an available-for-sale investment is deter-
mined to be impaired, the cumulative unrealized loss previ-
ously recognized in Equity is included in net profit or loss for
the period. On disposal of a financial investment available-
for-sale, the cumulative gain or loss previously recognized in
Equity is recognized in the income statement.
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 up to original
cost as well as gains and losses on disposal are included in
Other income.
3. Cash flow hedges
The Group uses derivative instruments to hedge the expo-
sure from varying cash flows. Under IFRS, when hedge ac-
counting is applied the unrealized gain or loss on the effec-
tive portion of the derivatives is recorded in Equity until the
hedged cash flows occur, at which time the accumulated
gain or loss is realized 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 in-
come when the hedged cash flows occur.
186
4. Investment property
Under IFRS, investment properties are carried at fair value,
with fair value changes reflected in profit or loss.
Under Swiss law, investment properties are carried at am-
ortized cost less impairment unless the investment proper-
ties are held for sale. Investment properties held for sale are
recorded at the lower of cost or market value.
5. Fair value option
Under IFRS, the Group applies the fair value option to cer-
tain financial assets and financial liabilities, mainly to hybrid
debt instruments. As a result the entire hybrid instrument is
accounted for at fair value with changes in fair value re-
flected in net trading income. Furthermore, UBS designated
certain loans, loan commitments and fund investments as
financial investments designated at fair value through profit
and loss.
Under Swiss law, the fair value option is not available.
Hybrid instruments are bifurcated: while the embedded de-
rivative is marked to market through net trading income, the
host contract is accounted for on an accrued cost basis. Gen-
erally, loans are accounted for at amortized cost less impair-
ment, loan commitments stay off-balance sheet and fund
investments are accounted for as financial investments.
6. Goodwill and intangible assets
Under IFRS, goodwill acquired in business combinations is
not amortized, but tested annually for impairment. Intangi-
ble assets acquired in business combinations with an indefi-
nite useful life are also 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. Dis-
posal groups that meet the criteria of discontinued opera-
tions are presented in the income statement in a single line
as net income from discontinued operations.
Under Swiss law, no such reclassifications take place.
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
differences between IFRS and US GAAP.
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 am-
ortized over periods ranging from two years to 20 years.
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 adjust-
ments were made to the carrying values of the assets and
liabilities. Under US GAAP, the business combination creat-
ing UBS AG is accounted for under the purchase method
with Union Bank of Switzerland being considered the ac-
quirer. Under the purchase method, the cost of acquisition is
measured at fair value and the acquirer’s interests in identifi-
able tangible assets and liabilities of the acquiree are restat-
ed to fair values at the date of acquisition. Any excess con-
sideration paid over the fair value of net tangible assets
acquired is allocated, first to identifiable intangible assets
based on their fair values, if determinable, with the remain-
der 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.
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 amor-
tized but be tested annually for impairment. Identifiable in-
tangible assets with finite lives continue to be amortized.
Upon adoption, the amortization charges related to the
1998 business combination of Union Bank of Switzerland
and Swiss Bank Corporation ceased to be recorded under US
GAAP.
In 2006 and 2005, goodwill recorded under US GAAP
was reduced by CHF 18 million and CHF 67 million respec-
tively, due to recognition of deferred tax assets of Swiss Bank
Corporation which had previously been subject to valuation
reserves.
b. Goodwill
With the adoption of IFRS 3 Business Combinations on
31 March 2004, UBS ceased amortizing goodwill on 1 Janu-
ary 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 standards. 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 31 December 2001 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
recognized separately from goodwill if they meet defined
recognition criteria. Existing intangible assets that do not
meet the recognition criteria have to be reclassified to good-
will. On 1 January 2005, UBS reclassified the trained work-
force intangible asset recognized in connection with the
acquisition of PaineWebber with a book value of CHF
1.0 billion to Goodwill. Under US GAAP, this asset was re-
classified from Intangible assets to Goodwill on 1 January
2002 with the adoption of SFAS 142 Goodwill and Other
Intangible Assets.
Under IFRS, the cost of the business combination of Banco
Pactual is estimated at USD 2,194 million (CHF 2,677 million)
on 31 December 2006 but is still subject to final determi-
nation. Of the total consideration, USD 971 million (CHF
1,164 million) was paid on 1 December 2006 in cash. The
residual payment of up to USD 1.6 billion (CHF 1.9 billion)
is subject to certain performance conditions and is due on
30 June 2011. 50% (USD 800 million) of the deferred re-
sidual payment is contingent upon achieving a specified
cumulative net income before tax of the acquired business
during the period from 1 December 2006 to 30 June 2011.
Under US GAAP, contingent consideration which depends
on the achievement of a specified earnings level in future
periods is not recognized as a cost of the business combina-
tion at its present value until the contingency is resolved. For
187
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)
that reason, Goodwill and Other liabilities recognized under
US GAAP are reduced by the present value of the contingent
consideration of CHF 746 million to CHF 459 million. Ac-
cordingly, the addition of accrued interest on the present
value of the contingent consideration recognized under IFRS
is reversed under US GAAP, which resulted in a decrease of
Interest expense and Other liabilities of CHF 3 million.
c. Purchase accounting under IFRS 3 and FAS 141
With the adoption of IFRS 3 on 31 March 2004, the ac-
counting for business combinations generally converged
with US GAAP except for the differences described below.
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 recog-
nized at the percentage of book value of identifiable net as-
sets acquired at the acquisition date. In most cases, minority
interests would tend to have a higher measurement value
under IFRS than under US GAAP.
The accounting treatment of purchased minority interests
of a subsidiary differs between IFRS and US GAAP. Under
IFRS, UBS records the difference between the purchase price
and the carrying value of the acquired minority interest di-
rectly in Equity whereas the acquisition of the minority inter-
ests is treated as a business combination under US GAAP. In
2006, goodwill of CAD 35 million (CHF 40 million) and in-
tangible assets of CAD 71 million (CHF 79 million) under US
GAAP resulted from the purchase of the then outstanding
50% minority interest in a consolidated subsidiary, UBS Bun-
ting. See Note 37 Business Combinations for the IFRS treat-
ment of this acquisition.
Furthermore, IFRS requires that in a step acquisition the
existing ownership interest in an entity be revalued to the
new valuation basis established at the time of acquisition.
The increase in value is recorded directly in equity as a re-
valuation reserve. Under US GAAP, the existing ownership
interest remains at its original valuation.
d. Hedge accounting
Under IAS 39, UBS hedges interest rate risk based on fore-
cast 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 fu-
ture 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. Accord-
ingly, for US GAAP such hedging instruments continue to be
carried at fair value with changes in fair value recognized in
Net trading income.
In addition, a new hedging methodology, fair value hedge
of portfolio interest rate risk, was implemented in 2005 for a
specific portfolio of mortgage loans. This new hedging
method is not recognized under US GAAP and therefore, the
fair value change of hedged items recognized 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 qual-
ify as hedges under current requirements under IFRS are am-
ortized to income over the remaining life of the hedging re-
lationship. Such amounts have been reversed for US GAAP
as they have never been treated as hedges.
e. Financial investments available-for-sale
For UBS, the following differences exist between IFRS and US
GAAP in accounting for financial investments available-for-
sale: 1) Under US GAAP, instruments which are not securities
or equity securities with no readily determinable fair value
(excluding private equity investments discussed in the next
part) are not classified as available-for-sale investments. They
are classified as Other assets and measured at cost less im-
pairment. Under IFRS, these instruments are measured at fair
value with changes in fair value reflected directly in equity.
2) Under IFRS, restricted stock is classified as a financial in-
vestment available-for-sale. Under US GAAP, restricted stock
(with a restriction period of more than one year) is classified
as Other assets and measured at cost less impairment.
f. Private equity investments
On 1 January 2005, UBS adopted revised IAS 27 Consoli-
dated and Separate Financial Statements and revised IAS 28
Investments 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 invest-
ments. Previously under IFRS, such investments were classi-
fied as Financial investments available-for-sale with changes
in fair value recorded directly in Equity. The effect of adopt-
ing 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 account-
ed for as associated companies using the equity method of
accounting. The remaining private equity investments con-
tinue to be accounted for as Financial investments available-
for-sale.
188
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)
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 accounted for at fair val-
ue with changes in fair value recorded in other income. The
remaining private equity investments held by UBS are ac-
counted for at cost less “other than temporary” impairment.
All private equity investments are presented in the balance
sheet line Private equity investments under US GAAP.
line basis as those amounts are recognized in the income
statement.
Under IFRS, the amount recognized on the balance sheet
as a net pension asset or liability is comprised of the funded
status of the plans as adjusted for unrecognized actuarial
gains and losses and prior service costs and the unrecog-
nized prepaid pension asset. Unrecognized net actuarial
gains and losses and prior service costs are subsequently rec-
ognized in the income statement on a straight line basis.
g. Pension and other post-retirement benefit plans
h. Equity participation plans
Under IFRS, UBS recognizes post-retirement benefit expense
based on a specific method of actuarial valuation used to
determine the projected plan liabilities for accrued service,
including future expected salary increases, and expected re-
turn on plan assets. Plan assets are recorded at fair value and
are held in a separate trust to satisfy plan liabilities. Under
IFRS, the recognition of a prepaid asset is subject to certain
limitations, and any unrecognized prepaid asset is recorded
as pension expense. US GAAP does not allow a limitation on
the recognition of prepaid assets recorded in the balance
sheet.
Under US GAAP, post-retirement benefit expense is based
on the same actuarial 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 transi-
tion date rules, stricter provisions for recognition of prepaid
assets under IFRS, 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 li-
ability 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 intan-
gible asset is reported in other comprehensive income (OCI).
This amount was removed from OCI when SFAS 158 Em-
ployers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans was first applied at 31 December 2006.
See Note 41.2 for details.
In accordance with SFAS 158, the US GAAP balance sheet
at 31 December 2006 shows the funded status of all post-
retirement benefit plans under Other liabilities. All amounts
not recognized in US GAAP Net profit are recognized in Oth-
er comprehensive income (OCI) as an adjustment to the end-
ing balance as of 31 December 2006. The recorded amounts
in OCI are subsequently reclassified from OCI on a straight-
On 1 January 2005, UBS adopted IFRS 2 Share-based pay-
ment which requires that the fair value of all share-based
payments made to employees be recognized as compensa-
tion expense from the date of grant over the service period,
which is generally equal to the vesting period. UBS applied
IFRS 2 on a retrospective application basis and restated its
2003 and 2004 comparative prior periods for all awards that
impact income statements commencing 2003. UBS recorded
an opening retained earnings adjustment on 1 January 2003
to reflect the cumulative income statement effects of prior
periods. See Note 1b) for details. Previously under IFRS, op-
tion 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 ex-
pense in full in the performance 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 employees
be recognized in the income statement over the requisite ser-
vice period based on their fair values at the date of grant. The
requisite service period is defined as the period that the em-
ployee is required to provide active employment in order to
earn their award. This may be different from the service peri-
od 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 op-
tions has been previously recognized in the income state-
ment 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
189
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)
the revenue produced. For disclosure purposes, UBS recog-
nized the fair value of option awards on the date of grant.
Thus, for recognition and disclosure purposes, expense for
share and option awards issued prior to but outstanding at
the date of adoption 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 prof-
it. 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 retained earnings adjustment on 1 January 2003 and
subsequent IFRS 2 restatement adjustments were reversed
and only the awards required to be expensed were recorded
in the 2005 US GAAP Financial Statements. Subsequent
awards have been recognized over the requisite service peri-
ods, which are determined 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 recogni-
tion of estimated forfeitures of share-based compensation
awards under SFAS 123-R. The standard requires that ex-
pense be recognized only for those instruments where the
requisite service is performed. During the service period,
compensation cost recognized is based on the estimated
number of instruments for which the requisite service is ex-
pected to be rendered. That estimate is revised if subsequent
information indicates that the actual number is likely to dif-
fer from previous estimates.
Under SFAS 123-R, entities are required to continue to
provide pro-forma disclosures for the periods in which the
fair value method of accounting for share-based compensa-
tion was not applied. See Note 42.7 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 provisions. Under SFAS 123-R, awards with non-
compete provisions generally do not impose a requisite ser-
vice period, and therefore expense should not be recognized
over a future period. UBS has determined that the appropri-
ate expense recognition period for such awards is the perfor-
mance year, which is generally the period prior to grant. This
is consistent with the approach applied under APB 25. Com-
pensation expense for awards with non-compete provisions
is generally recognized over the vesting period under IFRS.
Certain UBS awards contain provisions that permit the em-
ployee to retire, provided they meet certain eligibility condi-
tions 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 con-
nection with share-based payment arrangements and de-
ferred 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
required to consolidate that trust. UBS consolidated such
employee benefit trusts retrospectively to 1 January 2003.
For further details on the restatement, see Note 1b). Under
US GAAP prior to 1 January 2004, certain equity compensa-
tion trusts were already consolidated under US GAAP under
the provisions of EITF-97-14, Accounting for Deferred Com-
pensation Arrangements Where Amounts Earned Are Held
in a Rabbi Trust and Invested. With the adoption of FASB
Interpretation No. 46 Consolidation of Variable Interest Enti-
ties (revised December 2003), an interpretation of Account-
ing Research Bulletin No. 51 (FIN 46-R), on 1 January 2004,
the remaining unconsolidated employee equity compensa-
tion trusts formed before 1 February 2003 were consolidat-
ed 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.
