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Material accounting policies
 12 Months Ended
Dec. 31, 2021
Entity [Table]  
Material accounting policies
Note 1
 
Summary of material accounting policies
Material accounting policies
This Note describes the
 
material accounting policies
 
applied in the
preparation of the
 
consolidated financial
 
statements (the
 
Financial
Statements)
 
of
 
UBS
 
Group
 
AG
 
and
 
its
 
subsidiaries
 
(UBS
 
or
 
the
Group).
 
On
 
24 February
 
2022,
 
the
 
Financial
 
Statements
 
were
authorized for issue by the Board of Directors.
 
Basis of accounting
The Financial Statements have been prepared in accordance with
International Financial Reporting
 
Standards (IFRS), as
 
issued by the
International
 
Accounting
 
Standards
 
Board
 
(the
 
IASB),
 
and
 
are
presented in US dollars (USD).
Disclosures
 
marked
 
as
 
audited
 
in
 
the
 
“Risk,
 
capital,
 
liquidity
and funding,
 
and balance
 
sheet” section
 
of this
 
report form
 
an
integral part of the Financial
 
Statements. These disclosures relate
to requirements
 
under IFRS 7,
Financial Instruments:
 
Disclosures
,
and
 
IAS
 
1,
Presentation
 
of
 
Financial
 
Statements
,
 
and
 
are
 
not
repeated in this section.
 
The
 
accounting
 
policies
 
described
 
in
 
this
 
Note
 
have
 
been
applied consistently in all years presented unless otherwise stated
in Note 1b.
Critical accounting estimates and judgments
Preparation of these Financial
 
Statements under IFRS requires
 
management
to apply
 
judgment
 
and make
 
estimates
 
and assumptions
 
that affect
 
reported
amounts
 
of
 
assets,
 
liabilities,
 
income
 
and
 
expenses
 
and
 
disclosure
 
of
contingent
 
assets and
 
liabilities,
 
and may
 
involve
 
significant
 
uncertainty
 
at the
time they are made. Such
 
estimates and
 
assumptions
 
are based on the best
available
 
information.
 
UBS
 
regularly
 
reassesses
such
estimates
 
and
assumptions, which
 
encompass historical experience,
 
expectations of
 
the
future and other pertinent factors, to determine their continuing relevance
based on current conditions,
 
updating them
 
as necessary. Changes
 
in those
estimates and
 
assumptions may have
 
a
 
significant effect on
 
the Financial
Statements. Furthermore, actual results may differ significantly from UBS’s
estimates,
 
which could
 
result in
 
significant
 
losses to
 
the Group,
 
beyond what
was anticipated
 
or provided
 
for.
 
The
 
following areas
 
contain estimation
 
uncertainty or
 
require
 
critical
judgment
 
and
 
have
 
a
 
significant
 
effect
 
on
 
amounts
 
recognized
 
in
 
the
Financial Statements:
 
–
 
expected credit loss measurement (refer to item 2g in this Note and to
Note 20);
–
 
fair value measurement (refer to item 2f in this Note
 
and to Note 21);
–
 
income taxes (refer to item 6 in this Note and to Note
 
8);
–
 
provisions and contingent liabilities (refer to item 9
 
in this Note and to
Note 18);
–
 
post-employment benefit
 
plans (refer to item
 
5 in this Note
 
and to Note
27);
–
 
goodwill (refer to item 8 in this Note and to Note
 
13); and
–
 
consolidation of structured entities (refer to
 
item 1 in this Note
 
and to
Note 29).
1) Consolidation
The Financial Statements comprise the
 
financial statements of the
parent company
 
(UBS Group
 
AG) and
 
its subsidiaries,
 
presented
as
 
a
 
single
 
economic
 
entity
;
 
intercompany
 
transactions
 
and
balances have been
 
eliminated. UBS consolidates
 
all entities that
it
 
controls,
 
including
 
structured
 
entities
 
(SEs),
 
which
 
is
 
the
 
case
when
 
it
 
has:
 
(i)
 
power
 
over
 
the
 
relevant
 
activities
 
of
 
the
 
entity;
(ii) exposure to
 
an entity‘s
 
variable returns;
 
and (iii)
 
the ability
 
to
use its power to affect its own returns.
Consideration
 
is
 
given
 
to
 
all
 
facts
 
and
 
circumstances
 
to
determine whether the Group has
 
power over another entity,
 
i.e.,
the current ability
 
to direct the
 
relevant activities of
 
an entity when
decisions about those activities need to be made.
 
Subsidiaries,
 
including
 
SEs,
 
are
 
consolidated
 
from
 
the
 
date
when control
 
is gained
 
and deconsolidated
 
from the
 
date when
control ceases.
 
Control, or
 
the lack thereof,
 
is reassessed
 
if facts
and circumstances indicate that there is a change to one or more
elements required to establish that control is present.
Business combinations are accounted for using the acquisition
method. The amount of any non-controlling
 
interest is measured
at
 
the
 
non-controlling
 
interest’s
 
proportionate
 
share
 
of
 
the
acquiree’s identifiable net assets.
 
›
 
Refer to Note
29
for more information
Critical accounting estimates and judgments
Each
 
individual
 
entity
 
is
 
assessed
 
for
 
consolidation
 
in
 
line
 
with
 
the
aforementioned consolidation principles.
 
The assessment of control
 
can be
complex
 
and
 
requires
 
the
 
use
 
of
 
significant
 
judgment,
 
in
 
particular
 
in
determining whether
 
UBS has
 
power over
 
the entity.
 
As the
 
nature and
extent of UBS’s involvement is unique for each entity,
 
there is no uniform
consolidation outcome
 
by
 
entity.
 
Certain entities
 
within
 
a
 
class may
 
be
consolidated while
 
others may
 
not. When
 
carrying out
 
the consolidation
assessment, judgment
 
is exercised
 
considering all
 
the relevant
 
facts and
circumstances, including the
 
nature and activities
 
of the investee,
 
as well as
the substance of voting and similar rights.
 
›
 
Refer to Note
29
for more information
2) Financial instruments
a. Recognition
UBS recognizes financial instruments when it
 
becomes a party to
contractual
 
provisions
 
of an
 
instrument. UBS
 
applies settlement
date
 
accounting
 
to
 
all
 
standard
 
purchases
 
and
 
sales
 
of
 
non-
derivative financial instruments.
 
In transactions
 
where UBS
 
acts as
 
a transferee,
 
to the
 
extent
the financial
 
asset transfer
 
does not qualify
 
for derecognition by
the transferor, UBS does not recognize the transferred
 
instrument
as its asset.
UBS also acts in a fiduciary capacity, which results in it holding
or
 
placing
 
assets
 
on
 
behalf
 
of
 
individuals,
 
trusts,
 
retirement
benefit plans and
 
other institutions. Unless
 
these items meet the
definition
 
of
 
an
 
asset
 
and
 
the
 
recognition
 
criteria
 
are
 
satisfied,
they are
 
not recognized
 
on UBS’s
 
balance sheet
 
and the
 
related
income is excluded from the Financial Statements.
 
Client
 
cash balances
 
associated with
 
derivatives
 
clearing and
execution
 
services
 
are
 
not
 
recognized
 
on
 
the
 
balance
 
sheet
 
if,
through
 
contractual
 
agreement,
 
regulation
 
or
 
practice,
 
UBS
neither obtains benefits from nor controls such cash balances.
b. Classification, measurement and presentation
Financial assets
 
All financial instruments
 
are on initial recognition
 
measured at fair
value
 
and
 
classified
 
as
 
measured
 
at
 
amortized
 
cost,
 
fair
 
value
through
 
other
 
comprehensive
 
income
 
(FVOCI)
 
or
 
fair
 
value
through
 
profit
 
or
 
loss
 
(FVTPL)
.
For
 
financial
 
instruments
subsequently measured at amortized cost or
 
FVOCI, the initial fair
value is adjusted for directly attributable transaction costs.
Where the
 
contractual terms
 
of a
 
debt instrument
 
result in
 
cash
flows that are
 
solely payments of
 
principal and interest
 
(SPPI) on
the
 
principal
 
amount
 
outstanding,
the
 
debt
 
instrument
 
is
classified
 
as
 
measured
 
at
 
amortized
 
cost
 
if
 
it
 
is
 
held
 
within
 
a
business model that has
 
an objective of holding
 
financial assets to
collect
 
contractual
 
cash flows,
 
or
 
at
 
FVOCI if
 
it
 
is held
 
within a
business
 
model
with
the
objective
being
 
achieved
 
by
 
both
collecting contractual cash flows and selling financial assets.
 
All
 
other
 
financial
 
assets
 
are
 
measured
 
at
 
FVTPL,
 
including
those
 
held
 
for
 
trading
 
or
 
those
 
managed
 
on
 
a
 
fair
 
value
 
basis,
except for derivatives
 
designated in a
 
hedge relationship, in
 
which
case hedge accounting requirements apply (refer
 
to item 2j in this
Note for more information).
Business model assessment and contractual cash flow
characteristics
 
UBS determines the
 
nature of a
 
business model by
 
considering the
way financial assets are managed to achieve a particular business
objective.
 
In
 
assessing
 
whether
 
contractual
 
cash
 
flows
 
are
 
SPPI,
 
the
Group
 
considers whether
 
the contractual
 
terms of
 
the
 
financial
asset contain a
 
term that could
 
change the timing
 
or amount of
contractual cash flows arising over the life of the instrument.
 
Financial liabilities
 
Financial liabilities measured at amortized cost
 
Debt
 
issued
 
measured
 
at
 
amortized
 
cost
 
includes
 
contingent
capital instruments containing
 
contractual provisions under
 
which
the principal amounts
 
would be written
 
down or converted
 
into
equity upon either
 
a specified common
 
equity tier 1 (CET1)
 
ratio
breach
 
or
 
a
 
determination
 
by
the
Swiss
 
Financial
 
Market
Supervisory Authority (FINMA) that a viability event has occurred.
Such contractual provisions are not
 
derivatives, as the underlying
is deemed to be a non-financial variable specific to a party to
 
the
contract.
 
If a debt
 
were to be written
 
down or converted into
 
equity in
a future
 
period, it
 
would be
 
partially or
 
fully derecognized,
 
with
the difference between
 
its carrying amount
 
and the fair
 
value of
any equity issued recognized in the income statement.
 
A gain or loss is recognized in
Other income
 
when debt issued
is subsequently repurchased
 
for market-making
 
or other activities.
A
 
subsequent
 
sale
 
of
 
own
 
bonds
 
in
 
the
 
market
 
is
 
treated
 
as
 
a
reissuance of debt.
Financial liabilities measured at fair value through profit or loss
 
UBS
 
designates
 
certain
 
issued
 
debt
 
instruments
 
as
 
financial
liabilities at fair value
 
through profit or loss, on
 
the basis that such
financial instruments
 
include embedded
 
derivatives and
 
/ or
 
are
managed on a fair
 
value basis (refer to
 
the table below for
 
more
information),
 
in
 
which
 
case
 
bifurcation
 
of
 
the
 
embedded
derivative
 
component
 
is
 
not
 
required.
 
Financial
 
instruments
including
 
embedded
 
derivatives
 
arise
 
predominantly
 
from
 
the
issuance of certain structured debt instruments.
 
Measurement and presentation
 
After initial recognition, UBS
 
classifies, measures and presents
 
its
financial
 
assets
 
and
 
liabilities
 
in
 
accordance
 
with
 
IFRS
 
9,
 
as
described in the table on the following pages.
Classification, measurement and presentation
 
of financial assets
Classification, measurement and presentation
 
of financial assets
Classification, measurement and presentation
 
of financial liabilities
Financial assets classification
Significant items included
Measurement and presentation
Measured at
 
amortized cost
This classification includes:
–
 
cash and balances at central banks;
–
 
loans and advances to banks;
–
 
receivables from securities financing transactions;
–
 
cash collateral receivables on derivative instruments;
–
 
residential and commercial mortgages;
–
 
corporate loans;
–
 
secured loans, including Lombard loans, and
unsecured loans;
–
 
loans to financial advisors;
 
and
–
 
debt securities held as high-quality liquid
 
assets
(HQLA).
 
Measured at amortized cost using the effective interest
method less allowances for expected credit losses
 
(ECL)
(refer to items 2d and 2g in this Note for more information).
The following items are recognized in the income
statement:
–
 
interest income, which is accounted for in accordance
with item 2d
 
in this Note;
–
 
ECL and reversals;
 
and
–
 
foreign exchange (FX) translation gains and losses.
When a financial asset at amortized cost is derecognized,
the gain or loss is recognized in the income statement.
For amounts arising from settlement of certain derivatives,
refer to the next page.
 
Measured
at FVOCI
 
Debt instruments
measured at
FVOCI
This classification primarily includes debt securities
 
and
certain asset-backed securities held as HQLA.
Measured at fair value,
 
with unrealized gains and losses
reported in
Other comprehensive income,
net of applicable
income taxes, until such investments are derecognized.
Upon derecognition, any accumulated balances in
Other
comprehensive income
are reclassified to the income
statement and reported within
Other income.
The following items, which are determined on the
 
same
basis as for financial assets measured at amortized cost,
 
are
recognized in the income statement:
–
 
interest income, which is accounted for in accordance
with item 2d
 
in this Note;
–
 
ECL and reversals;
 
and
–
 
FX translation gains and losses.
Financial assets classification
Significant items included
Measurement and presentation
Measured at
FVTPL
Held for
 
trading
Financial assets held for trading include:
–
 
all derivatives with a positive replacement value,
 
except
those that are designated and effective hedging
instruments; and
–
 
other financial assets acquired principally for the
purpose of selling or repurchasing in the near term, or
that are part of a portfolio of identified financial
instruments that are managed together and for
 
which
there is evidence of a recent actual pattern of short-term
profit taking. Included in this category are debt
instruments (including those in the form of
 
securities,
money market paper,
 
and traded corporate and bank
loans) and equity instruments.
 
Measured at fair value,
 
with changes recognized in the
income statement.
Derivative assets (including derivatives that
 
are designated
and effective hedging instruments) are generally
presented as
Derivative financial instruments
, except those
exchange-traded (ETD) and over-the-counter
 
(OTC)-
cleared derivatives that are legally settled on a daily
 
basis
or in substance net settled on a daily basis,
 
which are
presented within
Cash collateral receivables on derivative
instruments.
Changes in fair value, initial transaction costs,
 
dividends
and gains and losses arising on disposal or redemption
 
are
recognized in
Other net income from financial
instruments measured at fair value through
 
profit or loss
,
except interest income on instruments other than
derivatives (refer to item 2d in this Note), interest on
derivatives designated as hedging instruments
 
in hedges
of interest rate risk and forward points on certain short-
and long-duration FX contracts acting as economic
hedges, which are reported in
Net interest income.
 
Changes in the fair value of derivatives that
 
are
designated and effective hedging instruments are
presented either in the income statement or
Other
comprehensive income
, depending on the type of hedge
relationship (refer to item 2j in this Note for more
information).
Mandatorily
measured at
FVTPL – Other
This classification includes financial assets
 
mandatorily
measured at FVTPL that are not held for trading, as
follows:
 
–
 
certain structured loans, certain commercial loans, and
receivables from securities financing transactions are
managed on a fair value basis;
 
–
 
loans managed on a fair value basis, including those
hedged with credit derivatives;
–
 
certain debt securities held as HQLA and
 
managed on a
fair value basis;
 
–
 
certain investment fund holdings and assets
 
held to
hedge delivery obligations related to cash-settled
employee compensation plans;
 
–
 
brokerage receivables, for which contractual cash flows
do not meet the SPPI criterion because the aggregate
balance is accounted for as a single unit of
 
account,
with interest being calculated on the individual
components;
–
 
auction rate securities, for which contractual cash
 
flows
do not meet the SPPI criterion because interest may
 
be
reset at rates that contain leverage;
–
 
equity
 
instruments;
 
and
–
 
assets held under unit-linked investment contracts.
Financial liabilities classification
Significant items included
Measurement and presentation
Measured at amortized cost
This classification includes:
–
 
demand and time deposits;
 
–
 
retail savings / deposits;
–
 
payables
 
from securities financing transactions;
 
–
 
non-structured fixed-rate bonds;
 
–
 
subordinated debt;
 
–
 
certificates of deposit and covered bonds; and
–
 
cash collateral payables on derivative instruments.
Measured at amortized cost using the effective interest
method.
When a financial liability at amortized cost is
derecognized, the gain or loss is recognized in the income
statement.
 
Measured at
fair value
through
profit or loss
Held for trading
Financial liabilities held for trading include:
–
 
all derivatives with a negative replacement value
(including certain loan commitments),
 
except those
that are designated and effective hedging
instruments; and
–
 
obligations to deliver financial instruments,
 
such as
debt and equity instruments, that UBS has
 
sold to
third parties but does not own (short positions).
Measurement and presentation of financial liabilities
classified at FVTPL follow the same principles
 
as for
financial assets classified at FVTPL, except that
 
the amount
of change in the fair value of a financial liability
designated at FVTPL that is attributable to changes
 
in
UBS’s own credit risk is presented in
Other comprehensive
income
 
directly within
Retained earnings
and is never
reclassified to the income statement.
Derivative liabilities (including derivatives that
 
are
designated and effective hedging instruments)
 
are
generally presented as
Derivative financial instruments
,
except those exchange-traded and OTC-cleared
derivatives that are legally settled on a daily basis
 
or in
substance net settled on a daily basis, which
 
are
presented within
Cash collateral payables on derivative
instruments.
Designated at
FVTPL
UBS designates
 
at FVTPL the following financial
liabilities:
–
 
issued hybrid debt instruments that primarily
 
include
equity-linked, credit-linked and rates-linked bonds
 
or
notes;
–
 
issued debt instruments managed on a fair
 
value
basis;
–
 
certain payables from securities financing transactions;
–
 
amounts due under unit-linked investment contracts
the cash flows of which are linked to financial
 
assets
measured at FVTPL and eliminate an accounting
mismatch;
 
and
–
 
brokerage payables, which arise in conjunction with
brokerage receivables and are measured at FVTPL to
achieve measurement consistency.
c. Loan commitments and financial guarantees
Loan
 
commitments
 
are
 
arrangements
 
to
 
provide
 
credit
 
under
defined terms and
 
conditions. Irrevocable loan
 
commitments are
classified
 
as:
 
(i)
 
derivative
 
loan
 
commitments
 
measured
 
at
 
fair
value through profit
 
or loss; (ii) loan
 
commitments designated at
fair
 
value
 
through
 
profit
 
or
 
loss;
 
or
 
(iii)
 
loan
 
commitments
 
not
measured at
 
fair value.
Financial guarantee
 
contracts are
 
contracts
that
 
require
 
UBS
 
to
 
make
 
specified
 
payments
 
to
 
reimburse
 
the
holder
 
for
 
an
 
incurred
 
loss
 
because
 
a
 
specified
 
debtor
 
fails
 
to
make
 
payments
 
when
 
due
 
in
 
accordance
 
with
 
the
 
terms
 
of
 
a
specified debt instrument.
d. Interest income and expense
Interest
 
income
 
and
 
expense
 
are
 
recognized
 
in
 
the
 
income
statement
based
 
on
the
 
effective
 
interest
method
.
 
When
calculating
 
the
 
effective
 
interest
 
rate
 
(the
 
EIR)
 
for
 
financial
instruments
 
(other
 
than
 
credit-impaired
 
financial
 
instruments),
UBS estimates future cash flows considering all contractual terms
of
 
the
 
instrument,
 
but
 
not
 
expected
 
credit
 
losses,
 
with
 
the
 
EIR
applied to the gross carrying amount of the financial asset
 
or the
amortized cost
 
of a
 
financial liability.
 
However,
 
when a
 
financial
asset
 
becomes
 
credit-impaired
 
after
 
initial
 
recognition,
 
interest
income is determined by
 
applying the EIR to
 
the amortized cost
 
of
the
 
instrument,
 
which
 
represents
 
the
 
gross
 
carrying
 
amount
adjusted for any credit loss allowance.
 
Upfront
 
fees,
 
including
 
fees
 
on
 
loan
 
commitments
 
not
measured at fair value where a loan is expected to be issued, and
direct
 
costs
 
are
 
included
 
within
 
the
 
initial
 
measurement
 
of
 
a
financial
 
instrument
 
measured
 
at
 
amortized
 
cost
 
or
 
FVOCI
 
and
recognized over the expected
 
life of the instrument
 
as part of its
EIR.
Fees related
 
to loan
 
commitments where
 
no loan
 
is expected
to be issued, as well as loan syndication fees where UBS does not
retain a portion of
 
the syndicated loan or where
 
UBS does retain
a
 
portion
 
of
 
the syndicated
 
loan at
 
the
 
same effective
 
yield
 
for
comparable risk as other participants, are included in
Net fee and
commission
 
income
and
 
either
 
recognized
 
over
 
the
 
life
 
of
 
the
commitment or when syndication occurs.
 