With the consolidation of the additional trusts under FIN
46-R from 1 January 2004, UBS re-evaluated its accounting for
share-based compensation plans under APB 25 by taking into
consideration the settlement methods and activities of the
trusts. Based on this review, most share plans issued 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
authority is triggered. This is generally the distribution date
for share awards and the exercise date of options.
190
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)
In addition, CHF 1,450 million has been reclassified from
Other liabilities to Shareholders' equity in the 31 December
2005 US GAAP balance sheet. The reclassification relates to
equity-settled awards which were recorded in Other liabilities.
i. Variable interest entities (VIEs), limited partnerships
and entities issuing preferred securities
IFRS and US GAAP generally require consolidation of entities
on the basis of controlling a majority of voting rights. How-
ever, in certain situations, there are no voting rights, or con-
trol of a majority of voting rights is not a reliable indicator of
the need to consolidate, such as when voting rights are sig-
nificantly disproportionate 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 oth-
er than controlling a majority of voting rights, the consolida-
tion assessment is based on the substance of the relation-
ship. Indicators of control in these situations include:
predetermination of the entity’s activities; the entity’s activi-
ties being conducted 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 activities of the entity; or retaining the major-
ity of the residual or ownership risks related to the entity’s
assets in order to obtain benefits from its activities.
In most other cases, US GAAP requires that control over
an entity be assessed first based on voting interests. If voting
interests do not exist, or differ significantly from economic
interests, the entity is considered a variable interest entity
(VIE) under FASB interpretation No. 46 (revised December
2003) Consolidation of Variable Interest Entities, an interpre-
tation of Accounting Research Bulletin No. 51 (FIN 46-R),
and control is assessed based on its variable interests. A dis-
cussion of FIN 46-R requirements is set out in Note 42.1.
In most instances, limited partnerships are not consoli-
dated under IFRS because UBS`s legal and contractual rights
and obligations do not indicate that UBS has the power to
govern the financial and operating policies of these entities
and concurrently has the objective to obtain benefits form its
activities through this power. Under US GAAP, UBS applies
EITF 04-05, 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), provided an entity is not considered a VIE
under FIN 46-R. As a result, UBS consolidates some limited
partnerships which are not consolidated under IFRS. Under
EITF 04-05, a general partner in a limited partnership is pre-
sumed to control that limited partnership regardless of the
extent of the general partners' ownership interest in the lim-
ited partnership. The assessment of whether the rights of
the limited partners should overcome the presumption of
control by the general partner is a matter of judgment that
depends on facts and circumstances. If the limited partners
have either (a) the substantive ability to dissolve (liquidate)
the limited partnership or otherwise remove the general
partner without cause or (b) substantive participating rights,
the general partner does not control the limited partnership
and therefore does not consolidate the entity.
The entities consolidated for US GAAP purposes at
31 December 2006, 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 2006, which UBS consolidates under IFRS, are
certain entities which have issued preferred securities. Under
IFRS such securities are equity instruments held by third par-
ties 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 Group Financial State-
ments. Under US GAAP, these entities are not consolidated,
and the UBS-issued debt is recognized as a liability in the
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 or loss
IFRS provides, under certain circumstances, the option to
designate at initial recognition a financial asset or financial
liability at fair value through profit or loss (see Notes 1, 9 and
19). This option is not available under US GAAP as UBS did
not early adopt SFAS 155 Accounting for Certain Hybrid In-
struments, an amendment of FASB Statements No. 133 and
140 (see Note 41.2). SFAS 155 will allow a fair value designa-
tion for certain hybrid instruments from 1 January 2007 on-
wards. Additionally, beginning 1 January 2008, Statement of
Financial Accounting Standards No. 159, The Fair Value Op-
tion for Financial Assets and Liabilities (Statement 159) will
become effective. Statement 159 provides a fair value op-
tion that is broader than that provided in Statement 155 and
is similar to the fair value option provided by IFRS. In 2006,
as in prior periods, UBS reversed all IFRS fair value desig-
nations of financial assets and financial liabilities under US
GAAP.
191
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)
UBS applies the fair value option to a significant portion
of its issued debt under IFRS. Many debt issues are in the
form of hybrid instruments, consisting of a debt host with an
embedded derivative. These hybrid instruments are carried
in their entirety at fair value with all changes in fair value
recorded in Net trading income. Under US GAAP, the debt
host contracts of these hybrid instruments are recognized at
amortized cost while the embedded derivatives are recog-
nized at fair value with changes in fair value recognized in
Net profit. Although separately measured, the positive and
negative replacement values of the embedded derivatives
are classified with the debt host contract.
k. Physically settled written puts on UBS shares
Under IFRS, the accounting for physically settled written put
options on UBS shares is as follows: the present value of the
contractual amount is recorded as a financial liability, while
the premium received is credited to equity. Subsequently, the
liability is accreted over the life of the put option to its con-
tractual amount recognizing interest expense in accordance
with the effective interest method. Under US GAAP, physi-
cally settled written put options on UBS shares are account-
ed for as derivative instruments. All other outstanding de-
rivative contracts, except written put options with the UBS
share as underlying, are treated as derivative instruments un-
der both sets of accounting standards.
l. Investment properties
In the IFRS Financial Statements, investment properties are
accounted for under the fair value method. Under this meth-
od, changes in fair value are recognized in the income state-
ment, and depreciation is no longer recognized. Under US
GAAP, investment properties continue to be carried at cost
less accumulated depreciation.
192
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 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 stipulates that the general partner in a limited part-
nership is presumed to control that limited partnership un-
less the limited partners have either substantive kick-out
rights or substantive participating rights. EITF 04-5 is effec-
tive after 29 June 2005 for new limited partnership agree-
ments and for pre-existing limited partnership agreements
that are modified; otherwise, the guidance was effective as
of 1 January 2006 for existing unmodified partnerships.
Adoption of EITF 04-05 did not have a material impact on
UBS’s Financial Statements.
As part of its convergence efforts with the IASB, 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) in May 2005. State-
ment 154 changes the requirements for the accounting and
reporting of a change in accounting principle and 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’ finan-
cial statements of a voluntary change in accounting principle
unless it is impracticable, whereas Opinion 20 previously re-
quired that the cumulative effect of most voluntary changes
in accounting principle be recognized in the net income of
the period of the change. Statement 154 was effective for
accounting changes and corrections of errors made in fiscal
years beginning after 15 December 2005. Adoption of State-
ment 154 did not have a material impact on UBS’s Financial
Statements.
In April 2006, the FASB issued FASB Staff Position FIN
46(R)-6, Determining the Variability to Be Considered in Ap-
plying FASB Interpretation No. 46(R) (FSP FIN 46(R)-6). FSP
FIN 46(R)-6 addresses the application of FIN 46(R), Consoli-
dation of Variable Interest Entities, in determining whether
certain contracts or arrangements with a variable interest
entity (VIE) are variable interests by requiring companies to
base its evaluation on an analysis of the VIE’s purpose and
design, rather than on its legal form or accounting classifica-
tion. FSP FIN 46(R)-6 was effective for all newly created VIEs
or for those that must be re-analyzed under FIN 46(R) as of
1 July 2006. Adoption of FSP FIN 46(R)-6 did not have a ma-
terial impact on UBS’s Financial Statements.
In September 2006, the FASB issued Statement No. 158,
Employers’ Accounting for Defined Benefit Pension and Oth-
er Postretirement Plans (Statement 158). Statement 158 re-
quires: (1) recognition of the over- or under-funded status of
a defined benefit post-retirement plan as an asset or liability
in the balance sheet; (2) recognition within shareholders eq-
uity (net of tax) of gains or losses and prior service costs or
credits arising during the period that are not recognized as
components of the period's net periodic benefit cost; and (3)
measurement of the defined benefit plan assets and obliga-
tions as of the date of the employer’s fiscal year-end balance
sheet. The recognition requirements of Statement 158 (re-
quirements (1) and (2), above) are effective as of the end of
the fiscal year ending after 15 December 2006. See Note
42.5 for the incremental effect of the first time application
of these requirements. The requirement to measure plan as-
sets and benefit obligations as of the date of the employer’s
fiscal year end is effective for fiscal years ending after 15 De-
cember 2008. Adoption of this requirement will not have an
impact on UBS's Financial Statements as plan assets and
benefit obligations are currently measured as of the balance
sheet date.
Recently issued US accounting standards not yet adopted
In February 2006, the FASB issued Statement of Financial Ac-
counting Standard No. 155, Accounting for Certain Hybrid
Instruments, an amendment of FASB Statements No. 133
and 140 (Statement 155). Statement 155 permits UBS to
elect to measure any hybrid financial instrument at fair val-
ue, with changes in fair value recognized in net profit, if the
hybrid instrument contains an embedded derivative that
would otherwise require bifurcation under Statement 133.
The election to measure the hybrid instrument at fair value is
made on an instrument-by-instrument basis and is irrevers-
ible. Statement 155 is effective after the beginning of an
entity’s first fiscal year that begins after 15 September 2006,
with early adoption permitted in certain circumstances. At
adoption of Statement 155, any difference between the to-
tal carrying amount of the individual components of an ex-
isting hybrid instrument and the fair value of the combined
hybrid financial instrument is recognized as a cumulative-ef-
fect adjustment to beginning retained earnings. UBS did not
elect to early adopt Statement 155 and, therefore, will adopt
the new standard as of 1 January 2007. On a US GAAP basis,
it is anticipated that the cumulative-effect adjustment to be-
ginning retained earnings resulting from the adoption of
Statement 155 will be a decrease to retained earnings of ap-
proximately CHF 414 million (before tax). Financial assets
designated at fair value and Financial liabilities designated at
fair value are estimated to be approximately CHF 4,125 mil-
lion and CHF 151,440 million on a US GAAP basis on 1 Janu-
ary 2007.
193
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 (continued)
In March 2006, the FASB issued Statement of Financial
Accounting Standard No. 156, Accounting for Servicing of
Financial Assets, (Statement 156). Statement 156 addresses
the accounting for recognized servicing assets and servicing
liabilities related to certain transfers of the servicer’s financial
assets and for acquisitions or assumptions of obligations to
service financial assets that do not relate to the financial as-
sets of the servicer and its related parties. Statement 156
requires that all recognized servicing assets and servicing li-
abilities are initially measured at fair value and subsequently
measured at either fair value or by applying an amortization
method for each class of recognized servicing assets and ser-
vicing liabilities. Statement 156 is effective in fiscal years be-
ginning after 15 September 2006. The adoption of SFAS 156
is not expected to have a material impact on UBS's Financial
Statements.
In June 2006, the FASB issued FIN 48, Accounting for Un-
certainty in Income Taxes – an interpretation of SFAS 109,
which prescribes a recognition threshold and measurement
attribute for financial statement recognition and measure-
ment of a tax position. FIN 48 is effective for years com-
mencing after 15 December 2006. UBS is continuing to
evaluate the impact of FIN 48 on its Financial Statements.
However, UBS does not expect FIN 48 to have a material ef-
fect on its financial position or results of operations.
On 15 September 2006, the FASB issued Statement of
Financial Accounting Standards No. 157, Fair Value Mea-
surements (Statement 157). Statement 157 defines fair val-
ue, establishes a framework for measuring fair value, and
expands the required disclosures about an entity's fair value
measurements. Additionally, Statement 157 eliminates the
requirement to defer calculated profit or loss on transaction
values that include unobservable inputs (“Day 1 profit and
loss”) and eliminates the use of block discounts for securities
traded in an active market. Statement 157 is effective for fi-
nancial statements issued for fiscal years beginning after 15
November 2007. The provisions of Statement 157 should be
applied prospectively upon initial adoption, except for the
provisions that eliminate prior measurement guidance re-
garding block discounts and Day 1 profit or loss. Those
changes should be applied retrospectively as an adjustment
to the opening balance of retained earnings in the period of
adoption. UBS is still assessing the impact Statement 157 will
have on its Financial Statements.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Liabilities (Statement 159). This new
standard permits entities to irrevocably choose to measure
many financial instruments and certain other items at fair
value. Unrealized gains and losses on items for which the fair
value option has been elected are recognized in net profit at
each subsequent reporting date. The election in Statement
159 is similar, but not identical, to the fair value option in IAS
39. The fair value option in IAS 39 is subject to certain quali-
fying criteria not included in this standard, and it applies to a
slightly different set of instruments. Statement 159 is effec-
tive for fiscal years beginning after 15 November 2007. Early
adoption is permitted only if the provisions of Statement 157
are also applied. UBS is currently assessing the impact
Statement 159 will have on its Financial Statements.