›
 
Refer to item 3 in this Note for more information
 
Interest
 
income
 
on
 
financial
 
assets,
 
excluding
 
derivatives,
 
is
included in interest income when positive and in interest expense
when negative.
 
Similarly, interest
 
expense on
 
financial liabilities,
excluding derivatives, is
 
included in interest
 
expense, except when
interest rates are
 
negative, in which case
 
it is included in
 
interest
income.
 
›
 
Refer to item 2b
 
in this Note and Note
3
 
for more information
e. Derecognition
 
Financial assets
UBS derecognizes
 
a transferred
 
financial asset,
 
or a
 
portion of
 
a
financial asset,
 
if the
 
purchaser has
 
received substantially
 
all the
risks and rewards of the asset or
 
a significant part of the risks
 
and
rewards
 
combined
 
with
 
a
 
practical
 
ability
 
to
 
sell
 
or
 
pledge
 
the
asset.
 
Where
 
financial
 
assets
 
have
 
been
 
pledged
 
as
 
collateral
 
or
 
in
similar
 
arrangements,
 
they
 
are
 
considered
 
to
 
have
 
been
transferred if the counterparty has received the contractual rights
to the cash flows of
 
the pledged assets, as may be
 
evidenced by,
for example,
 
the counterparty’s
 
right to
 
sell or
 
repledge the
 
assets.
In transfers where control over the financial asset is retained, UBS
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
 
following
 
the
transfer.
 
Certain
 
OTC
 
derivative
 
contracts
 
and
 
most
 
exchange-traded
futures
 
and
 
option
 
contracts
 
cleared
 
through
 
central
 
clearing
counterparties and
 
exchanges are
 
considered to
 
be settled
 
on a
daily basis,
 
as the
 
payment or
 
receipt of
 
variation margin
 
on a
 
daily
basis
 
represents
 
legal
 
or
 
economic
 
settlement,
 
which
 
results
 
in
derecognition of the associated derivatives.
›
 
Refer to Note 22 and
 
Note
23
 
for more information
 
Financial liabilities
UBS derecognizes a financial liability when
 
it is extinguished, i.e.,
when
 
the
 
obligation
 
specified
 
in
 
the
 
contract
 
is
 
discharged,
canceled
 
or
 
expires.
 
When
 
an
 
existing
 
financial
 
liability
 
is
exchanged for a
 
new one from
 
the same lender
 
on substantially
different
 
terms,
 
or
 
the
 
terms
 
of
 
an
 
existing
 
liability
 
are
substantially modified, the original
 
liability is derecognized
 
and a
new
 
liability
 
recognized
 
with
 
any
 
difference
 
in
 
the
 
respective
carrying amounts recognized in the income statement.
 
f. Fair value of financial instruments
UBS accounts
 
for a
 
significant portion
 
of its
 
assets and
 
liabilities
at fair value. Fair value is the price on the measurement date that
would be
 
received for
 
the sale
 
of an
 
asset or
 
paid to
 
transfer a
liability in
 
an orderly
 
transaction between
 
market participants
 
in
the principal market,
 
or in the most
 
advantageous market in the
absence of a principal market.
 
›
 
Refer to Note 21 for more information
Critical accounting estimates and judgments
The use
 
of valuation techniques, modeling
 
assumptions and estimates
 
of
unobservable market
 
inputs in
 
the fair
 
valuation of
 
financial instruments
requires
 
significant judgment and could affect the
 
amount of gain or loss
recorded
 
for
 
a
 
particular
 
position.
 
Valuation
 
techniques
 
that
 
rely
 
more
heavily on unobservable
 
inputs and sophisticated
 
models inherently require
a higher
 
level of judgment
 
and may
 
require adjustment to
 
reflect factors
that market
 
participants would
 
consider in
 
estimating fair
 
value, such
 
as
close-out costs, which are presented in Note 21d.
 
UBS‘s governance framework over
 
fair value measurement is described
in Note 21b,
 
and UBS provides
 
a sensitivity analysis
 
of the estimated
 
effects
arising from
 
changing significant unobservable
 
inputs in
 
Level 3 financial
instruments to reasonably possible alternative
 
assumptions in Note 21g.
 
›
 
Refer to Note 21 for more information
ECL
 
are
 
recognized
 
for
 
financial
 
assets
 
measured
 
at
 
amortized
cost,
 
financial
 
assets
 
measured
 
at
 
FVOCI,
 
fee
 
and
 
lease
receivables,
 
financial
 
guarantees
,
 
and
 
loan
 
commitments
 
not
measured at
 
fair value. ECL
 
are also
 
recognized on the
 
undrawn
portion
 
of
 
committed
 
unconditionally
 
revocable
 
credit
 
lines,
which include UBS’s credit
 
card limits and master
 
credit facilities,
as
 
UBS
 
is
 
exposed
 
to
 
credit
 
risk
 
because
 
the
 
borrower
 
has
 
the
ability
 
to
 
draw
 
down
 
funds
 
before
 
UBS
 
can
 
take
 
credit
 
risk
mitigation actions.
Recognition of expected credit losses
 
ECL are recognized on the following basis:
–
 
Stage 1 instruments: Maximum 12-month
 
ECL are recognized
from initial recognition,
 
reflecting the portion
 
of lifetime cash
shortfalls that would
 
result if a default
 
occurs in the 12
 
months
after
 
the
 
reporting
 
date,
 
weighted
 
by
 
the
 
risk
 
of
 
a
 
default
occurring.
 
–
 
Stage 2
 
instruments:
 
Lifetime
 
ECL
 
are
 
recognized
 
if
 
a
significant
 
increase
 
in
 
credit
 
risk
 
(
an
SICR)
 
is
 
observed
subsequent
 
to
 
the
 
instrument’s
 
initial
 
recognition,
 
reflecting
lifetime
 
cash
 
shortfalls
 
that
 
would
 
result
 
from
 
all
 
possible
default events over the expected life of a financial instrument,
weighted by
 
the risk
 
of a
 
default occurring.
 
When an
 
SICR is
no longer observed, the instrument will move back to stage 1.
–
 
Stage 3
 
instruments:
 
Lifetime
 
ECL
 
are
 
always
 
recognized
 
for
credit-impaired
 
financial
 
instruments,
 
as
 
determined
 
by
 
the
occurrence of one or more loss events, by estimating
 
expected
cash
 
flows
 
based
 
on
 
a
 
chosen
recovery
 
strategy.
 
Credit
-
impaired
 
exposures
 
may
 
include
 
positions
 
for
 
which
 
no
allowance has been recognized, for example because they are
expected to be fully recoverable through collateral held.
–
 
Changes
 
in
 
lifetime
 
ECL
 
since
 
initial
 
recognition
 
are
 
also
recognized for
 
assets that
 
are purchased
 
or originated
 
credit-
impaired (POCI). POCI financial instruments include those that
are purchased
 
at a
 
deep discount
 
or newly
 
originated with
 
a
defaulted counterparty; they
 
remain a separate
 
category until
derecognition.
All
 
or
 
part
 
of
 
a
 
financial
 
asset
 
is
 
written
 
off
 
if
 
it
 
is
 
deemed
uncollectible or forgiven.
 
Write-offs reduce the
 
principal amount
of a
 
claim and
 
are charged
 
against related
 
allowances for
 
credit
losses. Recoveries, in part or in full, of
 
amounts previously written
off are generally credited to
Credit loss (expense) / release
.
 
ECL
 
are
 
recognized
 
in
 
the
 
income
 
statement
 
in
Credit
 
loss
(expense) / release
. A corresponding ECL allowance is reported as
a decrease in the carrying amount of financial assets measured at
amortized cost on the balance sheet.
 
For financial assets that are
measured at
 
FVOCI, the
 
carrying amount
 
is not
 
reduced, but
 
an
accumulated
 
amount
 
is
 
recognized
 
in
Other
 
comprehensive
income
.
 
For
 
off-balance
 
sheet
 
financial
 
instruments
 
and
 
other
credit lines, provisions for ECL are presented in
Provisions.
Default and credit impairment
UBS
 
applies
 
a
 
single
 
definition
 
of
 
default
 
for
 
credit
 
risk
management
 
purposes,
 
regulatory
 
reporting
 
and
 
ECL,
 
with
 
a
counterparty
 
classified
 
as
 
defaulted
 
based
 
on
 
quantitative
 
and
qualitative criteria.
 
›
 
Refer to “Credit policies for distressed assets”
 
in the “Risk
management and control” section of this report for
 
more
information
Measurement of expected credit losses
IFRS
 
9
 
ECL
 
reflect
 
an
 
unbiased,
 
probability-weighted
 
estimate
based
 
on
 
loss
 
expectations
 
resulting
 
from
 
default
 
events.
 
The
method
 
used
 
to
 
calculate
 
ECL
 
applies
 
the
 
following
 
principal
factors: probability
 
of default
 
(PD), loss
 
given default
 
(LGD) and
exposure
 
at default
 
(EAD). Parameters
 
are
 
generally determined
on an
 
individual financial
 
asset level. Based
 
on the materiality
 
of
the
 
portfolio,
 
for
 
credit
 
card
 
exposures
 
and
 
personal
 
account
overdrafts
 
in
 
Switzerland,
 
a
 
portfolio
 
approach
 
is
 
applied
 
that
derives an average
 
PD and LGD
 
for the entire
 
portfolio. PDs and
LGDs used in the ECL calculation are point-in-time (PIT)-based for
key portfolios and consider both current conditions and expected
cyclical
 
changes.
 
For
 
material
 
portfolios,
 
PDs
 
and
 
LGDs
 
are
determined for
 
different scenarios,
 
whereas EAD
 
projections are
treated as scenario independent.
For the
 
purpose of
 
determining the
 
ECL-relevant parameters,
UBS leverages its
 
Pillar 1 internal
 
ratings-based (IRB) models
 
that
are also used in determining expected loss (EL) and risk-weighted
assets under
 
the Basel III
 
framework and
 
Pillar 2 stress
 
loss models.
Adjustments have been made to these models and IFRS 9-related
models
 
have
 
been
 
developed
 
that
 
consider
 
the
 
complexity,
structure and
 
risk profile
 
of relevant
 
portfolios and
 
take account
of the fact that PDs and LGDs used in the ECL calculation are PIT-
based,
 
as
 
opposed
 
to
 
the
 
corresponding
 
Basel III
 
through-the-
cycle (TTC) parameters.
 
All models that
 
are relevant for
 
measuring
expected credit
 
losses are
 
subject to
 
UBS’s model
 
validation and
oversight processes.
Probability of default:
PD represents the
 
probability of a
 
default
over
 
a
 
specified
 
time
 
period.
 
A
 
12-month
 
PD
 
represents
 
the
probability of
 
default determined
 
for the
 
next 12
 
months and
 
a
lifetime
 
PD
 
represents
 
the
 
probability
 
of
 
default
 
over
 
the
remaining lifetime of
 
the instrument.
 
PIT PDs
 
are derived from
 
TTC
PDs and scenario forecasts.
 
The modeling is region-,
 
industry- and
client
 
segment-specific
 
and
 
considers
 
both
 
macroeconomic
scenario dependencies and client-idiosyncratic information.
Exposure
 
at
 
default:
EAD
 
represents
 
an
 
estimate
 
of
 
the
exposure to credit risk
 
at the time of
 
a potential default
 
occurring,
considering
 
expected
 
repayments,
 
interest
 
payments
 
and
accruals, discounted at
 
the EIR. Future
 
drawdowns on facilities
 
are
considered
 
through
 
a
 
credit
 
conversion
 
factor
 
(a
 
CCF)
 
that
 
is
reflective
 
of
 
historical
 
drawdown
 
and
 
default
 
patterns
 
and
 
the
characteristics of the respective portfolios.
Loss given
 
default:
LGD represents
 
an estimate
 
of the loss
 
at the
time of a potential
 
default occurring,
 
taking into
 
account expected
future cash
 
flows from
 
collateral
 
and other
 
credit
 
enhancements,
 
or
expected
 
payouts
 
from
 
bankruptcy
 
proceedings
 
for
 
unsecured
claims and, where applicable, time to realization of collateral and
the seniority
 
of claims.
 
LGD is
 
commonly
 
expressed
 
as a percentage
of EAD.
Estimation of expected credit losses
Number of scenarios and estimation of scenario weights
Determination of probability
 
-weighted ECL
 
requires evaluating
 
a
range
 
of
 
diverse
 
and
 
relevant
 
future
 
economic
 
conditions,
especially
 
with
 
a
 
view
 
to
 
modeling
 
the
 
non-linear
 
effect
 
of
assumptions about macroeconomic factors on the estimate.
 
To
 
accommodate
 
this
 
requirement,
 
UBS
 
uses
 
different
economic
 
scenarios
 
in
 
the
 
ECL
 
calculation
.
 
Each
 
scenario
 
is
represented
 
by
 
a
 
specific
 
scenario
 
narrative,
 
which
 
is
 
relevant
considering the exposure of key portfolios to economic risks, and
for
 
which
 
a
 
set
 
of
 
consistent
 
macroeconomic
 
variables
 
is
determined. The estimation
 
of the appropriate weights
 
for these
scenarios
 
is
 
predominantly
 
judgement-based.
 
The
 
assessment
 
is
based on a
 
holistic review of
 
the prevailing economic
 
or political
conditions,
 
which
 
may
 
exhibit
 
different
 
levels
 
of
 
uncertainty.
 
It
 
takes
 
into
 
account
 
the
 
impact
 
of
 
changes
 
in
 
the
 
nature
 
and
severity
 
of
 
the underlying
 
scenario
 
narratives
 
and
 
the
 
projected
economic variables.
 
The
 
determined
 
weights
 
constitute
 
the
 
probabilities
 
that
 
the
respective
 
set
 
of
 
macroeconomic
 
conditions
 
will
 
occur
 
and
 
not
that
 
the
 
chosen
 
particular
 
narratives
 
with
 
the
 
related
macroeconomic variables will materialize.
Macroeconomic and other factors
The
 
range
 
of
 
macroeconomic,
 
market
 
and
 
other
 
factors
 
that
 
is
modeled
 
as
 
part
 
of
 
the
 
scenario
 
determination
 
is
 
wide,
 
and
historical information is
 
used to support
 
the identification of
 
the
key factors.
 
As the
 
forecast horizon
 
increases, the
 
availability of
information
 
decreases,
 
requiring
 
an
 
increase
 
in
 
judgment.
 
For
cycle-sensitive PD and LGD determination purposes, UBS projects
the relevant
 
economic factors
 
for a
 
period of
 
three years
 
before
reverting, over a specified period, to
 
cycle-neutral PD and LGD
 
for
longer-term projections.
 
Factors relevant
 
for ECL
 
calculation vary
 
by type
 
of exposure.
Regional
 
and
 
client-segment
 
characteristics
 
are
 
generally
 
taken
into
 
account,
 
with
 
specific
 
focus
 
on
 
Switzerland
 
and
 
the
 
US,
considering UBS’s key ECL-relevant portfolios.
For
 
UBS,
 
the
 
following
 
forward-looking
 
macroeconomic
variables represent the most relevant factors for ECL calculation:
 
–
 
GDP growth rates, given
 
their significant effect on
 
borrowers’
performance;
 
–
 
unemployment
 
rates, given
 
their significant
 
effect on
 
private
clients’ ability to meet contractual obligations;
 
–
 
house price indices, given their
 
significant effect on mortgage
collateral valuations;
 
–
 
interest rates,
 
given their
 
significant effect
 
on counterparties’
abilities to service debt;
 
–
 
consumer
 
price
 
indices,
 
given
 
their
 
overall
 
relevance
 
for
companies’
 
performance,
 
private
 
clients’
 
purchasing
 
power
and economic stability; and
–
 
equity indices,
 
given that
 
they are
 
an important
 
factor in
 
our
corporate rating tools.
 
Scenario generation, review process and governance
A
 
team
 
of
 
economists,
 
who
 
are
 
part
 
of
 
Group
 
Risk
 
Control,
develop
 
the
 
forward-looking
 
macroeconomic
 
assumptions
 
with
involvement from a broad range of experts.
The
 
scenarios, their
 
weight and
 
the key
 
macroeconomic and
other
 
factors
 
are
 
subject
 
to
 
a
 
critical
 
assessment
 
by
 
the
 
IFRS
 
9
Scenario Sounding Sessions and ECL Management Forum, which
include senior management from Group Risk and Group Finance.
Important aspects
 
for the
 
review include
 
whether there
 
may be
particular credit
 
risk concerns
 
that may
 
not be
 
capable of
 
being
addressed systematically and
 
require post-model adjustments
 
for
stage allocation and ECL allowance.
 
The
 
Group
 
Model
 
Governance
Committee
,
 
as
 
the
 
highest
authority under UBS’s
 
model governance framework, ratifies
 
the
decisions taken by the ECL Management Forum.
 
›
 
Refer to Note 20 for more information
ECL measurement period
 
The period for which lifetime ECL are determined is based on the
maximum
 
contractual period
 
that UBS
 
is exposed
 
to
 
credit
 
risk,
taking
 
into
 
account
 
contractual
 
extension,
 
termination
 
and
prepayment
 
options.
 
For
 
irrevocable
 
loan
 
commitments
 
and
financial guarantee contracts,
 
the measurement period
 
represents
the maximum contractual period for which
 
UBS has an obligation
to extend credit.
Additionally,
 
some
 
financial
 
instruments
 
include
 
both
 
an
 
on-
demand loan and
 
a revocable undrawn
 
commitment, where the
contractual
 
cancellation
 
right
 
does
 
not
 
limit
 
UBS’s
 
exposure
 
to
credit risk
 
to the
 
contractual notice
 
period, as
 
the client
 
has the
ability to
 
draw down
 
funds before
 
UBS can
 
take risk-mitigating
actions. In such cases UBS is required to estimate
 
the period over
which it is exposed to credit risk. This applies to UBS’s credit card
limits, which do not have a
 
defined contractual maturity date, are
callable
 
on
 
demand
 
and
 
where
 
the
 
drawn
 
and
 
undrawn
components are managed as one exposure.
 
The exposure arising
from UBS’s credit
 
card limits is not
 
significant and is managed
 
at
a portfolio level,
 
with credit actions
 
triggered when balances
 
are
past due.
 
An ECL
 
measurement period
 
of seven
 
years is
 
applied
for credit card
 
limits, capped at
 
12 months for
 
stage 1 balances,
as a proxy for the period that UBS is exposed to credit risk.
Customary
 
master
 
credit
 
agreements
 
in
 
the
 
Swiss
 
corporate
market
 
also
 
include
 
on-demand
 
loans
 
and
 
revocable
 
undrawn
commitments.
 
For
 
smaller
 
commercial
 
facilities,
 
a
 
risk-based
monitoring
 
(RbM)
 
approach
 
is
 
in
 
place
 
that
 
highlights
 
negative
trends
 
as
 
risk
 
events,
 
at
 
an
 
individual
 
facility
 
level,
 
based
 
on
 
a
combination
 
of
 
continuously
 
updated
 
risk
 
indicators.
 
The
 
risk
events trigger additional
 
credit reviews by
 
a risk officer,
 
enabling
informed credit
 
decisions to
 
be taken.
 
Larger corporate
 
facilities
are not subject
 
to RbM, but
 
are reviewed
 
at least
 
annually through
a
 
formal
 
credit
 
review.
 
UBS
 
has
 
assessed
 
these
 
credit
 
risk
management practices and
 
considers both
 
the RbM approach
 
and
formal credit
 
reviews as
 
substantive credit
 
reviews resulting
 
in a
re-origination
 
of
 
the
 
given
 
facility.
 
Following
 
this,
 
a
 
12-month
measurement
 
period
 
from
 
the
 
reporting
 
date
 
is
 
used
 
for
 
both
types of facilities as
 
an appropriate proxy of
 
the period over
 
which
UBS is exposed to credit risk, with 12 months also
 
used as a look-
back
 
period
 
for
 
assessing
SICR,
 
always
 
from
 
the
 
respective
reporting date.
Significant increase in credit risk
 
Financial
 
instruments
 
subject
 
to
 
ECL
 
are
 
monitored
 
on
 
an
ongoing
 
basis.
 
To
 
determine
 
whether
 
the
 
recognition
 
of
 
a
maximum
 
12-month
 
ECL
 
continues
 
to
 
be
 
appropriate,
 
an
assessment
 
is made
 
as
 
to
 
whether
 
an
 
SICR
 
has
 
occurred
 
since
initial
 
recognition
 
of
 
the
 
financial
 
instrument
 
,
 
applying
 
both
quantitative
 
and qualitative
 
factors.
 