194
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
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
Hedge accounting
Financial investments available-for-sale
Private equity investments
Pension and other post-retirement benefit plans
Equity participation plans
Variable interest entities (VIEs), limited partnerships and
entities issuing preferred securities
Financial assets and liabilities designated at fair value through profit or loss
Physically settled written puts on UBS shares
Investment properties
Other adjustments
Tax adjustments
Total adjustments
Amounts determined in accordance with US GAAP
Equity attributable to
UBS shareholders
(IFRS) / Shareholders’ equity
(US GAAP)
as of
Net profit attributable to
UBS shareholders (IFRS) /
Net profit (US GAAP)
for the year ended
31.12.06
31.12.05
31.12.06
31.12.05
31.12.04
49,686
44,015
12,257
14,029
8,016
Note 41.1
Reference
a
b
c
d
e
f
g
h
i
j
k
l
15,091
2,366
85
(5)
(1,670)
337
(1,452)
815
(1)
(994)
184
(12)
317
(224)
15,116
2,373
(86)
(40)
(384)
709
229
658
(98)
(197)
131
(8)
74
(876)
14,837
64,523
17,601
61,616
(25)
3
(6)
372
171
(278)
165
(475)
(2)
(682)
6
(4)
130
(146)
(771)
11,486
(36)
0
35
(455)
0
(486)
(18)
358
0
(436)
8
0
(118)
(529)
(1,677)
12,352
(44)
778
3
(217)
0
217
(110)
62
18
100
9
14
(50)
22
802
8,818
195
Financial Statements
Notes to the Financial Statements
Note 41.4 Earnings per share
Under both IFRS and US GAAP, basic earnings per share
(“EPS”) is computed by dividing income available to com-
mon shareholders by the weighted-average number of com-
mon shares outstanding. Diluted EPS includes the determi-
nants 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 2006, 31 December 2005 and 31 De-
cember 2004 are presented in the following table.
For the year ended
US GAAP
IFRS
US GAAP
IFRS
US GAAP
31.12.06
31.12.05
31.12.04
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
11,486
11,082
404
11,478
11,074
404
12,257
11,491
766
12,249
11,483
766
12,352
8,376
3,976
12,330
8,377
3,953
14,029
9,776
4,253
14,007
9,777
4,230
8,818
8,398
420
8,813
8,401
412
IFRS
8,016
7,547
469
8,011
7,550
461
Weighted average shares outstanding
1,975,933,228 1,976,405,800
2,013,859,982
2,013,987,754
2,059,791,220
2,059,836,926
Diluted weighted average shares outstanding
2,058,834,812 2,058,834,812
2,097,191,540
2,097,191,540
2,163,922,720
2,163,922,720
Basic earnings per share (CHF)
from continuing operations
from discontinued operations
Diluted earnings per share (CHF)
from continuing operations
from discontinued operations
5.81
5.61
0.20
5.57
5.38
0.19
6.20
5.81
0.39
5.95
5.58
0.37
6.13
4.16
1.97
5.88
3.99
1.89
6.97
4.85
2.12
6.68
4.66
2.02
4.28
4.08
0.20
4.07
3.88
0.19
3.89
3.66
0.23
3.70
3.49
0.21
196
Note 41.5 Presentation Differences between IFRS and US GAAP
In addition to the differences in valuation and income recog-
nition, other differences exist between IFRS and US GAAP
which generally have an impact solely on balance sheet and/
or Income statement presentation, although in certain cases,
these presentation differences may result in an immaterial
impact on US GAAP Shareholders’ equity and Net profit. In
such cases, these differences are aggregated in the Other
differences line in the table in Note 41.3. The following is a
summary of these differences.
1. Settlement date vs. trade date accounting
UBS’s transactions from securities activities are recorded un-
der 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, presented as re-
placement value on balance sheet and any unrealized profits
and losses are recognized in Net profit.
Under US GAAP, trade date accounting is required for
spot purchases and spot sales of securities. Therefore, all
such transactions with a trade date on or before the balance
sheet date and with a settlement date after the balance
sheet date have been recorded at trade date for US GAAP.
This has resulted in receivables and payables to broker-deal-
ers and clearing organizations recorded in Other assets and
Other liabilities in the US GAAP balance sheet.
2. Securities received as collateral in a securities-for-
securities lending transaction
When UBS acts as the lender in a securities lending agree-
ment and receives securities as collateral that can be pledged
or sold, it recognizes the securities received and a correspond-
ing obligation to return them. These securities are reflected
on the US GAAP balance sheet in the asset line Securities re-
ceived as collateral. The offsetting liability is presented in the
line Obligation to return securities received as collateral.
3. Reverse repurchase, repurchase, securities borrowing and
securities lending transactions
UBS enters into certain types of reverse repurchase, repur-
chase, securities borrowing and securities lending transac-
tions 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 as-
sets or derecognition of the financial assets lent. The cash
collateral received or delivered in such transactions is reflect-
ed in the balance sheet with a corresponding receivable or
obligation to return it. Under US GAAP, however, certain
transactions are considered purchase and sale transactions
due to the fact that the contracts do not meet specific re-
quirements, including those related to collateral or margin-
ing or the repurchase of the transferred securities is not be-
fore maturity of these securities. Due to the different
treatment of these transactions under IFRS and US GAAP,
interest income and expense recorded under IFRS is reclassi-
fied to Net trading income for US GAAP. Additionally under
US GAAP, the securities received are recognized on the bal-
ance sheet as a spot purchase (Trading portfolio assets or
Trading portfolio assets pledged as collateral) with a corre-
sponding forward sale transaction (Replacement values) and
a receivable (Cash collateral on securities borrowed) is reclas-
sified, as applicable. The securities delivered are recorded as
a spot sale, which means that the securities are derecog-
nized if they are on-balance sheet securities or recorded as a
short sale if the delivered securities are off-balance sheet se-
curities (Trading portfolio liabilities). Additionally, a corre-
sponding forward repurchase transaction (Replacement val-
ues) and a liability (Cash collateral on securities lent) is
reclassified, as applicable.
Securities borrowing transactions with the clients' pool
are generally done without providing collateral. UBS pays a
fee to the client in such transactions. Under IFRS, the bor-
rowed securities are not recognized on balance sheet but
disclosed in a separate line in Note 24 Pledgeable Off-Bal-
ance Sheet Securities. Under US GAAP, the borrowed securi-
ties are recognized in Trading portfolio assets and Trading
portfolio assets pledged as collateral, as applicable, and the
obligation to return the securities, which represents a hybrid
instrument, is included in Negative replacement values. Ef-
fects on net profit which arise from derecognition/ recogni-
tion of financial assets and related recognition of forward
transactions are reflected in the Net trading income.
4. Recognition / derecognition of financial assets
The guidance governing recognition and derecognition of a
financial asset requires a multi-step decision process to de-
termine whether recognition or derecognition of transferred
financial assets is appropriate. UBS derecognizes financial as-
sets for which it transfers the contractual rights to the cash
flows and no longer retains any risk or reward coming from
them nor maintains control over the financial assets. As a
result of these requirements, certain transactions are ac-
counted for as secured financing transactions instead of pur-
chases or sales of trading portfolio assets with an accompa-
nying swap derivative. Under US GAAP, these transactions
typically continue to be shown as purchases and sales of
trading portfolio assets and were reclassified accordingly. Ef-
fects on net profit which arise from derecognition / recogni-
tion of financial assets and related recognition of forward
transactions are reflected in Net trading income.
197
Financial Statements
Notes to the Financial Statements
Note 41.6 Consolidated Income Statement
The following is a Consolidated Income Statement of the Group, for the years ended 31 December 2006, 31 December 2005
and 31 December 2004, 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
31.12.06
31.12.05
31.12.04
Reference US GAAP
IFRS
US GAAP
IFRS
US GAAP
IFRS
Operating income
Interest income
Interest expense
Net interest income
Credit loss (expense) / recovery
f
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 / (benefit)
Minority interests (US GAAP)
Net profit/(loss) from continuing operations
Net profit / (loss) from discontinued operations
Net profit (IFRS)
Net profit attributable to minority interests (IFRS)
Cumulative adjustment due to the adoption of SFAS 123
(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, f, i, j, 3, 4
87,380
87,401
a, b, d, f, i, j, k,3, 4
(80,463)
(80,880)
58,791
(49,488)
59,286
(49,758)
6,917
156
7,073
25,881
12,548
1,742
0
47,244
23,771
7,944
1,277
0
143
0
6,521
156
6,677
25,881
13,318
1,596
693
48,165
23,671
8,116
1,263
0
153
295
d, e, f, h, i, j, k,3, 4
c, e, f, i, j, l
f
f, g, h
f, i
a, f, i
b
c, f
f
9,303
375
9,678
21,436
7,012
747
0
9,528
375
9,903
21,436
7,996
1,122
675
38,991
(27,245)
11,746
334
12,080
18,435
4,795
1,158
0
39,228
(27,484)
11,744
241
11,985
18,506
4,902
853
640
38,873
41,132
36,468
36,886
19,542
6,469
1,272
0
119
0
20,148
6,632
1,261
0
131
283
17,970
6,420
1,295
0
103
0
17,891
6,563
1,284
673
170
263
33,135
33,498
27,402
28,455
25,788
26,844
14,109
2,932
14,667
2,786
11,881
869
12,750
(493)
f, i
(95)
11,082
404
c, f, i
h
h
12,677
2,471
10,206
4,484
14,690
(661)
11,471
2,995
(138)
8,338
3,976
38
10,042
2,155
7,887
583
8,470
(454)
10,680
1,966
(322)
8,392
420
6
11,486
12,257
12,352
14,029
8,818
8,016
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.
198
Note 41.7 Condensed Consolidated Balance Sheet
The following is a Condensed Consolidated Balance Sheet of the Group, as of 31 December 2006 and 31 December
2005, 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 available-for-sale
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)
Total liabilities, minority interests and
shareholders’ equity
Reference
US GAAP
IFRS
US GAAP
IFRS
31.12.06
31.12.05
f, i, j,1,3, 4
3
j, 3 44 44
f, h, i, j,1, 4
3, 4
i, j,1, 3, 4
j
a, f, i, j,1, 4
e, f, i, j,1, 4
2
f, j
c, e, f
a, c, f, l
a, b, c, f
b, c, f
f
c, d, e, f, g, h, i, j, k, l,1
f, i, j,1, 4
3
i, j, 3
i, j,1, 3, 4
2
i, j, k,1, 3, 4
i, j,1
f, i, j,1, 4
f, i, j
a, c, f, i, j, 1
b, c, d, f, g, h, i, j, k, l,1
c, f, i
3,495
51,416
351,461
361,571
627,160
401,176
332,128
316,141
4,535
49,088
10,335
1,823
7,207
28,530
2,340
2,195
84,027
3,495
50,426
351,590
405,834
627,036
251,478
328,445
5,930
312,521
8,937
10,361
1,523
6,913
12,464
2,309
17,249
5,359
33,427
288,304
359,883
505,717
272,494
337,105
277,471
3,407
67,430
8,853
2,554
9,282
28,104
1,665
2,210
75,992
2,634,628
2,396,511
2,279,257
206,985
60,878
520,351
236,929
49,088
439,495
597,139
22,131
306,994
129,239
203,689
63,088
545,480
204,773
332,533
145,687
570,565
21,527
190,143
63,251
2,569,229
2,340,736
876
64,523
6,089
49,686
55,775
127,252
59,897
464,957
201,212
67,430
432,290
481,784
19,106
240,212
121,493
2,215,633
2,008
61,616
5,359
33,644
288,435
404,432
499,297
154,759
333,782
1,153
279,910
6,551
8,918
2,956
9,423
11,313
2,173
16,243
2,058,348
124,328
59,938
478,508
188,631
337,663
117,401
466,907
18,791
160,710
53,837
2,006,714
7,619
44,015
51,634
2,634,628
2,396,511
2,279,257
2,058,348
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. Certain prior year US GAAP amounts have been reclas-
sified to conform to the current year’s presentation.
199
Financial Statements
Notes to the Financial Statements
Note 41.8 Comprehensive Income
Comprehensive income under US GAAP is defined as the
change in shareholders’ equity excluding transactions with
shareholders. Comprehensive income has two major com-
ponents: Net profit, as reported in the income statement,
and Other comprehensive income (OCI). OCI includes for-
eign currency translation adjustments and changes in unre-
alized gains / losses on available-for-sale securities. In addi-
tion, up to 31 December 2006, OCI included adjustments
to the additional minimum pension liability, which as of
31 December 2006 has been eliminated to reflect that a
minimum pension liability is no longer recognized under US
GAAP. However, as a result of the adoption of SFAS 158 as
discussed in Note 41.1.g, OCI now includes changes in
gains or losses and prior service costs or credits relating to
post-retirement benefit plans that have not been recog-
nized as components of net periodic pension costs. The
components and Accumulated other comprehensive in-
come amounts on a US GAAP basis for the years ended 31
December 2006, 31 December 2005 and 31 December
2004 are as follows:
CHF million
Balance at 1 January 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 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
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
Pension and other post-retirement benefit plans –
initial adoption of SFAS 158 1
Balance at 31 December 2006
Unrealized
gains /
(losses) on
available-
for-sale
investments
175
Pension and
Other Post-
Retirement
Benefit Plans
(306)
Deferred
income taxes
211
Accumulated
other compre-
hensive
income /
(loss)
(1,735)
Comprehen-
sive income /
(loss)
8,818
Foreign
currency
translation
(1,815)
(1,062)
(1,062)
32
10
(5)
37
(819)
(819)
(2,877)
212
(1,125)
236
(15)
(2)
1
21
241
452
(826)
(826)
17
8
(4)
(798)
(1,603)
(3,338)
17
8
(4)
(798)
(1,603)
7,215
12,352
2,380
(292)
2,088
2,088
2,380
(497)
(1,269)
130
19
(19)
130
342
1,506
5
(460)
(1,269)
1,051
(1,766)
1,393
(127)
(127)
(1,252)
(38)
(38)
(1,815)
(3,105)
(6)
(3)
3
18
(280)
172
83
(323)
(1)
97
4
(140)
475
507
124
16
(16)
(109)
2,103
(1,235)
124
16
(16)
(109)
2,103
14,455
11,486
(1,186)
(1,186)
1,183
4
(363)
(34)
(396)
11,090
1,183
4
(363)
(34)
(396)
(1,340)
(2,971)
1 Represents the incremental effect of transferring amounts not recognized in the income statement to Accumulated other comprehensive income.
200
Note 42 Additional Disclosures Required under US GAAP and SEC Rules
In addition to the differences in valuation, income recogni-
tion and presentation, disclosure differences exist between
IFRS and US GAAP. The following are additional disclosures
that relate to the basic Financial Statements required under
US GAAP. Unless otherwise indicated in the note, all amounts
are shown on an IFRS basis.
Note 42.1 Variable Interest Entities
Introduction
Since 1 January 2004, UBS has applied FASB Interpretation
No. 46, Consolidation of Variable Interest Entities (revised
December 2003), an interpretation of Accounting Research
Bulletin No. 51 (FIN 46-R). Until 31 December 2003, the pre-
decessor standard, FIN 46, had application to UBS only with
respect to transitional disclosure requirements, and consoli-
dation requirements for certain variable interest entities
(VIEs) created after 31 January 2003. All amounts in Note
42.1 are reported on a US GAAP basis.
Identification of variable interest entities (VIEs) and mea-
surement of variable interests
Qualifying special purpose entities (QSPEs) per FASB State-
ment No. 140 Accounting for Transfers and Servicing of Fi-
nancial Assets and Extinguishments of Liabilities are exclud-
ed 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 interests do not exist, or differ sig-
nificantly from economic interests, the entity is considered a
VIE under FIN 46-R, and control is assessed based on its vari-
able interests. Specifically, VIEs are legal entities in which no
equity investors exist, or the equity investors:
– do not have sufficient equity at risk for the entity to fi-
nance its activities without additional subordinated finan-
cial support from other parties; or
and provide certain disclosures. The holder of a significant
variable interest in a VIE is required to make disclosures only.
UBS treats variable interests of more than 20% of a VIE’s
expected losses, expected residual returns, or both, as sig-
nificant.
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,
based on variability in the fair value of the net assets in the
VIE, exclusive of variable interests.
Under this approach, 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
creator (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,
equity, 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 models are based on internally approved valuation
models and in some cases require the use of Monte Carlo
simulation techniques.
They are applied when UBS first becomes involved with a
– do not have the characteristics of a controlling financial
VIE, or after a major restructuring.
interest; 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.
VIEs are evaluated for consolidation based on all contrac-
tual, ownership, or other interests that expose their holders
to the risks and rewards of the entity. These interests are
termed variable interests and include only investments or
contractual interests whose value changes with changes in
the fair value of a VIE’s net assets, exclusive of variable inter-
ests. Interests of related parties (including management, em-
ployees, affiliates and agents) are included in the evaluation
as if owned directly by the enterprise.
The holder of a variable interest that receives a majority of
a VIE’s expected losses, expected residual returns, or both, is
the VIE's primary beneficiary and must consolidate the VIE
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 guaran-
tees 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 expos-
ing 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 in-
volves the hedging of risk exposures for VIEs, on the same
201
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)
basis as for non-VIE counterparties. See Note 29 for a further
discussion of UBS’s risk mitigation strategies.
purposes, have combined assets of approximately CHF
3.4 billion and are included in the table below.
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
result 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
beneficiary. Significant groups of these include CHF 2.5 bil-
lion of investment fund products, and CHF 1.1 billion of se-
curitization VIEs, which includes some third-party VIEs men-
tioned below.
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 this population is approximately CHF 7.5 billion, mostly
comprising investment funds managed by UBS, other invest-
ment fund products, employee equity compensation trusts
mentioned previously, and private equity investments.
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.
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
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
Passive intermediary to a derivative transaction
Trust vehicles for awards to UBS employees
Private equity investments
Other miscellaneous structures
Total 31.12.06
1,085
3,898
1,027
1,260
1,829
397
1,600
11,096
Consolidated assets that are collateral
for the VIEs’ obligations
Classification
Loan receivables, government debt securities, corporate debt securities
Investment funds
Debt, Equity
Loan receivables, corporate debt securities
UBS shares and derivatives thereon
Private equity investments
Equity, derivatives, investment funds
Amount
1,085
3,898
984
1,260
1,829
272
615
9,943
Entities which are de-consolidated for US GAAP purposes
In certain cases, an entity consolidated under IFRS is not con-
solidated under FIN 46-R. UBS consolidates under IFRS sev-
eral entities that have issued preferred securities amounting
to CHF 4.5 billion, which are de-consolidated for US GAAP
purposes. Under IFRS the preferred securities are equity in-
struments held by third parties and are treated as minority
interests, with dividends paid also reported in minority inter-
ests; the UBS issued debt held by these entities and the re-
spective 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.
202
Note 42 Additional Disclosures Required under US GAAP and SEC Rules (continued)
Note 42.1 Variable Interest Entities (continued)
VIEs in which UBS holds a significant variable interest
VIEs in which UBS holds a significant variable interest but
does not consolidate the VIE are mostly used in securitiza-
tions, or as investment fund products, including funds man-
aged by UBS.
UBS has reviewed the population of potential third-party
VIEs it is involved with. Those identified in which UBS holds
a significant variable interest have combined assets of ap-
proximately CHF 4.6 billion, for which UBS has a maximum
exposure to loss of approximately CHF 2.4 billion. Disclo-
sures 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 31.12.06
Total assets
Nature of involvement
61
5,707
23,870
1,200
1,181
32,019
UBS holds beneficial interests
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
Maximum exposure
to loss
0
1,975
17,772
894
301
20,942
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 81
third party VIEs that in some cases could result in UBS being
considered the primary beneficiary, but the information nec-
essary to make this determination, or perform the account-
ing required to consolidate the VIE was held by third parties,
and was not available to UBS. Additional disclosures for
these VIEs are provided 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
Investment fund products
Total 31.12.06
Total assets
Nature of involvement
5,204
5,204
UBS acts as swap counterparty
Net income
from VIE in
current period
441
441
Maximum
exposure
to loss
4,483
4,483
203
Financial Statements
Notes to the Financial Statements
Note 42 Additional Disclosures Required under US GAAP and SEC Rules (continued)
Note 42.2 Securitizations
UBS records a securitization of financial assets when the
transfer of financial assets to the special purpose entity
meets the accounting criteria to be accounted for as a sale.
These criteria include: (1) the assets are legally isolated from
UBS’s creditors; (2) the entity can pledge or exchange the fi-
nancial assets, or if the entity is a qualifying special purpose
entity, its investors can pledge or exchange their beneficial
interests; and (3) UBS does not maintain effective control
over the transferred assets through an agreement to repur-
chase the assets before their maturity or have the ability to
unilaterally cause the holder to return the assets.
Proceeds received at the time of securitization were as follows:
CHF billion
Residential mortgage securitizations
Commercial mortgage securitizations
Other financial asset securitizations
During the years ended 31 December 2006, 2005 and
2004, UBS securitized residential mortgage loans and securi-
ties, 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. All amounts are shown
on a US GAAP basis. Prior period amounts have been ad-
justed to conform to the current year’s presentation.
Proceeds Received
31.12.06
31.12.05
31.12.04
38
6
18
58
5
9
91
3
9
Related pre-tax gains (losses) recognized, including unrealized gains (losses) on retained interests, at the time of securitiza-
tion were as follows:
CHF million
Residential mortgage securitizations
Commercial mortgage securitizations
Other financial asset securitizations
Pre-tax gains / (losses) recognized
31.12.06
31.12.05
31.12.04
128
143
(49)
102
125
17
197
141
21
At 31 December 2006 and 2005, UBS retained CHF 3.5 bil-
lion and CHF 1.7 billion, respectively, in agency residential
mortgage securities, backed by the Government National
Mortgage Association (GNMA), the Federal National Mort-
gage Association (FNMA) and the Federal Home Loan Mort-
gage Corporation (FHLMC). The retained interests in invest-
ment-grade non-residential and other asset-backed securities
amounted to CHF 1,618 million at 31 December 2006 and
CHF 713 million at 31 December 2005. The fair value of in-
vestment-grade retained interests is generally determined
using observable market prices. Retained interests in non-
investment-grade securities were not material at 31 Decem-
ber 2006 and 2005.
204
Note 42 Additional Disclosures Required under US GAAP and SEC Rules (continued)
Note 42.3 Industrial Holdings’ Income Statement
After 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 held a majority ownership interest in
the company, and as a result, consolidated Motor-Columbus
in its Financial Statements since 1 July 2004. The investment
in Motor-Columbus is presented as a discontinued operation
in the income statements for the years ended 31 December
2006, 31 December 2005 and 31 December 2004 due to its
sale on 23 March 2006 (refer to Note 38 Discontinued Op-
erations). In addition, due to the adoption of IAS 27 Con-
solidated and Separate Financial Statements which is further
described in Note 1b), 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.
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
Tax expense
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 receivable trade, gross
Allowance for doubtful receivables
Accounts receivables trade, net
As of or for the year ended
31.12.06
31.12.05
31.12.04
693
469
52
135
0
5
55
716
(23)
0
(44)
334
290
267
35
11
243
865
1,108
104
1,004
103
(7)
96
675
457
61
124
0
4
105
751
(76)
5
(54)
585
536
460
175
25
310
409
719
207
512
2,068
(62)
2,006
640
425
64
111
27
2
66
695
(55)
37
(101)
334
270
215
51
5
169
284
453
93
360
205
Financial Statements
Notes to the Financial Statements
Note 42 Additional Disclosures Required under US GAAP and SEC Rules (continued)
Note 42.4 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 con-
tracts 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.
Indemnifications 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 gen-
erally 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 of 31 December 2006,
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
diligence UBS performs to ensure that the assets comply
with the requirements set forth in the representations and
warranties. UBS receives no compensation for representa-
tions and warranties, and it is not possible to determine
their fair value because they rarely, if ever, result in a pay-
ment. Historically, losses incurred on such repurchases and /
or indemnifications have been insignificant. Management
expects the risk of material loss to be remote. No liabilities
related to such representations, warranties, and indemnifi-
cations are included in the balance sheet at 31 December
2006 and 2005.
206
Note 42.5 Pension and Other Post-Retirement Benefit Plans
All amounts in Note 42.5 are on a US GAAP basis. The additional minimum liability required amounts to CHF 1,290 million,
CHF 1,252 million and CHF 1,125 million as of 31 December 2006, 2005 and 2004, respectively.
Incremental Effect of First Time Application of SFAS 158
The incremental effects on individual line items in the 31 December 2006 Financial Statements due to the adoption of
SFAS 158 Employers’ Accounting for Defined Benefit Pension and Other Post-Retirement Plans (see Note 41.2 for details) are
as follows:
CHF million
Other assets
Total assets
Other liabilities
Total liabilities
Total shareholder’ equity
Amounts Included in Accumulated Other Comprehensive Income (AOCI)
Before
application of
SFAS 158
31.12.06
Adjustment
After
application of
SFAS 158
86,008
86,008
129,880
129,880
65,863
(1,981)
(1,981)
(641)
(641)
(1,340)
84,027
84,027
129,239
129,239
64,523
CHF million
Net gains or losses
Net prior service costs or credits
Transition assets
Ending balance in AOCI
31.12.06
Swiss plans
Foreign plans
Post-retirement
medical and
life plans
(564)
(1,153)
0
(1,717)
(1,386)
41
0
(1,345)
73
(7)
0
66
(25)
(15)
(3)
(43)
0
1
0
1
Amounts in AOCI expected to be recognized as components of net periodic benefit cost in 2007
Net gains or losses
Net prior service costs or credits
Transition assets
Total
0
347
0
347
No plan assets are expected to be returned to the Group during 2007.
For more details on the pension and other post-retirement benefit plans on an IFRS basis, see Note 31.
Total
(1,975)
(1,127)
(3)
(3,105)
73
341
0
414
207
Financial Statements
Notes to the Financial Statements
Note 42 Additional Disclosures Required under US GAAP and SEC Rules (continued)
Note 42.6 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
Securities”) of PaineWebber. Prior to the acquisition,
PaineWebber was an SEC Registrant. Upon the acquisition,
PaineWebber was merged into UBS Americas Inc., a wholly
owned subsidiary 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 pro-
ceeding against UBS Americas Inc. UBS’s obligations under
the subordinated note guarantee are subordinated to the
prior payment in full of the deposit liabilities of UBS and all
other liabilities of UBS. At 31 December 2006, the amount
of senior liabilities of UBS to which the holders of the subor-
dinated debt securities would be subordinated is approxi-
mately CHF 2,324 billion.
The information presented in this note is prepared in ac-
cordance with IFRS and should be read in conjunction with
the Consolidated Financial Statements of UBS of which this
information is a part. At the bottom of each column, Net prof-
it and Shareholders’ equity have 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.
Supplemental Guarantor Consolidating Income Statement
CHF million
For the year ended 31 December 2006
UBS AG 1
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
60,057
(56,020)
4,037
167
4,204
11,646
10,306
3,760
(450)
0
29,466
12,208
2,805
979
14
0
16,006
13,460
1,715
11,745
512
12,257
0
12,257
8,748
42,667
(41,049)
1,618
(6)
1,612
8,590
1,634
0
1,637
0
13,473
8,040
3,362
133
83
0
11,618
1,855
585
1,270
0
1,270
527
743
259
39,269
(38,403)
866
(5)
861
5,645
1,378
0
409
693
8,986
3,423
1,949
151
56
295
5,874
3,112
486
2,626
357
2,983
(34)
3,017
2,479
(54,592)
54,592
87,401
(80,880)
0
0
0
0
0
(3,760)
0
0
(3,760)
0
0
0
0
0
0
(3,760)
0
(3,760)
0
(3,760)
0
(3,760)
0
6,521
156
6,677
25,881
13,318
0
1,596
693
48,165
23,671
8,116
1,263
153
295
33,498
14,667
2,786
11,881
869
12,750
493
12,257
11,486
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. 2 Refer to Note
41 for a description of the differences between IFRS and US GAAP.