Primarily,
 
UBS
 
assesses
 
changes
 
in
 
an
 
instrument’s
 
risk
 
of
default
 
on
 
a
 
quantitative
 
basis
 
by
 
comparing
 
the
 
annualized
forward-looking
 
and
 
scenario-weighted
 
lifetime
 
PD
 
of
 
an
instrument determined at two different dates:
 
–
 
at the reporting date; and
 
–
 
at inception of the instrument.
If, based on UBS’s
 
quantitative modeling, an increase exceeds
a
 
set
 
threshold,
 
an
 
SICR
 
is
 
deemed
 
to
 
have
 
occurred
 
and
 
the
instrument is transferred to stage 2 with lifetime ECL recognized
The threshold
 
applied varies
 
depending on
 
the original
 
credit
quality of the borrower,
 
with a higher SICR
 
threshold set for
 
those
instruments
 
with
 
a
 
low
 
PD
 
at
 
inception.
 
The
 
SICR
 
assessment
based on PD changes
 
is made at
 
an individual financial asset
 
level.
A high-level
 
overview of
 
the SICR
 
trigger, which
 
is a
 
multiple of
the
 
annualized
 
remaining
 
lifetime
 
PIT
 
PD
 
expressed
 
in
 
rating
downgrades,
 
is
 
provided
 
in
 
the
 
“SICR
 
thresholds”
 
table
 
below.
The actual SICR
 
thresholds applied are
 
defined on a
 
more granular
level by interpolating between the values shown in the table.
Internal rating at origination
 
of the instrument
Rating downgrades /
SICR trigger
0–3
3
4–8
2
9–13
1
Irrespective
 
of
 
the
 
SICR
 
assessment
 
based
 
on
 
default
probabilities, credit
 
risk is
 
generally deemed
 
to have
 
significantly
increased for an instrument if the contractual payments are more
than
 
30
 
days
 
past
 
due.
 
For
 
certain
 
less
 
material
 
portfolios,
specifically
 
the
 
Swiss
 
credit
 
card
 
portfolio,
 
the
 
30-day
 
past
 
due
criterion
 
is
 
used
 
as
 
the
 
primary
 
indicator
 
of
 
an
 
SICR.
 
Where
instruments are transferred to stage 2 due
 
to the 30-day past
 
due
criterion,
 
a
 
minimum
 
period
 
of
 
six
 
months
 
is
 
applied
 
before
 
a
transfer
 
back
 
to
 
stage 1
 
can
 
be
 
triggered.
 
For
 
instruments
 
in
Personal &
 
Corporate Banking
 
and Global
 
Wealth Management
Region Switzerland
 
that are
 
between 90
 
and 180
 
days past
 
due
but
 
have
 
not
 
been
 
reclassified
 
to
 
stage 3,
 
a
 
one-year
 
period
 
is
applied before a transfer back to stage 1 can be triggered.
Additionally,
 
based
 
on
 
individual
 
counterparty-specific
indicators,
 
external
 
market
 
indicators
 
of
 
credit
 
risk
 
or
 
general
economic
 
conditions,
 
counterparties may
 
be moved
 
to a
 
watch
list, which is used as a
 
secondary qualitative indicator for an SICR.
Exception management is further applied,
 
allowing for individual
and collective adjustments
 
on exposures
 
sharing the same
 
credit
risk characteristics
 
to take
 
account of
 
specific situations
 
that are
not otherwise fully reflected.
 
In
 
general,
 
the
 
overall
 
SICR
 
determination
 
process
 
does
 
not
apply
 
to
 
Lombard
 
loans,
 
securities
 
financing
 
transactions
 
and
certain other asset-based
 
lending transactions, because
 
of the risk
management
 
practices
 
adopted,
 
including
 
daily
 
monitoring
processes with strict margining. If margin calls are not satisfied, a
position
 
is
 
closed
 
out
 
and
 
classified
 
as
 
a
 
stage 3
 
position.
 
In
exceptional
 
cases,
 
an
 
individual
 
adjustment
 
and
 
a
 
transfer
 
into
stage 2 may be made to take account of specific facts.
Credit risk
 
officers are
 
responsible for
 
the identification
 
of an
SICR,
 
which for accounting purposes is in some respects different
from
 
internal
 
credit
 
risk
 
management processes.
 
This difference
mainly
arises
because
 
ECL
 
accounting
 
requirements
 
are
instrument-specific,
 
such
 
that
 
a
 
borrower
 
can
 
have
 
multiple
exposures
 
allocated
 
to
 
different
 
stages,
 
and
 
maturing
 
loans
 
in
stage 2 will
 
migrate to
 
stage 1 upon
 
renewal irrespective
 
of the
actual
 
credit
 
risk
 
at
 
that
 
time.
 
Under
 
a
 
risk-based
 
approach,
 
a
holistic counterparty
 
credit assessment
 
and the
 
absolute level
 
of
risk at any given date
 
will determine what risk-mitigating actions
may be warranted.
›
 
Refer to the “
Risk management and control
” section of this
report for more information
Critical accounting estimates and judgments
The calculation of ECL requires management
 
to apply significant judgment
and make estimates and assumptions
 
that can result in significant
 
changes
to the timing and amount of ECL recognized.
 
Determination of a significant increase in
 
credit risk
 
IFRS 9 does
 
not include
 
a definition of
 
what constitutes an
 
SICR,
 
with UBS’s
assessment considering qualitative and quantitative criteria. An IFRS 9 ECL
Management Forum
 
has been
 
established to
 
review and challenge
 
the SICR
results.
Scenarios, scenario weights and macroeconomic
 
variables
 
ECL
 
reflect
 
an
 
unbiased
 
and
 
probability-weighted
 
amount,
 
which
 
UBS
determines
 
by
 
evaluating
 
a
 
range
 
of
 
possible
 
outcomes.
 
Management
selects
 
forward-looking
 
scenarios
 
that
 
include
 
relevant
 
macroeconomic
variables
 
and
 
management’s
 
assumptions
 
around
 
future
 
economic
conditions. IFRS
 
9 Scenario Sounding
 
Sessions,
 
in addition
 
to the IFRS
 
9 ECL
Management
 
Forum,
 
are
 
in
 
place
 
to
 
derive,
 
review
 
and
 
challenge
 
the
scenario selection and weights,
 
and to determine
 
whether any additional
post-model adjustments are required that may significantly
 
affect ECL.
 
ECL measurement period
Lifetime ECL are
 
generally determined
 
based upon the
 
contractual maturity
of the transaction,
 
which significantly
 
affects ECL. For credit
 
card limits and
Swiss callable
 
master credit
 
facilities, judgment
 
is required,
 
as UBS
 
must
determine the period over
 
which it is exposed
 
to credit risk.
 
A seven-year
period is
 
applied for
 
credit card
 
limits, capped
 
at 12
 
months for
 
stage 1
positions, and a 12-month period applied for
 
master credit facilities.
 
Modeling and post-model adjustments
A number
 
of complex
 
models have
 
been developed
 
or modified
 
to calculate
ECL,
 
with
 
additional
 
post-model
 
adjustments
 
required
 
which
 
may
significantly affect
 
ECL. The
 
models are governed
 
by UBS’s
 
model validation
controls and
 
approved by
 
the Group Model
 
Governance Committee (the
GMGC)
.
 
The
 
post
-
model
 
adjustments
are
 
approved
 
by
 
the
ECL
Management Forum and endorsed by the
 
GMGC.
A
sensitivity
 
analysis
covering
 
key
 
macroeconomic
 
variables
,
 
scenario
weights and SICR trigger points
 
on ECL measurement is provided
 
in Note
20f.
 
›
 
Refer to Note 20 for more information
h. Restructured and modified financial assets
When payment default is expected,
 
or where default has already
occurred,
 
UBS
 
may
 
grant
 
concessions
 
to
 
borrowers
 
in
 
financial
difficulties that
 
it would not
 
consider in
 
the normal course
 
of its
business, such as
 
preferential interest rates, extension
 
of maturity,
modifying
 
the
 
schedule
 
of
 
repayments,
 
debt
 
/
 
equity
 
swap,
subordination,
 
etc. When a concession or forbearance measure is
granted, each case
 
is considered individually
 
and the exposure
 
is
generally classified as
 
being in default.
 
Forbearance classification
will
 
remain
 
until
 
the
 
loan
 
is
 
collected
 
or
 
written
 
off,
 
non-
preferential
 
conditions
 
superseding
 
preferential
 
conditions
 
are
granted
 
or
 
until
 
the
 
counterparty
 
has
 
recovered
 
and
 
the
preferential conditions no longer exceed UBS’s risk tolerance.
Modifications result in an alteration of future contractual cash
flows and can occur within UBS’s normal risk tolerance or as part
of
 
a
 
credit
 
restructuring
 
where
 
a
 
counterparty
 
is
 
in
 
financial
difficulties. The
 
restructuring or
 
modification of
 
a financial
 
asset
could lead
 
to a
 
substantial change
 
in the
 
terms and
 
conditions,
resulting in the
 
original financial asset
 
being derecognized and
 
a
new
 
financial
 
asset
 
being
 
recognized.
 
Where
 
the
 
modification
does
 
not
 
result
 
in
 
a
 
derecognition,
 
any
 
difference
 
between
 
the
modified contractual cash
 
flows discounted at
 
the original
 
EIR and
the existing
 
gross carrying amount
 
of the
 
given financial asset
 
is
recognized in the
 
income statement as
 
a modification gain
 
or loss.
 
i. Offsetting
UBS
 
presents
 
financial
 
assets
 
and
 
liabilities on
 
its
 
balance
 
sheet
net if (i) it has a legally enforceable right to set
 
off the recognized
amounts
 
and
 
(ii)
 
it
 
intends
 
either
 
to
 
settle
 
on
 
a
 
net
 
basis
 
or
 
to
realize
 
the
 
asset
 
and
 
settle
 
the
 
liability
 
simultaneously.
 
Netted
positions include, for example, certain derivatives and repurchase
and reverse
 
repurchase transactions
 
with various
 
counterparties,
exchanges and clearing houses.
In assessing whether
 
UBS intends
 
to either settle
 
on a net
 
basis,
or
 
to
 
realize
 
the
 
asset
 
and
 
settle
 
the
 
liability
 
simultaneously,
emphasis is placed on the effectiveness of operational settlement
mechanics
 
in
 
eliminating
 
substantially
 
all
 
credit
 
and
 
liquidity
exposure
 
between
 
the
 
counterparties.
 
This
 
condition
 
precludes
offsetting on the balance
 
sheet for substantial amounts
 
of UBS’s
financial assets and liabilities, even
 
though they may be
 
subject to
enforceable netting arrangements.
 
Repurchase arrangements and
securities
 
financing
 
transactions
 
are
 
presented
 
net
 
only
 
to
 
the
extent
 
that
 
the
 
settlement
 
mechanism
 
eliminates,
 
or
 
results
 
in
insignificant,
 
credit
 
and
 
liquidity
 
risk,
 
and
 
processes
 
the
receivables and payables in a single settlement process or cycle.
›
 
Refer to Note
22
for more information
. Hedge accounting
The Group
 
applies
 
hedge accounting
 
requirements
 
of IFRS
 
9, unless
stated otherwise
 
below, where the criteria for documentation
 
and
hedge
 
effectiveness are
 
met.
 
If
 
a
 
hedge
 
relationship no
 
longer
meets
 
the
 
criteria
 
for
 
hedge
 
accounting,
 
hedge
 
accounting
 
is
discontinued. Voluntary
 
discontinuation of
 
hedge
 
accounting is
permitted under
 
IAS 39 but
 
not under
 
IFRS 9.
Fair value hedges of interest rate risk related to debt instruments
and loan assets
The fair value change
 
of the hedged item
 
attributable
 
to a hedged
risk is
 
reflected as
 
an
 
adjustment to
 
the
 
carrying amount of
 
the
hedged item, and recognized
 
in the income statement along with
the change
 
in the fair
 
value
 
of the
 
hedging
 
instrument.
 
Fair value hedges of portfolio interest rate risk related to loans
designated under IAS 39
Prior to discontinuation in December 2021, the fair value change
of the
 
hedged item
 
attributable to
 
a hedged
 
risk is
 
reflected within
Other
 
financial
 
assets
 
measured
 
at
 
amortized
 
cost
or
Other
financial liabilities measured
 
at amortized cost
and recognized in
the income statement
 
along with the
 
change in the
 
fair value of
the hedging instrument.
 
Fair value hedges of FX risk related to debt instruments
The
 
fair
 
value
 
change
 
of
 
the
 
hedged
 
item
 
attributable
 
to
 
the
hedged risk
 
is reflected
 
in the measurement
 
of the
 
hedged item
and recognized
 
in the
 
income statement
 
along with
 
the change
in the fair value of
 
the hedging instrument. The foreign
 
currency
basis
 
spread
 
of
 
cross-currency
 
swaps
 
designated
 
as
 
hedging
derivatives is excluded from the designation and
 
accounted for as
a cost of hedging with
 
amounts deferred in
Other comprehensive
income
 
within
Equity
. These amounts are released
 
to the income
statement over the term of the hedged item.
Discontinuation of fair value hedges
Discontinuations
 
for
 
reasons
 
other
 
than
 
derecognition
 
of
 
the
 
hedged
item
 
result
 
in
 
an
 
adjustment to
 
the
 
carrying
 
amount,
 
which
 
is
amortized to the income statement over the remaining life of the
hedged
 
item using
 
the effective
 
interest
 
method.
 
If the
 
hedged
 
item
is derecognized,
 
the unamortized
 
fair value adjustment
 
or deferred
cost of
 
hedging amount is recognized immediately in the income
statement
 
as part
 
of any
 
derecognition
 
gain or
 
loss.
Cash flow hedges of forecast transactions
Fair value gains
 
or losses associated with
 
the effective portion
 
of
derivatives designated as cash
 
flow hedges for
 
cash flow repricing
risk are recognized initially in
Other comprehensive income
within
Equity
 
and
 
reclassified
 
to
 
the
 
income
 
statement
 
in
 
the
 
periods
when
 
the
 
hedged
 
forecast
 
cash
 
flows
 
affect
 
profit
 
or
 
loss,
including discontinued
 
hedges for which
 
forecast cash
 
flows are
expected
 
to
 
occur.
 
If
 
the
 
forecast
 
transactions
 
are
 
no
 
longer
expected to
 
occur,
 
the deferred
 
gains or
 
losses are
 
immediately
reclassified to the income statement.
Hedges of net investments in foreign operations
Gains or losses on the hedging
 
instrument
 
relating to the effective
portion of a hedge are recognized
 
directly in
Other comprehensive
income
 
within
Equity,
while
 
any
 
gains
 
or
 
losses
 
relating
 
to
 
the
ineffective
 
and / or undesignated
 
portion (for
 
example, the
 
interest
element
 
of
 
a
 
forward
 
contract)
 
are
 
recognized
 
in
 
the
 
income
statement.
 
Upon
 
disposal
 
or
 
partial
 
disposal
 
of
 
the
 
foreign
 
operation,
the cumulative
 
value
 
of any
 
such
 
gains
 
or losses
 
recognized
 
in
Equity
 
associated
 
with the
 
entity
 
is reclassified
 
to
Other income
.
Interest Rate Benchmark Reform
 
UBS
 
can
 
continue
 
hedge
 
accounting
 
during
 
the
 
period
 
of
uncertainty before existing interest rate benchmarks are replaced
with
 
alternative
 
risk-free
 
interest
 
rates.
 
During
 
this
 
period,
 
UBS
can
 
assume
 
that
 
the
 
current
 
benchmark
 
rates
 
will
 
continue
 
to
exist,
 
such
 
that
 
forecast
 
transactions
 
are
 
considered
 
highly
probable
 
and
 
hedge
 
relationships
 
remain,
 
with
 
little
 
or
 
no
consequential
 
impact
 
on
 
the
 
financial
 
statements.
 
Upon
replacement
 
of
 
existing
 
interest
 
rate
 
benchmarks
 
by
 
alternative
risk-free
 
interest
 
rates
 
expected
 
in
 
2021
 
and
 
beyond,
 
UBS
 
will
apply the requirements of
Amendments to IFRS 9, IAS 39, IFRS 7,
IFRS 4 and IFRS 16 (Interest Rate Benchmark Reform – Phase 2).
 
›
 
Refer to Note 1b for more information
3) Fee and commission income and expenses
UBS
 
earns
 
fee
 
income
 
from
 
the
 
diverse
 
range
 
of
 
services
 
it
provides to its
 
clients. Fee income can
 
be divided into two
 
broad
categories:
 
fees
 
earned
 
from
 
services
 
that
 
are
 
provided
 
over
 
a
certain
 
period
 
of
 
time,
 
such
 
as
 
management
 
of
 
clients’
 
assets,
custody
 
services
 
and
 
certain
 
advisory
 
services;
 
and
 
fees
 
earned
from
 
point-in-time
 
services,
 
such
 
as
 
underwriting
 
fees,
 
deal-
contingent
 
merger
 
and
 
acquisitions
 
fees,
 
and
 
brokerage
 
fees
(e.g.,
 
securities
 
and
 
derivative
s
 
execution
 
and
 
clearing).
 
UBS
recognizes
 
fees
 
earned
 
from
 
point-in-time
 
services
 
when
 
it
 
has
fully
 
provided
 
the
 
service
 
to
 
the
 
customer.
 
Where
 
the
 
contract
requires
 
services to be
 
provided over
 
time, income
 
is recognized
on a systematic basis over the life of the agreement.
Consideration
 
received
 
is
 
allocated
 
to
 
the
 
separately
identifiable performance
 
obligations in
 
a contract.
 
Owing to
 
the
nature
 
of
 
UBS’s
 
business,
 
contracts
 
that
 
include
 
multiple
performance obligations are typically those that
 
are considered to
include
 
a
 
series of
 
similar performance
 
obligations fulfilled
 
over
time
 
with
 
the
 
same
 
pattern
 
of
 
transfer
 
to
 
the
 
client,
 
e.g.,
management
 
of
 
client
 
assets
 
and
 
custodial
 
services.
 
As
 
a
consequence, UBS is not
 
required to apply
 
significant judgment in
allocating
 
the
 
consideration
 
received
 
across
 
the
 
various
performance obligations.
Point-in-time
 
services
 
are
 
generally
 
for
 
a
 
fixed
 
price
 
or
dependent on
 
deal size,
 
e.g., a
 
fixed number
 
of basis
 
points of
trade
 
size,
 
where
 
the
 
amount
 
of
 
revenue
 
is
 
known
 
when
 
the
performance
 
obligation
 
is
 
met.
 
Fixed
 
over-time
 
fees
 
are
recognized on
 
a straight-line
 
basis over
 
the performance period.
Custodial
 
and
 
asset
 
management
 
fees
 
can
 
be
 
variable
 
through
reference to the size of the customer portfolio. However,
 
they are
generally
 
billed
 
on
 
a
 
monthly
 
or
 
quarterly
 
basis
 
once
 
the
customer’s portfolio
 
size is
 
known or
 
known with
 
near certainty
and
 
therefore
 
also
 
recognized
 
ratably
 
over
 
the
 
performance
period.
 
UBS
 
does
 
not
 
recognize
 
performance
 
fees
 
related
 
to
management
 
of
 
clients’
 
assets
 
or
 
fees
 
related
 
to
 
contingencies
beyond UBS’s control until such uncertainties are resolved.
 
UBS’s fees are generally
 
earned from short-term contracts.
 
As
a result, UBS’s contracts do
 
not include a financing
 
component or
result in the
 
recognition of
 
significant receivables or
 
prepayment
assets.
 
Furthermore,
 
due
 
to
 
the
 
short-term
 
nature
 
of
 
such
contracts, UBS has not capitalized any material costs to obtain or
fulfill
 
a
 
contract
 
or
 
generated any
 
significant
 
contract
 
assets
 
or
liabilities.
UBS presents expenses primarily in line with their nature in the
income
 
statement,
 
differentiating
 
between
 
expenses
 
that
 
are
directly
 
attributable
 
to
 
the
 
satisfaction
 
of
 
specific
 
performance
obligations associated with the
 
generation of revenues, which
 
are
generally
 
presented
 
within
Total
 
operating
 
income
 
as
Fee
 
and
commission
 
expense
,
 
and
 
those
 
that
 
are
 
related
 
to
 
personnel,
general and administrative expenses,
 
which are presented within
Total operating
 
expenses
. For
 
derivatives execution
 
and clearing
services (where UBS
 
acts as an
 
agent), UBS only
 
records its specific
fees in the
 
income statement, with
 
fees payable to
 
other parties
not recognized
 
as an
 
expense but
 
instead directly
 
offset against
the associated income collected from the given client.
›
 
Refer to Note 4 for more information, including
 
the
disaggregation of revenues
4) Share-based and other deferred compensation plans
UBS recognizes expenses for deferred compensation awards over
the
 
period
 
that
 
the
 
employee
 
is
 
required
 
to
 
provide
 
service
 
to
become
 
entitled
 
to
 
the
 
award.
 