208
Note 42 Additional Disclosures Required under US GAAP and SEC Rules (continued)
Note 42.6 Supplemental Guarantor Information (continued)
Supplemental Guarantor Consolidating Balance Sheet
UBS AG 1
Parent Bank 1
UBS
Americas Inc.
Subsidiaries
Consolidating
entries
UBS Group
CHF million
As of 31 December 2006
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 available-for-sale
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
Minority interests
Total equity
Total liabilities and equity
Total shareholders’ equity – US GAAP 2
2,660
121,404
99,829
270,814
294,590
162,722
318,936
2,902
414,031
5,843
6,598
34,887
5,432
258
10,709
1,751,615
228,992
106,019
167,166
107,747
326,216
121,074
504,502
12,336
110,020
16,488
1,700,560
51,055
0
51,055
1,751,615
29,738
78
16,884
303,607
167,222
188,710
51,834
13,168
4,147
40,279
862
4,029
179
637
11,128
5,524
808,288
114,782
57,937
419,427
71,165
13,629
49
80,936
8,406
29,149
4,284
757
182,850
156,083
300,862
143,736
36,922
173,243
7,146
38,644
2,232
4,809
237
844
3,387
5,587
0
(270,712)
(207,929)
(333,064)
0
0
(176,902)
(8,265)
(180,433)
0
(5,075)
(33,780)
0
0
(4,571)
3,495
50,426
351,590
405,834
627,036
251,478
328,445
5,930
312,521
8,937
10,361
1,523
6,913
14,773
17,249
1,057,339
(1,220,731)
2,396,511
130,627
107,061
291,951
25,861
169,590
32,829
165,560
5,860
50,974
47,050
(270,712)
(207,929)
(333,064)
0
(176,902)
(8,265)
(180,433)
(5,075)
0
(4,571)
(1,186,951)
(33,780)
0
(33,780)
(1,220,731)
0
203,689
63,088
545,480
204,773
332,533
145,687
570,565
21,527
190,143
63,251
2,340,736
49,686
6,089
55,775
2,396,511
64,523
799,764
1,027,363
5,539
2,985
8,524
808,288
7,287
26,872
3,104
29,976
1,057,339
27,498
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. 2 Refer to
Note 41 for a description of the differences between IFRS and US GAAP.
209
Financial Statements
Notes to the Financial Statements
Note 42 Additional Disclosures Required under US GAAP and SEC Rules (continued)
Note 42.6 Supplemental Guarantor Information (continued)
Note 42.6 Supplemental Guarantor Consolidating Cash Flow Statement
CHF million
For the year ended 31 December 2006
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 available-for-sale
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
Capital repayment by par value reduction
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 1
Parent Bank 1
(1,705)
UBS
Americas Inc.
Subsidiaries
UBS Group
(14,810)
11,805
(4,710)
2,856
1,154
(1,292)
298
90
3,106
17,526
(3,624)
1
(631)
(3,214)
79,358
(48,959)
0
0
(8,246)
32,211
388
34,000
68,548
102,548
2,660
73,431
26,457
102,548
0
0
(255)
47
433
225
0
0
(246)
154
1,200
1,108
1,039
(1,644)
0
0
0
0
10,881
(447)
85
2,441
3,055
17,054
(1,871)
598
13,531
14,129
78
11,488
2,563
14,129
0
0
0
0
7,436
(10,545)
1,246
(3,513)
5,191
(1,829)
(634)
10,450
8,963
19,413
757
2,225
16,431
19,413
2,856
1,154
(1,793)
499
1,723
4,439
16,921
(3,624)
1
(631)
(3,214)
97,675
(59,951)
1,331
(1,072)
0
47,436
(2,117)
45,048
91,042
136,090
3,495
87,144
45,451
136,090
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. 2 Money
market paper is included in the Balance sheet under Trading portfolio assets and Financial investments available-for-sale. CHF 7,183 million was pledged at 31 December 2006.
210
Note 42 Additional Disclosures Required under US GAAP and SEC Rules (continued)
Note 42.6 Supplemental Guarantor Information (continued)
42.6 Supplemental Guarantor Consolidating Income Statement
CHF million
For the year ended 31 December 2005
UBS AG
Parent Bank 1
UBS
Americas Inc.
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
27,782
(24,803)
2,979
(3)
2,976
7,420
(123)
0
476
0
25,340
10,749
9,962
2,330
988
24
0
13,304
12,036
1,712
10,324
3,705
14,029
0
14,029
14,490
6,587
2,667
140
70
0
9,464
1,285
1,079
206
0
206
122
84
(891)
Subsidiaries
Consolidating
entries
UBS Group
20,729
(20,067)
(29,004)
29,004
59,286
(49,758)
662
8
670
4,346
666
0
(1,989)
675
4,368
3,599
1,635
133
37
283
5,687
(1,319)
(320)
(999)
779
(220)
539
(759)
(1,247)
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
1,122
675
41,132
20,148
6,632
1,261
131
283
28,455
12,677
2,471
10,206
4,484
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. 2 Refer to
Note 41 for a description of the differences between IFRS and US GAAP.
211
Financial Statements
Notes to the Financial Statements
Note 42 Additional Disclosures Required under US GAAP and SEC Rules (continued)
Note 42.6 Supplemental Guarantor Information (continued)
Supplemental Guarantor Consolidating Balance Sheet
CHF million
As of 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 available-for-sale
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
Minority interests
Total equity
Total liabilities and equity
Total shareholders’ equity – US GAAP 2
UBS AG 1
Parent Bank 1
UBS
Americas Inc.
Subsidiaries
Consolidating
entries
UBS Group
2,712
127,321
98,105
240,762
299,750
79,333
330,894
2,186
299,518
3,198
5,720
31,250
5,462
641
7,509
1,534,361
181,592
85,369
132,073
113,171
337,172
93,207
434,675
10,439
87,267
10,409
1,485,374
48,987
0
48,987
1,534,361
33,028
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
8,415
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
288,435
404,432
499,297
154,759
333,782
1,153
279,910
6,551
8,918
2,956
9,423
13,486
16,243
838,338
(1,029,672)
2,058,348
81,262
110,202
268,262
6,000
155,499
24,194
64,485
5,672
53,947
42,326
811,849
18,984
7,505
26,489
838,338
20,173
(265,360)
(186,028)
(282,759)
0
(162,282)
0
(95,496)
(4,814)
0
(2,492)
(999,231)
(30,441)
0
(30,441)
(1,029,672)
0
124,328
59,938
478,508
188,631
337,663
117,401
466,907
18,791
160,710
53,837
2,006,714
44,015
7,619
51,634
2,058,348
61,616
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. 2 Refer to Note
41 for a description of the differences between IFRS and US GAAP.
212
Note 42 Additional Disclosures Required under US GAAP and SEC Rules (continued)
Note 42.6 Supplemental Guarantor Information (continued)
Note 42.6 Supplemental Guarantor Consolidating Cash Flow Statement
CHF million
For the year ended 31 December 2005
UBS AG
Parent Bank 1
(29,118)
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 available-for-sale
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
Americas Inc.
(15,771)
Subsidiaries
(18,318)
UBS Group
(63,207)
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
(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
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. 2 Money
market paper is included in the Balance sheet under Trading portfolio assets and Financial investments available-for-sale. CHF 4,744 million was pledged at 31 December 2005.
Guarantee of other securities
UBS AG, acting through a wholly owned finance subsidiaries, issued the following trust preferred securities:
USD billion, unless otherwise indicated
Issuing entity
UBS Preferred Funding Trust I
UBS Preferred Funding Trust II
UBS Preferred Funding Trust IV
UBS Preferred Funding Trust V
Type of security
Trust preferred securities
Trust preferred securities 1
Floating rate noncumulative trust
preferred securities
Trust preferred securities
1 In June 2006, USD 300 million (at 7.25%) of Trust preferred securities also issued in June 2001 were redeemed.
Outstanding as of 31.12.06
Date issued
Interest (%)
Amount
October 2000
June 2001
8.622
7.247
May 2003
May 2006
one-month LIBOR
+ 0.7%
6.243
1.5
0.5
0.3
1.0
UBS AG has fully and unconditionally guaranteed these se-
curities. 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 2006, the amount of senior liabilities of UBS to
which the holders of the subordinated debt securities would
be subordinated is approximately CHF 2,324 billion.
213
Financial Statements
Notes to the Financial Statements
Note 42 Additional Disclosures Required under US GAAP and SEC Rules (continued)
Note 42.7 Pro-Forma Effect of the Fair Value Method of Accounting on US GAAP Net Profit
The following table presents US GAAP Net profit and earn-
ings per share for the year ended 31 December 2004 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 com-
pensation plans using the modified prospective method. See
Note 41.1h) 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
8,818
1,209
(1,717)
8,310
4.28
4.03
4.07
3.84
214
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 Auditors of the Conditional Capital Increase
216
217
218
218
219
220
221
222
222
222
223
223
223
223
224
224
224
224
225
225
225
226
227
UBS AG (Parent Bank)
Table of Contents
Parent Bank Review
Income Statement
Balance Sheet
The Parent Bank UBS AG Net profit decreased by CHF 6,939
million from CHF 13,497 million to CHF 6,558 million. In-
come from investments in associated companies decreased
to CHF 1,910 million from CHF 3,943 million in 2005 mainly
due to lower dividend distributions received. The decrease in
Extraordinary income and increase in Extraordinary expenses
are explained on page 222.
Total assets increased by CHF 226 billion to CHF 1,586 billion
at 31 December 2006. This movement is mainly caused by
increased positions in Money market paper of CHF 26 billi-
on, Due from banks of CHF 8 billion and Due from custo-
mers of CHF 131 billion (of which CHF 88 billion relates to
Dillon Read Capital Management and the remaining amount
mainly relates to current and margin accounts). A consider-
able increase resulted as well in Trading balances in securities
and precious metals of CHF 53 billion (thereof debt instru-
ments CHF 12 billion, equities CHF 33 billion and precious
metals CHF 8 billion). The investments in associated compa-
nies expanded by CHF 5 billion which is mainly due to new
investments or additional financing of subsidiaries abroad of
Banco Pactual S.A., UBS VIII Wilmington (as “funding unit”),
Dillon Read Capital Management and Global Futures and
Options Business of ABN AMRO but also includes the reduc-
tion of investments in associated companies due to the sale
of Motor-Columbus.
217
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
218
For the year ended
31.12.06
31.12.05
% change from
31.12.05
45,978
15,324
32
(57,507)
3,827
199
12,288
840
(1,820)
11,507
9,467
333
1,910
21
2,982
(3,059)
2,187
26,988
12,886
4,736
17,622
9,366
1,352
342
7,672
1,095
239
1,970
6,558
27,320
12,482
36
(33,972)
5,866
244
9,751
773
(1,349)
9,419
7,289
95
3,943
38
2,164
(2,352)
3,888
26,462
10,999
4,113
15,112
11,350
1,265
27
10,058
5,274
0
1,835
13,497
68
23
(11)
69
(35)
(18)
26
9
35
22
30
251
(52)
(45)
38
30
(44)
2
17
15
17
(17)
7
(24)
(79)
7
(51)
Balance She et
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
31.12.06
31.12.05
% change from
31.12.05
2,660
73,430
439,098
316,241
153,114
411,981
2,844
27,076
4,527
6,573
138,222
9,975
2,712
47,840
431,071
185,331
153,387
358,600
4,216
22,016
4,527
5,359
136,503
7,980
1,585,741
1,359,542
5,852
657,919
69,861
556,136
80,883
508,609
2,238
143,779
16,672
149,879
10,471
2,305
211
8,295
9,114
20,730
6,558
6,094
557,355
52,335
482,134
86,997
406,724
1,464
102,386
13,543
160,002
5,648
2,157
871
7,927
10,562
13,295
13,497
1,585,741
1,359,542
21,907
450,093
16,022
404,108
(2)
53
2
71
0
15
(33)
23
0
23
1
25
17
(4)
18
33
15
(7)
25
53
40
23
(6)
85
7
(76)
5
(14)
56
(51)
17
37
11
219
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 2006 as per the Parent Bank’s Income Statement
Appropriation to general statutory reserve
Appropriation to other reserves
Proposed dividends
Total appropriation
Dividend Distribution
6,558
457
1,519
4,582
6,558
The Board of Directors will recommend to the Annual General
Meeting on 18 April 2007 that UBS should pay a dividend of
CHF 2.20 per share of CHF 0.10 par value. If the dividend is
approved, the payment of CHF 2.20 per share, after deduction
of 35% Swiss withholding tax, would be made on 23 April
2007 for shareholders who hold UBS shares on 18 April 2007.
220
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
Note 1, Summary of Significant Accounting Policies. Major
differences 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 ba-
lance sheet as trading balances or as financial investments.
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 treasury shares in the trading portfolio to market value are
included in the income statement. Treasury shares included
in financial investments are carried at the lower of cost and
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 average
rates for the period. Exchange differences arising on the trans-
lation of each of these foreign branches are credited to a pro-
vision account (other liabilities) in case of a gain, while any
losses are debited first 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
impairment, if applicable.