Where
 
the
 
service
 
period
 
is
shortened,
 
for
 
example
 
in
 
the
 
case
 
of
 
employees
 
affected
 
by
restructuring programs or
 
mutually agreed termination
 
provisions,
recognition
 
of
 
such
 
expense
 
is
 
accelerated
 
to
 
the
 
termination
date. Where no
 
future service is
 
required, such
 
as for employees
who are eligible for
 
retirement or who have
 
met certain age and
length-of-service criteria, the services are presumed to have been
received
 
and
 
compensation
 
expense
 
is
 
recognized
 
over
 
the
performance year or, in the case of off-cycle awards, immediately
on the grant date.
Share-based compensation plans
Share-based compensation
 
expense is
 
measured by
 
reference to
the
 
fair
 
value
 
of
 
the
 
equity
 
instruments
 
on
 
the
 
date
 
of
 
grant,
taking
 
into
 
account
 
the
 
terms
 
and
 
conditions
 
inherent
 
in
 
the
award,
 
including,
 
where
 
relevant,
 
dividend
 
rights,
 
transfer
restrictions in effect
 
beyond the vesting date,
 
market conditions,
and non-vesting conditions.
 
For equity-settled
 
awards, fair
 
value is
 
not remeasured
 
unless
the
 
terms
 
of
 
the
 
award
 
are
 
modified
 
such
 
that
 
there
 
is
 
an
incremental increase in value. Expenses
 
are recognized, on a per-
tranche basis, over the service period based
 
on an estimate of the
number
 
of
 
instruments
 
expected
 
to
 
vest
 
and
 
are
 
adjusted
 
to
reflect the actual outcomes of service or performance conditions.
 
For
 
equity-settled
 
awards,
 
forfeiture
 
events
 
resulting
 
from
 
a
breach of
 
a non-vesting
 
condition (i.e.,
 
one that
 
does not
 
relate
to
 
a
 
service
 
or
 
performance
 
condition)
 
do
 
not
 
result
 
in
 
any
adjustment to the share-based compensation expense.
For cash-settled
 
share-based awards,
 
fair value
 
is remeasured
at each reporting
 
date, so that
 
the cumulative
 
expense recognized
equals the cash distributed.
 
Other deferred compensation plans
Compensation expense for other deferred
 
compensation plans is
recognized on a
 
per-tranche or straight-line
 
basis, depending on
the nature of
 
the plan. The
 
amount recognized is
 
measured based
on the
 
present
 
value of
 
the amount
 
expected to
 
be paid
 
under
the
 
plan and
 
is remeasured
 
at each
 
reporting
 
date,
 
so that
 
the
cumulative expense
 
recognized equals
 
the cash
 
or the
 
fair value
of respective financial instruments distributed.
›
 
Refer to Note
28
 
for more information
5) Post-employment benefit plans
Defined benefit plans
Defined
 
benefit
 
plans
 
specify
 
an
 
amount
 
of
 
benefit
 
that
 
an
employee
 
will
 
receive,
 
which
 
usually
 
depends
 
on
 
one
 
or
 
more
factors,
 
such
 
as
 
age,
 
years
 
of
 
service
 
and
 
compensation.
 
The
defined
 
benefit
 
liability
 
recognized
 
in
 
the
 
balance
 
sheet
 
is
 
the
present value
 
of the
 
defined benefit
 
obligation, measured
 
using
the projected unit
 
credit method, less
 
the fair value of
 
the plan’s
assets
 
at
 
the
 
balance
 
sheet
 
date,
 
with
 
changes
 
resulting
 
from
remeasurements
 
recorded
 
immediately
 
in
Other
 
comprehensive
income
.
 
If
 
the
 
fair
 
value
 
of
 
the plan
 
’s assets
 
is
 
higher
 
than
 
the
present value of the
 
defined benefit obligation, the
 
recognition of
the resulting net asset is limited to the present value of economic
benefits
 
available
 
in
 
the
 
form
 
of
 
refunds
 
from
 
the
 
plan
 
or
reductions in future
 
contributions to the plan.
 
Calculation of the
net
 
defined
 
benefit
 
obligation
 
or
 
asset
 
takes
 
into
 
account
 
the
specific
 
features
 
of
 
each
 
plan,
 
including
 
risk
 
sharing
 
between
employee
 
and
 
employer,
and
is
 
calculated
 
periodically
 
by
independent qualified actuaries.
Critical accounting estimates and judgment
The net defined benefit liability or asset at the balance sheet date and the
related personnel expense
 
depend on the
 
expected future benefits
 
to be
provided,
 
determined
 
using
 
a
 
number
 
of
 
economic
 
and
 
demographic
assumptions.
 
A
 
range
 
of
 
assumptions
 
could
 
be
 
applied,
 
and
 
different
assumptions could
 
significantly alter
 
the defined
 
benefit liability
 
or asset
and pension expense
 
recognized. The most
 
significant assumptions
 
include
life expectancy, discount rate, expected salary increases, pension increases
and
 
interest
 
credits
 
on
 
retirement
 
savings
 
account
 
balances.
 
Sensitivity
analysis for reasonable possible movements in each significant
 
assumption
for UBS‘s post-employment obligations is provided
 
in Note 27.
›
 
Refer
 
to Note 27
 
for more information
A
 
defined
 
contribution
 
plan
 
pays
 
fixed
 
contributions
 
into
 
a
separate entity
 
from which
 
post-employment and other
 
benefits
are paid. UBS
 
has no
 
legal or
 
constructive obligation
 
to pay
 
further
amounts
 
if
 
the
 
plan
 
does
 
not
 
hold
 
sufficient
 
assets
 
to
 
pay
employees the benefits relating
 
to employee service in
 
the current
and prior periods. Compensation expense
 
is recognized when the
employees have rendered
 
services in exchange for
 
contributions.
This is generally in the year of contribution. Prepaid contributions
are recognized
 
as an
 
asset to
 
the extent that
 
a cash
 
refund or
 
a
reduction in future payments is available.
6) Income taxes
UBS is subject to the income tax laws
 
of Switzerland and those of
the non-Swiss jurisdictions in which UBS has business operations.
The Group’s provision for income
 
taxes is composed of current
and deferred
 
taxes. Current
 
income taxes
 
represent taxes
 
to be
paid or refunded for the current period or previous periods.
 
Deferred
 
taxes
 
are
 
recognized
 
for
 
temporary
 
differences
between
 
the
 
carrying
 
amounts
 
and
 
tax
 
bases
 
of
 
assets
 
and
liabilities that will
 
result in taxable
 
or deductible amounts
 
in future
periods and are measured using the applicable tax rates and laws
that have been
 
enacted or substantively
 
enacted by the
 
end of the
reporting period and that
 
will be in effect when
 
such differences
are expected to reverse.
Deferred
 
tax
 
assets arise
 
from a
 
variety
 
of
 
sources, the
 
most
significant being:
 
(i) tax
 
losses that
 
can be
 
carried forward
 
to be
used against profits in future years; and (ii) temporary differences
that
 
will
 
result
 
in
 
deductions
 
against
 
profits
 
in
 
future
 
years.
Deferred tax assets
 
are recognized only to
 
the extent it
 
is probable
that sufficient taxable profits will be
 
available against which these
differences can be
 
used. When an
 
entity or tax
 
group has a
 
history
of
 
recent
 
losses,
 
deferred
 
tax
 
assets
 
are
 
only
 
recognized
 
to
 
the
extent there are
 
sufficient taxable temporary differences
 
or there
is convincing
 
other evidence
 
that sufficient
 
taxable profit
 
will be
available against which the unused tax losses can be utilized.
Deferred tax liabilities
 
are recognized for
 
temporary differences
between
 
the
 
carrying
 
amounts
 
of
 
assets
 
and
 
liabilities
 
in
 
the
balance sheet
 
that reflect
 
the expectation
 
that certain
 
items will
give rise to taxable income in future periods.
Deferred and current tax assets and
 
liabilities are offset when:
(i) they arise in the
 
same tax reporting group; (ii)
 
they relate to the
same tax authority; (iii)
 
the legal right to
 
offset exists; and (iv)
 
they
are intended to be settled net or realized simultaneously.
Current
 
and
 
deferred
 
taxes
 
are
 
recognized
 
as
 
income
 
tax
benefit
 
or
 
expense in
 
the income
 
statement,
 
except for
 
current
and deferred taxes recognized in relation to:
 
(i) the acquisition of
a subsidiary (for which such amounts would
 
affect the amount of
goodwill arising from the acquisition); (ii) gains
 
and losses on the
sale of
 
treasury shares
 
(for which
 
the tax
 
effects are
 
recognized
directly
 
in
Equity
);
 
(iii)
 
unrealized
 
gains
 
or
 
losses
 
on
 
financial
instruments that are classified at
 
FVOCI; (iv) changes in fair
 
value
of
 
derivative
 
instruments
 
designated
 
as
 
cash
 
flow
 
hedges;
 
(v)
remeasurements
 
of defined
 
benefit plans;
 
or (vi)
 
certain foreign
currency translations
 
of foreign
 
operations. Amounts
 
relating to
points
 
(iii)
 
through
 
(vi)
 
above
 
are
 
recognized
 
in
Other
comprehensive income
 
within
Equity
.
UBS reflects
 
the potential effect
 
of uncertain tax
 
positions for
which acceptance by
 
the relevant tax
 
authority is not
 
considered
probable
 
by
 
adjusting
 
current
 
or
 
deferred
 
taxes,
 
as
 
applicable,
using either
 
the most
 
likely amount
 
or expected
 
value methods,
depending on which method is deemed a
 
better predictor of the
basis
 
on
 
which,
 
and
 
extent
 
to
 
which,
 
the
 
uncertainty
 
will
 
be
resolved.
Critical accounting estimates and judgments
Tax
 
laws
 
are
 
complex,
 
and
 
judgment
 
and
 
interpretations
 
about
 
the
application of such
 
laws are required
 
when accounting for
 
income taxes.
UBS
 
considers
 
the
 
performance
 
of
 
its
 
businesses
 
and
 
the
 
accuracy
 
of
historical forecasts and other factors when evaluating the recoverability of
its
 
deferred
 
tax
 
assets,
 
including
 
the
 
remaining
 
tax
 
loss
 
carry-forward
period, and its
 
assessment of expected
 
future taxable profits
 
in the forecast
period
 
used
 
for
 
recognizing
 
deferred
 
tax
 
assets.
 
Estimating
 
future
profitability
 
and
 
business
 
plan
 
forecasts
 
is
 
inherently
 
subjective
 
and
 
is
particularly sensitive to future economic,
 
market and other conditions.
 
Forecasts are reviewed
 
annually, but adjustments
 
may be made
 
at other
times, if required. If recent losses have been incurred, convincing evidence
is required to prove there is sufficient future profitability given the
 
value of
UBS’s deferred tax
 
assets may
 
be affected, with
 
effects primarily
 
recognized
through the income statement.
In
 
addition,
 
judgment
 
is
 
required
 
to
 
assess
 
the
 
expected
 
value
 
of
uncertain
 
tax
 
positions
 
and
 
the
 
related
 
probabilities,
 
including
interpretation of tax laws,
 
the resolution of any income
 
tax-related appeals
and litigation.
 
›
 
Refer to Note 8 for more information
Property,
 
equipment
 
and
 
software
 
is
measured
 
at
 
cost
 
less
accumulated
 
dep
reciation
 
and
 
impairment
 
losses
.
 
Software
development
 
costs
 
are
 
capitalized
 
only
 
when
 
the
 
costs
 
can
 
be
measured reliably and it is
 
probable that future economic
 
benefits
will
 
arise.
 
Depreciation
 
of
 
property,
 
equipment
 
and
 
software
begins
 
when
 
they
 
are
 
available
 
for
 
use
 
and
 
is
 
calculated
 
on
 
a
straight line basis over an asset’s estimated useful life.
 
Property,
 
equipment
 
and
 
software
 
are
 
generally
 
tested
 
for
impairment
 
at
 
the
 
appropriate
cash
-
generating
 
unit
 
level,
alongside goodwill and intangible assets as described in item 8 in
this Note.
 
An impairment
 
charge is
 
recognized for
 
such assets
 
if
the
 
recoverable
 
amount
 
is
 
below
 
its
 
carrying
 
amount
.
The
recoverable amounts of such assets, other than property that has
a market price,
 
are generally determined
 
using a replacement
 
cost
approach
 
that
 
reflects
 
the
 
amount
 
that
 
would
 
be
 
currently
required by a market participant to replace the service capacity
 
of
the
 
asset.
 
If
 
such
 
assets
 
are
 
no
 
longer
 
used,
 
they
 
are
 
tested
individually for impairment.
›
 
Refer to Note
12
for more information
8) Goodwill
Goodwill represents the
 
excess of
 
the consideration over the
 
fair
value
 
of
 
identifiable
 
assets,
 
liabilities
 
and
 
contingent
 
liabilities
acquired
 
that
 
arises
 
in
 
a
 
business combination.
 
Goodwill is
 
not
amortized,
 
but
 
is
 
assessed
 
for
 
impairment
 
at
 
the
 
end
 
of
 
each
reporting period,
 
or when indicators
 
of impairment
 
exist.
 
UBS tests
goodwill for impairment annually,
 
irrespective of whether there is
any indication
 
of impairment.
 
An impairment charge
 
is recognized in the income
 
statement if
the carrying
 
amount exceeds
 
the recoverable
 
amount.
Critical accounting estimates and judgments
UBS‘s methodology for
 
goodwill impairment testing is
 
based on a
 
model
that
 
is
 
most
 
sensitive
 
to
 
the
 
following
 
key
 
assumptions:
 
(i)
 
forecasts
 
of
earnings available to shareholders in years one to three; (ii) changes in the
discount rates; and (iii) changes in the long-term
 
growth rate.
 
Earnings available
 
to shareholders
 
are estimated
 
on the basis
 
of forecast
results,
 
which
 
are
 
part
 
of
 
the
 
business
 
plan
 
approved
 
by
 
the
 
Board
 
of
Directors.
 
The
 
discount
 
rates
 
and
 
growth
 
rates
 
are
 
determined
 
using
external information, and
 
also considering inputs
 
from both
 
internal and
external analysts and the view of management.
 
The
 
key assumptions
 
used
 
to determine
 
the recoverable
 
amounts of
each cash-generating unit are tested for sensitivity by applying reasonably
possible changes to those assumptions.
 
›
 
Refer to Notes
2
and
 
13
 
for more information
Provisions
 
are
 
liabilities
 
of
 
uncertain
 
timing
 
or
 
amount,
 
and
 
are
generally
recognized
in
 
accordance
 
with
 
IAS
 
37,
Provisions,
Contingent Liabilities and Contingent Assets
, when: (i) UBS has a
present obligation as a
 
result of a
 
past event; (ii) it
 
is probable that
an outflow
 
of resources will
 
be required
 
to settle
 
the obligation;
and (iii) a reliable estimate
 
of the amount of the
 
obligation can be
made.
 
The majority of UBS’s provisions
 
relate to litigation, regulatory
and
 
similar
 
matters,
 
restructuring,
 
and
 
employee
 
benefits.
Restructuring
 
provisions
 
are
 
generally
 
recognized
 
as
 
a
consequence of
 
management agreeing
 
to materially
 
change the
scope
 
of
 
the
 
business
 
or
 
the
 
manner
 
in
 
which
 
it
 
is
 
conducted,
including
 
changes
 
in
 
management
 
structures.
 
Provisions
 
for
employee
 
benefits
 
relate
 
mainly
 
to
 
service
 
anniversaries
 
and
sabbatical
 
leave,
 
and
 
are
 
recognized
 
in
 
accordance
 
with
measurement principles set out in item 4
 
in this Note. In addition,
UBS presents
 
expected credit loss
 
allowances within
Provisions
 
if
they relate to a loan commitment,
 
financial guarantee contract or
a revolving revocable credit line.
IAS 37 provisions are
 
measured considering the
 
best estimate
of the
 
consideration required
 
to settle
 
the present
 
obligation at
the balance sheet date.
 
When conditions required
 
to recognize
 
a provision
 
are not met,
a
 
contingent
 
liability
 
is
 
disclosed,
 
unless
 
the
 
likelihood
 
of
 
an
outflow
 
of
 
resources
 
is
 
remote.
 
Contingent
 
liabilities
 
are
 
also
disclosed for
 
possible obligations that
 
arise from past
 
events the
existence
 
of
 
which
 
will
 
be
 
confirmed
 
only
 
by
 
uncertain
 
future
events not wholly within the control of UBS.
Critical accounting estimates and judgments
Recognition of provisions
 
often involves significant judgment
 
in assessing
the
 
existence
 
of
 
an
 
obligation
 
that
 
results
 
from
past
 
events
 
and
 
in
estimating the
 
probability, timing and
 
amount of
 
any outflows
 
of resources.
This
 
is particularly
 
the case
 
for litigation,
 
regulatory and
 
similar matters,
which, due to their nature,
 
are subject to many uncertainties,
 
making their
outcome
 
difficult to predict.
 
The amount of any provision
 
recognized is sensitive to the
 
assumptions
used
 
and
 
there
 
could
 
be
 
a
 
wide
 
range
 
of
 
possible
 
outcomes
 
for
 
any
particular matter.
Management regularly reviews
 
all the available
 
information regarding
such
 
matters,
 
including
 
legal
 
advice,
 
to
 
assess
 
whether
 
the
 
recognition
criteria for provisions have been satisfied and to determine the timing and
amount of any potential outflows
.
›
 
Refer to Note
18
 
for more information
Transactions
 
denominated
 
in
 
a
 
foreign
 
currency
 
are
 
translated
into
 
the
 
functional
 
currency
 
of
 
the
 
reporting
 
entity
 
at
 
the
 
spot
exchange rate
 
on the
 
date of
 
the transaction.
 
At the
 
balance sheet
date, all monetary
 
assets, including those
 
at FVOCI, and
 
monetary
liabilities denominated in foreign currency
 
are translated into the
functional currency
 
using the
 
closing exchange
 
rate. Translation
differences
 
are
 
reported
 
in
Other
 
net
 
income
 
from
 
financial
instruments measured at fair value through profit or loss
.
Non-monetary items measured at historical cost are translated
at the exchange rate on the date of the transaction.
 
Upon consolidation, assets and liabilities of
 
foreign operations
are translated into US
 
dollars, UBS’s presentation currency, at the
closing exchange rate
 
on the balance sheet date, and income
 
and
expense items and other comprehensive income are translated at
the
 
average
 
rate
 
for
 
the
 
period.
 
The
 
resulting
 
foreign
 
currency
translation differences are recognized in
Equity
 
and reclassified to
the
 
income
 
statement when
 
UBS
 
disposes of,
 
partially or
 
in
 
its
entirety,
 
the
 
foreign
 
operation and
 
UBS
 
no
 
longer
 
controls
 
the
foreign operation.
Share
 
capital
 
issued,
 
share premium
 
and treasury
 
shares held
 
are
translated
 
at the historic
 
average rate,
 
with
 
the difference
 
between
the historic
 
average rate
 
and the
 
spot rate
 
realized
 
upon repayment
of
 
share capital
 
or
 
disposal of
 
treasury shares
 
reported as
Share
premium.
 
Cumulative
 
amounts
 
recognized
 
in
Other comprehensive
income
 
in
 
respect
 
of
 
cash
 
flow
 
hedg
es
 
and
 
financial
 
assets
measured at FVOCI are translated at the closing exchange rate as
of the
 
balance sheet
 
dates, with
 
any translation effects
 
adjusted
through
Retained earnings
.
›
 
Refer to Note 33 for more information
11) Equity, treasury shares and contracts on UBS Group AG
shares
UBS Group AG shares held (treasury shares)
UBS
 
Group
 
AG
 
shares
 
held
 
by
 
the
 
Group,
 
including
 
those
purchased
 
as
 
part of
 
market-making activities,
 
are
 
presented
 
in
Equity
 
as
Treasury
 
shares
 
at
 
their
 
acquisition
 
cost
 
and
 
are
deducted
 
from
Equity
 
until
 
they
 
are
 
canceled
 
or
 
reissued.
 
The
difference
 
between
 
the
 
proceeds
 
from
 
sales
 
of
 
treasury
 
shares
and their weighted average cost (net of tax, if any)
 
is reported as
Share premium
.
Net cash settlement contracts
Contracts involving
 
UBS Group
 
AG shares
 
that require
 
net cash
settlement, or provide the counterparty or UBS with a settlement
option that includes a choice of settling net in cash, are classified
as derivatives held for trading.
UBS AG  
Entity [Table]  
Material accounting policies
Note 1
 
Summary of material accounting policies
Material accounting policies
This Note describes the
 
material accounting policies
 
applied in the
preparation of the
 
consolidated financial
 
statements (the
 
Financial
Statements)
 
of
 
UBS
 
AG
 
and
 
its
 
subsidiaries
 
(UBS
AG
).
On
24 February 2022,
 
the Financial
 
Statements were
 
authorized for
issue by the Board of Directors.
 
Basis of accounting
The Financial Statements have been prepared in accordance with
International Financial Reporting
 
Standards (IFRS), as
 
issued by the
International
 
Accounting
 
Standards
 
Board
 
(the
 
IASB),
 
and
 
are
presented in US dollars (USD).
Disclosures
 
marked
 
as
 
audited
 
in
 
the
 
“Risk,
 
capital,
 
liquidity
and funding,
 
and balance
 
sheet” section
 
of this
 
report form
 
an
integral part of the Financial
 
Statements. These disclosures relate
to requirements
 
under IFRS 7,
Financial Instruments:
 
Disclosures
,
and
 
IAS
 
1,
Presentation
 
of
 
Financial
 
Statements
,
 
and
 
are
 
not
repeated in this section.
 
The
 
accounting
 
policies
 
described
 
in
 
this
 
Note
 
have
 
been
applied consistently in all years presented unless otherwise stated
in Note 1b.
Critical accounting estimates and judgments
Preparation of these Financial
 
Statements under IFRS requires
 
management
to apply
 
judgment
 
and make
 
estimates
 
and assumptions
 
that affect
 
reported
amounts
 
of
 
assets,
 
liabilities,
 
income
 
and
 
expenses
 
and
 
disclosure
 
of
contingent
 
assets and
 
liabilities,
 
and may
 
involve
 
significant
 
uncertainty
 
at the
time they are made. Such
 
estimates and
 
assumptions
 
are based on the best
available
 
information.
 
UBS
AG
regularly
 
reassesses
such
estimates
 
and
assumptions, which
 
encompass historical experience,
 
expectations of
 
the
future and other pertinent factors, to determine their continuing relevance
based on current conditions,
 
updating them
 
as necessary. Changes
 
in those
estimates and
 
assumptions may have
 
a
 
significant effect on
 
the Financial
Statements.
 
Furthermore,
 
actual
 
results
 
may differ
 
significantly
 
from UBS
 
AG’s
estimates, which could result in significant
 
losses to UBS AG, beyond what
was anticipated
 
or provided
 
for.
 
The
 
following
 
areas
 
contain
 
estimation
 
uncertainty
 
or
 
require
 
critical
judgment
 
and
 
have
 
a
 
significant
 
effect
 
on
 
amounts
 
recognized
 
in
 
the
Financial Statements:
 
–
 
expected credit loss measurement (refer to item 2g in this Note and to
Note 20);
–
 
fair value measurement (refer to item 2f in this Note
 
and to Note 21);
–
 
income taxes (refer to item 6 in this Note and to Note
 
8);
–
 
provisions and contingent liabilities (refer to item 9
 
in this Note and to
Note 18);
–
 
post-employment benefit
 
plans (refer to item
 
5 in this Note
 
and to Note
27);
–
 
goodwill (refer to item 8 in this Note and to Note
 
13); and
–
 
consolidation of structured entities (refer to
 
item 1 in this Note
 
and to
Note 29).
1) Consolidation
The
 
Financial
 
Statements
 
comprise
 
the
 
financial
 
statements
 
of
UBS AG
 
and its
 
subsidiaries, presented
 
as a
 
single economic
 
entity;
intercompany
 
transactions
 
and
 
balances
 
have
 
been
 
eliminated.
UBS
 
AG
 
consolidates
 
all
 
entities
 
that
 
it
 
controls,
 
including
structured entities
 
(SEs), which is
 
the case when
 
it has: (i)
 
power
over the relevant activities of
 
the entity;
 
(ii) exposure to an
 
entity‘s
variable returns;
 
and (iii)
 
the ability
 
to use
 
its power
 
to affect
 
its
own returns.
Consideration
 
is
 
given
 
to
 
all
 
facts
 
and
 
circumstances
 
to
determine whether
 
UBS AG
 
has power
 
over another
 
entity,
 
i.e.,
the current ability
 
to direct the
 
relevant activities of
 
an entity when
decisions about those activities need to be made.
 
Subsidiaries,
 
including
 
SEs,
 
are
 
consolidated
 
from
 
the
 
date
when control
 
is gained
 
and deconsolidated
 
from the
 
date when
control ceases.
 
Control, or
 
the lack thereof,
 
is reassessed
 
if facts
and circumstances indicate that there is a change to one or more
elements required to establish that control is present.
Business combinations are accounted for using the acquisition
method. The amount of any non-controlling
 
interest is measured
at
 
the
 
non-controlling
 
interest’s
 
proportionate
 
share
 
of
 
the
acquiree’s identifiable net assets.
 
›
 
Refer to Note
29
for more information
Critical accounting estimates and judgments
Each
 
individual
 
entity
 
is
 
assessed
 
for
 
consolidation
 
in
 
line
 
with
 
the
aforementioned consolidation principles.
 
The assessment of control
 
can be
complex
 
and
 
requires
 
the
 
use
 
of
 
significant
 
judgment,
 
in
 
particular
 
in
determining whether
 
UBS AG has
 
power over the
 
entity. As the nature and
extent
 
of
 
UBS
 
AG’s
 
involvement
 
is
 
unique
 
for
 
each
 
entity,
 
there
 
is
 
no
uniform consolidation
 
outcome by
 
entity. Certain entities
 
within a
 
class may
be consolidated while
 
others may
 
not. When carrying
 
out the consolidation
assessment, judgment
 
is exercised
 
considering all
 
the relevant
 
facts and
circumstances, including the
 
nature and activities
 
of the investee,
 
as well as
the substance of voting and similar rights.
 
›
 
Refer to Note
29
for more information
2)
Financial instruments
a. Recognition
UBS AG recognizes financial
 
instruments when it
 
becomes a party
to
 
contractual
 
provisions
 
of
an
 
instrument.
 
UBS
 
AG
 
applies
settlement date accounting to all standard purchases and
 
sales of
non-derivative financial instruments.
 
In
 
transactions
 
where
 
UBS
 
AG
 
acts
 
as
 
a
 
transferee,
 
to
 
the
extent
the
 
financial
 
asset
 
transfer
 
does
 
not
 
qualify
 
for
derecognition by
 
the transferor,
 
UBS AG
 
does not
 
recognize the
transferred instrument as its asset.
UBS
 
AG
 
also
 
acts
 
in
 
a
 
fiduciary
 
capacity,
 
which
 
results
 
in
 
it
holding
 
or
 
placing
 
assets
 
on
 
behalf
 
of
 
individuals,
 
trusts,
retirement benefit plans and
 
other institutions. Unless these
 
items
meet
 
the
 
definition
 
of
 
an
 
asset
 
and
 
the
 
recognition
 
criteria
 
are
satisfied, they are not recognized on UBS AG’s balance sheet and
the related income is excluded from the Financial Statements.
 
Client
 
cash balances
 
associated with
 
derivatives
 
clearing and
execution
 
services
 
are
 
not
 
recognized
 
on
 
the
 
balance
 
sheet
 
if,
through
 
contractual agreement,
 
regulation
 
or
 
practice,
 
UBS AG
neither obtains benefits from nor controls such cash balances.
b. Classification, measurement and presentation
Financial assets
All financial instruments
 
are on initial recognition
 
measured at fair
value
 
and
 
classified
 
as
 
measured
 
at
 
amortized
 
cost,
 
fair
 
value
through
 
other
 
comprehensive
 
income
 
(FVOCI)
 
or
 
fair
 
value
through
 
profit
 
or
 
loss
 
(FVTPL)
.
For
 
financial
 
instruments
subsequently measured at amortized cost or
 
FVOCI, the initial fair
value is adjusted for directly attributable transaction costs.
Where the
 
contractual terms
 
of a
 
debt instrument
 
result in
 
cash
flows that are
 
solely payments of
 
principal and interest
 
(SPPI) on
the
 
principal
 
amount
 
outstanding,
the
 
debt
 
instrument
 
is
classified
 
as
 
measured
 
at
 
amortized
 
cost
 
if
 
it
 
is
 
held
 
within
 
a
business model that has
 
an objective of
 
holding financial assets to
collect
 
contractual
 
cash flows,
 
or
 
at
 
FVOCI if
 
it
 
is held
 
within a
business
 
model
with
the
objective
being
 
achieved
 
by
 
both
collecting contractual cash flows and selling financial assets.
 
All
 
other
 
financial
 
assets
 
are
 
measured
 
at
 
FVTPL,
 
including
those
 
held
 
for
 
trading
 
or
 
those
 
managed
 
on
 
a
 
fair
 
value
 
basis,
except for derivatives
 
designated in a
 
hedge relationship, in
 
which
case hedge accounting requirements apply (refer
 
to item 2j in this
Note for more information).
Business model assessment and contractual cash flow
characteristics
 
UBS AG determines
 
the nature
 
of a business
 
model by
 
considering
the
 
way
 
financial
 
assets
 
are
 
managed
 
to
 
achieve
 
a
 
particular
business objective.
In assessing whether
 
contractual cash flows
 
are SPPI, UBS
 
AG
considers
 
whether
 
the
 
contractual
 
terms
 
of
 
the
 
financial
 
asset
contain
 
a
 
term
 
that
 
could
 
change
 
the
 
timing
 
or
 
amount
 
of
contractual cash flows arising over the life of the instrument.
Financial liabilities
 
Financial liabilities measured at amortized cost
Financial liabilities
 
measured at
 
amortized cost
 
include
Debt issued
measured
 
at
 
amortized
 
cost
 
and
Funding
 
from UBS
 
Group AG
,
which
 
constitute
 
obligations
 
of
 
UBS
 
AG arising
 
from
 
funding it
has received from
 
UBS Group AG,
 
which are not
 
within the UBS
AG scope of consolidation.
 
The latter includes contingent capital
instruments
issued
 
to
 
UBS
 
Group
 
AG
 
cont
ain
ing
 
contractual
provisions
 
under which
 
the principal
 
amounts would
 
be written
down or
 
converted into
 
equity upon
 
either a
 
specified common
equity tier 1 (CET1)
 
ratio breach or
 
a determination by
 
the Swiss
Financial
 
Market
 
Supervisory
 
Authority
 
(FINMA)
 
that
 
a
 
viability
event
 
has
 
occurred.
Such
 
contractual
 
provisions
 
are
 
not
derivatives,
 
as
 
the
 
underlying
 
is
 
deemed
 
to
 
be
 
a
 
non-financial
variable specific to a party to the contract.
 
If a debt
 
were to be written
 
down or converted into
 
equity in
a future
 
period, it
 
would be
 
partially or
 
fully derecognized,
 
with
the difference between
 
its carrying amount
 
and the fair
 
value of
any equity issued recognized in the income statement.
A gain or loss is recognized in
Other income
 
when debt issued
is subsequently repurchased
 
for market-making
 
or other activities.
A
 
subsequent
 
sale
 
of
 
own
 
bonds
 
in
 
the
 
market
 
is
 
treated
 
as
 
a
reissuance of debt.
Financial liabilities measured at fair value through profit or loss
 
UBS
 
AG
 
designates
 
certain
 
issued
 
debt
 
instruments
 
as
 
financial
liabilities at fair value
 
through profit or loss, on
 
the basis that such
financial instruments
 
include embedded
 
derivatives and
 
/ or
 
are
managed on a fair
 
value basis (refer to
 
the table below for
 
more
information),
 
in
 
which
 
case
 
bifurcation
 
of
 
the
 
embedded
derivative
 
component
 
is
 
not
 
required.
 
Financial
 
instruments
including
 
embedded
 
derivatives
 
arise
 
predominantly
 
from
 
the
issuance of certain structured debt instruments.
 
Measurement and presentation
 
After initial recognition, UBS AG
 
classifies, measures and presents
its
 
financial
 
assets
 
and
 
liabilities
 
in
 
accordance
 
with
 
IFRS
 
9,
 
as
described in the table on the following pages.
Classification, measurement and presentation
 
of financial assets
Financial assets classification
Significant items included
Measurement and presentation
Measured at
 
amortized cost
This classification includes:
–
 
cash and balances at central banks;
–
 
loans and advances to banks;
–
 
receivables from securities financing transactions;
–
 
cash collateral receivables on derivative instruments;
–
 
residential and commercial mortgages;
–
 
corporate loans;
–
 
secured loans, including Lombard loans, and
unsecured loans;
–
 
loans to financial advisors;
 
and
–
 
debt securities held as high-quality liquid
 
assets
(HQLA).
 
Measured at amortized cost using the effective interest
method less allowances for expected credit losses
 
(ECL)
(refer to items 2d and 2g in this Note for more information).
The following items are recognized in the income
statement:
–
 
interest income, which is accounted for in accordance
with item 2d
 
in this Note;
–
 
ECL and reversals;
 
and
–
 
foreign exchange (FX) translation gains and losses.
When a financial asset at amortized cost is derecognized,
the gain or loss is recognized in the income statement.
For amounts arising from settlement of certain derivatives,
refer to the next page.
 
Measured
at FVOCI
 
Debt instruments
measured at
FVOCI
This classification primarily includes debt securities
 
and
certain asset-backed securities held as HQLA.
Measured at fair value,
 
with unrealized gains and losses
reported in
Other comprehensive income,
net of applicable
income taxes, until such investments are derecognized.
Upon derecognition, any accumulated balances in
Other
comprehensive income
are reclassified to the income
statement and reported within
Other income.
The following items, which are determined on the
 
same
basis as for financial assets measured at amortized
 
cost,
 
are
recognized in the income statement:
–
 
interest income, which is accounted for in accordance
with item 2d
 
in this Note;
–
 
ECL and reversals;
 
and
–
 
FX translation gains and losses.
Classification, measurement and presentation
 
of financial assets
Financial assets classification
Significant items included
Measurement and presentation
Measured at
FVTPL
Held for
 
trading
Financial assets held for trading include:
–
 
all derivatives with a positive replacement value,
 
except
those that are designated and effective hedging
instruments; and
–
 
other financial assets acquired principally for the
purpose of selling or repurchasing in the near term, or
that are part of a portfolio of identified financial
instruments that are managed together and for
 
which
there is evidence of a recent actual pattern of short-term
profit taking. Included in this category are debt
instruments (including those in the form of
 
securities,
money market paper,
 
and traded corporate and bank
loans) and equity instruments.
 
Measured at fair value,
 
with changes recognized in the
income statement.
Derivative assets (including derivatives that
 
are designated
and effective hedging instruments) are generally
presented as
Derivative financial instruments
, except those
exchange-traded (ETD) and over-the-counter
 
(OTC)-
cleared derivatives that are legally settled on a daily
 
basis
or in substance net settled on a daily basis,
 
which are
presented within
Cash collateral receivables on derivative
instruments.
Changes in fair value, initial transaction costs,
 
dividends
and gains and losses arising on disposal or redemption
 
are
recognized in
Other net income from financial
instruments measured at fair value through
 
profit or loss
,
except interest income on instruments other than
derivatives (refer to item 2d in this Note), interest on
derivatives designated as hedging instruments
 
in hedges
of interest rate risk and forward points on certain short-
and long-duration FX contracts acting as economic
hedges, which are reported in
Net interest income.
 
Changes in the fair value of derivatives that
 
are
designated and effective hedging instruments are
presented either in the income statement or
Other
comprehensive income
, depending on the type of hedge
relationship (refer to item 2j in this Note for more
information).
Mandatorily
measured at
FVTPL – Other
This classification includes financial assets
 
mandatorily
measured at FVTPL that are not held for trading, as
follows:
 
–
 
certain structured loans, certain commercial loans, and
receivables from securities financing transactions are
managed on a fair value basis;
 
–
 
loans managed on a fair value basis, including those
hedged with credit derivatives;
–
 
certain debt securities held as HQLA and
 
managed on a
fair value basis;
 
–
 
certain investment fund holdings and assets
 
held to
hedge delivery obligations related to cash-settled
employee compensation plans;
 
–
 
brokerage receivables, for which contractual cash flows
do not meet the SPPI criterion because the aggregate
balance is accounted for as a single unit of
 
account,
with interest being calculated on the individual
components;
–
 
auction rate securities, for which contractual cash
 
flows
do not meet the SPPI criterion because interest may
 
be
reset at rates that contain leverage;
–
 
equity instruments;
 
and
–
 
assets held under unit-linked investment contracts.
Classification, measurement and presentation
 
of financial liabilities
Financial liabilities classification
Significant items included
Measurement and presentation
Measured at amortized cost
This classification includes:
–
 
demand and time deposits;
 
–
 
retail savings / deposits;
–
 
payables
 
from securities financing transactions;
 
–
 
non-structured fixed-rate bonds;
 
–
 
subordinated debt;
 
–
 
certificates of deposit and covered bonds;
 
–
 
obligations against funding from UBS Group AG;
 
and
–
 
cash collateral payables on derivative instruments.
Measured at amortized cost using the effective interest
method.
When a financial liability at amortized cost is
derecognized, the gain or loss is recognized in the income
statement.
 
Measured at
fair value
through
profit or loss
Held for trading
Financial liabilities held for trading include:
–
 
all derivatives with a negative replacement value
(including certain loan commitments),
 
except those
that are designated and effective hedging
instruments; and
–
 
obligations to deliver financial instruments,
 
such as
debt and equity instruments, that UBS AG has sold
 
to
third parties but does not own (short positions).
Measurement and presentation of financial liabilities
classified at FVTPL follow the same principles
 
as for
financial assets classified at FVTPL, except that
 
the amount
of change in the fair value of a financial liability
designated at FVTPL that is attributable to changes
 
in UBS
AG’s own credit risk is presented in
Other comprehensive
income
 
directly within
Retained earnings
and is never
reclassified to the income statement.
Derivative liabilities (including derivatives that
 
are
designated and effective hedging instruments)
 
are
generally presented as
Derivative financial instruments
,
except those exchange-traded and OTC-cleared
derivatives that are legally settled on a daily basis
 
or in
substance net settled on a daily basis, which
 
are
presented within
Cash collateral payables on derivative
instruments.
Designated at
FVTPL
UBS AG designates
 
at FVTPL the following financial
liabilities:
–
 
issued hybrid debt instruments that primarily include
equity-linked, credit-linked and rates-linked bonds
 
or
notes;
–
 
issued debt instruments managed on a fair
 
value
basis;
–
 
certain payables from securities financing transactions;
–
 
amounts due under unit-linked investment contracts
the cash flows of which are linked to financial
 
assets
measured at FVTPL and eliminate an accounting
mismatch;
 
and
–
 
brokerage payables, which arise in conjunction with
brokerage receivables and are measured at FVTPL to
achieve measurement consistency.
c.
Loan commitments and financial guarantees
Loan
 
commitments
 
are
 
arrangements
 
to
 
provide
 
credit
 
under
defined terms and
 
conditions. Irrevocable loan
 
commitments are
classified
 
as:
 
(i)
 
derivative
 
loan
 
commitments
 
measured
 
at
 
fair
value through profit
 
or loss; (ii) loan
 
commitments designated at
fair
 
value
 
through
 
profit
 
or
 
loss;
 
or
 
(iii)
 
loan
 
commitments
 
not
measured at
 
fair value.
Financial guarantee
 
contracts are
 
contracts
that require UBS AG
 
to make specified
 
payments to reimburse
 
the
holder
 
for
 
an
 
incurred
 
loss
 
because
 
a
 
specified
 
debtor
 
fails
 
to
make
 
payments
 
when
 
due
 
in
 
accordance
 
with
 
the
 
terms
 
of
 
a
specified debt instrument.
d. Interest income and expense
Interest
 
income
 
and
 
expense
 
are
 
recognized
 
in
 
the
 
income
statement
based
 
on
the
 
effective
 
interest
method
.
 
When
calculating
 
the
 
effective
 
interest
 
rate
 
(the
 
EIR)
 
for
 
financial
instruments
 
(other
 
than
 
credit-impaired
 
financial
 
instruments),
UBS
 
AG
 
estimates
 
future
 
cash flows
 
considering
 
all
 
contractual
terms of the instrument,
 
but not expected credit
 
losses, with the
EIR applied to the gross
 
carrying amount of the financial asset or
the
 
amortized
 
cost
 
of
 
a
 
financial
 
liability.
 
However,
 
when
 
a
financial
 
asset
 
becomes
 
credit-impaired
 
after
 
initial
 
recognition,
interest income is
 
determined by
 
applying the
 
EIR to
 
the amortized
cost
 
of
 
the
 
instrument,
 
which
 
represents
 
the
 
gross
 
carrying
amount adjusted for any credit loss allowance.
 
Upfront
 
fees,
 
including
 
fees
 
on
 
loan
 
commitments
 
not
measured at fair value where a loan is expected to be issued, and
direct
 
costs
 
are
 
included
 
within
 
the
 
initial
 
measurement
 
of
 
a
financial
 
instrument
 
measured
 
at
 
amortized
 
cost
 
or
 
FVOCI
 
and
recognized over the expected
 
life of the instrument
 
as part of its
EIR.
Fees related
 
to loan
 
commitments where
 
no loan
 
is expected
to be issued, as well as loan syndication fees where UBS AG does
not retain a portion
 
of the syndicated loan
 
or where UBS AG
 
does
retain a portion of the syndicated loan at the same effective yield
for comparable risk
 
as other participants, are
 
included in
Net fee
and commission income
and either recognized over the
 
life of the
commitment or when syndication occurs.
 