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 extraordina-
ry within the Parent Bank Financial Statements, whereas in
the Group Financial Statements they are considered to be
operating income or expenses and appear within the ap-
propriate income or expense category, or they are included
in net profit from discontinued operations, if required.
Equity participation plans
Under IFRS, UBS recognizes the fair value of stock and stock
option awards determined at the grant date as compensati-
on expense over the required service period. Equity-settled
awards are classified as equity instruments and are generally
not re-measured subsequently. Cash settled awards are clas-
sified as liabilities and re-measured to fair value at each ba-
lance sheet date.
Under Swiss law, employee stock awards are accrued over
the performance period, while employee stock option
awards are recognized in the year of grant. Equity- and cash-
settled awards are classified as liabilities. Stock option awards
are re-measured at their intrinsic value.
Comparability
For 2005, current income taxes of CHF 2,092 million have
been reclassified from Allowances and provisions to Accruals
and deferred income and CHF 2,118 million of intra-group
revenue transfers has been reclassified from Sundry income
from ordinary activities to Sundry ordinary expenses to con-
cur with the current year‘s gross presentation of revenue
transfers within subsidiaries.
UBS holds investments in financial assets in order to
economically hedge fair value movements on certain liabi-
lities. These financial assets are included in Trading balan-
ces in securities and precious metals. Where such invest-
ments were consolidated entities under IFRS, they were
measured at the lower of cost or market until 2005. Net
trading income includes gains of CHF 346 million related
to prior years‘ fair value movements on those invest-
ments.
221
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
31.12.06
31.12.05
31.12.05
5,761
1,629
2,077
9,467
3,068
1,540
2,681
7,289
88
6
(23)
30
Extraordinary income includes a CHF 678 million gain on the
sale of Motor-Columbus compared to a gain on the sale of
Private Banks & GAM of CHF 3,183 million in 2005. In addi-
tion, amounts in 2006 include a write-up of investments in
associated companies of CHF 223 million (2005: CHF 1,263
million), releases of provisions of CHF 167 million (2005:
CHF 452 million). Amounts in 2005 include a gain of CHF
370 million resulting from a merger with a subsidiary.
Extraordinary expenses include CHF 202 million related to
the under-accrual of unused vacation, sabbatical leave and
service anniversary awards in prior years and a CHF 37 milli-
on loss related to the merger with a subsidiary.
222
Additional Balance Sheet Information
Balance at
31.12.05
1,836
3,880
328
1,662
19
7,725
5,568
2,157
Share capital
901
(32)
2
871
(631)
(30)
1
Allowances and Provisions
CHF million
Default risks (credit and country risk)
Trading portfolio risks
Litigation risks
Operational risks
Deferred taxes
Total allowances and provisions
Allowances deducted from assets
Total provisions as per balance sheet
Statement of Shareholders’ Equity
CHF million
As of 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
As of 31.12.05 and 1.1.06
Par value reduction
Cancellation of own shares
Capital increase
Increase in reserves
Prior year dividend
Profit for the period
Changes in reserves for own shares
As of 31.12.06
Share Capital
As of 31.12.06
Issued and paid up
Conditional share capital
As of 31.12.05
Issued and paid up
Conditional share capital
Provisions
applied in
accordance
with their
specified purpose
Recoveries,
doubtful interest,
currency
translation
differences
(439)
(135)
(47)
(621)
67
(225)
(124)
97
(17)
(202)
Provisions
released
to income
(513)
(811)
(32)
(348)
New
provisions
charged
to income
347
256
537
32
(1,704)
1,172
Balance at
31.12.06
1,298
2,844
293
1,901
34
6,370
4,065
2,305
General statutory
reserves:
Share premium
General statutory
reserves:
Retained earnings
6,213
1,359
Reserves for
own shares
9,056
33
322
6,246
1,681
1,506
10,562
34
334
211
6,280
2,015
(1,448)
9,114
Total
shareholders’
equity (before
distribution
of profit)
Other reserves
21,739
(3,511)
(322)
(3,105)
13,497
(1,506)
26,792
35
(3,997)
(334)
(3,214)
6,558
1,448
27,288
39,268
(3,543)
35
(3,105)
13,497
46,152
(596)
(4,027)
35
(3,214)
6,558
44,908
Par value
Ranking for dividends
No. of shares
Capital in CHF
No. of shares
Capital in CHF
2,105,273,286
210,527,329
2,082,673,286
208,267,329
151,437,410
15,143,741
2,177,265,044
870,906,018
2,109,495,044
843,798,018
3,647,002
1,458,801
On 31 December 2006, a maximum of 1,437,410 shares 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 table above. In addition, during 2006, shareholders approved the creation
of conditional capital of up to a maximum of 150 million shares to fund UBS‘s employee share option programs. As of 31 December 2006, no
shares have been issued under this program.
223
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
31.12.06
31.12.05
Change in %
Book value Effective liability
Book value
Effective liability
Book value
Effective liability
37,471
81
89,869
127,421
9,035
38
41,306
50,379
26,513
64
102,330
128,907
6,120
38
48,580
54,738
41
27
(12)
(1)
48
(15)
(8)
Financial assets are pledged in securities borrowing and lending transactions, in repurchase and reverse repurchase trans-
actions, under collateralized credit lines with central banks, against loans from mortgage institutions and for security deposits
relating to stock exchange and clearinghouse memberships.
Commitments and Contingent Liabilities
CHF million
Contingent liabilities
Irrevocable commitments
Liabilities for calls on shares and other equities
Confirmed credits
Derivative Instruments
CHF million
Interest rate contracts
Credit derivative contracts
Foreign exchange contracts
Precious metal contracts
Equity / Index contracts
Commodities contracts, excluding precious metals contracts
Total derivative instruments
Replacement value netting
Replacement values after netting
1 PRV: Positive replacement value. 2 NRV: Negative replacement value.
31.12.06
189,627
115,364
125
2,133
31.12.05
184,665
68,071
130
2,004
% change from
31.12.05
3
69
(4)
6
31.12.06
31.12.05
PRV 1
176,765
NRV 2
175,394
29,026
76,459
4,472
22,437
11,459
320,618
182,396
138,222
31,781
70,899
4,168
39,016
11,017
332,275
182,396
149,879
Notional
amount
CHF bn
PRV
NRV
29,558
222,508
221,437
2,824
6,134
121
745
359
39,741
15,811
57,705
3,616
25,663
10,677
335,980
199,477
136,503
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
224
Fiduciary Transactions
CHF million
Deposits:
with other banks
with Group banks
Total
31.12.06
31.12.05
% change from
31.12.05
41,075
1,650
42,725
37,171
1,382
38,553
11
19
11
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
31.12.06
31.12.05
% change from
31.12.05
790
7,169
19
719
2,222
21
10
223
(10)
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.
Personnel
Parent Bank personnel was 42,443 on 31 December 2006 and 38,189 on 31 December 2005.
225
UBS AG (Parent Bank)
Report of the Statutory Auditors
226
UBS AG (Parent Bank)
Report of the Auditors of the Conditional Capital Increase
227
228
Additional Disclosure Required
under SEC Regulations
Additional Disclosure Required under SEC Regulations
Table of Contents
Additional Disclosure Required
under SEC Regulations
Table of Contents
A – Introduction
B – Selected Financial Data
Balance Sheet Data
US GAAP Income Statement Data
US GAAP Balance Sheet Data
Ratio of Earnings to Fixed Charges
C – Information on the Company
Property, Plant and Equipment
D – 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
231
231
233
234
235
235
235
235
236
236
236
238
240
241
242
243
244
245
246
247
249
250
251
230
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
Reporting 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 United States Generally Accepted Accounting Principles
(US GAAP).
B – Selected Financial Data
The tables below set forth, for the periods and dates indica-
ted, 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 2007 the noon buying rate was 0.8204
USD per 1 CHF.
Year ended 31 December
2002
2003
2004
2005
2006
Month
September 2006
October 2006
November 2006
December 2006
January 2007
February 2007
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
0.6453
0.7493
0.8059
0.8039
0.8034
0.7229
0.8069
0.8712
0.7606
0.8200
High
0.7229
0.8189
0.8843
0.8721
0.8396
High
0.8125
0.8049
0.8357
0.8396
0.8247
0.8204
Low
0.5817
0.7048
0.7601
0.7544
0.7575
Low
0.7949
0.7842
0.7958
0.8161
0.7978
0.7980
231
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 (%) 3
Rates of return (%)
Return on equity attributable to UBS shareholders 4
Return on average equity
Return on average assets
31.12.06
31.12.05
31.12.04
31.12.03
31.12.02
For the year ended
87,401
(80,880)
59,286
(49,758)
6,521
156
6,677
25,881
13,318
1,596
693
48,165
33,498
14,667
2,786
11,881
869
12,750
493
12,257
69.7
6.20
5.95
7.42
2.20
35.5
28.2
26.3
0.51
9,528
375
9,903
21,436
7,996
1,122
675
41,132
28,455
12,677
2,471
10,206
4,484
14,690
661
14,029
70.1
6.97
6.68
6.29
1.60
1.26
23.0
39.7
37.2
0.67
39,228
(27,484)
11,744
241
11,985
18,506
4,902
853
640
36,886
26,844
10,042
2,155
7,887
583
8,470
454
8,016
73.2
3.89
3.70
4.88
1.50
1.27
38.6
25.8
23.8
0.44
40,045
(27,784)
12,261
(102)
12,159
16,673
3,670
280
535
33,317
26,000
7,317
1,403
5,914
339
6,253
349
5,904
76.8
2.72
2.59
3.37
1.30
1.00
47.8
18.0
16.9
0.38
39,896
(29,417)
10,479
(112)
10,367
17,481
5,381
13
335
33,577
30,135
3,442
566
2,876
489
3,365
348
3,017
84.7
1.30
1.27
1.48
1.00
0.73
76.9
8.3
7.7
0.20
1 Operating expenses / operating income before credit loss expense for Financial Businesses. 2 For EPS calculation, see Note 8 to the Financial Statements. 3 In July 2006, a par value reduction of CHF
0.60 per share was distributed, after which the UBS share was split 2-for-1. Dividends are normally declared and paid in the year subsequent to the reporting period. On a post-split basis,
a dividend of CHF 1.60 per share was paid on 24 April 2006, CHF 1.50 on 26 April 2005, CHF 1.30 on 20 April 2004 and CHF 1.00 on 23 April 2003. A dividend of CHF 2.20 per share will be paid on
23 April 2007, subject to approval by shareholders at the Annual General Meeting. The USD amount per share will be determined on 19 April 2007. 4 Net profit attributable to UBS shareholders /
average equity attributable to UBS shareholders less distributions.
232
B – Selected Financial Data (continued)
CHF million, except where indicated
31.12.06
31.12.05
31.12.04
31.12.03
31.12.02
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
1 See the Handbook 2006/2007 for information about the nature of these ratings.
2,396,511
2,058,348
1,737,171
1,554,032
1,350,905
49,686
1.93
154,222
44,015
1.79
131,949
33,632
1.84
103,638
33,350
2.23
95,401
35,701
2.65
79,448
2,105,273,286
2,177,265,044
2,253,716,354
2,366,093,528
2,512,595,356
164,475,699
208,519,748
249,326,620
273,482,454
282,461,382
11.9
14.7
341,892
2,989
27,018
12,687
30,819
7,616
78,140
AA+
Aa2
AA+
12.8
14.1
310,409
2,652
26,028
11,007
27,136
5,398
69,569
AA+
Aa2
AA+
11.8
13.6
264,832
2,217
25,990
10,764
26,232
4,438
67,424
AA+
Aa2
AA+
11.8
13.4
252,398
2,098
26,662
9,906
25,511
3,850
65,929
AA+
Aa2
AA+
11.2
13.7
238,790
1,959
27,972
10,009
27,350
3,730
69,061
AAA
Aa2
AA+
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
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
31.12.06
31.12.05
31.12.04
31.12.03
31.12.02
2,396,511
2,058,348
1,737,171
1,554,032
1,350,905
50,426
351,590
405,834
627,036
251,478
328,445
312,521
203,689
63,088
545,480
204,773
332,533
145,687
570,565
190,143
49,686
33,644
288,435
404,432
499,297
154,759
333,782
279,910
124,328
59,938
478,508
188,631
337,663
117,401
466,907
160,710
44,015
35,419
210,606
357,164
389,487
159,115
284,577
241,803
120,026
51,301
422,587
171,033
303,712
65,756
386,320
117,856
33,632
31,959
206,519
320,499
354,558
120,759
248,206
220,083
129,084
48,272
415,863
143,957
254,768
35,286
351,583
88,874
33,350
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
35,701
233
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
Total operating income
Operating expenses
Personnel expenses
General and administrative expenses
Depreciation of property and equipment
Amortization of other intangible assets
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 / (loss)
31.12.06
31.12.05
31.12.04
31.12.03
31.12.02
For the year ended
87,380
(80,463)
6,917
156
7,073
25,881
12,548
1,742
47,244
23,771
7,944
1,277
143
33,135
14,109
2,932
(95)
11,082
404
58,791
(49,488)
9,303
375
9,678
21,436
7,012
747
38,873
19,542
6,469
1,272
119
27,402
11,471
2,995
(138)
8,338
3,976
39,802
(27,628)
12,174
(74)
12,100
16,606
3,944
382
33,032
17,234
5,917
1,368
110
24,629
8,403
1,790
(350)
6,263
250
39,612
(29,334)
10,278
(112)
10,166
17,481
5,870
(65)
33,452
18,224
6,953
1,573
1,443
28,193
5,259
456
(331)
4,472
435
639
38,991
(27,245)
11,746
334
12,080
18,435
4,795
1,158
36,468
17,970
6,420
1,295
103
25,788
10,680
1,966
(322)
8,392
420
6
11,486
38
12,352
8,818
6,513
5,546
234
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
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
31.12.06
31.12.05
31.12.04
31.12.03
31.12.02
2,634,628
2,279,257
1,903,239
1,699,060
1,296,991
51,416
351,461
361,571
627,160
401,176
332,128
316,141
28,530
2,340
84,027
206,985
60,878
520,351
236,929
49,088
439,495
597,139
22,131
306,994
64,523
33,427
288,304
359,883
505,717
272,494
337,105
277,471
28,104
1,665
75,992
127,252
59,897
464,957
201,212
67,430
432,290
481,784
19,106
240,212
61,616
35,286
208,778
357,164
378,281
230,223
284,468
238,604
26,977
1,722
101,121
119,021
47,548
423,513
190,907
12,950
360,345
397,157
15,229
164,744
52,359
31,758
203,645
320,499
349,023
195,469
248,924
220,142
26,775
1,174
64,434
127,385
46,151
415,863
149,380
13,071
326,136
352,364
14,072
123,259
52,865
32,481
139,073
294,086
268,263
173,582
83,757
211,755
28,127
1,222
21,367
83,178
36,870
366,858
117,721
16,308
132,354
306,872
15,729
129,527
55,267
1 Positive and negative replacement values represent the fair values of derivative instruments. From 2003 onwards they are presented on a gross basis under US GAAP.