›
 
Refer to item 3 in this Note for more information
 
Interest
 
income
 
on
 
financial
 
assets,
 
excluding
 
derivatives,
 
is
included in interest income when positive and in interest expense
when negative.
 
Similarly, interest
 
expense on
 
financial liabilities,
excluding derivatives, is
 
included in interest
 
expense,
 
except when
interest rates are
 
negative, in which case
 
it is included in
 
interest
income.
 
›
 
Refer to item 2b
 
in this Note and Note
3
 
for more information
e.
Derecognition
 
Financial assets
UBS AG derecognizes a transferred financial asset, or
 
a portion of
a financial asset, if the purchaser has received substantially all the
risks and rewards of the asset or
 
a significant part of the risks
 
and
rewards
 
combined
 
with
 
a
 
practical
 
ability
 
to
 
sell
 
or
 
pledge
 
the
asset.
 
Where
 
financial
 
assets
 
have
 
been
 
pledged
 
as
 
collateral
 
or
 
in
similar
 
arrangements,
 
they
 
are
 
considered
 
to
 
have
 
been
transferred if the counterparty has received the contractual rights
to the cash flows of
 
the pledged assets, as may be
 
evidenced by,
for example,
 
the counterparty’s
 
right to
 
sell or
 
repledge the
 
assets.
In transfers where control over the financial asset is retained, UBS
AG 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
 
following
 
the
transfer.
 
Certain
 
OTC
 
derivative
 
contracts
 
and
 
most
 
exchange-traded
futures
 
and
 
option
 
contracts
 
cleared
 
through
 
central
 
clearing
counterparties
 
and exchanges
 
are considered
 
to be
 
settled on
 
a
daily basis,
 
as the
 
payment or
 
receipt of
 
variation margin
 
on a
 
daily
basis
 
represents
 
legal
 
or
 
economic
 
settlement,
 
which
 
results
 
in
derecognition of the associated derivatives.
›
 
Refer to Note 22 and Note 23 for more information
 
Financial liabilities
UBS AG derecognizes
 
a financial liability
 
when it is extinguished,
i.e., when
 
the obligation
 
specified in
 
the contract
 
is discharged,
canceled
 
or
 
expires.
 
When
 
an
 
existing
 
financial
 
liability
 
is
exchanged for a
 
new one from
 
the same lender
 
on substantially
different
 
terms,
 
or
 
the
 
terms
 
of
 
an
 
existing
 
liability
 
are
substantially modified, the original
 
liability is derecognized
 
and a
new
 
liability
 
recognized
 
with
 
any
 
difference
 
in
 
the
 
respective
carrying amounts recognized in the income statement.
 
f. Fair value of financial instruments
UBS
 
AG
 
accounts
 
for
 
a
 
significant
 
portion
 
of
 
its
 
assets
 
and
liabilities at fair value. Fair
 
value is the price on the measurement
date
 
that would
 
be received
 
for the
 
sale of
 
an asset
 
or paid
 
to
transfer
 
a
 
liability
 
in
 
an
 
orderly
 
transaction
 
between
 
market
participants in the principal market, or in the most advantageous
market in the absence of a principal market.
 
›
 
Refer to Note 21 for more information
Critical accounting estimates and judgments
The use
 
of valuation techniques, modeling
 
assumptions and estimates
 
of
unobservable market
 
inputs in
 
the fair
 
valuation of
 
financial instruments
requires
 
significant judgment and could affect the
 
amount of gain or loss
recorded
 
for
 
a
 
particular
 
position.
 
Valuation
 
techniques
 
that
 
rely
 
more
heavily on unobservable
 
inputs and sophisticated
 
models inherently require
a higher
 
level of judgment
 
and may
 
require adjustment
 
to reflect
 
factors
that market
 
participants would
 
consider in
 
estimating fair
 
value, such
 
as
close-out costs, which are presented in Note 21d.
 
UBS
AG
‘
s
 
governance
 
framework
 
over
 
fair
 
value
 
measurement
 
is
described in
 
Note 21b,
 
and UBS
 
AG provides
 
a sensitivity
 
analysis of
 
the
estimated effects arising from changing significant unobservable inputs in
Level 3 financial instruments
 
to reasonably possible
 
alternative assumptions
in Note 21g.
 
›
 
Refer to Note 21 for more information
ECL
 
are
 
recognized
 
for
 
financial
 
assets
 
measured
 
at
 
amortized
cost,
 
financial
 
assets
 
measured
 
at
 
FVOCI,
 
fee
 
and
 
lease
receivables,
 
financial
 
guarantees
,
 
and
 
loan
 
commitments
 
not
measured at
 
fair value. ECL
 
are also
 
recognized on the
 
undrawn
portion
 
of
 
committed
 
unconditionally
 
revocable
 
credit
 
lines,
which
 
include
 
UBS
 
AG
’s
 
credit
 
card
 
limits
 
and
 
master
 
credit
facilities, as UBS
 
AG is
 
exposed to credit
 
risk because
 
the borrower
has the ability to
 
draw down funds
 
before UBS AG can
 
take credit
risk mitigation actions.
Recognition of expected credit losses
 
ECL are recognized on the following basis:
–
 
Stage 1 instruments: Maximum 12-month
 
ECL are recognized
from initial recognition,
 
reflecting the portion
 
of lifetime cash
shortfalls that would
 
result if a default
 
occurs in the 12
 
months
after
 
the
 
reporting
 
date,
 
weighted
 
by
 
the
 
risk
 
of
 
a
 
default
occurring.
 
–
 
Stage 2
 
instruments:
 
Lifetime
 
ECL
 
are
 
recognized
 
if
 
a
significant
 
increase
 
in
 
credit
 
risk
 
(
an
SICR)
 
is
 
observed
subsequent
 
to
 
the
 
instrument’s
 
initial
 
recognition,
 
reflecting
lifetime
 
cash
 
shortfalls
 
that
 
would
 
result
 
from
 
all
 
possible
default events over the expected life of a financial instrument,
weighted by
 
the risk
 
of a
 
default occurring.
 
When an
 
SICR is
no longer observed, the instrument will move back to stage 1.
–
 
Stage 3
 
instruments:
 
Lifetime
 
ECL
 
are
 
always
 
recognized
 
for
credit-impaired
 
financial
 
instruments,
 
as
 
determined
 
by
 
the
occurrence of one or more loss events, by estimating
 
expected
cash
 
flows
 
based
 
on
 
a
 
chosen
recovery
 
strategy.
 
Credit
-
impaired
 
exposures
 
may
 
include
 
positions
 
for
 
which
 
no
allowance has been recognized, for example because they are
expected to be fully recoverable through collateral held.
–
 
Changes
 
in
 
lifetime
 
ECL
 
since
 
initial
 
recognition
 
are
 
also
recognized for
 
assets that
 
are purchased
 
or originated
 
credit-
impaired (POCI). POCI financial instruments include those that
are purchased
 
at a
 
deep discount
 
or newly
 
originated with
 
a
defaulted counterparty; they
 
remain a separate
 
category until
derecognition.
All
 
or
 
part
 
of
 
a
 
financial
 
asset
 
is
 
written
 
off
 
if
 
it
 
is
 
deemed
uncollectible or forgiven.
 
Write-offs reduce the
 
principal amount
of a
 
claim and
 
are charged
 
against related
 
allowances for
 
credit
losses. Recoveries, in part or in full, of
 
amounts previously written
off are generally credited to
Credit loss (expense) / release
.
 
ECL
 
are
 
recognized
 
in
 
the
 
income
 
statement
 
in
Credit
 
loss
(expense) / release
. A corresponding ECL allowance is reported as
a decrease in the carrying amount of financial assets measured at
amortized cost on the balance sheet.
 
For financial assets that are
measured at
 
FVOCI, the
 
carrying amount
 
is not
 
reduced, but
 
an
accumulated
 
amount
 
is
 
recognized
 
in
Other
 
comprehensive
income
.
 
For
 
off-balance
 
sheet
 
financial
 
instruments
 
and
 
other
credit lines, provisions for ECL are presented in
Provisions.
Default and credit impairment
UBS
 
AG
 
applies
 
a
 
single
 
definition
 
of
 
default
 
for
 
credit
 
risk
management
 
purposes,
 
regulatory
 
reporting
 
and
 
ECL,
 
with
 
a
counterparty
 
classified
 
as
 
defaulted
 
based
 
on
 
quantitative
 
and
qualitative criteria.
 
›
 
Refer to “Credit policies for distressed assets’’ in the ‘’Risk
management and control” section of this report for
 
more
information
Measurement of expected credit losses
IFRS
 
9
 
ECL
 
reflect
 
an
 
unbiased,
 
probability-weighted
 
estimate
based
 
on
 
loss
 
expectations
 
resulting
 
from
 
default
 
events.
 
The
method
 
used
 
to
 
calculate
 
ECL
 
applies
 
the
 
following
 
principal
factors: probability
 
of default
 
(PD), loss
 
given default
 
(LGD) and
exposure
 
at default
 
(EAD). Parameters
 
are
 
generally determined
on an
 
individual financial
 
asset level. Based
 
on the materiality
 
of
the
 
portfolio,
 
for
 
credit
 
card
 
exposures
 
and
 
personal
 
account
overdrafts
 
in
 
Switzerland,
 
a
 
portfolio
 
approach
 
is
 
applied
 
that
derives an average
 
PD and LGD
 
for the entire
 
portfolio. PDs and
LGDs used in the ECL calculation are point-in-time (PIT)-based for
key portfolios and consider both current conditions and expected
cyclical
 
changes.
 
For
 
material
 
portfolios,
 
PDs
 
and
 
LGDs
 
are
determined for
 
different scenarios,
 
whereas EAD
 
projections are
treated as scenario independent.
For the
 
purpose of
 
determining the
 
ECL-relevant parameters,
UBS AG
 
leverages its
 
Pillar 1 internal
 
ratings-based (IRB)
 
models
that
 
are
 
also
 
used
 
in
 
determining
 
expected
 
loss
 
(EL)
 
and
 
risk-
weighted assets
 
under the
 
Basel III framework
 
and Pillar 2
 
stress
loss models.
 
Adjustments have
 
been made
 
to these
 
models and
IFRS
 
9-related
 
models
 
have
 
been
 
developed
 
that
 
consider
 
the
complexity,
 
structure
 
and
 
risk
 
profile
 
of
 
relevant
 
portfolios
 
and
take
 
account
 
of
 
the
 
fact
 
that
 
PDs
 
and
 
LGDs
 
used
 
in
 
the
 
ECL
calculation
 
are
 
PIT-based,
 
as
 
opposed
 
to
 
the
 
corresponding
Basel III through-the-cycle
 
(TTC) parameters.
 
All models
 
that are
relevant for
 
measuring expected
 
credit losses
 
are subject
 
to UBS
AG’s model validation and oversight processes.
Probability of default:
PD represents the
 
probability of a
 
default
over
 
a
 
specified
 
time
 
period.
 
A
 
12-month
 
PD
 
represents
 
the
probability of
 
default determined
 
for the
 
next 12
 
months and
 
a
lifetime
 
PD
 
represents
 
the
 
probability
 
of
 
default
 
over
 
the
remaining lifetime of
 
the instrument.
 
PIT PDs
 
are derived from
 
TTC
PDs and scenario forecasts.
 
The modeling is region-,
 
industry- and
client
 
segment-specific
 
and
 
considers
 
both
 
macroeconomic
scenario dependencies and client-idiosyncratic information.
Exposure
 
at
 
default:
EAD
 
represents
 
an
 
estimate
 
of
 
the
exposure to credit risk
 
at the time of
 
a potential default
 
occurring,
considering
 
expected
 
repayments,
 
interest
 
payments
 
and
accruals, discounted at
 
the EIR. Future
 
drawdowns on facilities
 
are
considered
 
through
 
a
 
credit
 
conversion
 
factor
 
(a
 
CCF)
 
that
 
is
reflective
 
of
 
historical
 
drawdown
 
and
 
default
 
patterns
 
and
 
the
characteristics of the respective portfolios.
Loss given
 
default:
LGD represents
 
an estimate
 
of the loss
 
at the
time of a potential
 
default occurring,
 
taking into
 
account expected
future cash
 
flows from
 
collateral
 
and other
 
credit
 
enhancements,
 
or
expected
 
payouts
 
from
 
bankruptcy
 
proceedings
 
for
 
unsecured
claims and, where applicable, time to realization of collateral and
the seniority
 
of claims.
 
LGD is
 
commonly
 
expressed
 
as a percentage
of EAD.
Estimation of expected credit losses
Number of scenarios and estimation of scenario weights
Determination of probability
 
-weighted ECL
 
requires evaluating
 
a
range
 
of
 
diverse
 
and
 
relevant
 
future
 
economic
 
conditions,
especially
 
with
 
a
 
view
 
to
 
modeling
 
the
 
non-linear
 
effect
 
of
assumptions about macroeconomic factors on the estimate.
 
To
 
accommodate
 
this
 
requirement,
 
UBS
 
AG
 
uses
 
different
economic
 
scenarios
 
in
 
the
 
ECL
 
calculation
.
 
Each
 
scenario
 
is
represented
 
by
 
a
 
specific
 
scenario
 
narrative,
 
which
 
is
 
relevant
considering the exposure of key portfolios to economic risks, and
for
 
which
 
a
 
set
 
of
 
consistent
 
macroeconomic
 
variables
 
is
determined. The estimation
 
of the appropriate weights
 
for these
scenarios
 
is
 
predominantly
 
judgement-based.
 
The
 
assessment
 
is
based on a
 
holistic review of
 
the prevailing economic
 
or political
conditions,
 
which
 
may
 
exhibit
 
different
 
levels
 
of
 
uncertainty.
 
It
 
takes
 
into
 
account
 
the
 
impact
 
of
 
changes
 
in
 
the
 
nature
 
and
severity
 
of
 
the underlying
 
scenario
 
narratives
 
and
 
the
 
projected
economic variables.
 
The
 
determined
 
weights
 
constitute
 
the
 
probabilities
 
that
 
the
respective
 
set
 
of
 
macroeconomic
 
conditions
 
will
 
occur
 
and
 
not
that
 
the
 
chosen
 
particular
 
narratives
 
with
 
the
 
related
macroeconomic variables will materialize.
Macroeconomic and other factors
The
 
range
 
of
 
macroeconomic,
 
market
 
and
 
other
 
factors
 
that
 
is
modeled
 
as
 
part
 
of
 
the
 
scenario
 
determination
 
is
 
wide,
 
and
historical information is
 
used to support
 
the identification of
 
the
key factors.
 
As the
 
forecast horizon
 
increases, the
 
availability of
information
 
decreases,
 
requiring
 
an
 
increase
 
in
 
judgment.
 
For
cycle
-
sensitive
 
PD
 
a
nd
 
LGD
 
determination
 
purposes,
 
UBS
 
AG
 
projects the relevant economic factors for a period
 
of three years
before reverting, over
 
a specified period, to
 
cycle-neutral PD and
LGD for longer-term projections.
 
Factors relevant
 
for ECL
 
calculation vary
 
by type
 
of exposure.
Regional
 
and
 
client-segment
 
characteristics
 
are
 
generally
 
taken
into
 
account,
 
with
 
specific
 
focus
 
on
 
Switzerland
 
and
 
the
 
US,
considering UBS AG’s key ECL-relevant portfolios.
For
 
UBS
 
AG,
 
the
 
following
 
forward-looking
 
macroeconomic
variables represent the most relevant factors for ECL calculation:
 
–
 
GDP growth rates, given
 
their significant effect on
 
borrowers’
performance;
 
–
 
unemployment
 
rates, given
 
their significant
 
effect on
 
private
clients’ ability to meet contractual obligations;
 
–
 
house price indices, given their
 
significant effect on mortgage
collateral valuations;
 
–
 
interest rates,
 
given their
 
significant effect
 
on counterparties’
abilities to service debt;
 
–
 
consumer
 
price
 
indices,
 
given
 
their
 
overall
 
relevance
 
for
companies’
 
performance,
 
private
 
clients’
 
purchasing
 
power
and economic stability; and
–
 
equity indices,
 
given that
 
they are
 
an important
 
factor in
 
our
corporate rating tools.
 
Scenario generation, review process and governance
A
 
team
 
of
 
economists,
 
who
 
are
 
part
 
of
 
Group
 
Risk
 
Control,
develop
 
the
 
forward-looking
 
macroeconomic
 
assumptions
 
with
involvement from a broad range of experts.
The
 
scenarios, their
 
weight and
 
the key
 
macroeconomic and
other
 
factors
 
are
 
subject
 
to
 
a
 
critical
 
assessment
 
by
 
the
 
IFRS
 
9
Scenario Sounding Sessions and ECL Management Forum, which
include senior management from Group Risk and Group Finance.
Important aspects
 
for the
 
review include
 
whether there
 
may be
particular credit
 
risk concerns
 
that may
 
not be
 
capable of
 
being
addressed systematically and
 
require post-model adjustments
 
for
stage allocation and ECL allowance.
 
The
 
Group
 
Model
 
Governance
Committee
,
 
as
 
the
 
highest
authority under UBS
 
AG’s model governance framework,
 
ratifies
the decisions taken by the ECL Management Forum.
 
›
 
Refer to Note 20 for more information
ECL measurement period
 
The period for which lifetime ECL are determined is based on the
maximum
 
contractual
 
period
 
that
 
UBS
 
AG
 
is
 
exposed
 
to
 
credit
risk, taking
 
into account
 
contractual extension,
 
termination and
prepayment
 
options.
 
For
 
irrevocable
 
loan
 
commitments
 
and
financial guarantee contracts,
 
the measurement period
 
represents
the
 
maximum
 
contractual
 
period
 
for
 
which
 
UBS
 
AG
 
has
 
an
obligation to extend credit.
Additionally,
 
some
 
financial
 
instruments
 
include
 
both
 
an
 
on-
demand loan and
 
a revocable undrawn
 
commitment, where the
contractual cancellation right
 
does not limit
 
UBS AG’s exposure
 
to
credit risk
 
to the
 
contractual notice
 
period, as
 
the client
 
has the
abi
lity
 
to
 
draw
 
down
 
funds
 
before
 
UBS
 
AG
 
can
 
take
 
risk
-
mitigating actions.
 
In such
 
cases UBS
 
AG is required
 
to estimate
the period
 
over which
 
it is
 
exposed to
 
credit risk.
 
This applies to
UBS
 
AG
’s
 
credit
 
card
 
limits,
 
which
 
do
 
not
 
have
 
a
 
defined
contractual maturity date, are callable on demand and where the
drawn and undrawn components are managed as
 
one exposure.
The
 
exposure
 
arising
 
from
 
UBS
 
AG’s
 
credit
 
card
 
limits
 
is
 
not
significant and is managed at a portfolio level, with credit actions
triggered
 
when
 
balances
 
are
 
past
 
due.
 
An
 
ECL
 
measurement
period of seven years
 
is applied for
 
credit card limits,
 
capped at 12
months for
 
stage 1 balances,
 
as a
 
proxy for
 
the period
 
that UBS
AG is exposed to credit risk.
Customary
 
master
 
credit
 
agreements
 
in
 
the
 
Swiss
 
corporate
market
 
also
 
include
 
on-demand
 
loans
 
and
 
revocable
 
undrawn
commitments.
 
For
 
smaller
 
commercial
 
facilities,
 
a
 
risk-based
monitoring
 
(RbM)
 
approach
 
is
 
in
 
place
 
that
 
highlights
 
negative
trends
 
as
 
risk
 
events,
 
at
 
an
 
individual
 
facility
 
level,
 
based
 
on
 
a
combination
 
of
 
continuously
 
updated
 
risk
 
indicators.
 
The
 
risk
events trigger additional
 
credit reviews by
 
a risk officer,
 
enabling
informed credit
 
decisions to
 
be taken.
 
Larger corporate
 
facilities
are not subject
 
to RbM, but
 
are reviewed
 
at least
 
annually through
a
 
formal
 
credit
 
review.
 
UBS
 
AG
 
has
 
assessed
 
these
 
credit
 
risk
management practices and
 
considers both
 
the RbM approach
 
and
formal credit
 
reviews as
 
substantive credit
 
reviews resulting
 
in a
re-origination
 
of
 
the
 
given
 
facility.
 
Following
 
this,
 
a
 
12-month
measurement
 
period
 
from
 
the
 
reporting
 
date
 
is
 
used
 
for
 
both
types of facilities as
 
an appropriate proxy of
 
the period over
 
which
UBS AG is
 
exposed to credit
 
risk, with 12
 
months also used
 
as a
look-back
 
period for
 
assessing SICR,
 
always from
 
the respective
reporting date.
Significant increase in credit risk
 
Financial
 
instruments
 
subject
 
to
 
ECL
 
are
 
monitored
 
on
 
an
ongoing
 
basis.
 
To
 
determine
 
whether
 
the
 
recognition
 
of
 
a
maximum
 
12-month
 
ECL
 
continues
 
to
 
be
 
appropriate,
 
an
assessment
 
is made
 
as
 
to
 
whether
 
an
 
SICR
 
has
 
occurred
 
since
initial
 
recognition
 
of
 
the
 
financial
 
instrument
 
,
 
applying
 
both
quantitative
 
and qualitative
 
factors.
 
Primarily, UBS
 
AG assesses
 
changes in
 
an instrument’s
 
risk of
default
 
on
 
a
 
quantitative
 
basis
 
by
 
comparing
 
the
 
annualized
forward-looking
 
and
 
scenario-weighted
 
lifetime
 
PD
 
of
 
an
instrument determined at two different dates:
 
–
 
at the reporting date; and
 
–
 
at inception of the instrument.
If,
 
based
 
on
 
UBS
 
AG’s
 
quantitative
 
modeling,
 
an
 
increase
exceeds a set threshold, an SICR is deemed to have occurred and
the
 
instrument
 
is
 
transferred
 
to
 
stage 2
 
with
 
lifetime
 
ECL
recognized.
The threshold
 
applied varies
 
depending on
 
the original
 
credit
quality of the borrower,
 
with a higher SICR
 
threshold set for
 
those
instruments
 
with
 
a
 
low
 
PD
 
at
 
inception.
 
The
 
SICR
 
assessment
based on PD changes
 
is made at
 
an individual financial asset
 
level.
A high-level
 
overview of
 
the SICR
 
trigger, which
 
is a
 
multiple of
the
 
annualized
 
remaining
 
lifetime
 
PIT
 
PD
 
expressed
 
in
 
rating
downgrades,
 
is
 
provided
 
in
 
the
 
“SICR
 
thresholds”
 
table
 
below.
The actual SICR
 
thresholds applied are
 
defined on a
 
more granular
level by interpolating between the values shown in the table.
Internal rating at origination
 
of the instrument
Rating downgrades /
SICR trigger
0–3
3
4–8
2
9–13
1
Irrespective
 
of
 
the
 
SICR
 
assessment
 
based
 
on
 
default
probabilities, credit
 
risk is
 
generally deemed
 
to have
 
significantly
increased for an instrument if the contractual payments are more
than
 
30
 
days
 
past
 
due.
 
For
 
certain
 
less
 
material
 
portfolios,
specifically
 
the
 
Swiss
 
credit
 
card
 
portfolio,
 
the
 
30-day
 
past
 
due
criterion
 
is
 
used
 
as
 
the
 
primary
 
indicator
 
of
 
an
 
SICR.
 
Where
instruments are transferred to stage 2 due
 
to the 30-day past
 
due
criterion,
 
a
 
minimum
 
period
 
of
 
six
 
months
 
is
 
applied
 
before
 
a
transfer
 
back
 
to
 
stage 1
 
can
 
be
 
triggered.
 
For
 
instruments
 
in
Personal &
 
Corporate Banking
 
and Global
 
Wealth Management
Region Switzerland
 
that are
 
between 90
 
and 180
 
days past
 
due
but
 
have
 
not
 
been
 
reclassified
 
to
 
stage 3,
 
a
 
one-year
 
period
 
is
applied before a transfer back to stage 1 can be triggered.
Additionally,
 
based
 
on
 
individual
 
counterparty-specific
indicators,
 
external
 
market
 
indicators
 
of
 
credit
 
risk
 
or
 
general
economic
 
conditions,
 
counterparties may
 
be moved
 
to a
 
watch
list, which is used as a
 
secondary qualitative indicator for an SICR.
Exception management is further applied,
 
allowing for individual
and collective adjustments
 
on exposures
 
sharing the same
 
credit
risk characteristics
 
to take
 
account of
 
specific situations
 
that are
not otherwise fully reflected.
 
In
 
general,
 
the
 
overall
 
SICR
 
determination
 
process
 
does
 
not
apply
 
to
 
Lombard
 
loans,
 
securities
 
financing
 
transactions
 
and
certain other asset-based
 
lending transactions, because
 
of the risk
management
 
practices
 
adopted,
 
including
 
daily
 
monitoring
processes with strict margining. If margin calls are not satisfied, a
position
 
is
 
closed
 
out
 
and
 
classified
 
as
 
a
 
stage 3
 
position.
 
In
exceptional
 
cases,
 
an
 
individual
 
adjustment
 
and
 
a
 
transfer
 
into
stage 2 may be made to take account of specific facts.
Credit risk
 
officers are
 
responsible for
 
the identification
 
of an
SICR,
 
which for accounting purposes is in some respects different
from
 
internal
 
credit
 
risk
 
management processes.
 
This difference
mainly
arises
because
 
ECL
 
accounting
 
requirements
 
are
instrument-specific,
 
such
 
that
 
a
 
borrower
 
can
 
have
 
multiple
exposures
 
allocated
 
to
 
different
 
stages,
 
and
 
maturing
 
loans
 
in
stage 2 will
 
migrate to
 
stage 1 upon
 
renewal irrespective
 
of the
actual
 
credit
 
risk
 
at
 
that
 
time.
 
Under
 
a
 
risk-based
 
approach,
 
a
holistic counterparty
 
credit assessment
 
and the
 
absolute level
 
of
risk at any given date
 
will determine what risk-mitigating actions
may be warranted.
›
 
Refer to the “
Risk management and control
” section of this
report for more information
Critical accounting estimates and judgments
The calculation of ECL requires management
 
to apply significant judgment
and make estimates and assumptions
 
that can result in significant
 
changes
to the timing and amount of ECL recognized.
 
Determination of a significant increase in
 
credit risk
 
IFRS 9 does not include a definition of what constitutes an SICR, with UBS
AG’s assessment considering
 
qualitative and quantitative
 
criteria. An IFRS
 
9
ECL Management Forum has
 
been established to review
 
and challenge the
SICR results.
Scenarios, scenario weights and macroeconomic
 
variables
 
ECL reflect an unbiased and probability-weighted amount, which UBS AG
determines
 
by
 
evaluating
 
a
 
range
 
of
 
possible
 
outcomes.
 
Management
selects
 
forward-looking
 
scenarios
 
that
 
include
 
relevant
 
macroeconomic
variables
 
and
 
management’s
 
assumptions
 
around
 
future
 
economic
conditions. IFRS
 
9 Scenario Sounding
 
Sessions,
 
in addition
 
to the IFRS
 
9 ECL
Management
 
Forum,
 
are
 
in
 
place
 
to
 
derive,
 
review
 
and
 
challenge
 
the
scenario selection and weights,
 
and to determine
 
whether any additional
post-model adjustments are required that may significantly
 
affect ECL.
 
ECL measurement period
Lifetime ECL are
 
generally determined
 
based upon the
 
contractual maturity
of the transaction,
 
which significantly
 
affects ECL. For credit
 
card limits and
Swiss callable master
 
credit facilities, judgment
 
is required, as UBS
 
AG must
determine the period over
 
which it is exposed
 
to credit risk.
 
A seven-year
period is
 
applied for
 
credit card
 
limits, capped
 
at 12
 
months for
 
stage 1
positions, and a 12-month period applied for
 
master credit facilities.
 
Modeling and post-model adjustments
A number
 
of complex
 
models have
 
been developed
 
or modified
 
to calculate
ECL,
 
with
 
additional
 
post-model
 
adjustments
 
required
 
which
 
may
significantly
 
affect
 
ECL.
 
The
 
models
 
are
 
governed
 
by
 
UBS
 
AG’s
 
model
validation
 
controls
 
and
 
approved
 
by
 
the
 
Group
 
Model
 
Governance
Committee (the GMGC).
 
The post-model adjustments
 
are approved by the
ECL Management Forum and endorsed by the
 
GMGC.
A
sensitivity
 
analysis
covering
 
key
 
macroeconomic
 
variables
,
 
scenario
weights and SICR trigger points
 
on ECL measurement is provided
 
in Note
20f.
 
›
 
Refer to Note 20 for more information
h.
Restructured and modified financial assets
When payment default is expected,
 
or where default has already
occurred, UBS AG
 
may grant
 
concessions to
 
borrowers in financial
difficulties that
 
it would not
 
consider in
 
the normal course
 
of its
business, such as
 
preferential interest rates, extension
 
of maturity,
modifying
 
the
 
schedule
 
of
 
repayments,
 
debt
 
/
 
equity
 
swap,
subordination,
 
etc. When a concession or forbearance measure is
granted, each case
 
is considered individually
 
and the exposure
 
is
generally classified as
 
being in default.
 
Forbearance classification
will
 
remain
 
until
 
the
 
loan
 
is
 
collected
 
or
 
written
 
off,
 
non-
preferential
 
conditions
 
superseding
 
preferential
 
conditions
 
are
granted
 
or
 
until
 
the
 
counterparty
 
has
 
recovered
 
and
 
the
preferential conditions no longer exceed UBS AG’s risk tolerance.
Modifications result in an alteration of future contractual cash
flows and can occur
 
within UBS AG’s normal
 
risk tolerance or as
part of a
 
credit restructuring where
 
a counterparty is
 
in financial
difficulties. The
 
restructuring or
 
modification of
 
a financial
 
asset
could lead
 
to a
 
substantial change
 
in the
 
terms and
 
conditions,
resulting in the
 
original financial asset
 
being derecognized and
 
a
new
 
financial
 
asset
 
being
 
recognized.
 
Where
 
the
 
modification
does
 
not
 
result
 
in
 
a
 
derecognition,
 
any
 
difference
 
between
 
the
modified contractual cash
 
flows discounted at
 
the original
 
EIR and
the existing
 
gross carrying amount
 
of the
 
given financial asset
 
is
recognized in the
 
income statement as
 
a modification gain
 
or loss.
 
i. Offsetting
UBS AG
 
presents financial assets
 
and liabilities
 
on its
 
balance sheet
net if (i) it has a legally enforceable right to set
 
off the recognized
amounts
 
and
 
(ii)
 
it
 
intends
 
either
 
to
 
settle
 
on
 
a
 
net
 
basis
 
or
 
to
realize
 
the
 
asset
 
and
 
settle
 
the
 
liability
 
simultaneously.
 
Netted
positions include, for example, certain derivatives and repurchase
and reverse
 
repurchase transactions
 
with various
 
counterparties,
exchanges and clearing houses.
In assessing whether UBS
 
AG intends to either
 
settle on a net
basis, or to realize the asset and settle the liability simultaneously,
emphasis is placed on the effectiveness of operational settlement
mechanics
 
in
 
eliminating
 
substantially
 
all
 
credit
 
and
 
liquidity
exposure
 
between
 
the
 
counterparties.
 
This
 
condition
 
precludes
offsetting on
 
the balance
 
sheet for
 
substantial amounts
 
of
 
UBS
AG’s
 
financial
 
assets
 
and
 
liabilities,
 
even
 
though
 
they
 
may
 
be
subject
 
to
 
enforceable
 
netting
 
arrangements.
R
epurchase
arrangements and securities financing transactions are presented
net only to the extent that the settlement mechanism
 
eliminates,
or results
 
in insignificant,
 
credit and
 
liquidity risk,
 
and processes
the
 
receivables
 
and
 
payables
 
in
 
a
 
single
 
settlement
 
process
 
or
cycle.
›
 
Refer to Note
22
for more information
j.
Hedge accounting
UBS AG applies
 
hedge accounting requirements of IFRS 9, unless
stated otherwise
 
below, where the criteria for documentation
 
and
hedge
 
effectiveness are
 
met.
 
If
 
a
 
hedge
 
relationship no
 
longer
meets
 
the
 
criteria
 
for
 
hedge
 
accounting,
 
hedge
 
accounting
 
is
discontinued. Voluntary
 
discontinuation of
 
hedge
 
accounting is
permitted under
 
IAS 39 but
 
not under
 
IFRS 9.
Fair value hedges of interest rate risk related to debt instruments
and loan assets
The fair value change
 
of the hedged item
 
attributable
 
to a hedged
risk is
 
reflected as
 
an
 
adjustment to
 
the
 
carrying amount of
 
the
hedged item, and recognized
 
in the income statement along with
the change
 
in the fair
 
value
 
of the
 
hedging
 
instrument.
 
Fair value hedges of portfolio interest rate risk related to loans
designated under IAS 39
Prior to discontinuation in December 2021, the fair value change
of the
 
hedged item
 
attributable to
 
a hedged
 
risk is
 
reflected within
Other
 
financial
 
assets
 
measured
 
at
 
amortized
 
cost
or
Other
financial liabilities measured
 
at amortized cost
and recognized in
the income statement
 
along with the
 
change in the
 
fair value of
the hedging instrument.
 
Fair value hedges of FX risk related to debt instruments
The
 
fair
 
value
 
change
 
of
 
the
 
hedged
 
item
 
attributable
 
to
 
the
hedged risk
 
is reflected
 
in the measurement
 
of the
 
hedged item
and recognized
 
in the
 
income statement
 
along with
 
the change
in the fair value of
 
the hedging instrument. The foreign
 
currency
basis
 
spread
 
of
 
cross-currency
 
swaps
 
designated
 
as
 
hedging
derivatives is excluded from the designation and
 
accounted for as
a cost of hedging with
 
amounts deferred in
Other comprehensive
income
 
within
Equity
. These amounts are released
 
to the income
statement over the term of the hedged item.
Discontinuation of fair value hedges
Discontinuations
 
for
 
reasons
 
other
 
than
 
derecognition
 
of
 
the
 
hedged
item
 
result
 
in
 
an
 
adjustment to
 
the
 
carrying
 
amount,
 
which
 
is
amortized to the income statement over the remaining life of the
hedged
 
item using
 
the effective
 
interest
 
method.
 
If the
 
hedged
 
item
is derecognized,
 
the unamortized
 
fair value adjustment
 
or deferred
cost of
 
hedging amount is recognized immediately in the income
statement
 
as part
 
of any
 
derecognition
 
gain or
 
loss.
Cash flow hedges of forecast transactions
Fair value gains
 
or losses associated with
 
the effective portion
 
of
derivatives designated as cash
 
flow hedges for
 
cash flow repricing
risk are recognized initially in
Other comprehensive income
within
Equity
 
and
 
reclassified
 
to
 
the
 
income
 
statement
 
in
 
the
 
periods
when
 
the
 
hedged
 
forecast
 
cash
 
flows
 
affect
 
profit
 
or
 
loss,
including discontinued
 
hedges for which
 
forecast cash
 
flows are
expected
 
to
 
occur.
 
If
 
the
 
forecast
 
transactions
 
are
 
no
 
longer
expected to
 
occur,
 
the deferred
 
gains or
 
losses are
 
immediately
reclassified to the income statement.
Hedges of net investments in foreign operations
Gains or losses on the hedging
 
instrument
 
relating to the effective
portion of a hedge are recognized
 
directly in
Other comprehensive
income
 
within
Equity,
while
 
any
 
gains
 
or
 
losses
 
relating
 
to
 
the
ineffective
 
and / or undesignated
 
portion (for
 
example, the
 
interest
element
 
of
 
a
 
forward
 
contract)
 
are
 
recognized
 
in
 
the
 
income
statement.
 
Upon
 
disposal
 
or
 
partial
 
disposal
 
of the
 
foreign
 
operation,
the cumulative
 
value
 
of any
 
such
 
gains
 
or losses
 
recognized
 
in
Equity
 
associated
 
with the
 
entity
 
is reclassified
 
to
Other income
.
Interest Rate Benchmark Reform
 
UBS
 
AG
 
can
 
continue
 
hedge
 
accounting
 
during
 
the
 
period
 
of
uncertainty before existing interest rate benchmarks are replaced
with alternative
 
risk-free interest rates.
 
During this
 
period, UBS
 
AG
can
 
assume
 
that
 
the
 
current
 
benchmark
 
rates
 
will
 
continue
 
to
exist,
 
such
 
that
 
forecast
 
transactions
 
are
 
considered
 
highly
probable
 
an
d
 
hedge
 
relationships
 
remain,
 
with
 
little
 
or
 
no
consequential
 
impact
 
on
 
the
 
financial
 
statements.
 
Upon
replacement
 
of
 
existing
 
interest
 
rate
 
benchmarks
 
by
 
alternative
risk-free interest rates expected in 2021 and beyond, UBS
 
AG will
apply the requirements of
Amendments to IFRS 9, IAS 39, IFRS 7,
IFRS 4 and IFRS 16 (Interest Rate Benchmark Reform – Phase 2).
 
›
 
Refer to Note 1b for more information
3) Fee and commission income and expenses
UBS
 
AG
 
earns fee
 
income
 
from
 
the
 
diverse
 
range
 
of
 
services it
provides to its
 
clients. Fee income can
 
be divided into two
 
broad
categories:
 
fees
 
earned
 
from
 
services
 
that
 
are
 
provided
 
over
 
a
certain
 
period
 
of
 
time,
 
such
 
as
 
management
 
of
 
clients’
 
assets,
custody
 
services
 
and
 
certain
 
advisory
 
services;
 
and
 
fees
 
earned
from
 
point-in-time
 
services,
 
such
 
as
 
underwriting
 
fees,
 
deal-
contingent
 
merger
 
and
 
acquisitions
 
fees,
 
and
 
brokerage
 
fees
(e.g., securities
 
and derivatives
 
execution and
 
clearing). UBS
 
AG
recognizes
 
fees
 
earned
 
from
 
point-in-time-services
 
when
 
it
 
has
fully
 
provided
 
the
 
service
 
to
 
the
 
customer.
 
Where
 
the
 
contract
requires
 
services to be
 
provided over
 
time, income
 
is recognized
on a systematic basis over the life of the agreement.
Consideration
 
received
 
is
 
allocated
 
to
 
the
 
separately
identifiable performance
 
obligations in
 
a contract.
 
Owing to
 
the
nature
 
of
 
UBS
 
AG’s
 
business,
 
contracts
 
that
 
include
 
multiple
performance obligations are typically those that
 
are considered to
include
 
a
 
series of
 
similar performance
 
obligations fulfilled
 
over
time
 
with
 
the
 
same
 
pattern
 
of
 
transfer
 
to
 
the
 
client,
 
e.g.,
management
 
of
 
client
 
assets
 
and
 
custodial
 
services.
 
As
 
a
consequence,
 
UBS
 
AG
 
is
 
not
 
required
 
to
 
apply
 
significant
judgment
 
in
 
allocating
 
the
 
consideration
 
received
 
across
 
the
various performance obligations.
Point-in-time
 
services
 
are
 
generally
 
for
 
a
 
fixed
 
price
 
or
dependent on
 
deal size,
 
e.g., a
 
fixed number
 
of basis
 
points of
trade
 
size,
 
where
 
the
 
amount
 
of
 
revenue
 
is
 
known
 
when
 
the
performance
 
obligation
 
is
 
met.
 
Fixed
 
over-time
 
fees
 
are
recognized on
 
a straight-line
 
basis over
 
the performance period.
Custodial
 
and
 
asset
 
management
 
fees
 
can
 
be
 
variable
 
through
reference to the size of the customer portfolio. However,
 
they are
generally
 
billed
 
on
 
a
 
monthly
 
or
 
quarterly
 
basis
 
once
 
the
customer’s portfolio
 
size is
 
known or
 
known with
 
near certainty
and
 
therefore
 
also
 
recognized
 
ratably
 
over
 
the
 
performance
period. UBS
 
AG does
 
not recognize
 
performance fees
 
related to
management
 
of
 
clients’
 
assets
 
or
 
fees
 
related
 
to
 
contingencies
beyond UBS AG’s control until such uncertainties are resolved.
 
UBS AG’s fees are generally earned from short-term contracts.
As
 
a
 
result,
 
UBS
 
AG
’s
 
contracts
 
do
 
not
 
include
 
a
 
financing
component or
 
result in
 
the recognition
 
of significant
 
receivables
or prepayment assets. Furthermore, due to the short-term nature
of such contracts,
 
UBS AG has not
 
capitalized any material
 
costs
to obtain or fulfill a contract
 
or generated any significant contract
assets or liabilities.
UBS AG presents expenses primarily in line with their nature
 
in
the income statement, differentiating between expenses that are
directly
 
attributable
 
to
 
the
 
satisfaction
 
of
 
specific
 
performance
obligations associated with the
 
generation of revenues, which
 
are
generally
 
presented
 
within
Total
 
operating
 
income
 
as
Fee
 
and
commission
 
expense
,
 
and
 
those
 
that
 
are
 
related
 
to
 
personnel,
general and administrative expenses,
 
which are presented within
Total operating
 
expenses
. For
 
derivatives execution
 
and clearing
services (where UBS AG
 
acts as an agent),
 
UBS AG only records
 
its
specific fees in the income
 
statement, with fees payable to other
parties
 
not recognized
 
as an
 
expense but
 
instead directly
 
offset
against the associated income collected from the given client.
›
 
Refer to Note 4 for more information, including
 
the
disaggregation of revenues
4)
Share-based and other deferred compensation plans
UBS AG
 
recognizes expenses
 
for deferred
 
compensation awards
over the
 
period that
 
the employee
 
is required
 
to provide
 
service
to
 
become
 
entitled
 
to
 
the
 
award.
 