Certain prior year US GAAP amounts have been reclassified to conform to the current year’s presentation.
Ratio of Earnings to Fixed Charges
The following table sets forth UBS’s ratio of earnings to fixed charges on a IFRS basis for the periods indicated. The ratios are
calculated based on earnings from continuing operations. Ratios of earnings to combined fixed charges and preferred stock
dividend requirements are not presented as there were no preferred share dividends in any of the periods indicated. The ratios
are calculated on a US GAAP basis and are not materially different from the IFRS ratios for the periods presented.
IFRS
C – Information on the Company
For the year ended
31.12.06
1.17
31.12.05
1.24
31.12.04
1.34
31.12.03
1.24
31.12.02
1.10
Property, Plant and Equipment
At 31 December 2006, UBS Financial Businesses operated
about 1,135 business and banking locations worldwide, of
which about 37% were in Switzerland, 49% in the Americas,
10% in the rest of Europe, Middle East and Africa and 4% in
Asia-Pacific. 15% 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 2006, the Industrial Holdings segment
operated about 42 business locations worldwide, of which
0% were in Switzerland, 55% in the rest of Europe, Middle
East and Africa, 43% in the Americas and 2% in Asia-Pacific.
98% 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.
235
Additional Disclosure Required under SEC Regulations
D – Information Required by Industry Guide 3
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 2006, 31 Decem-
ber 2005 and 31 December 2004 are calculated from month-
ly data. The distinction between domestic and foreign is ge-
nerally 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 2006, 2005 and 2004.
Average
balance
31.12.06
Interest
Average
rate (%)
Average
balance
31.12.05
Interest
Average
rate (%)
Average
balance
31.12.04
Interest
Average
rate (%)
5.4
5.0
4.9
4.1
3.6
4.4
2.9
4.4
3.0
3.2
5.9
0.7
3.2
3.2
4.3
15,467
25,497
270
1,334
33,012
776,972
15,545
580,763
3,390
1,079
22,283
457
23,619
58
584,153
23,677
616
691
0
26
174,299
91,290
5,424
3,531
1,036
3,546
0
3,546
1,722,124
3
83
0
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
3.9
0.3
2.3
2.3
3.4
12,463
23,843
154
397
17,969
701,817
10,122
513,922
2,309
457
10,242
336
18,908
27
516,231
18,935
196
0
0
0
168,456
68,393
5,308
2,126
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
3.1
1.5
0.7
0.7
2.5
2,021,523
87,401
4.3
1,722,124
59,286
3.4
1,523,622
39,228
2.6
320,596
7,445
66,362
2,415,926
319,698
9,308
55,178
2,106,308
246,952
8,808
53,140
1,832,522
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
10,800
29,814
587
1,490
27,147
926,575
1,333
38,393
17,976
651
707,432
31,433
4,438
127
711,870
31,560
42
2,325
0
70
181,186
106,491
5,784
6,284
Financial investments available-for-sale
Domestic
Foreign taxable
Foreign non-taxable
Foreign total
4,126
3,171
0
3,171
Total interest-earning assets
2,021,523
28
100
0
100
86,280
1,121
Net interest on swaps
Interest income and average interest-
earning assets
Non-interest-earning assets
Positive replacement values
Fixed assets
Other
Total average assets
236
D – Information Required by Industry Guide 3 (continued)
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
Total interest-bearing liabilities
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
Average
balance
31.12.06
Interest
Average
rate (%)
Average
balance
31.12.05
Interest
Average
rate (%)
Average
balance
31.12.04
Interest
Average
rate (%)
46,544
108,885
1,583
5,261
46,224
751,617
1,589
32,432
4,408
283
202,263
14,250
1,864
127,458
58
4,699
70,981
86,631
28,876
186,488
315,917
534
392
639
1,565
11,500
1,973
110,418
115
4,939
3,957
57,899
1,965,915
82
2,524
80,880
320,766
76,270
2,362,951
52,975
2,415,926
3.4
4.8
3.4
4.3
6.4
7.0
3.1
3.7
0.8
0.5
2.2
0.8
3.6
5.8
4.4
2.1
4.4
4.1
35,713
92,431
897
3,321
40,772
647,998
881
19,599
3,632
145
173,394
10,591
638
86,688
67,987
86,373
24,245
178,605
249,561
1,584
96,767
4,250
43,035
5
2,385
292
404
386
1,082
5,906
20
2,905
117
1,904
1,655,068
49,758
335,992
70,654
2,061,714
44,594
2,106,308
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
606,623
3,717
161,286
385
1,582
489
9,417
180
7,813
85
1
49,234
1,167
67,005
84,112
19,052
170,169
200,664
246
79,902
10,358
28,259
167
414
250
831
2,785
0
1,338
168
1,328
1,471,853
27,484
260,629
60,844
1,793,326
39,196
1,832,522
6,521
9,528
11,744
0.3
0.6
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
1.7
1.6
4.7
1.9
0.8
1 Due to customers in foreign offices consists mainly of time deposits.
The percentage of total average interest-earning assets attri-
butable to foreign activities was 88% for 2006 (86% for
2005 and 86% for 2004). The percentage of total average
interest-bearing liabilities attributable to foreign activities
was 85% for 2006 (84% for 2005 and 83% for 2004). All
assets and liabilities are translated into CHF at uniform
month-end rates. Interest income and expense are transla-
ted at monthly average rates.
Average rates earned and paid on assets and liabilities can
change from period to period based on the changes in interest
rates in general, but are also affected by changes in the curren-
cy mix included in the assets and liabilities. This is especially
true for foreign assets and liabilities. Tax-exempt income is not
recorded on a tax-equivalent basis. For all three years presen-
ted, tax-exempt income is considered to be insignificant and
the impact from such income is therefore negligible.
237
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-ear-
ning assets and interest-bearing liabilities, the changes in in-
terest income and expense due to changes in volume and
interest rates for the year ended 31 December 2006 com-
pared with the year ended 31 December 2005, and for the
year ended 31 December 2005 compared with the year
ended 31 December 2004. Volume and rate variances have
been calculated on movements in average balances and
changes in interest rates. Changes due to a combination of
volume and rates have been allocated proportionally. Refer
to page 245 of Industry Guide 3 for a discussion of the treat-
ment of impaired, non-performing and restructured loans.
2006 compared with 2005
2005 compared with 2004
Increase / (decrease)
due to changes in
Increase / (decrease)
due to changes in
Average
volume
Average
rate
Net
change
Average
volume
Average
rate
Net
change
(79)
224
396
(68)
317
156
(194)
4,338
448
11,772
254
16,110
70
5,193
18
5,211
0
62
213
593
9
(9)
0
(9)
124
2,621
51
2,672
0
(18)
147
2,160
16
26
0
26
19
10,419
10,438
1,131
16,544
17,675
194
7,814
69
7,883
0
44
360
2,753
25
17
0
17
1,150
26,963
28,113
2
28,115
36
28
376
1,127
179
2,473
13
2,486
0
26
187
710
(1)
4
0
4
80
909
116
937
246
10,914
622
12,041
(58)
2,238
18
2,256
0
0
(71)
695
(13)
58
0
58
121
4,711
31
4,742
0
26
116
1,405
(14)
62
0
62
961
19,213
20,174
(116)
20,058
777
4,381
5,158
184
14,832
15,016
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
238
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
2006 compared with 2005
2005 compared with 2004
Increase / (decrease)
due to changes in
Increase / (decrease)
due to changes in
Average
volume
Average
rate
Net
change
Average
volume
Average
rate
Net
change
271
592
120
3,109
31
1,761
10
1,142
12
1
74
87
415
1,348
588
9,724
107
1,898
43
1,172
230
(13)
179
396
686
1,940
708
12,833
138
3,659
53
2,314
242
(12)
253
483
1,593
4,001
5,594
5
410
(8)
654
516
9,261
9,777
90
1,624
(27)
(34)
1,612
19,733
21,345
95
2,034
(35)
620
2,128
28,994
31,122
55
(62)
97
662
(4)
581
7
899
2
11
68
81
685
20
287
(98)
694
158
3,746
3,904
457
1,801
295
9,520
(31)
2,197
(3)
319
123
(21)
68
170
512
1,739
392
10,182
(35)
2,778
4
1,218
125
(10)
136
251
2,436
3,121
0
1,280
47
(118)
935
17,435
18,370
20
1,567
(51)
576
1,093
21,181
22,274
239
Additional Disclosure Required under SEC Regulations
D – Information Required by Industry Guide 3 (continued)
Deposits
The following table analyzes average deposits and the ave-
rage rates on each deposit category listed below for the
years ended 31 December 2006, 2005 and 2004. The geo-
graphic allocation is based on the location of the office or
branch where the deposit is made. Deposits by foreign de-
positors in domestic offices were CHF 78,234 million,
CHF 54,968 million and CHF 49,699 million at 31 December
2006, 31 December 2005 and 31 December 2004, respec-
tively.
CHF million, except where indicated
31.12.06
31.12.05
31.12.04
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.
2,024
8,776
10,800
29,814
40,614
70,981
86,631
28,876
186,488
315,917
502,405
0.2
4.5
3.7
4.8
4.5
0.8
0.5
2.2
0.8
3.6
2.6
8,491
6,976
15,467
25,497
40,964
67,987
86,373
24,245
178,605
249,561
428,166
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
200,664
370,833
0.1
1.7
0.7
1.6
1.3
0.2
0.5
1.3
0.5
1.4
1.0
At 31 December 2006, the maturity of time deposits exceeding CHF 150,000, or an equivalent amount in other currencies,
was as follows:
Domestic
45,236
5,676
2,764
310
254
Foreign
256,610
4,253
2,224
5,134
90
54,240
268,311
CHF million
Within 3 months
3 to 6 months
6 to 12 months
1 to 5 years
Over 5 years
Total time deposits
240
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 borro-
wings, along with the average rates and period-end rates at and for the years ended 31 December 2006, 2005 and 2004.
CHF million, except where indicated
31.12.06 31.12.05 31.12.04
31.12.06 31.12.05 31.12.04
Money market paper issued
Due to banks
Repurchase agreements 1
31.12.06 31.12.05 31.12.04
Period-end balance
Average balance
Maximum month-end balance
Average interest rate during the period (%)
Average interest rate at period-end (%)
119,584 102,662
112,391
98,351
123,108 112,217
4.5
4.0
3.0
4.0
79,442
80,148
94,366
1.7
2.1
153,231
90,651
114,815 114,701
84,351
91,158
754,623 667,317
557,892
717,542 628,362
587,988
153,231 101,178
115,880
777,010 719,208
637,594
4.4
4.1
3.3
3.0
1.6
2.0
4.4
5.0
3.0
2.6
1.5
2.0
1 For the purpose of this disclosure, balances are presented on a gross basis.
241
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 2006
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 instruments
Total fair value
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 instruments
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 instruments
Total fair value
Within 1 year
1–5 years
5–10 years
Over 10 years
Amount Yield (%)
Amount Yield (%)
Amount Yield (%)
Amount Yield (%)
2.22
0.00
0.00
1.48
7.00
0.00
0.00
2
0
0
38
26
0
0
66
0.00
0.00
0.00
1.89
0.00
0.00
9.28
0
0
0
2
0
0
233
235
0.00
0.00
0.00
4.47
0.00
4.48
0.00
0
0
0
57
2
10
0
69
1
0
0
0
0
150
0
151
4.00
0.00
0.00
0.00
0.00
5.10
0.00
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
1
0
12
2
103
129
0
247
4.00
0.00
6.03
6.17
5.66
4.80
0.00
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
1 Money market paper has a contractual maturity of less than one year. 2 Average yields are calculated on an amortized cost basis.