Where
 
the
 
service
 
period
 
is
shortened,
 
for
 
example
 
in
 
the
 
case
 
of
 
employees
 
affected
 
by
restructuring programs or
 
mutually agreed termination
 
provisions,
recognition
 
of
 
such
 
expense
 
is
 
accelerated
 
to
 
the
 
termination
date. Where no
 
future service is
 
required, such
 
as for employees
who are eligible for
 
retirement or who have
 
met certain age and
length-of-service criteria, the services are presumed to have been
received
 
and
 
compensation
 
expense
 
is
 
recognized
 
over
 
the
performance year or, in the case of off-cycle awards, immediately
on the grant date.
Share-based compensation plans
UBS Group
 
AG is the
 
grantor of and
 
maintains the obligation
 
to
settle
 
share-based
 
compensation
 
plans
 
that
 
are
 
awarded
 
to
employees of
 
UBS AG.
 
As a
 
consequence, UBS
 
AG classifies
 
the
awards
 
of
 
UBS
 
Group
 
AG
 
shares
 
as
 
equity-settled
 
share-based
payment transactions. UBS
 
AG recognizes the
 
fair value
 
of awards
granted
 
to
 
its
 
employees
 
by
 
reference
 
to
 
the
 
fair
 
value
 
of
 
UBS
Group AG’s
 
equity instruments on the date of grant, taking into
account
 
the
 
terms
 
and
 
conditions
 
inherent
 
in
 
the
 
award,
including, where
 
relevant, dividend rights,
 
transfer restrictions in
effect
 
beyond
 
the
 
vesting
 
date,
 
market
 
conditions,
 
and
 
non-
vesting conditions.
 
For equity-settled
 
awards, fair
 
value is
 
not remeasured
 
unless
the
 
terms
 
of
 
the
 
award
 
are
 
modified
 
such
 
that
 
there
 
is
 
an
incremental increase in value. Expenses
 
are recognized, on a per-
tranche basis, over the service period based
 
on an estimate of the
number
 
of
 
instruments
 
expected
 
to
 
vest
 
and
 
are
 
adjusted
 
to
reflect the actual outcomes of service or performance conditions.
 
For
 
equity-settled
 
awards,
 
forfeiture
 
events
 
resulting
 
from
 
a
breach of
 
a non-vesting
 
condition (i.e.,
 
one that
 
does not
 
relate
to
 
a
 
service
 
or
 
performance
 
condition)
 
do
 
not
 
result
 
in
 
any
adjustment to the share-based compensation expense.
For cash-settled
 
share-based awards,
 
fair value
 
is remeasured
at each reporting
 
date, so that
 
the cumulative
 
expense recognized
equals the cash distributed.
 
Other deferred compensation plans
Compensation expense for other deferred
 
compensation plans is
recognized on a
 
per-tranche or straight-line
 
basis, depending on
the nature of
 
the plan. The
 
amount recognized is
 
measured based
on the
 
present
 
value of
 
the amount
 
expected to
 
be paid
 
under
the
 
plan and
 
is remeasured
 
at each
 
reporting
 
date,
 
so that
 
the
cumulative expense
 
recognized equals
 
the cash
 
or the
 
fair value
of respective financial instruments distributed.
›
 
Refer to Note
28
 
for more information
5)
Post-employment benefit plans
Defined benefit plans
Defined
 
benefit
 
plans
 
specify
 
an
 
amount
 
of
 
benefit
 
that
 
an
employee
 
will
 
receive,
 
which
 
usually
 
depends
 
on
 
one
 
or
 
more
factors,
 
such
 
as
 
age,
 
years
 
of
 
service
 
and
 
compensation.
 
The
defined
 
benefit
 
liability
 
recognized
 
in
 
the
 
balance
 
sheet
 
is
 
the
present value
 
of the
 
defined benefit
 
obligation, measured
 
using
the projected unit
 
credit method, less
 
the fair value of
 
the plan’s
assets
 
at
 
the
 
balance
 
sheet
 
date,
 
with
 
changes
 
resulting
 
from
remeasurements
 
recorded
 
immediately
 
in
Other
 
comprehensive
income
.
 
If
 
the
 
fair
 
value
 
of
 
the plan
 
’s assets
 
is
 
higher
 
than
 
the
present value of the
 
defined benefit obligation, the
 
recognition of
the resulting net asset is limited to the present value of economic
benefits
 
available
 
in
 
the
 
form
 
of
 
refunds
 
from
 
the
 
plan
 
or
reductions in future
 
contributions to the plan.
 
Calculation of the
net
 
defined
 
benefit
 
obligation
 
or
 
asset
 
takes
 
into
 
account
 
the
specific
 
features
 
of
 
each
 
plan,
 
including
 
risk
 
sharing
 
between
employee
 
and
 
employer,
and
is
 
calculated
 
periodically
 
by
independent qualified actuaries.
 
Critical accounting estimates and judgments
The net defined benefit liability or asset at the balance sheet date and the
related personnel expense
 
depend on the
 
expected future benefits
 
to be
provided,
 
determined
 
using
 
a
 
number
 
of
 
economic
 
and
 
demographic
assumptions.
 
A
 
range
 
of
 
assumptions
 
could
 
be
 
applied,
 
and
 
different
assumptions could
 
significantly alter
 
the defined
 
benefit liability
 
or asset
and pension expense
 
recognized. The most
 
significant assumptions
 
include
life expectancy, discount rate, expected salary increases, pension increases
and
 
interest
 
credits
 
on
 
retirement
 
savings
 
account
 
balances.
 
Sensitivity
analysis for reasonable possible movements in each significant
 
assumption
for UBS AG‘s post-employment obligations is
 
provided in Note 27
.
›
 
Refer to Note 27
 
for more information
Defined contribution plans
A
 
defined
 
contribution
 
plan
 
pays
 
fixed
 
contributions
 
into
 
a
separate entity
 
from which
 
post-employment and other
 
benefits
are paid.
 
UBS AG
 
has no
 
legal or
 
constructive obligation
 
to pay
further amounts if the plan does not hold sufficient assets
 
to pay
employees the benefits relating
 
to employee service in
 
the current
and prior periods. Compensation expense
 
is recognized when the
employees have rendered
 
services in exchange for
 
contributions.
This is generally in the year of contribution. Prepaid contributions
are recognized
 
as an
 
asset to
 
the extent that
 
a cash
 
refund or
 
a
reduction in future payments is available.
6)
Income taxes
UBS AG is
 
subject to
 
the income
 
tax laws of
 
Switzerland and
 
those
of
 
the
 
non-Swiss
 
jurisdictions
 
in
 
which
 
UBS
 
AG
 
has
 
business
operations.
UBS
 
AG’s provision
 
for income
 
taxes is
 
composed of
 
current
and deferred
 
taxes. Current
 
income taxes
 
represent taxes
 
to be
paid or refunded for the current period or previous periods.
 
Deferred
 
taxes
 
are
 
recognized
 
for
 
temporary
 
differences
between
 
the
 
carrying
 
amounts
 
and
 
tax
 
bases
 
of
 
assets
 
and
liabilities that will
 
result in taxable
 
or deductible amounts
 
in future
periods and are measured using the applicable tax rates and laws
that have been
 
enacted or substantively
 
enacted by the
 
end of the
reporting period and that
 
will be in effect when
 
such differences
are expected to reverse.
Deferred
 
tax
 
assets arise
 
from a
 
variety
 
of
 
sources,
 
the most
significant being:
 
(i) tax
 
losses that
 
can be
 
carried forward
 
to be
used against profits in future years; and (ii) temporary differences
that
 
will
 
result
 
in
 
deductions
 
against
 
profits
 
in
 
future
 
years.
Deferred tax assets
 
are recognized only to
 
the extent it
 
is probable
that sufficient taxable profits will be
 
available against which these
differences can be
 
used. When an
 
entity or tax
 
group has a
 
history
of
 
recent
 
losses,
 
deferred
 
tax
 
assets
 
are
 
only
 
recognized
 
to
 
the
extent there are
 
sufficient taxable temporary differences
 
or there
is convincing
 
other evidence
 
that sufficient
 
taxable profit
 
will be
available against which the unused tax losses can be utilized.
Deferred tax liabilities
 
are recognized for temporary
 
differences
between
 
the
 
carrying
 
amounts
 
of
 
assets
 
and
 
liabilities
 
in
 
the
balance sheet
 
that reflect
 
the expectation
 
that certain
 
items will
give rise to taxable income in future periods.
Deferred and current tax assets and
 
liabilities are offset
 
when:
(i) they arise in the
 
same tax reporting group; (ii)
 
they relate to the
same tax authority; (iii)
 
the legal right to
 
offset exists; and (iv)
 
they
are intended to be settled net or realized simultaneously.
Current
 
and
 
deferred
 
taxes
 
are
 
recognized
 
as
 
income
 
tax
benefit
 
or
 
expense in
 
the income
 
statement,
 
except for
 
current
and deferred taxes recognized in relation to:
 
(i) the acquisition of
a subsidiary (for which such amounts would
 
affect the amount of
goodwill arising from the acquisition); (ii) gains
 
and losses on the
sale of
 
treasury shares
 
(for which
 
the tax
 
effects are
 
recognized
directly
 
in
Equity
);
 
(iii)
 
unrealized
 
gains
 
or
 
losses
 
on
 
financial
instruments that are classified at
 
FVOCI; (iv) changes in fair
 
value
of
 
derivative
 
instruments
 
designated
 
as
 
cash
 
flow
 
hedges;
 
(v)
remeasurements
 
of defined
 
benefit plans;
 
or (vi)
 
certain foreign
currency translations
 
of foreign
 
operations. Amounts
 
relating to
points
 
(iii)
 
through
 
(vi)
 
above
 
are
 
recognized
 
in
Other
comprehensive income
 
within
Equity
.
UBS AG reflects the
 
potential effect of uncertain
 
tax positions
for
 
which
 
acceptance
 
by
 
the
 
relevant
 
tax
 
authority
 
is
 
not
considered
 
probable
 
by
 
adjusting
 
current
 
or
 
deferred
 
taxes,
 
as
applicable, using either the most likely amount or expected value
methods,
depending
 
on
 
which
 
method
 
is
deemed
 
a
 
better
predictor
 
of
 
the
 
basis
 
on
 
which
,
 
and
 
extent
 
to
 
which
,
 
the
uncertainty will be resolved.
Critical accounting estimates and judgments
Tax
 
laws
 
are
 
complex,
 
and
 
judgment
 
and
 
interpretations
 
about
 
the
application of such
 
laws are required
 
when accounting for
 
income taxes.
UBS AG
 
considers the performance
 
of its
 
businesses and the
 
accuracy of
historical forecasts and other factors when evaluating the recoverability of
its
 
deferred
 
tax
 
assets,
 
including
 
the
 
remaining
 
tax
 
loss
 
carry-forward
period, and its
 
assessment of expected
 
future taxable profits
 
in the forecast
period
 
used
 
for
 
recognizing
 
deferred
 
tax
 
assets.
 
Estimating
 
future
profitability
 
and
 
business
 
plan
 
forecasts
 
is
 
inherently
 
subjective
 
and
 
is
particularly sensitive to future economic,
 
market and other conditions.
 
Forecasts are reviewed
 
annually, but adjustments
 
may be made
 
at other
times, if required. If recent losses have been incurred, convincing evidence
is required to prove there is sufficient future profitability given the
 
value of
UBS
AG
’s
 
deferred
 
tax
 
assets
 
may
 
b
e
 
affected
,
 
with
 
effects
primarily
recognized through the income statement.
In
 
addition,
 
judgment
 
is
 
required
 
to
 
assess
 
the
 
expected
 
value
 
of
uncertain
 
tax
 
positions
 
and
 
the
 
related
 
probabilities,
 
including
interpretation of tax laws,
 
the resolution of any income
 
tax-related appeals
and litigation.
 
›
 
Refer to Note
8
 
for more information
Property,
 
equipment
 
and
 
software
 
is
measured
 
at
 
cost
 
less
accumulated
 
dep
reciation
 
and
 
impairment
 
losses
.
 
Software
development
 
costs
 
are
 
capitalized
 
only
 
when
 
the
 
costs
 
can
 
be
measured reliably and it is
 
probable that future economic
 
benefits
will
 
arise.
 
Depreciation
 
of
 
property,
 
equipment
 
and
 
software
begins
 
when
 
they
 
are
 
available
 
for
 
use
 
and
 
is
 
calculated
 
on
 
a
straight line basis over an asset’s estimated useful life.
 
Property,
 
equipment
 
and
 
software
 
are
 
generally
 
tested
 
for
impairment
 
at
 
the
 
appropriate
cash
-
generating
 
unit
 
level,
alongside goodwill and intangible assets as described in item 8 in
this Note.
 
An impairment
 
charge is
 
recognized for
 
such assets
 
if
the
 
recoverable
 
amount
 
is
 
below
 
its
 
carrying
 
amount
.
The
recoverable amounts of such assets, other than property that has
a market price,
 
are generally determined
 
using a replacement
 
cost
approach
 
that
 
reflects
 
the
 
amount
 
that
 
would
 
be
 
currently
required by a market participant to replace the service capacity
 
of
the
 
asset.
 
If
 
such
 
assets
 
are
 
no
 
longer
 
used,
 
they
 
are
 
tested
individually for impairment.
›
 
Refer to Note
12
for more information
8) Goodwill
Goodwill represents the
 
excess of
 
the consideration over the
 
fair
value
 
of
 
identifiable
 
assets,
 
liabilities
 
and
 
contingent
 
liabilities
acquired
 
that
 
arises
 
in
 
a
 
business combination.
 
Goodwill is
 
not
amortized,
 
but
 
is
 
assessed
 
for
 
impairment
 
at
 
the
 
end
 
of
 
each
reporting period,
 
or when indicators of impairment exist.
 
UBS AG
tests
 
goodwill
 
for
 
impairment
 
annually,
 
irrespective of
 
whether
there is any
 
indication
 
of impairment.
 
An impairment charge
 
is recognized in the income
 
statement if
the carrying
 
amount exceeds
 
the recoverable
 
amount.
Critical accounting estimates and judgments
UBS
 
AG‘s
 
methodology
 
for
 
goodwill
 
impairment
 
testing
 
is
 
based
 
on
 
a
model that is most sensitive to the following key assumptions: (i) forecasts
of earnings available to shareholders
 
in years one to
 
three; (ii) changes in
the discount rates; and (iii) changes in the
 
long-term growth rate.
 
Earnings available
 
to shareholders
 
are estimated
 
on the basis
 
of forecast
results,
 
which
 
are
 
part
 
of
 
the
 
business
 
plan
 
approved
 
by
 
the
 
Board
 
of
Directors.
 
The
 
discount
 
rates
 
and
 
growth
 
rates
 
are
 
determined
 
using
external information, and
 
also considering inputs
 
from both
 
internal and
external analysts and the view of management.
 
The
 
key assumptions
 
used
 
to determine
 
the recoverable
 
amounts of
each cash-generating unit are tested for sensitivity by applying reasonably
possible changes to those assumptions.
 
›
 
Refer to Notes
2
and
 
13
 
for more information
Provisions
 
are
 
liabilities
 
of
 
uncertain
 
timing
 
or
 
amount,
 
and
 
are
generally
recognized
in
 
accordance
 
with
 
IAS
 
37,
Provisions,
Contingent
 
Liabilities
 
and
 
Contingent
 
Assets
,
 
when:
 
(i)
 
UBS
 
AG
has a
 
present obligation
 
as a
 
result of
 
a past
 
event; (ii)
 
it is
 
probable
that
 
an
 
outflow
 
of
 
resources
 
will
 
be
 
required
 
to
 
settle
 
the
obligation;
 
and
 
(iii)
 
a
 
reliable
 
estimate
 
of
 
the
 
amount
 
of
 
the
obligation can be made.
 
The
 
majority
 
of
 
UBS
 
AG
’s
 
provisio
ns
 
relate
 
to
 
litigation,
regulatory
 
and
 
similar
 
matters,
 
restructuring,
 
and
 
employee
benefits.
 
Restructuring
 
provisions
 
are
 
generally
 
recognized
 
as
 
a
consequence of
 
management agreeing
 
to materially
 
change the
scope
 
of
 
the
 
business
 
or
 
the
 
manner
 
in
 
which
 
it
 
is
 
conducted,
including
 
changes
 
in
 
management
 
structures.
 
Provisions
 
for
employee
 
benefits
 
relate
 
mainly
 
to
 
service
 
anniversaries
 
and
sabbatical
 
leave,
 
and
 
are
 
recognized
 
in
 
accordance
 
with
measurement principles set out in item 4
 
in this Note. In addition,
UBS AG presents
 
expected credit loss
 
allowances within
Provisions
 
if they relate to a loan commitment, financial
 
guarantee contract
or a revolving revocable credit line.
IAS 37 provisions are
 
measured considering the
 
best estimate
of the
 
consideration required
 
to settle
 
the present
 
obligation at
the balance sheet date.
 
When conditions required
 
to recognize
 
a provision
 
are not met,
a
 
contingent
 
liability
 
is
 
disclosed,
 
unless
 
the
 
likelihood
 
of
 
an
outflow
 
of
 
resources
 
is
 
remote.
 
Contingent
 
liabilities
 
are
 
also
disclosed for
 
possible obligations that
 
arise from past
 
events the
existence
 
of
 
which
 
will
 
be
 
confirmed
 
only
 
by
 
uncertain
 
future
events not wholly within the control of UBS AG.
Critical accounting estimates and judgments
Recognition of provisions
 
often involves significant judgment
 
in assessing
the
 
existence
 
of
 
an
 
obligation
 
that
 
results
 
from
past
 
events
 
and
 
in
estimating the
 
probability, timing and
 
amount of
 
any outflows
 
of resources.
This
 
is particularly
 
the case
 
for litigation,
 
regulatory and
 
similar matters,
which, due to their nature,
 
are subject to many uncertainties,
 
making their
outcome difficult to predict.
 
The amount of any provision
 
recognized is sensitive to the
 
assumptions
used
 
and
 
there
 
could
 
be
 
a
 
wide
 
range
 
of
 
possible
 
outcomes
 
for
 
any
particular matter.
Management regularly reviews
 
all the available
 
information regarding
such
 
matters,
 
including
 
legal
 
advice,
 
to
 
assess
 
whether
 
the
 
recognition
criteria for provisions have been satisfied and to determine the timing and
amount of any potential outflows.
›
 
Refer to Note
18
 
for more information
Transactions
 
denominated
 
in
 
a
 
foreign
 
currency
 
are
 
translated
into
 
the
 
functional
 
currency
 
of
 
the
 
reporting
 
entity
 
at
 
the
 
spot
exchange rate
 
on the
 
date of
 
the transaction.
 
At the
 
balance sheet
date, all monetary
 
assets, including those
 
at FVOCI, and
 
monetary
liabilities denominated in foreign currency
 
are translated into the
functional currency
 
using the
 
closing exchange
 
rate. Translation
differences
 
are
 
reported
 
in
Other
 
net
 
income
 
from
 
financial
instruments measured at fair value through profit or loss
.
Non-monetary items measured at historical cost are translated
at the exchange rate on the date of the transaction.
 
Upon consolidation, assets and liabilities of
 
foreign operations
are translated into US
 
dollars,
 
UBS AG’s presentation currency, at
the closing exchange rate on the balance sheet date, and income
and expense
 
items and
 
other comprehensive
 
income are
 
translated
at the
 
average rate for the
 
period. The resulting foreign currency
translation differences are recognized in
Equity
 
and reclassified to
the income statement
 
when UBS AG disposes of, partially
 
or in its
entirety, the foreign
 
operation and UBS AG no longer controls
 
the
foreign operation.
Share
 
capital
 
issued,
 
share premium
 
and treasury
 
shares held
 
are
translated
 
at the historic
 
average rate,
 
with the
 
difference
 
between
the historic
 
average rate
 
and the
 
spot rate
 
realized
 
upon repayment
of
 
share capital
 
or
 
disposal of
 
treasury shares
 
reported as
Share
premium.
 
Cumulative
 
amounts
 
recognized
 
in
Other comprehensive
income
 
in
 
respect
 
of
 
cash
 
flow
 
hedges
 
and
 
financial
 
assets
measured at FVOCI are translated at the closing exchange rate as
of the
 
balance sheet
 
dates, with
 
any translation effects
 
adjusted
through
Retained earnings
.
›
 
Refer to Note 33 for more information
11) Net cash settlement contracts
Contracts involving
 
UBS Group
 
AG shares
 
that require
 
net cash
settlement,
 
or
 
provide
 
the
 
counterparty
 
or
 
UBS
 
AG
 
with
 
a
settlement option
 
that includes
 
a choice
 
of settling
 
net in
 
cash,
are classified as derivatives held for trading.