242
D – Information Required by Industry Guide 3 (continued)
Due from Banks and Loans (gross)
The Group’s lending portfolio is widely diversified across
industry sectors with no significant concentrations of credit
risk. CHF 152.9 billion (42% of the total) consists of loans
to thousands of private households, predominantly in
Switzerland, and mostly secured by mortgages, financial
collateral or other assets. Exposure to Banks and Financial
institutions amounted to CHF 138 billion (38% of the total).
This includes cash posted as collateral by UBS against nega-
tive replacement values on derivatives or other positions,
which, from a risk perspective, is not considered lending
but is a key component of the measurement of counterpar-
ty risk taken in connection with the underlying products.
Exposure to banks includes money market deposits with
highly rated institutions. Excluding financial institutions, the
largest industry sector exposure is CHF 25 billion (7% of the
total) to the Services sector. For further discussion of the
lending portfolio, see the Risk Management chapter of the
Handbook 2006/2007. The following table illustrates diver-
sification of the lending portfolio among industry sectors at
31 December 2006, 2005, 2004, 2003 and 2002. The in-
dustry categories presented are consistent with the classifi-
cation of loans for reporting to the Swiss Federal Banking
Commission and Swiss National Bank. The table below does
not include loans designated at fair value.
CHF million
Domestic
Banks 1
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
Banks 1
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
31.12.06
31.12.05
31.12.04
31.12.03
31.12.02
561
1,535
5,542
1,957
4,439
1,407
1,816
4,213
2,044
5,038
1,406
1,943
4,332
2,269
5,485
619
2,175
4,009
2,440
6,478
117,852
111,549
105,160
102,180
4,972
11,356
4,569
9,159
1,127
5,494
11,792
4,808
9,300
1,004
5,460
11,466
4,908
9,110
591
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
163,069
158,465
152,130
152,170
151,588
49,895
1,296
483
892
82,064
2,964
2,756
35,029
2,038
4,238
1,750
16,231
1,038
460
32,282
34,269
31,405
31,882
2,716
295
1,637
62,306
3,899
2,694
38,280
1,501
2,707
1,257
5,596
1,419
156
366
122
745
45,095
2,758
1,695
30,237
1,228
940
1,102
8,002
762
318
245
84
249
30,906
2,421
1,114
21,195
1,224
473
1,880
7,983
3,658
432
519
153
1,105
18,378
2,300
868
33,063
2,628
616
1,367
1,654
676
2,314
201,134
364,203
156,745
315,210
127,639
279,769
103,269
255,439
97,523
249,111
1 Includes Due from banks and Loans from Industrial Holdings of CHF 93 million at 31 December 2006, CHF 728 million at 31 December 2005, CHF 909 million at 31 December 2004 and CHF 220 million
at 31 December 2003. 2 Includes chemicals, food and beverages. 3 Includes transportation, communication, health and social work, education and other social and personal service activities.
4 Includes mining and electricity, gas and water supply. 5 Includes food and beverages. 6 Includes hotels and restaurants.
243
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 2006, 2005, 2004, 2003 and 2002. Mortgages are included in the industry categories mentioned on the
previous page.
CHF million
Mortgages
Domestic
Foreign
Total gross mortgages
Mortgages
Residential
Commercial
Total gross mortgages
Due from Banks and Loan Maturities (gross)
31.12.06
31.12.05
31.12.04
31.12.03
31.12.02
134,468
10,069
144,537
124,548
19,989
144,537
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
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
558
54,752
21,068
76,378
47,391
8,451
125,334
181,176
257,554
3
60,051
5,493
65,547
2,323
1,219
13,150
16,692
82,239
0
19,665
1,479
21,144
181
399
2,686
3,266
24,410
561
134,468
28,040
163,069
49,895
10,069
141,170
201,134
364,203
1 Includes Due from banks from Industrial Holdings of CHF 93 million at 31 December 2006.
At 31 December 2006, the total amount 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 to 5 years
Over 5 years
75,549
6,690
82,239
22,918
1,492
24,410
Total
98,467
8,182
106,649
244
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; or 2) when insolvency proceedings have commenced; or 3) when obligations have been restructured
on concessionary terms.
CHF million
31.12.06
31.12.05
31.12.04
31.12.03
31.12.02
Gross interest income that would have been recorded on
non-performing loans:
Domestic
Foreign
Interest income included in net profit for non-performing loans:
Domestic
Foreign
50
10
56
8
81
8
72
9
107
17
106
8
171
23
163
8
148
53
152
22
The table below provides an analysis of the Group's non-performing loans. For further information, see the Risk Manage-
ment chapter of the Handbook 2006 / 2007.
CHF million
Non-performing loans:
Domestic
Foreign
Total non-performing loans
31.12.06
31.12.05
31.12.04
31.12.03
31.12.02
1,744
174
1,918
2,106
257
2,363
2,772
783
3,555
4,012
746
4,758
4,609
1,170
5,779
UBS does not, as a matter of policy, typically restructure loa-
ns to accrue interest at rates different from the original con-
tractual terms or reduce the principal amount of loans. In-
stead, specific loan allowances are established as necessary.
Unrecognized interest related to restructured loans was not
material to the results of operations in 2006, 2005, 2004,
2003 or 2002.
In addition to the non-performing loans shown above,
the Group had CHF 710 million, CHF 1,071 million, CHF
1,144 million, CHF 2,241 million and CHF 3,875 million in
“other impaired loans” for the years ended 31 December
2006, 2005, 2004, 2003 and 2002, respectively.
Other impaired loans are loans where the Group’s credit
officers have expressed doubts as to the ability of the bor-
rowers to repay the loans. For the years ended 31 December
2006, 2005 and 2004, they are loans not considered “non-
performing” in accordance with Swiss regulatory guidelines,
and for the years ended 31 December 2003 and 2002, they
are loans that were current or less than 90 days in arrears
with respect to payment of principal or interest. As of 31
December 2006, 31 December 2005 and 31 December
2004, specific allowances of CHF 106 million, CHF 200 milli-
on, CHF 241 million, respectively, had been established
against these loans.
245
Additional Disclosure Required under SEC Regulations
D – Information Required by Industry Guide 3 (continued)
Cross-border Outstandings
Cross-border outstandings consist of general banking pro-
ducts such as loans and deposits with third parties, credit
equivalents of over-the-counter (OTC) derivatives and securi-
ties financing, and the market value of the inventory of debt
securities. Outstandings are monitored and reported on an
ongoing basis by the credit risk control organization with a
dedicated country risk information system. With the excepti-
on of the 32 most developed economies, these exposures
are rigorously limited. The following analysis excludes Due
from banks and Loans from Industrial Holdings. Prior periods
have been adjusted to conform to the current year’s presen-
tation.
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 2006, 2005 and 2004. At 31 December 2006,
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 abi-
lity to service its obligations.
For more information on cross-border exposure, see the
Handbook 2006 / 2007.
Banks
7,692
2,283
11,149
15,240
Banks
6,700
16,985
2,044
6,384
3,343
Banks
8,550
18,478
4,362
8,131
31.12.06
Private sector
Public sector
Total % of total assets
208,200
8,263
16,098
8,080
22,574
30,158
559
1,574
31.12.05
238,466
40,704
27,806
24,894
10.0
1.7
1.2
1.0
Private sector
Public sector
Total % of total assets
133,561
4,525
7,582
11,423
2,509
23,297
1,265
10,824
555
11,324
31.12.04
163,558
22,775
20,450
18,362
17,176
7.9
1.1
1.0
0.9
0.8
Private sector
Public sector
Total % of total assets
109,131
2,882
2,207
10,760
8,859
7,348
16,803
259
126,540
28,708
23,372
19,150
7.3
1.7
1.3
1.1
CHF million
United States
Japan
United Kingdom
Germany
CHF million
United States
Germany
Japan
United Kingdom
Italy
CHF million
United States
Germany
Italy
United Kingdom
246
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
allowances and provisions for credit losses. The following
analysis includes Due from banks from Industrial Holdings.
UBS writes off loans against allowances only on final
settlement of bankruptcy proceedings, the sale of the under-
lying assets and / or due to 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
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
31.12.06
1,776
31.12.05
2,802
31.12.04
3,775
31.12.03
5,015
31.12.02
7,992
0
(14)
(11)
(16)
(40)
(89)
0
(44)
(20)
(47)
(2)
(283)
(3)
0
0
0
0
(11)
(1)
(7)
(58)
0
0
0
0
0
(80)
(363)
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)
(1,772)
(49)
0
0
(36)
(228)
(70)
(1)
(65)
(1)
(2)
(10)
(39)
(74)
(189)
(764)
(2,536)
1 Includes chemicals, food and beverages. 2 Includes transportation, communication, health and social work, education and other social and personal service activities. 3 Includes mining and electri-
city, gas and water supply. 4 Includes food and beverages. 5 Includes hotels and restaurants.
247
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
31.12.06
31.12.05
31.12.04
31.12.03
31.12.02
51
11
62
(301)
(108)
(48)
13
1,332
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
31.12.06
31.12.05
31.12.04
31.12.03
31.12.02
10
3
13
50
(114)
(64)
2
63
65
(57)
64
7
(269)
(357)
(626)
248
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 2006, 2005, 2004, 2003 and 2002. For a description of procedures with respect
to allowances and provisions for credit losses, see the Handbook 2006 / 2007. 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
31.12.06
31.12.05
31.12.04
31.12.03
31.12.02
10
72
61
27
155
187
3
99
311
113
107
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
1,145
1,425
1,891
2,649
3,484
20
4
2
8
9
37
0
26
21
4
4
7
1
6
35
5
2
16
8
57
1
30
72
3
1
27
0
8
149
38
1,332
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
1 Includes chemicals, food and beverages. 2 Includes transportation, communication, health and social work, education and other social and personal service activities. 3 Includes mining, electricity,
gas and water supply. 4 Counterparty allowances and provisions only. Country provisions with banking counterparties amounting to CHF 0 million, CHF 37 million and CHF 17 million are disclosed
under Collective loan loss provisions for 2006, 2005 and 2004, respectively. 5 Includes food and beverages. 6 Includes hotels and restaurants. 7 The 2006, 2005, 2004, 2003 and 2002
amounts include CHF 0 miilion, CHF 48 million, CHF 161 million, CHF 262 million and CHF 696 million , respectively, of country provisions. 8 The 2006, 2005, 2004, 2003 and 2002 amounts include
CHF 76 million, CHF 109 million, CHF 214 million, CHF 290 million and CHF 366 million , respectively, of provisions for unused commitments and contingent liabilities.
249
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 cre-
dit losses by industry sectors to evaluate the credit risks in each of the categories. The table below does not include loans
designated at fair value.
in %
Domestic
Banks 1
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
Banks 1
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
31.12.06
31.12.05
31.12.04
31.12.03
31.12.02
0.2
0.4
1.5
0.5
1.2
32.4
1.4
3.1
1.3
2.5
0.3
44.8
13.7
0.4
0.1
0.2
22.5
0.8
0.8
9.6
0.6
1.2
0.5
4.4
0.3
0.1
0.5
0.6
1.3
0.7
1.6
35.4
1.7
3.7
1.5
3.0
0.3
50.3
10.2
0.9
0.1
0.5
19.8
1.2
0.9
12.1
0.5
0.9
0.4
1.8
0.4
0.0
0.5
0.7
1.5
0.8
2.0
37.6
2.0
4.1
1.7
3.3
0.2
54.4
12.3
0.1
0.0
0.3
16.1
1.0
0.6
10.8
0.4
0.3
0.4
2.9
0.3
0.1
0.2
0.8
1.6
1.0
2.5
40.0
2.1
4.9
2.4
3.7
0.4
59.6
12.3
0.1
0.0
0.1
12.1
1.0
0.4
8.3
0.5
0.2
0.7
3.1
1.4
0.2
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
55.2
100.0
49.7
100.0
45.6
100.0
40.4
100.0
39.1
100.0
1 Includes Due from banks and Loans from Industrial Holdings in the amount of CHF 93 for 2006, CHF 728 million for 2005, CHF 909 million for 2004 and CHF 220 million for 2003. 2 Includes che-
micals, food and beverages. 3 Includes transportation, communication, health and social work, education and other social and personal service activities. 4 Includes mining and electricity, gas and
water supply. 5 Includes food and beverages. 6 Includes hotels and restaurants.
250
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). The table below does
not include loans designated at fair value.
CHF million, except where indicated
Gross loans 1
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
31.12.06
364,203
2,628
1,918
1,332
301
156
0.7
0.5
0.4
50.7
69.4
46.3
58.0
0.1
0.1
22.6
4.43
31.12.05
315,210
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
31.12.04
279,769
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
31.12.03
255,439
31.12.02
249,111
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
1 Includes Due from banks and Loans from Industrial Holdings in the amount of CHF 93 million 2006, CHF 728 million for 2005, CHF 909 million for 2004 and CHF 220 million for 2003. 2 Includes
Collective loan loss provisions. 3 Allowances relating to impaired loans only. 4 Allowances relating to non-performing loans only.
251
252
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 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 and macro-economic trends, (2) legislative developments, governmental and regulatory
trends, (3) movements in local and international securities markets, currency exchange rates and interest rates, (4) competitive
pressures, (5) technological developments, (6) changes in the financial position or creditworthiness of our customers, obligors and
counterparties and developments in the markets in which they operate, (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 2006. UBS is not
under any obligation to (and expressly disclaims any such obligation 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-0701
UBS AG
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P.O. Box, CH-4002 Basel
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